As enforcement cases rise, the SEC’s “shadow” crypto rule is starting to take shape.
The U.S. securities regulator has now put out dozens of actions that explain how it defines a crypto security and which companies should be exchanges, but the industry is still in a holding pattern.
Gary Gensler, who is in charge of the U.S. Securities and Exchange Commission (SEC), thinks that the cryptocurrency industry is messing with his agency. He has said that companies know what they need to do to legally do business in the U.S., but they choose not to do it, with some of them openly mocking the regulator.
Is the crypto industry acting like it doesn’t know what the SEC wants, as the agency keeps showing in cases like the recent action against the Terra/Luna ecosystem and its founder? If so, how long can that go on?
Last week, when CoinDesk asked Gensler some questions, he said, “The law is pretty clear.” He said it is a “false story” that the SEC is leaving crypto without clear rules because the industry keeps saying so.
Late last year, people in the industry started to wonder what the SEC was waiting for because crypto enforcement cases seemed to have slowed down. Many people wondered if the SEC was waiting for the outcome of its big court case with Ripple before getting into more legal fights with crypto companies. But in 2023, the SEC jumped out of the gate with a series of actions and policy decisions that could have huge effects on digital assets.
Amy Jane Longo, who used to work as a trial lawyer for the SEC in Los Angeles and now works at Ropes & Gray, said, “It was done on purpose to try to reach more types of market participants and be able to take action against a wider range of targets.” Aside from its campaign against token issuers and platforms, her former agency has been dealing with everything from staking services to stablecoins to celebrity endorsements.
The industry’s main complaint hasn’t changed: the SEC is ignoring the industry’s requests for real rules, so crypto projects have no choice but to keep going even though the government is closing in on them. But the U.S. securities regulator has been building a fairly detailed set of implied standards with every enforcement action, application ruling, and policy decision it makes.
Most crypto lawyers know what the SEC means when it says that a token is a security. This is because the SEC uses legal standards like the so-called “Howey Test” to explain it over and over again in enforcement documents. And the lawyers also know which companies the SEC thinks should be registered as national exchanges.