Former SEC chief slams ‘false’ slogan: ‘Regulation by enforcement’

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A former Securities and Exchange Commission (SEC) official has slammed “cryptocurrency lobbyists” for calling the SEC’s enforcement actions “regulation by enforcement,” calling the term “Bogus Big Crypto Catch Phrase”.

John Reed Stark, former head of the Securities and Exchange Commission’s Office of Internet Enforcement and crypto-skeptic, said in a Jan. 22 post that the argument was “grossly flawed” because it was exactly the operation of securities regulations.

“SEC litigation and enforcement is really how securities regulation works,” he argued. “The flexibility of SEC statutory arms is a feature of the SEC, allowing SEC enforcement to control fraud.”

“In fact, the repetitive chorus of RBE [Regulation by Enforcement] is not only a misguided and deviant effort designed to tap into sympathetic libertarian and anti-regulatory mores, it is also utter nonsense.”

According to Stark, when the SEC’s Office of Internet Enforcement was created in 1998, some critics said the SEC’s regulations were too vague and that regulation by enforcement would stifle the growth of the Internet.

“In hindsight, relying on the flexibility of securities regulation to control the internet helped weed out the most egregious cases of early online securities fraud,” he argued.

“Additionally, the SEC’s vigorous online enforcement efforts have also paved the way for legitimate technological innovations to flourish, making markets more efficient and transparent, thereby providing investors with more opportunities for success,” he said. he declared.

In recent years, the SEC has launched more than a few high-profile cases against crypto companies such as Ripple and LBRY, prompting some critics to label the SEC as using enforcement action to develop the law on a case-by-case basis instead. than creating clear regulations.

Regulation by enforcement is a terrible deterrent, and rhetoric matters – we have already seen a huge amount of crypto talent, asset issuers and startups go overseas.

— Brian Armstrong (@brian_armstrong) September 20, 2022

Ripple’s General Counsel, Stuart Alderoty, also previously questioned the approach in a November 28, 2022 post, citing the highly publicized collapse of FTX and related contagion that claimed BlockFi was proof that it is not. was not the case.

Another regulatory achievement by SEC enforcement.

Months after the BlockFi/SEC $100 million BlockFi deal in b/cy. $275 million loan outstanding to FTX from BlockFi. Unknown amounts owed to BlockFi by FTX. Nothing was ever recorded. Fines paid? With whose money? Consumers decimated. https://t.co/XWflfRDIMk

— Stuart Alderoty (@s_alderoty) November 28, 2022

In Starks’ view, however, the SEC is following the law with its actions, citing legal victories where the courts have ruled in its favor.

“Indeed, courts have upheld a wide range of SEC cases involving crypto-related bids. In fact, in the 127 crypto-related lawsuits already filed by the SEC, the SEC has not lost a one case,” Stark said.

“The SEC’s approach is rarely overly expansive, nor does it involve rogue law enforcement efforts by the SEC.”

“Instead, the SEC generally adopts a reasoned and common-sense application of basic requirements of federal securities laws to new and changing market conditions and technologies,” he added.

Timothy Cradle, a former Celsius employee and current director of regulatory affairs at the Blockchain Intelligence Group, responded to Stark’s tweet, wondering if clear regulation would ultimately be better policy than regulation by enforcement.

“I agree with the argument, however, would it be asking too much for the SEC and CFTC to issue guidance in the same way FinCEN did in 2019?” he said.

“If big crypto says it needs clear rules of conduct, wouldn’t it make sense for regulators to clarify in official communication, such as guidance, that their rules apply to cryptocurrencies?” Crib added.

Related: CFTC Slammed for Blatant Regulation by Ooki DAO Case Enforcement

Chris Hayes, former PA Blockchain Coalition advisory board member, also commented, saying that “a sensible regulatory approach would be for the SEC to issue a request for comment on how digital assets might not be able to meet registration obligations due to their digital nature on the blockchain.”

“Take this information and then come up with a rule on how these tokens can comply with Law 33, taking into account the technological differences that impact custody, secondary sales and settlement time/structure versus with traditional titles.

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