SEC Spin Doctors Trying To Hide Crypto Regulation Disaster

Over the last two U.S. administrations, the U.S. Securities and Exchange Commission (SEC) has promoted an all-encompassing policy of “regulation by enforcement” for U.S.-based digital asset markets like Coinbase and the enterprise blockchain industry that develops fintech solutions like Ethereum, Ripple, Stellar and Circle. Two successive chairmen – Jay Clayton and Gary Gensler – said that every digital asset except bitcoin is a security and should register at the SEC like a stock. The details end there, unless you end up on the wrong side of an SEC lawsuit. The SEC banks on a quick settlement from the parties it charges. Parties which dare to challenge the SEC need financial reserves, superstar lawyers, and years of patience for litigation to play out court. This “enforcement” produces little clarity for the market or protection of investors, which is the ostensible point of the regulatory exercise.

FTX

The SEC claimed this approach would “protect investors.” That didn’t work out for FTX. A series of regulatory mishaps and wealth-destroying events created the current “crypto winter”.

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SEC Chairman Gary Gensler claims that FTX – all other digital crypto assets are – “out of compliance” and their innovators need to “come in and register” at the SEC. Presumably paper and physical presence at the SEC are just the ticket. In any event, the SEC has not published such registration forms, guidelines, procedures, or instructions, nor any theory of how such regulatory deterrence will protect investors.

Sheila Warren, the highly respected head of the Crypto Council for Innovation, observed correctly that the FTX case is not about crypto per se but wrongdoers. Sam Bankman-Fried and his conspirators are being duly charged on multiple charges for fraud, wire fraud, theft, and money laundering by the Department of Justice—in addition to the SEC complaint and another for campaign finance violation. This shoes that already “crypto is subject to a variety of regulations and laws,” notes Warren. In fact, there are already multiple regulators which assert jurisdiction over crypto.

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Gensler’s scapegoating the whole industry likely is a distraction from the many meetings he and his inner circle had with FTX founder Sam Bankman-Fried (SBF) and how close SBF got to a regulatory pass before the fraud emerged right under the SEC’s nose.

Ripple

But FTX wasn’t the only big event in crypto at year’s end that launched the SEC’s spin machine. The cryptocurrency trial of the century – SEC. v. Ripple – reached final arguments after two grueling years in the Southern District of New York. The lawsuit over the San Francisco-based enterprise blockchain company’s sales and distributions of the XRP token is the flagship case for the SEC’s regulation by enforcement policy on crypto.

It was obvious when Clayton’s SEC filed the case on his last day in office that it was a gamble for a quick settlement. The SEC made sweeping arguments about the XRP token itself being a security for seven years, and included Ripple Chairman Chris Larsen and CEO Brad Garlinghouse as defendants. In retrospect, it seemed tactical saber-rattling to terrorize the company’s two top officials into a settlment, isolate the company in court, and shame it into surrendering. But Ripple fought back, tore apart the SEC’s legal theories, and drew vigorous support from 75,000 XRP holders and many of the industry’s leading associations, legal experts and companies.

It was curious, therefore, when Charles Gasparino of Fox Business tweeted some exclusive reporting on an “autopsy” of the Ripple case unfolding at the SEC. Gasparino and his colleague Eleanor Terrett reported on the conflicts of interest among Clayton and his now departed senior staff.

Gasparino tweeted, “it’s worth asking why the SEC did focus on XRP/Ripple”, noting that his agency sources claim “Ripple management was flouting their authority by continuing to sell XRP after on notice to stop because the way it was being sold seemed to establish XRP’s designation as a security.”

Ripple never received any “notice to stop” selling XRP from the SEC. No letters or official warnings were published or issued that have shown up on the case docket. While Ripple’s sales “seemed” to make XRP a security to one official, a trove of internal emails and documents that the SEC fought for more than a year to hide from the judge, show a muddy internal picture. What does “compliance” mean for Ripple or any market participant in such a cloud of confusion?

Reporter Gasparino attempts to capture verbatim the mind-bending SEC gobbledygook on the issue, but no conversational workarounds can hide the SEC’s failed, destructive policy of regulation by enforcement.