Matt Belenky discusses the booming crypto market and the challenges the SEC faces in regulating the cryptoasset industry...
In case you haven’t heard, cryptocurrencies have gone mainstream. Well, namely Bitcoin. MicroStrategy, the business software behemoth, was the first corporation to make waves with Bitcoin when it sold $650 million of convertible notes in December to buy the crypto. On February 16, the company added that they will sell an additional $600 million of convertible notes, which likely drove the price of one Bitcoin (or “BTC”) past the formidable $50,000 price point. As Elon Musk has proven to move the stock market, his company Tesla also bought $1.5 billion of Bitcoin earlier this month and stated that they the company will start accepting it as payment for its electric vehicles at some point in the near future. In the following weeks BNY Mellon, one of America’s oldest banks, said that they would hold, transfer, and issue Bitcoin for their clients and Mastercard agreed to implement Bitcoin into its payments network this year. As major figures, corporations, and businesses buy-in (literally) to cryptocurrencies, government enforcement at the hands of the Securities and Exchange Commission (SEC) will become vital, if not necessary.
Earlier in February, newly confirmed Treasury Secretary Janet Yellen stated that she “sees promise” with regards to the new currencies but is concerned that they have been “used to launder the profits of online drug traffickers; they’ve been a tool to finance terrorism.” The way Yellen described them sounded more ominous and detrimental than reality. In 2019, for example, only 1.1% of all cryptocurrency transactions (which were worth over $ 1 trillion) were considered illicit. In 2020, that percentage has been rumored to be even lower. This still adds up to a sizable amount but it’s not like dollars aren’t used to launder money or finance terrorism. Creating a currency that acts as both an advantageous exchange token and a less-than-criminal panacea will be a difficult line to tread but the lack of overall transactions being used illicitly is an encouraging sign that controlling the cryptocurrency market, at least to some extent, is possible.
Christened by crypto fans as the “Crypto Mom”, Hester Pierce, a Republican commissioner at the SEC, recently came out to show not only her support for the asset class but also urged for regulators to create clear rules that would allow crypto assets to thrive. “To see new investors participating in the markets is a good thing and of course we want them to be educated and skeptical,” she added. Other countries, like Thailand, have already begun making note of this concern and are taking steps to further ensure investor protection. A few days ago it was announced that the SEC of Thailand scheduled a public hearing for this month to address specific requirements for investors who want to open a crypto trading account. The Thai SEC wants to make sure that retail investors investing in crypto assets know what they’re doing from a risk-tolerance perspective in view of the volatile price fluctuations. The United States SEC department, would be wise to take similar steps and listen to Ms. Pierce’s urging that transparency and education in terms of crypto assets is vital to the health of both unknowing retail investors looking to score a quick buck and to corporations making big moves by way of their investments.
The lawsuit of Ripple (XRP), once though to be a legitimate cryptocurrency, is one that many in the industry have their eyes set on. This past Monday, the SEC and Ripple announced that there’s little chance of a settlement ahead of the expected trial of the blockchain payments firm over the alleged fraudulent activities. In a discovery letter address to Federal Judge Analisa Torres of the Southern District of New York, the parties “do not believe there is a prospect for settlement at this time.” The transitioning SEC administration from the Trump era is one reason settlement is likely out of the question at this point. The settlement was prompted in late December when the SEC filed an action against Ripple and two of its executives, alleging that they raised over $1.3 billion through an unregistered, ongoing digital asset securities offering. The SEC’s complaint added that “[w]e allege that Ripple, Larsen, and Garlinghouse failed to register their ongoing offer and sale of billions of XRP to retail investors, which deprived potential purchasers of adequate disclosures about XRP and Ripple’s business…” If this lawsuit shows anything, is that even well discussed and popular cryptocurrencies may have serious problems and may be proffering fraudulent activity as a result. But the encouraging sign is that this case shows semblance to the SEC taking steps to protect retail investors from fraudulent currencies. The complaint, filed in Manhattan and charged the defendants in violating the Securities of 1933, goes to the heart of promoting transparency and communication on the part of the company and making sure their investors and the general retail public, knows about their financial condition and business operations. Applying the ’33 Act to a case like this goes to show the SEC’s authority over similar cases and cryptocurrencies but also the degree to which communication and finance-adjacent cooperation, with the Commodity Futures Trading Commission (CFTC), will be vital to the promulgation and greater acceptance of crypto assets.
What makes crypto difficult to regulate, however, are mostly the result of blockchains. These are essentially abstract ledgers that contain a record of transactions and are maintained across a peer-to-peer network of linked computers, so as not to lose the data. One proposed regulation from December, at the hands of the U.S. Department of Treasury and ex-Treasury Secretary Steven Mnuchin, would prove wholly intrusive and threaten to be a serious invasion of privacy. Among other intrusions, the regulation proposes to have exchanges collect the name and address for anyone that sends an individual crypto or receives crypto for any transaction over $3,000. This would not only be an onerous endeavor for the crypto exchanges (i.e. Coinbase), who will have to collect information on all sent and received transaction that use a crypto wallet (i.e. a storing device for the crypto assets), but an invasion of privacy based on unnecessary personal information that the Treasury has no business in knowing. Not to mention the fact that some of these regulations would be impossible to keep track of as most, if not all, smart contracts do not have name or address information that they keep track of. Luckily for exchanges and crypto consumers alike, President Biden froze all agency rulemaking for the time being, pending review. Still, as Coinbase CEO Brian Armstrong noted, “New regulation should only be made after a thorough and fair process, which involves feedback from industry experts and those that will be ultimately impacted…” The public enters its last 30 days, after receiving a necessary extension, to comment on the proposed rules and decide the future of some critical regulations. The regulations are further curious they are superfluous. There are no regulations that require the same exchanges between friends exchanging money or stocks via bank accounts and/or exchanges. Besides the extremely arbitrary number of $3,000 in crypto per day, Mnuchin’s proposed rule adds nothing with regard to why this information is necessary. This lingering doubt from government officials and regulators should be handled thoughtfully and judiciously by implementing rules and regulations that make sense and promote the crypto asset class. Not hinder it to the point where grave privacy concerns are put at stake.
Make no mistake, the SEC’s challenge with interpreting and regulating the crypto market is wide and vast. One strategy may be to allow these crypto exchanges and assets to continue to rise before they evolve into a more traditional part of the financial market, as Professor Cowen notes. Helping to educate retail investors looking to score big on the recent wave of Bitcoin mania is smart but that concern should be balanced by the fact that government regulation works best when industries mature and they become subject to some form of economic risk. Regulating tokens, coins, assets, exchanges that are still in their infancy stage would thus seem suspect because their problems aren’t well understood and these components need time to develop. Getting expert opinions, gathering knowledge from leading figures in the field will be a necessary step for the SEC and at this point under-regulating while keeping in mind and protecting the safety of the run-of-the mill retail investor, given the industry’s early stage, is a safer bet than overregulating and hindering the prospective growth of the cryptoasset industry in the process.
Matt is a lawyer who has experience working in tax, compliance, executive compensation, and employee benefits. He received his JD from the University of Pittsburgh School of Law and his Tax LLM from the Georgetown University Law Center. He is interested in cryptocurrencies and all things blockchain.
Suggested citation: Matt Belenky, With Bitcoin and the Crypto Market Booming, SEC Regulation is Inevitable, But How Should it Look?, JURIST – Professional Commentary, February 24, 2021, https://www.jurist.org/commentary/2021/02/Matt-Belenky-Bitcoin-Crypto-SEC-Regulation/.
This article was prepared for publication by Anne Bloomberg, a JURIST staff editor. Please direct any questions or comments to her at email@example.com
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