The Crypto Task Force, under the US Securities and Exchange Commission (SEC), recently held the inaugural session of its “Spring sprint toward crypto clarity” roundtable series. SEC experts debated crypto regulation in a discussion that was open to the public, with the aim to draw on the expertise of the masses in the development of a regulatory framework for crypto.
In her speech, SEC commissioner Caroline Crenshaw reminded the audience that at the foundation of the current regulatory structure is the definition of security – a definition that has been used for decades to “successfully regulate an incredibly diverse array of financial products”.
“We cannot poke holes in the foundation without expecting the walls may crack. Modifying the law to facilitate the success of a chosen product category is fraught with risk,” she said. “Risk not only of weakening regulatory protections for that category, but of creating a negative domino effect on other areas of the market protected by the same laws.”
Updates required
Despite this, she acknowledged that “current law is not working for crypto” and asked those sharing their views to carefully consider the implications of the changes they were going to propose. She encouraged the audience to ask critical questions, such as whether these changes would “protect investors, the capital markets, and national security”.
“This is critical given the heightened risks associated with crypto assets, including, just to name a few, their speculative nature, a disproportionately high volume of scams and frauds, lack of legal redress available against bad actors that are unidentifiable or located abroad, and use of crypto assets to finance crime and terrorism,” she pointed out.
An old law
Mark Uyeda, acting chair of the Crypto Task Force, focused on the Howey test in his speech. A legal test with roots in a 1946 court case, the Howey test considers an asset to be a security as long as it involves an investment of money into a common enterprise with the expectation of profit from the effort of others.
The application of the test on crypto assets has been controversial – this post here on PostTrade 360° summarises the history of the debate and links to various sources covering the subject.
“In the years following Howey, various courts of appeals are split on various nuances and other aspects of that decision,” recalled Uyeda. He claimed that differences in opinions among various courts is not unusual and that in these cases, the SEC has stepped in to provide guidance. “This approach of using notice-and-comment rulemaking or explaining the commission’s thought process through releases – rather than through enforcement actions – should have been considered for classifying crypto assets under the federal securities laws,” he said.
