SEC is just doing its job in enforcement cases, crypto critics tell lawmakers – DL News

You can’t have it both ways.

That was the message from critics of the cryptocurrency industry at a congressional hearing held on Tuesday to discuss the Securities and Exchange Commission’s enforcement powers.

The top Democrat in the House Financial Services Committee, Maxine Waters of California, told lawmakers that watering down the SEC’s powers “only empowers fraudsters, grifters, and those who know the law but don’t like it” — including many crypto firms.

“The crypto industry, which publicly claims to want regulation, is suing the SEC for trying to regulate it,” Waters said.

During the hearing, lawmakers discussed whether the SEC’s enforcement powers should be defanged in some cases, whether its disciplinary processes are biased, and whether it has levied arbitrary and inflated fines on crypto firms.

But the discussion inevitably strayed into familiar territory for the subcommittee — rehashing arguments about whether the SEC under Chair Gary Gensler has declared an unfair war on crypto.

Under Gensler’s leadership, the agency ramped up its enforcement against crypto businesses by 53% in 2023 as measured by the number of enforcement actions it took

Targets of the litigation and administrative proceedings included major players like exchanges Coinbase and Binance.

The trend is continuing this year.

Last month, the SEC served decentralised exchange Uniswap with a Wells Notice — an alert that the agency is about to bring an enforcement action against a company.

And on Monday, fintech Robinhood Markets said it, too, was served with a Wells Notice over crypto tokens traded on its retail platform.

Industry counters

Crypto venture capitalists and crypto CEOs such as Coinbase founder Brian Armstrong have hit back.

With the rallying cry that the SEC’s strategy is one of “regulation by enforcement,” these crypto proponents say that their tokens are not securities and that the SEC is therefore overstepping its authority.

But there are those, like Waters, who say that line of reasoning is specious.

‘The crypto industry, which publicly claims to want regulation, is suing the SEC for trying to regulate it.’

—  Maxine Waters, House Financial Services Committee ranking member

These critics say that crypto companies want just enough regulation to give them a patina of respectability without getting in the way of their profits — and investor protection be damned.

Consultant John Reed Stark, who was present at the hearing as a witness, is another of those vocal industry critics.

During the hearing, he said the industry’s arguments were “oddly hypocritical.”

Digital assets as securities

While crypto promoters say they are championing a new kind of finance, “when the SEC comes knocking, they argue in court papers that selling digital assets is just like selling baseball cards, American Girl dolls or Beanie Babies,” said Stark, a former lawyer in the SEC’s enforcement division.

Stark said that trading cryptocurrencies — and the exchanges, brokers, and market makers that support that trading — clearly fall under the Securities Acts of 1933 and 1934 that regulate securities issuance and secondary markets.

The Securities Act of 1933 requires that investors receive relevant information about securities that are sold to the public and it prohibits deceit or fraud.

The 1934 Securities Act requires that anyone who seeks to control more than 5% of a company’s securities disclose material information.

Judges in SEC lawsuits against crypto defendants — such as LBRY, Kik, and TerraForm Labs — have supported the assertion that the sale of cryptocurrencies falls under those rules, Stark added.

He said the SEC is just doing its job under securities laws that have made it a largely effective, if sometimes imperfect, financial watchdog under both Republican and Democratic chairs.

“Digital asset advocates may not like the outcome of SEC enforcement policing, but that doesn’t amount to an absence of due process and fair notice,” Stark said.

“It just means the industry needs to get its act together and adapt to the laws that apply to it — not the other way around,” he said.

Have you got a hot tip or burning opinion on crypto regulation? Reach out to the author at joanna@dlnews.com.