In a letter recently published in the Wall Street Journal, the chief executive officer of Grayscale Investments was the most recent to criticize the authority for its purported “regulation by enforcement” actions.

SEC’s strategy hindering BTC’s development

According to Michael Sonnenshein, the CEO of Grayscale Investments, the U.S. Securities and Exchange Commission’s (SEC) approach to cryptocurrency regulatory compliance has halted the growth of Bitcoin (BTC) in the nation.

Also in a letter that was posted in the Wall Street Journal (WSJ) on January 23, Michael Sonnenshein, the head of the cryptocurrency management company, stated that the SEC was “late to the game” when it came to regulating cryptocurrencies and averting the demise and bankruptcy of the Futures exchange (FTX). He noted that:

“Late doesn’t capture what transpired here. The problem is the Securities and Exchange Commission’s one-dimensional approach of regulation by enforcement.”

According to Michael, the United States Securities and Exchange Commission’s (SEC) “one-dimensional approach” to the regulation of Bitcoin (BTC) and the cryptocurrency sector is the major issue. Sonnenshein noted that the SEC “should certainly try to eliminate bad actors” and it shouldn’t obstruct “efforts to develop appropriate regulation.”

The regulators’ inactivity in not taking action to prohibit such undesirable actors from entering the cryptocurrency market has “prevented Bitcoin’s advancement into the U.S. regulatory perimeter,” Sonnenshein noted.

“We are seeing the consequences of the SEC’s priorities play out in real time—at the expense of U.S. investors.”

He claimed that due to this, American cryptocurrency investors are now forced to work with offshore businesses and cryptocurrency organizations that offer “less protection and oversight.” He added that the protection of customers is supposed to be the priority of the SEC and not litigation, which seems to be what they’re currently focused on.

Grayscale investment sues SEC

Grayscale is suing the SEC at the moment because it was denied permission to convert its Bitcoin trust into a spot-based exchange-traded fund (ETF). Grayscale’s lawsuit journey with the SEC started in June 2022, after the SEC turned down the firm’s application to turn its Bitcoin trust (GBTC) into an ETF.

Published at the same time that Grayscale filed a lawsuit against the SEC was Sonnenshein’s opinion piece. The lawsuit alleges that the agency “arbitrarily” declined Grayscale’s request to change its Grayscale Bitcoin Trust (GBTC) into a spot ETF.

According to the SEC, Grayscale’s proposal was insufficiently safeguarded against deception and manipulation. In response, Grayscale argued in opposition that the SEC was arbitrarily treating products that are sold on spot exchanges and those that are traded on futures exchanges differently.

Widespread reactions to the SEC’s “regulation by enforcement”

Grayscale Investments is owned by Digital Currency Group (DCG), the financially troubled cryptocurrency juggernaut. Also, the now bankrupt Genesis Trading, which filed for Chapter 11 and was accused by the SEC of selling unregistered securities in January 12 alongside Gemini, is owned by Digital Currency Group (DCG) too.

Following the issue of the SEC’s “regulation by enforcement,” Sonnenshein does not seem to be the only one to have commented on the SEC’s strategy. The phrase “regulation by enforcement” also came under fire over the weekend from cryptocurrency skeptic and former SEC chairman John Reed Stark, who tagged it a “Bogus Big Crypto Catch Phrase.”

He referred to the phrase as “utter nonsense” in a post on Linkedin from January 22, in which he labeled it a “misguided, deflective effort designed to tap into sympathetic libertarian and anti-regulatory mores.” Asserting that “litigation and SEC enforcement are actually how securities regulation works.”

The tweet that generated lots of comments had most comments coming for Sonnenshein. One commenter noted that the trust in Bitcoin wasn’t the issue, but rather the trust in the actors and applications was the problem they had. Another person asked Sonnenshein to sell the GBTC to a competent third party that wasn’t corrupt and wouldn’t put the holders at risk if he had any morals left.