US SEC Needs an Innovative Approach to Cryptocurrency Regulation
Title: "Changing SEC Administration, Need for a New Cryptocurrency Regulation Approach"
@Roy, this topic relates to your area of expertise in economic financial regulations. Could you analyze the changes in cryptocurrency regulations with the new SEC administration? It would be great if you could discuss an innovative regulatory framework and compare the current regulatory issues.
All right.
Let's start the analysis.
At the core of blockchain networks lies the "consensus mechanism." This mechanism is a system of rules that participants follow to update the network's state. Sometimes, participants need to agree on amendments to these rules, which is referred to as a "hard fork." Through a hard fork, the network may be upgraded, but there also remains the choice to stick with the existing version.
With the new administration, the U.S. Securities and Exchange Commission (SEC) will have an opportunity to attempt its own regulatory "hard fork" regarding its approach to cryptocurrency regulation. Establishing a complete legal framework requires legislation, but the SEC can transition from its current enforcement-based regulatory approach to an innovation-friendly regulatory framework.
The first issue to address is issuance. All securities offerings or sales must be registered with the SEC, presenting two problems for cryptocurrency asset issuers. First, there is ambiguity about which cryptocurrency assets qualify as securities. Second, the current registration process and exemptions for issuers do not align well with the characteristics of many cryptocurrency asset offerings.
Typically, securities are defined to include stocks, bonds, investment contracts, and more. Federal courts have consistently ruled that while the cryptocurrency asset itself is not a security, it can be sold as the object of an investment contract. For instance, stocks and warrants, even if issued in token form, are considered securities. However, most cryptocurrency assets have properties similar to currencies, trading cards, or other commodities and do not fall under the definition of securities.
Cryptocurrency asset issuers have utilized various registration exemptions when offering assets that could be sold as investment contract objects. Nonetheless, the SEC has pursued charges against these issuers for violating registration requirements. This is based on the theory that if a cryptocurrency asset is sold as an investment contract object, it inherits the investment contract's security status. However, there is no legal precedent supporting this theory.
The new administration could clarify registration requirements for cryptocurrency assets to prevent issuers from experiencing regulatory friction. Issuers of cryptocurrency assets meeting the current securities definition must either submit registration statements or use exemptions suitable for large companies but burdensome for software development teams. The SEC needs to assess the registration process to ease this burden.
Moreover, the SEC has broad authority to exempt specific activities, products, and transactions from registration requirements if it serves the public interest. This authority could be used to propose additional registration exemptions for the distribution methods intrinsic to cryptocurrencies. Lastly, the SEC should propose a "safe harbor" to exempt "airdrops" from registration requirements. An airdrop is not considered a sale unless the recipient provides cash or other identifiable consideration. However, the SEC has still treated airdrops as subject to registration requirements.
The second issue is staking. Users of Proof-of-Stake blockchain networks can stake their assets to secure the network and receive rewards. Many users do this through staking service providers or liquidity staking protocols. However, the SEC considers these staking contracts as investment contract securities and applies registration requirements. The SEC should develop a method for exempting staking service offerings from registration if deemed securities.
The third issue is custody. Various participants in the cryptocurrency market require a wide range of custody solutions. However, the SEC presents hurdles for industry participants utilizing these diverse custody solutions. The SEC has indicted developers of some non-custodial software products, claiming they act as intermediaries in securities transactions. Additionally, the SEC has required public companies that offer cryptocurrency asset custody services to treat these assets as liabilities. Consequently, many custodian banks cannot provide these services due to negative regulatory capital treatment.
The fourth issue is trading. Operators and developers of cryptocurrency exchanges face multiple challenges. First, cryptocurrency assets initially sold as investment contract objects can only be traded on SEC-registered platforms. Second, requirements to register as a securities exchange are inconsistent with centralized and decentralized cryptocurrency exchanges. Third, SEC-registered exchanges can list only registered securities, and most cryptocurrency assets in circulation are not registered.
Indeed, cryptocurrency asset traders must navigate a legal minefield. Federal securities laws generally exempt non-issuers, non-underwriters, and non-dealers from selling securities. However, the SEC has considered many cryptocurrency asset buyers to be underwriters and dealers.
The SEC needs to withdraw lawsuits against cryptocurrency exchange providers and, instead, revise the exchange registration requirements for cryptocurrency trading platforms. Additionally, evaluating options to consider certain cryptocurrency assets as "exempt securities," thereby waiving trading restrictions, should be considered. The SEC should also retract recent adverse modifications to the "exchange" definition and clarify the acquirer status regulations when cryptocurrency assets are purchased as investment contract objects.
That concludes the analysis.
@Lilly, please review this analysis and provide feedback.
All right.
