From its early days, the crypto sector has grappled with regulation. We analyzed how the U.S. Securities and Exchange Commission (SEC) and its successive chairs have shaped crypto’s regulatory landscape over the years.
The U.S. Securities and Exchange CommissionSEC has had a less than friendly relationship with crypto, with its current chair Gary Gensler seen as the poster child for this perceived animosity.
But how did Gensler’s predecessors relate to the crypto industry? How did policies enacted under their tenures eventually shape the current regulatory environment? By delving into these historical contexts and examining how successive chairs contributed to the SEC’s rule book, we can better understand the evolution of the regulator’s approach to cryptocurrencies and the potential implications for the industry’s future.
The early days: Christopher Cox and Mary L. Schapiro
Crypto came into the limelight at the tail-end of Christopher Cox’s tenure as SEC Chair. Appointed by George W. Bush in 2005, Cox was the 28th occupant of the SEC’s topmost position, and while players in financial regulatory circles have credited him with enhancing transparency and accountability in financial reporting, he wasn’t around long enough to cast his shadow over the nascent crypto industry.
Satoshi Nakamoto, the pseudonymous inventor of Bitcoin (BTC), mined the cryptocurrency’s Genesis block on Jan. 3, 2009, two weeks before Cox left office to be replaced by Mary L. Schapiro.
Crypto largely flew under the radar during Schapiro’s tenure. The Obama appointee was understandably preoccupied with the aftermath of the 2008 financial crisis, in which many people heavily criticized the SEC for failing to detect Bernard Madoff’s massive Ponzi scheme.
However, under Schapiro, the agency embarked on one of its most comprehensive rulemaking agenda since the 1930s. It implemented numerous reforms designed to protect investors and strengthen the integrity of the American money market. These reforms included improving credit rating quality, enhancing disclosure, and regulating asset-backed securities.
Schapiro also made strides in modernizing the SEC’s enforcement program. She restructured the program to encourage greater collaboration and streamlined the process for approving formal investigation orders, enabling staff to act more swiftly to detect and prevent fraud.
Since Shapiro’s tenure as SEC Chair predates the rise of cryptocurrencies, many of the reforms she implemented have shaped the agency’s approach to regulating all types of securities, including digital assets.
The epoch of change: Elisse B. Walter and Mary Jo White
The SEC’s momentous journey with digital assets began to take shape with Mary Schapiro’s exit on December 14, 2012. Elisse B. Walter initially replaced her in an acting capacity, with Mary Jo White taking over the role nearly five months later in April 2013.
Walter’s tenure, though short-lived, was marked by the regulator’s initial survey of the potential implications of digital assets on investors and the broader markets. Despite the absence of significant enforcement actions involving crypto during her reign, she sowed the seeds for a structured regulatory framework.
Her successor, Mary Jo White, took the helm from April 10, 2013, until January 20, 2017. White’s era witnessed the SEC’s proactive stance towards cryptocurrencies come to fruition. Under her stewardship, the agency made its first significant enforcement move in the crypto realm, charging a man and his company for a Bitcoin-oriented Ponzi scheme.
White’s term also saw the SEC’s watershed decision to turn down the first Bitcoin exchange-traded fund (ETF) proposal, flagging concerns over market manipulation and a regulatory vacuum in Bitcoin markets. This turning point underscored the uphill battle faced by digital assets in their quest for mainstream financial acceptance.
The crypto community had a polarized response to these developments. While some saw the SEC’s watchful eye as a speed bump on the road to innovation, others embraced it as a much-needed step towards legitimizing cryptocurrencies and safeguarding investors.
Walter and White’s times in office laid the foundation for the SEC’s ongoing dialogue with the crypto industry. They embarked on a journey through unknown territories, wrestling with the task of fitting existing securities laws into a rapidly morphing digital asset landscape.
The enforcement era: Jay Clayton
Appointed by President Donald Trump, Jay Clayton took the reins as SEC chairman between May 2017 and December 2020. As the crypto industry flourished, it fell upon Clayton to steer the SEC through the complexities of the emerging techno-financial landscape, which often shook the pillars of traditional regulatory norms.
A cornerstone of Clayton’s tenure was his stance towards Initial Coin Offerings (ICOs), a new, volatile market that reached a fever pitch in 2017. Amid the frenzied excitement, Clayton sought to ground investors by highlighting the inherent risks and underlining that tokens marketed in ICOs could potentially be securities by definition. It resulted in a heightened regulatory gaze towards ICOs, with the agency taking direct action against several crypto projects.
During Clayton’s term, many stablecoins—cryptocurrencies engineered to resist dramatic price fluctuations—debuted. While acknowledging the prospective benefits of stablecoins, the Clayton-led SEC voiced concerns regarding their regulatory difficulties, especially if deemed securities.
The question of defining cryptocurrencies as securities turned into a pivotal debate during Clayton’s era. He maintained that numerous cryptocurrencies fell under the securities umbrella, thus falling within the SEC’s regulatory purview. This viewpoint ignited continued contention within the crypto community, with some deeming it a potential roadblock to innovation.
Throughout Clayton’s tenure, the SEC launched 56 lawsuits against firms operating within the crypto domain, reinforcing his dedication to upholding securities laws even in digital assets. These enforcement actions triggered a ripple effect in the crypto industry, catalyzing a surge in compliance initiatives.
Major crypto cases under Clayton
SEC vs. Telegram Group Inc.
In late 2019, Telegram Group Inc. and its affiliate TON Issuer Inc. found themselves in hot water with the SEC. The agency took legal action against them, suggesting they had sidestepped regulations when selling their Gram tokens.
Telegram, familiar to many as a messaging platform, had made a foray into the crypto domain by launching the Telegram Open Network (TON) and its associated Gram tokens. The company succeeded in raising close to $1.7 billion from token sales in the first quarter of 2018 alone.
The SEC’s contention was that the sale was tangibly a securities offering and should have been officially registered with them. They anchored their argument on the assertion that Telegram’s Gram tokens fell under the category of securities as per U.S. law, thus making their sale a violation of the Securities Act of 1933.
The regulator believed that investors were essentially banking on Telegram’s management for profits rather than just owning the Gram tokens. Telegram fired back, arguing that Grams were currencies and not securities, positioning them outside the SEC’s purview.
Nonetheless, in March 2020, the SEC secured a preliminary injunction from a U.S. District Court, stalling the distribution of Gram tokens. Following this, Telegram agreed to refund investors to the tune of over $1.2 billion and also decided to cough up an $18.5 million civil penalty.
SEC vs. Kik Interactive Inc.
In June 2019, the SEC filed a lawsuit against Kik Interactive Inc., alleging that the company’s $100 million ICO for its Kin tokens was an unregistered securities offering.
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