The tenure of Gary Gensler as Chair of the Securities and Exchange Commission coincided with the rapid rise and then fall of crypto. Acting Chairman Mark T. Uyeda started his sure-to-be brief tenure by launching a crypto task force “dedicated to developing a comprehensive and clear regulatory framework for crypto assets.”
There will clearly be a move away from “regulation by enforcement.” The SEC just reassigned one of its top crypto litigators, Jorge Tenreiro, to office Siberia. I guess that this task force is useful and could give some certainty to the crypto market. But I don’t think it’s going to make the cypto-bros that happy.
In my mind, there are five types of crypto:
- Fraud Coins
- Securities
- Stable Coins
- Commodities
- Meme Coins
Fraud Coins
The SEC has been very consistent about using its enforcement powers against number 1. The SEC should be in the business of stopping securities fraud. A huge portion of crypto and ICOs were for failed projects with poor disclosure and sponsors pocketing the cash. Number 1 is really the evil counterpart of 2.
Securities
Number 2 is illegal so far as it fails to comply the existing securities laws. Nearly of the coins that promise some kind of profit-sharing or interest in the underlying platform fall into this category. Those securities laws are in place to protect the general public. No reason those securities laws should not be applied to crypto. The Howey test is still the law of the land. There have been some edge cases, like Stoner Cats, that pushed the limit of the Howey test.
Stable Coins
Stable coins are great. For the stable coin companies. You get a coin pegged to the dollar. The stable coin company takes your dollar, issues you a coin and holds your dollar in safe-keeping. You hand the coin back and you get your dollar back. A terrible way to hold your money. Your bank will give you interest on your dollar. The stable coin company won’t pay interest. It actually can’t pay interest because that would turn into a category 2: security. So the stable coin company invests your dollar in something safe (hopefully) and earns interest which it gets to keep. Stablecoins are just terrible money market funds.
Commodities
For the category 4 commodities you have BitCoin and Ethereum. The SEC has stated that it doesn’t consider these to be securities.
Meme Coins
The first category 5 meme coin was DogeCoin. It never purported value. It just had a cute picture of Kabosu, the memed Shiba Inu dog. It’s still the largest meme coin. The splashiest was the recent Trump coin. Meme coins do not purport to have any underlying value or use. The sponsors clump them into the same category as commodities, often equating them to trading cards. It seems that Trump’s coin was not welcome by the crypto community that was trying to gain ground in stable, securities and commodities type of coins.
The big question is how you categorize something as a commodity coin or a meme coin. What’s the differentiation? I’m not so sure any more. Meme coins used to just be a joke. But the jokes have kept going and keeping some value.
What Can the SEC do?
I assume the SEC will chose to work in the existing securities law frameworks. Otherwise, it needs congressional changes to the underlying laws. In that case, I assume it will work on better defining when a coin becomes a security. I don’t think that is going to move the needle that much.
If it does, then I see a whole lot of fundraising switching over to coins instead of traditional methods. Let’s raise a fund using coins instead of partnership interests. Or run an IPO. It would mean less protection for investors. Probably a bad result.
The SEC might create a framework for stable coins. Those should look a whole lot like money market funds. There is an existing framework there to run them in a legal way and pay interest to the con holders. The stable coin companies are not going to like a stable coin regulation because it would mean they have to pay interest rather than keep it all to themselves. It would also likely require them to get a real audit to show how the money is held by the coin.
Another area that will could use some work is crypto exchanges. I think some of them would embrace clarity about what they can and can not do. A bunch of the regulation by enforcement is happening in this space. Rather than pushing them offshore, the exchanges could be brought onshore, subject to regulatory scrutiny.
Of course, the added regulation may not be wanted by the ultimate users of crypto: the criminals, the sanctions targets and the money launderers. Crypto’s first use case was buying illegal things on Silk Road. There are plenty of legal traders moving their capital around. It all creates great liquidity and pricing for the dark side of the payment system. Those who embrace the anonymity.
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