The enforcement drums are pounding at the Securities and Exchange Commission (SEC) when it comes to digital assets. At the top of the list are trading platforms that may be skirting established securities laws, especially when the Commission believes they are enabling the buying and selling of digital assets that are deemed to be unregistered securities. Yet the authority of the SEC in regards to other (non-security) types of digital assets are not completely clear and the agency has been slow to establish rules that reflect the digital generation.
Recently, SEC Chairman Gary Gensler sent a letter to Senator Elizabeth Warren outlining what he would like, in the form of new legislation, to more closely regulate the market with a keen eye on investor protection concerns. This may worry digital asset innovators in the US – some of who may be interested in changing jurisdictions.
Earlier this week, Poloniex, once a significant digital asset trading platform but now smaller, settled with the SEC paying a substantial penalty while assuring the authorities it will no longer accept US investors – even those attempting to evade geography by using a virtual private network. The enforcement action targeting Poloniex may foreshadow things to come.
Recently, Crowdfund Insider connected with attorney Daniel Payne, Shareholder, and part of the Fintech & Blockchain Practice at Murphy & McGonigle, to garner his perspective on the current regulatory environment. Our discussion is below.
SEC Chair Gary Gensler has stated that he intends to crack down on the digital asset sector indicating crypto exchanges are at the top of the list. How may this impact US-based crypto marketplaces?
Daniel Payne: Crypto marketplaces have always faced the difficult decision of whether to register with the SEC, but Gensler’s comments may have shifted the decision-making process.
Most marketplaces attempt to avoid SEC registration by only listing non-securities, but this middle ground may vanish if the SEC takes a more aggressive stance in identifying digital assets as securities and bringing enforcement actions against marketplaces.
Indeed, the SEC’s Poloniex settlement may be the start of a larger enforcement wave that could reshape the entire digital asset industry. A crackdown would lead to fewer U.S. marketplaces where digital assets can be traded, which would lead to more traders looking to trade on overseas marketplaces.
The Commission has shown a proclivity to pursue actions against issuers/platforms regardless of geographic location. Should all issuers/marketplaces be concerned?
Daniel Payne: The SEC takes the view that if U.S. investors are able to buy or trade securities from a platform (either an issuer or a marketplace), then the SEC has jurisdiction.
Issuers and marketplaces should understand the SEC’s ability to reach overseas and ensure they are acting in compliance with U.S. securities laws. On the other hand, the SEC has limited resources.
The more involved the issuer or marketplace is with U.S. investors, the more likely it is that the SEC will assert jurisdiction.
What about the FATF travel rule? How will this impact the digital asset sector in regard to innovation?
Daniel Payne: We are having conversations with many of our crypto clients about the benefits of moving operations overseas. They are reacting not just to Gensler’s comments, but to the possibility of negative trends in the tax and regulatory approach to crypto in the United States.
The sector will continue to innovate without a doubt, but how much of that innovation will occur in the U.S. heavily depends on the regulatory and tax regime that governs here.
Crypto companies are highly mobile and particularly sensitive to regulatory threats. They are ready to move anywhere they perceive as a more attractive jurisdiction for crypto innovation.
What about DeFi? How does the Commission handle decentralized finance without an intermediary?
Daniel Payne: This is the $100,000 question. Gensler did not give any indication of how the SEC may try to answer this question.
It is hard to imagine the SEC will permit platforms engaging in securities transactions to escape regulation because they call themselves decentralized. Certainly, if a party has some control over the platform or is deriving revenue from the platform, the SEC will target that party.
But for a truly decentralized platform, who would the SEC approach about registration?
The original developer may no longer have control over the platform and the parties running the platform may be anonymous or otherwise difficult to pursue. Could the SEC decide it may have to go after the users? If the SEC has to design a new regulatory paradigm to deal with decentralized platforms, that could take a long time to design and implement.