Crypto regulation isn’t that complicated, crypto skeptics say

Speakers at Monday’s “Crypto Policy Symposium,” a gathering of crypto-skeptics, or “nocoiners,” dismissed the usual calls for “regulatory clarity” from crypto supporters as a “distraction.” The rules around crypto are crystal clear, they said – and that’s why crypto enthusiasts don’t like them.

“An Oscar should go to whoever first coined ‘regulatory clarity,'” said Santa Clara University Associate Professor of Law Stephen Diamond.

In a panel titled “Are Regulators and Regulations Fit to Meet the Crypto Challenge?” Diamond said, “There is regulatory clarity – it’s pretty simple and it’s been in place for a long time. Hopefully there will be no dramatic shift to redefine this very stable understanding of financial markets.”

At issue was the ongoing discussion between the Securities and Exchange Commission (SEC) and Coinbase, one of the world’s largest crypto exchanges. The SEC recently sued two former Coinbase employees for insider trading, suggesting that several of the crypto tokens sold by Coinbase were securities.

Coinbase responded by attacking the SEC in a long blog post, following the tradition of other crypto companies, such as Ripple and Kik, which have challenged the regulator in court. Including Coinbase accused the regulator of suffocating technology.

Co-panelist John Stark, former head of the SEC’s Office of Internet Enforcement, said he had heard this claim before and called it false. He went on to draw comparisons to the 1990s, when he ran enforcement against early internet companies.

“There was a lot of talk about us ‘stifling technology’ back then,” he said. “We didn’t stifle anything, we got bad actors out of the way so technology could flourish. Not so with crypto, because there’s no good in it. We stifle fraud, crime, chicanery and theft.”

At the heart of much of the mutual distrust between regulators and crypto companies is the debate over which regulatory body should have jurisdiction over crypto markets.

The SEC, for its part, is perfectly content with its de facto position of authority, which it has exercised with great confidence, enforcing hundreds of judgments against a variety of projects that it has deemed to be securities fraud.

Crypto lobbyists, on the other hand, have been agitating for this jurisdiction to pass to the Commodity Futures Trading Commission (CFTC), which would see cryptocurrencies treated more like commodities like gold, oil or wool. Proponents of this approach argue that cryptocurrencies, which are often community-owned, can fall under the narrow limits set by the century-old Howie test, which defines a security as an investment that promises some form of return on the back of a third-party effort.

The SEC has already suggested that Bitcoin is “sufficiently decentralized” and therefore not a security, but other coins remain in limbo.

Meanwhile, the regulatory agency has cracked down on anything with a hint of a securities crackdown, an approach that lobbyists — and even some regulators — deride as “regulation by enforcement.”

However, the supervisory authorities themselves laugh at this criticism.

“The Howie test is assumed to be broad,” Diamond said, pointing to the rule of thumb’s century-long pedigree and broad, diverse application. He said the majority of cryptocurrencies were clearly securities and the industry should remain under SEC oversight.

On enforcement, Stark was similarly blunt, saying, “It is not regulation by enforcement. It is enforcement.”

The breadth of the Howie test and other SEC criteria, he added, was by design. “It’s really quite simple: you can’t lie, cheat and steal people’s money. That’s securities fraud.”

Stark added on the panel that the combative attitude of regulators of crypto companies was not only a mistake, but self-defeating. “You don’t fight with your regulator,” he said. “You can be put out of business overnight.”

He predicted that another round of enforcement action against crypto companies was imminent, and that regulators would likely involve the Department of Justice. “The next wave is the stock exchanges,” Stark said. “They’re going to get hit. Coinbase is going to be sued.”

Crypto companies “go online and call the SEC names,” he said. “They won’t call the DOJ (Department of Justice) names when they’re behind bars.”

These comments are not toothless: the speakers of the Crypto Policy Symposium have an audience in the upper echelons of power. Just before Diamond and Stark spoke, California Democrat Brad Sherman — with the help of some verbose and confusing comments about hamsters — confirmed his desire to see the crypto industry regulated into oblivion.