A former Securities and Exchange Commission (SEC) official lashed out at “cryptocurrency lobbyists” for calling the SEC’s enforcement actions “regulation by enforcement”, calling the term “a fake phrase for a big haul of cryptocurrencies.”
John Reed Stark, former head of the Securities and Exchange Commission’s Office of Internet Enforcement and a crypto-skeptic, opined in a January 22 post that this argument is “grossly flawed” because that’s how securities regulations work.
“Litigation and SEC enforcement is how securities regulation works,” he said. “The flexibility of the SEC’s official weapons is a hallmark of the SEC, allowing the SEC to control fraud.”
“Actually the repetitive refrain of RBE [Regulation by Enforcement] is not only a misguided, diversionary attempt to engage sympathetic libertarian and anti-regulatory mores, it is also complete nonsense.”
When the SEC’s Office of Internet Enforcement was created in 1998, Stark said, there were critics who said the SEC’s rules were too vague and that forced regulation would stifle the growth of the Internet.
“Looking back, relying on the flexibility of securities regulation to control the Internet, we have eliminated the most egregious cases of early online securities fraud,” he said.
“Moreover, the vigorous efforts to enforce the SEC online have also paved the way for legitimate technological innovation to flourish by making markets more efficient and transparent, thus giving investors more room to succeed,” he said.
Over the past few years, the SEC has brought several high-profile cases against crypto companies such as Ripple and LBRY, prompting some critics to brand the SEC as using coercive measures to make law on a case-by-case basis. instead of making clear rules.
Enforcement has a terrible deterrent effect, and rhetoric matters – we have already seen a huge amount of crypto talent, asset issuers and startups go offshore.
— Brian Armstrong (@brian_armstrong) September 20, 2022
Ripple General Counsel Stuart Alderothy also previously questioned this approach in a November 28, 2022 post, citing the high-profile FTX crash and associated contagion that claimed BlockFi was proof that this was not the case.
Another success story for the SEC in the area of ”regulation through enforcement”.
A few months after BlockFi/SEC made a $100 million deal with BlockFi in bitcoin. $275 million FTX loan from BlockFi. Unknown amounts owed to BlockFi by FTX. Nothing has ever been registered. Paid fines? Whose money? Consumers are destroyed. https://t.co/XWflfRDIMk
— Stuart Alderoty (@s_alderoty) November 28, 2022
However, according to Stark, the SEC follows the law in its actions, citing legal victories when the courts ruled in its favor.
“Indeed, the courts have upheld a wide range of SEC cases involving cryptocurrency-related proposals. In fact, out of the 127 crypto-related enforcement actions already filed with the SEC, the SEC has not lost a single case,” Stark said.
“The SEC’s approach is rarely unreasonably expansive and unrelated to the SEC’s fraudulent enforcement efforts.”
“Rather, the SEC generally adopts a sound and common sense application of the fundamental requirements of the federal securities laws to new and emerging market conditions and technologies,” he added.
Timothy Cradle, a former Celsius employee and current director of regulation at Blockchain Intelligence Group, responded to Stark’s tweet by asking if clear rules would ultimately be a better policy than regulation through enforcement.
“I agree with this argument, however, wouldn’t it be too much to ask the SEC and CFTC to issue guidance in the same way that FinCEN did in 2019?” he said.
“If a major cryptocurrency says it needs clear rules of conduct, wouldn’t it make sense for regulators to clarify in an official communication, such as a guideline, that their rules do apply to cryptocurrencies?” Credle added.
Related: CFTC criticized for ‘blatant enforcement regulation’ in Ooki DAO case
Chris Hayes, former Advisory Board Member of the PA Blockchain Coalition, also commented, arguing that “A prudent regulatory approach for the SEC would be to submit a request for comment on how digital assets may be unable to meet registration obligations due to their digital nature of the blockchain.
“Take this information and then propose a rule on how these tokens can comply with Law 33, taking into account technological differences that affect storage, secondary sales, and settlement time/structure compared to traditional securities.”