Biden and Trump’s SEC trade tips on crypto regulation

It is very rare for regulators on the right and left to agree on policy. However, when it comes to cryptocurrency, it seems that the two men who have headed the Securities and Exchange Commission (SEC) in the United States are remarkably aligned. Yes, the technology as well as its offerings may be new, but the old rules are still applicable. The Digital Asset Compliance and Market Integrity Summit was held on Wednesday in New York where the SEC chairman under the Republican President Donald Trump administration, Jay Clayton interviewed the current SEC chairman, Gary Gensler, under the Democratic Biden Administration.

Mr. Clayton is now advising crypto companies, whereas Mr. Gensler was a professor at M.I.T before he joined the SEC and taught classes on cryptocurrencies. The former SEC chairman questioned his successor, Mr. Gensler about cryptocurrency regulation and the latter responded that he hoped Mr. Clayton wouldn’t mind if he quoted him. Mr. Gensler then went on to detail the view that the former chairman of the regulatory agency has articulated for quite long and one that has seen strong resistance from blockchain businesses; entrepreneurs use crypto tokens ‘largely’ for raising money, which means that they fulfill the criteria of an investment contract so they fall under the securities law.

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Jay Clayton was in complete agreement with Mr. Gensler in this regard and added that any other definition of security would also suffice in the matter. The agreement of the former and the current SEC chairman on the issue of crypto regulation is undoubtedly significant because it indicates that many, if not all, crypto issuers are in violation of the law. This is because they have not registered with the SEC for doing so, which means that they could have to face enforcement actions. There is already a critical case pending that could provide the answer to this question.

Last year, when Mr. Clayton’s tenure had been coming to an end, the SEC had filed a case against Ripple Labs as well as its founders and executives. The case alleged that they had used an ongoing, unregistered digital asset securities offering for raising a whopping $1.3 billion. The SEC was referring to Ripple Labs selling its XRP token to the public. One important fact that has been established is that not every cryptocurrency can be classified as a security. For instance, Bitcoin regulation would be vastly different because the original cryptocurrency has been established as a commodity in the United States.

This is due to the fact that Bitcoin is not minted by a single entity or individual for that matter. Instead, a decentralized network that comprises of high-powered computers operated independently compete with each other for mining Bitcoin and solve math problems algorithmically for earning a portion of the cryptocurrency. However, the SEC has argued that since Ripple Labs sold its XRP token to people for raising money for its various payment products, it is classified as a security. It has also added that investors should have been given disclosures about the company’s operations and businesses in order to help them in making informed decisions about whether to buy the token or not.

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While none of the two men mentioned the Ripple case by name, its implications were certainly relevant. They asymmetry of information between investors and insiders when companies use unregistered tokens for raising money was extensively discussed by the two men. The purpose of registration is to address this imbalance by making certain disclosures mandatory and companies operating outside the regulatory framework means the crypto market will not be able to flourish.

Mr. Gensler has warned before and he did so again that aisle three will see a ‘spill’ and this could lead to instability in the market. Crypto enthusiasts who were following this discussion were mostly likely frustrated because of the agreement between the two men over the matter of cryptocurrency regulation as it is certainly not positive.