Compared to the rest of the world, the Securities and Exchanges Commission (SEC) appears to have a higher rate of intervention in blockchain cases. In just the past 18 months, U.S. regulators have ordered Telegram to stop selling its cryptocurrency, fined Kik Interactive $ 5 million for problems with its Kin token, and is currently suing Ripple.
Recent research by Yuliya Guseva of Rutgers Law School and her colleague Douglas S. Eakeley, Co-Director of the Rutgers Center for Corporate Law and Governance, and Alan V. Lowenstein, Professor of Corporate and Business Law, confirm that the SEC “does more Take enforcement action against digital asset issuers, broker-dealers, exchanges and other crypto market participants as the regulators in most other major countries combined. “
Prof. Guseva admits that the size of the US cryptocurrency market contributes to the high rate of intervention by the SEC. However, she believes the other key factor could be the use of the Howey Test to determine whether a transaction should be classified as an investment contract and therefore registered as a security. The broad scope of the test has enabled the SEC over the past 70 years to extend its powers to a wide range of financial instruments, including digital assets today.
Prof. Guseva warns that, unfortunately, there may be inconsistencies in enforcement that suggest that a 1946 Supreme Court ruling may be unsuitable for assessing 21st Century innovations. In her recent article, Guseva emphasizes that the SEC appears to have deviated from its previously clear policy of prosecuting crypto scams and protecting investors. Kik, telegram, and Ripple are important examples of this deviation.
“I am concerned about the dynamic inconsistencies in recent SEC enforcement actions. Together with the large range of the Howey Test, the inconsistencies in enforcement can exacerbate the uncertainty and not make a clear statement to the market participants ex ante Understanding the securities laws. ”
Market players need to understand what is expected of them and how to effectively comply with regulations. Indeed, markets prefer predictability and security, while inconsistencies and unclear rules can force US companies to relocate their businesses and can profoundly affect the direction of financial innovation.
Unlike the US, the lack of clarity of regulations and focus on enforcement is not the case in other countries. Some overseas regulators offer more guidance on digital asset markets. The UK Financial Conduct Authority, for example, classifies digital assets based on their functions and uses, relying on upfront guidelines and clear prospective rules rather than retroactive enforcement.
Of the 23 major jurisdictions for the financial market that Prof. Guseva examined for her work, nine had yet to take enforcement action against companies related to crypto, and the remaining jurisdictions in the sample resorted to more lenient enforcement actions than those of the S. Es it is possible that some overseas jurisdictions have chosen this approach as a deliberate strategy targeting fintech startups looking for a more welcoming environment.
Another concern is that “[i]f The SEC can no longer provide clarity due to the strategic predictability of a transparent enforcement approach. If the market finds significant inconsistencies in the regulator’s policies and strategic commitments, the fabric of collaboration between innovators and the regulator can be undermined. “Guseva suggests that in this case, even bona fide companies may be less inclined to comply fully with the US Securities Act or to seek cooperation with the SEC.
Guseva also argues in her most recent article that the SEC should consider cost-benefit analysis in its enforcement guidelines, especially in cases where there is no fraud or where there are opaque regulatory issues such as the classification of assets as securities or are available as raw materials. “Digital assets can have different utilities or a limited application,” explains Guseva. “For this reason, a functional approach that looks at the actual uses and applications of a digital asset may be more appropriate. Even then, however, the regulatory analysis is not always that simple. ”
Given the complexity of blockchain technology, Prof. Guseva believes that science plays an important role in educating regulators and policymakers about the benefits and risks of innovative financial instruments. The current global pandemic and subsequent economic downturn have made legislative reforms even more critical, as innovations can fuel future growth and provide new ways to help people in times of crisis.
With the help of Ripple’s Blockchain Research Research (UBRI), the Rutgers Center for Corporate Law and Governance and Prof. Guseva recently launched the Fintech and Blockchain Collaboratory, a meeting of academics, regulators and lawyers interested in regulatory and industry-related developments interested in fintech, defi- and blockchain-based companies. The purpose of the Collaboratory is to discuss the latest political issues in the fintech and crypto fields. Guseva is also teaching a new course on financial regulation and innovation with Prof. Ozair of Rutgers Business School. In addition, Prof. Guseva founded a research group that has already attracted many students.
“Our latest initiatives would not be possible without the support we have received from UBRI,” concludes Prof. Guseva. “It has enabled us to do research and provide our students with better education in technology, fintech and crypto. Given the need for reforms in the crypto and fintech space, law schools have become crucial centers for debating policies and proposing teaching and regulatory solutions for industry, regulators and other stakeholders. “