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Should the SEC Be Allowed to Wage an Unsupervised Dirty War on Crypto?

Cato Institute | Jack Solowey and Jennifer J. Schulp | Mar 6, 2023

Congress must both defend its oversight authority and give American crypto developers, entrepreneurs and users a clear path to lawfully carry on their business. Providing a common‐​sense disclosure framework for asset‐​backed stablecoins is the place to start.

  • On Feb. 9, the SEC settled allegations that Kraken’s “staking‐​as‐​a‐​service” program constituted the illegal sale of unregistered securities.  Then the SEC sent a Wells notice to stablecoin issuer Paxos, indicating a potential future enforcement action over its Binance USD token (a Binance‐​branded asset designed to keep a 1:1 peg with the U.S. dollar), which the commission apparently also alleges is an unregistered security.
    • And Gensler indicated in a recent interview that basically every crypto project — “everything other than Bitcoin” — could have an SEC target on its back.
  • The SEC maintains it is merely enforcing existing registration and disclosure requirements on crypto tokens and services it considers securities. But this is misleading for two reasons.
    • One, the applicability of securities laws to the projects at issue — Kraken’s staking service and Paxos’s BUSD stablecoin — is, at the very least, contestable.  Even more so if the idea is that every crypto token other than Bitcoin is to be considered a security.
    • Two, a regulator interested in getting consumers the best disclosures about new products, including stablecoins, would provide clear guidance on how to do so. The SEC hasn’t.
    • Gensler’s comments also could imply that he views even highly decentralized tokens, like Ether, as securities. This is inconsistent with previous comments by SEC officials, as well as the idea that securities laws are to address managerial risks — hallmarks of centralized bodies, not decentralized software protocols.

See:  Gary Gensler, Chairman of the SEC Speech

  • Lawmakers have a vital role in restoring administrative accountability.
    • In a Feb. 14 Senate Banking Committee hearing, Republican Senator Tim Scott told the hearing, “If Chairman Gensler is going to take enforcement action, Congress needs to hear from him very soon.”  Across the aisle, Democratic Senator Kirsten Gillibrand has voiced similar sentiment: “I have many concerns about Chairman Gensler and his approach to this space.
    • Oversight would be most welcome. Congress should go a step further by legislating, first providing a practical registration path for stablecoins.
    • The SEC shouldn’t be left in the shadows to try to snuff out Americans’ work on and access to a new class of technology. As House Financial Services Committee Chairman Patrick McHenry has recognized, the future of digital assets “is a major political and economic question that must be decided by Congress.

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