John Reed Stark, a former Securities and Exchange Commission (SEC) official, has blasted “cryptocurrency lobbyists” for using the phrase “regulation by enforcement” to describe the SEC’s enforcement activities. He had referred to the phrase as a “Bogus Big Crypto Catch Phrase.”
According to a post he wrote on January 22, the former head of the SEC’s Office of Internet Enforcement and a skeptic of cryptocurrencies opined that the argument was “solely misguided,” as it is simply how securities laws function.
John argued that “litigation and SEC enforcement are actually how securities regulation works. The flexibility of SEC statutory weaponry is an SEC hallmark, enabling SEC enforcement to keep fraud in check.” He added that:
“In fact, the repetitive chorus of RBE—regulation by enforcement—is not only a misguided, deflective effort designed to tap into sympathetic libertarian and anti-regulatory mores. It’s also utter nonsense”.
Effectiveness of the SEC’s regulation
In 1998, when the SEC Office of Internet Enforcement was established, Stark claims that detractors said that the SEC’s policies were too ambiguous and that regulating the Internet through enforcement would stunt its development. John argued that,
“In hindsight, relying upon the flexibility of securities regulation to police the Internet cleared out the more egregious instances of early online securities fraud.”
He also noted that:
“Moreover, vigorous online SEC enforcement efforts also paved the way for legitimate technological innovations to flourish, rendering markets more efficient and transparent, thereby allowing investors more opportunities for success.”
The SEC has filed numerous high-profile lawsuits over the past few years against cryptocurrency firms like Ripple and LBRY, leading some detractors to claim that rather than establishing clear regulations, the SEC has been using enforcement actions to build the law case-by-case.
Arguments on the SEC’s “regulation by enforcement”
Brian Armstrong, the CEO of Coinbase, took to Twitter to say that “one of the strongest policy arguments for cryptocurrency is that it’s a national security issue. The US missed on semiconductors and 5g which is now largely manufactured offshore. It can’t afford to have cryptocurrency go offshore as well. (same for every country btw).”
Regulation by enforcement has a terrible chilling effect, and rhetoric matters – we've already seen a huge amount of crypto talent, asset issuers, and startups go offshore.
— Brian Armstrong (@brian_armstrong) September 20, 2022
In a Twitter reply to the news of BlockFi’s bankruptcy, made on Twitter on November 28, Ripple General Counsel Stuart Alderoty also questioned the strategy, arguing that it is ineffective in light of the well-publicized failure of FTX and the subsequent contagion that claimed BlockFi.
“Another SEC “regulation by enforcement” success story. Months after $100M BlockFi/SEC deal BlockFi in b/cy. $275M loan outstanding to FTX from BlockFi. Unknown amounts owed to BlockFi from FTX. Nothing ever registered. Fines paid? With whose money? Consumers decimated.”
Stark asserted that the SEC is abiding by the law by doing what it is doing, and he listed instances in which the courts have ruled in its favor. He noted that:
“Indeed, courts have upheld a broad array of SEC cases involving crypto-related offerings. In fact, in the 127 crypto-related enforcement actions already filed by the SEC, the SEC has not lost a single case. The SEC’s approach is rarely improperly expansive, nor does it involve rogue SEC enforcement efforts. Rather, the SEC typically adopts a reasoned, common sense application of the basic requirements of the federal securities laws to new and evolving market conditions and technologies.”
In response to Stark’s post, former Celsius employee Timothy Cradle, who is now the Blockchain Intelligence Group’s director of regulatory affairs, questioned if “regulation by enforcement” would be preferable in the long run to clear legislation.
A second commenter, Chris Hayes, a former member of the Pennsylvania Blockchain Coalition’s advisory board, asserted that a “sensible regulatory approach would be for the SEC to issue a request for comment on how digital assets might not be able to meet the registration obligations due to their digital nature on blockchain.”