U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler recently asked for additional SEC funding to tackle "misconduct," particularly in the crypto industry. While some have been critical of the SEC's regulation-by-enforcement approach, Antonio Gomes, director of the Blockchain Education Network, told Federal Newswire that he agrees the SEC needs additional funding, but not just for enforcement. Gomes called on the SEC to establish regulations for the crypto industry to halt the brain drain of innovators who are flocking to more crypto-friendly jurisdictions.
"I agree with the fact the agency needs additional funding, not only for more enforcement, but to create clear regulations and legislation for the crypto industry," Gomes told Federal Newswire. "As someone who just entered the workforce, I see a lot of companies leaving the U.S., and picking other jurisdictions due to the lack of clarity from regulatory agencies such as the SEC. Thus, making our country fall behind in innovation and increasing unemployment rates. Crypto is an innovative breakthrough that can benefit our nation in many ways and should be appropriately regulated to foster growth and young entrepreneurs to innovate."
In March, Gensler said in a testimony before the House Appropriations Committee, “Rapid technological innovation in the financial markets has led to misconduct in emerging and new areas, not least in the crypto space. Addressing this requires new tools, expertise and resources.”
He said the agency needs $2.4 billion in funding to hire additional staff for its enforcement and examinations divisions and added that the SEC received more than 35,000 tips and complaints in FY 2022, which resulted in more than 750 enforcement actions and $6.4 billion in "penalties and disgorgement."
Of those 750 enforcement actions, 30 – or 4% – were related to the crypto industry. Of the $6.4 billion in penalties, $242 million – or 3.78% – was related to the crypto industry, CoinTelegraph reported.
Last month, the SEC sent a Wells notice to Coinbase, the largest crypto exchange in the U.S., notifying the company of a potential upcoming enforcement action. Paul Grewal, the chief legal officer of Coinbase, said in response to the Wells notice that Coinbase has repeatedly asked the SEC to put out clear regulatory guidelines so that Coinbase and other crypto companies can follow them, but he said the SEC has not been communicative, Grewal wrote in a blog post. Last summer, the SEC asked Coinbase if it would be interested in registering with the SEC and laying out what a potential path for registration would look like, given that a path for crypto exchanges to register does not currently exist. Coinbase said it was absolutely interested in registering with the SEC and developed and proposed two different models for registration.
"We spent millions of dollars on legal support to build these proposals and repeatedly asked for the SEC’s feedback. We got none," Grewal said. "If our regulators cannot agree on who regulates which aspects of crypto, the industry has no fair notice on how to proceed. Against this backdrop, it makes no sense to threaten enforcement actions against trusted public companies like Coinbase who are committed to playing by the rules."
SEC Commissioner Hester Peirce recently criticized the SEC's approach to crypto in a statement expressing her dissent from proposed rule amendments that would redefine "exchange." She said the proposed amendments "embrace stagnation, force centralization, urge expatriation and welcome extinction of new technology." She said the SEC's current approach to regulation "aggressively expands its regulatory reach to solve problems that do not exist." Peirce emphasized that the SEC will urge entrepreneurs to register, but when those companies try to do so but cannot, "the Commission dismisses the possibility of making practical adjustments to our registration framework to help entrepreneurs register, and instead rewards their good faith with an enforcement action."
U.S. Bankruptcy Judge Michael Wiles wrote in a March 11 opinion that the absence of clear regulatory guidelines for digital asset issuers in the U.S. has created a "highly uncertain" environment for those companies, many of which, Wiles pointed out, have been operating for years "without being subject to clear and well-defined regulatory requirements."
"Regulators themselves cannot seem to agree as to whether cryptocurrencies are commodities that may be subject to regulation by the CFTC, or whether they are securities that are subject to securities laws, or neither, or even on what criteria should be applied in making the decision. This uncertainty has persisted despite the fact that cryptocurrency exchanges have been around for a number of years," Wiles said. He added that the SEC's actions might foreshadow "a wider regulatory assault," but also pointed out that the SEC and the CFTC have sometimes acted in ways that contradict each other when it comes to the crypto industry.
Ambre Soubiran, the CEO of Paris-based Kaiko, a crypto market data provider, predicted that Hong Kong’s openness to crypto, coupled with the U.S.’s regulation-by-enforcement approach, will push crypto innovation out of the U.S. and into Hong Kong, CoinTelegraph reported.
“The U.S. being more stringent these days than ever on crypto and Hong Kong regulating in a more favorable way…is going to clearly shift the center of gravity of crypto assets trading and investments more toward Hong Kong," Soubiran said in an interview.
In February, Hong Kong’s Securities and Futures Commission laid out a proposed licensing framework for crypto companies with the goal of protecting consumers while also encouraging innovation. In March, Hong Kong’s secretary for financial services and the treasury, Christian Hu, said that more than 80 crypto-related companies have shown interest in either moving to or expanding operations in Hong Kong.
Changpeng Zhao (CZ), the Canadian CEO of Binance, the world's largest crypto exchange, has also called for regulatory clarity in the U.S. CZ wrote in a blog post last year that believing "regulation is bad for crypto" is a "simplistic view," and he believes that well-guided regulations serve to protect consumers while still encouraging growth and innovation in the crypto sector.
