U.S. Regulators Increase Crypto Market Scrutiny; Will Clarity Follow?

  • Cryptocurrency Analysis

With cryptocurrencies having been mired in a bear market for the better part of 2018, alt-currency investors were desperately hoping the US Securities and Exchange Commission (SEC) might find its way to approving a Bitcoin ETF sometime soon. The hope, of course, is that such a move would inject some life—as well as additional legitimacy—into the digital asset class.

The US regulatory agency dashed investor hopes in late August when it rejected nine Bitcoin ETF proposals, including applications from ProShares, Direxion and the long-suffering Winklevoss twins Cameron and Tyler who've already endured multiple such denials. Less than a month ago the SEC reaffirmed that near-term approval of a Bitcoin ETF remains illusive, when its Chairman, Jay Clayton, confirmed that in the very near-term, approval for a Bitcoin ETF wasn't likely, citing lack of adequate crypto-market surveillance.

Indeed, throughout 2018, the SEC seems to have intensified its scrutiny of the digital asset class. Though there's been a trickle of good news from time to time, such as the state of Ohio announcing at the end of November that businesses will be able to pay their taxes in Bitcoin, mostly the news has been grimmer for the cryptosphere. Crackdowns on fraudulent initial coin offerings (ICOs) increased, and celebrity crypto promoters—most recently professional boxer Floyd Mayweather Jr. and music producer DJ Khaled—have been penalized for not disclosing they were paid for their services.

Premature Regulation, Negative Consequences

Will global regulators follow suit and and take the US's regulatory lead in clamping down more strictly on illicit use of this nascent technology? Quoc Le, founder and managing director of Quanta, which builds cross-chain infrastructure for decentralized exchanges, notes that because the US has the largest economy in the world, as crypto adoption continues, even if only at the state level, the SEC will increasingly be able to garner data points with which to create more balanced and progressive crypto regulations for the US. That in turn will be noted by regulators worldwide as well as the global economy.

But he stresses that the path to US cryptocurrency regulation should be done thoughtfully and carefully, precisely because it could ultimately have ramifications for both local and global markets. For the SEC to come up with specific cryptocurrency regulation prematurely, he believes, without fully understanding the specifics involved, would have lasting consequences. Regulation that's too rigid could stiffen growth while controls that are too loose could lead to havoc, not only for US investors but for any other countries paying attention to SEC initiatives.

“For now, the SEC is applying traditional security rules to the crypto market and it is starting to look like it is not a good fit. I'm glad to see regulatory innovation at the state level. Places like Ohio...have been stagnant for too long, and blockchain represents a meaningful way to jump start their local economy with a new competitive advantage: a more progressive regulation of crypto.”

Alex Mashinksy, CEO of Celsius, a blockchain payment network, says:

“We believe that the SEC continues to clarify the line of what is acceptable and non-acceptable conduct in the digital currencies space. While many ETF requests were rejected, the SEC clarified what they want to see in such products to further protect investors.”

As the industry matures, adds Mashinksy, appropriate regulations and regulatory custodians will emerge to help build suitable products while safeguarding investor assets. At that point the SEC will likely loosen their strict requirements.

But that would also require regulatory bodies to have a clearer understanding of what alt-currencies are as well as a sharper understanding of the role they play in financial markets. Mashinksy cites the recent Blockvest ICO case as an example of how confusing the regulatory landscape in the US remains.

SEC Blocks ICO, Court Overturns Injunction

This past October, the SEC took action against Blockvest LLC, halting their BLV coin offering, alleging that fraudulent claims which violated the Securities Exchange Act had been made by Blockvest about the offering. However, in late November, a US district court judge denied the motion after Blockvest appealed, saying the SEC had failed to prove that the tokens met guidelines for securities.

That's not to say there weren't problems with the BLV offering and its parent company. There were. But, notes Mashinksy, the court overturned the complaint because both the rules were unclear, as was the SEC's role in overseeing them:

“If one looks at the recent Blockvest decision, the US courts have reminded the SEC that their job is enforcement and not interpretation of the laws when the court questioned the SEC determination that Blockvest was a security. Traditionally the SEC did not opine on the quality or validity of securities and ETFs as their role mostly was focused on making sure all best practices are followed when such products were presented to investors.”

Mashinksy believes that many more cases will ultimately be decided by the courts. And he stresses that new legislation will be needed to clarify how agencies deal with ICOs and security token offerings (STOs). As well, he says, clearer guidelines will hopefully be released regarding what derivative products such as ETFs and ETNs can officially be issued. Nevertheless, Mashinksy notes, “considering recent price volatility, I think the SEC can defend its position of trying to protect unsophisticated investors from jumping into the deep pool of cryptocurrencies.”

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