Having been the first chief of the Cryptographic Unit of the SEC from 2017 to 2019, I am often asked what type of application of cryptography that we should expect to see from the new administration. My first answer is that I don’t know. My second answer is that I think it will be different, but it will not disappear.
To anticipate the future of the application of cryptography, we must start by reviewing the past.
The start
The Cry Crypto application unit was formed in 2017 during the first Trump administration. The emphasis was placed on one, fraud and two, basic capital events. The regulation of capital lifting is the main objective of the ACT Securities of 1933. When an investor gives money to an entrepreneur who will use it in a company to generate profits, the investor is entitled to certain information on the company. The first cryptographic surveys focused on this fundraising activity, which was generally in the form of an initial offer of unregistered coins (“ICO”). The idea was that many ICOs at the time were not so different in substance as the offers of equity or debt, and had to be regulated in a similar way.
The industry has responded in a responsible manner and now, cryptographic entrepreneurs often collect funds in accordance with federal securities. In one of the many options, certain offers are exempt from the recording of the SEC because they are limited to accredited investors. Entrepreneurs then use capital to build a blockchain protocol or another cryptographic product. Once built, tokens sales are probably not values of securities because people do not buy tokens as an investment in someone’s business. Even if there is hope for profit, this profit would come from the activities of buyers and other participants, not the efforts of a central commercial director.
The last four years
Over the past four years, the SEC has concentrated more of its application activity on secondary markets such as centralized trading platforms and decentralized protocols. It is less clear how federal securities laws apply to these markets. These transactions generally do not imply a central entrepreneur collecting money from investors and using it in a company. Instead, there are thousands or even millions of cryptography participants who interact with each other, sometimes anonymously via autonomous software. The token buyers may not know who sold them and there may be no central actor who is the key to future success. The courts of the federal district have reached different conclusions and there are reports that the SEC could abandon one of these key cases.
More broadly, the application has become the dominant objective of the regulation of the dry. The SEC has doubled the size of the cryptographic unit, creating new monitoring positions and law enforcement lawyers. He spent years and a huge amount of resources littering several cases of non-Fraude. Many additional non -unique lawyers have worked on cryptographic surveys, and the crypto seemed to be the main objective of the application of the dry.
This approach did not generate advice useful to industry. Many dry rules have technical aspects incompatible with the great decentralized anonymous book that is blockchain technology. Under the approach of application of recent years, the very premise of technology has not been treated as a functionality, but as a bug. The result was the risk of application of the existential law for an emerging industry and the economic activity pushed to offshore.
The future
I do not believe that the cryptographic industry wants a savage of non-regulation. They want a reasonable rules of rules that make conformity feasible, and they also want regulators to retract fraud. No legitimate actor has fraud in the industry.
What does this mean for the next four years of application?
First, the application is only a component of the regulations. We will probably see increased resources dedicated to other parts of effective regulations – new guidelines and rules that offer an achievable regulatory framework. The acting president of the SEC, Mark Uyeda, recently announced a new crypto working group to develop a “reasonable regulatory path”, and Commissioner Hester Peirce, who will lead the working group, included in his objectives “the capacity for preservation (ING) to offer products and services”. The dedicated cryptographic unit has also been reduced in size and reused to cyber and emerging technologies, many staff members returning to general application tasks.
Second, we could see a renewed accent on the fight against fraud. The Commission has not ceased to carry cases of cryptographic fraud in the past four years, but many head cases were unsuccessful regulatory disputes. This could change; As Commissioner Peirce said in his speech of objectives, “we do not tolerate liars, cheaters and crooks.”
Third, once there is a new book of rules, we can expect the dry to apply these rules. It will take time. We could see a transition period, with certain cases of non-Fraude, but the emphasis put more on writing the new rules book. Once adopted, the application of this rules book could arise after a period of fair notice so that the industry adapts to it.
Conclusion
I expect dry crypto the application of the sec will continue, but with different priorities. The protection of investors will be balanced with co-equal mandates of the dry to facilitate capital formation and maintain the ordered markets. The cryptography industry is filled with good actors who want to comply; They just need a book of rules that makes compliance achievable. A renewed approach will allow the industry to grow without abandoning the protection of investors.
So far, the SEC has been the most assertive cryptography regulator, but it is not alone. Other federal agencies can emerge as co-equal regulatory leaders, either by legislation or otherwise, especially if the dry no longer takes the position only each cryptocurrency (except bitcoin) is security. Some state authorities have been active in the crypto, and this will probably continue or even increase.
A client recently reminded me that there will be another election in four years. The new regulatory approach and commercial decisions and industry products must be sustainable. If they are not, the renewed approach of the crypto over the next four years could be canceled as easily as that of the last four years.
