The Securities and Exchange Commission (SEC) is responsible for overseeing, regulating, and enforcing compliance on US securities offerings, and following its rules can be tough. Indeed, many crypto proponents would rather disregard — or abolish — the SEC altogether.
Here we’ll contextualize their attempts to fight the world’s most powerful securities regulator.
Crypto promoters have issued thousands of non-Bitcoin tokens since ICOs like Mastercoin, NXT, and Ethereum began in 2013. Almost all ICOs allocate generous quantities of tokens through pre-mines, bonding curves, or other schemes to enrich an inner circle.
Due to investors’ expectation of profit while relying on the essential, entrepreneurial, or managerial efforts of these well-compensated elites, most crypto offerings pass the Howey Test. In other words, they are classed as investment contracts.
In the opinion of the regulator responsible for determining whether an offering is or is not a security, the vast majority of crypto offerings fall firmly into this bracket.
- Indeed, the founder of the SEC Office of Internet Enforcement said, “Every single ICO I ever saw was unlawful on multiple levels.”
- Former SEC Chairman Jay Clayton said, “I believe every ICO I have seen is a security.”
- “I find myself agreeing with Chairman Clayton,” affirmed his successor, current SEC Chairman Gary Gensler.
Granted, a generic crypto asset might be a commodity or harmless piece of code, by itself. But anything (even orange groves) can be offered in a way that passes the Howey Test and makes the offering a securities offering.
Millions of token offerings
It’s the job of the SEC to ensure that issuers who offer securities to US residents disclose risks. Without mandating the disclosure of risks, issuers can withhold material, adverse information.
Obviously, every investment sounds enticing if the issuer can arbitrarily withhold the truth. However, not telling the whole truth is deception, and deception has been a surefire way to steal money from the public for millennia.
Unsurprisingly, crypto promoters — especially those who believe that their favorite crypto asset is somehow exempt from SEC disclosure obligations — would prefer to retain their legal option to withhold disclosing risks to investors. They believe the SEC, whose employees are dictionary-defined as public servants, is somehow their enemy. They lambast the SEC in court, through media appearances, and on Capitol Hill.
Some of their efforts have a modest amount of support even within the legislature. House of Representatives majority whip Tom Emmer accused Gensler of failing to provide a clear path for digital asset companies to comply with registration requirements.
Many crypto issuers have tried to fight the SEC’s jurisdiction.
- The digital asset industry has been watching the SEC v Ripple case closely since the SEC filed its enforcement action in December 2020. That billion-dollar lawsuit is one of the few examples where an ICO issuer had the financial wherewithal to fund years of attorney’s fees.
- Kik once attempted to raise $5 million in a crowdfunding campaign dubbed ‘Defend Crypto’ for its court battle with the SEC.
- Coinbase formed Crypto 435, an effort to promote crypto-friendly policies in all 435 districts of the United States House of Representatives.
- The Digital Currency Trader’s Alliance is running commercials to try to drum up support for its efforts to combat the SEC’s alleged overreach in regulating digital assets.
- Large digital asset firms spent millions of dollars on lobbying in 2022. Existing organizations like the Blockchain Association jumped into lobbying.