At the StartEngine Summit on October 19th in Santa Monica, CA, I had the pleasure of hearing former SEC Chairman Christopher Cox give a keynote address discussing crypto and regulation, and I spoke with him on stage for a Q&A afterward. Chairman Cox’s career highlights include service as White House counsel to President Ronald Reagan, seventeen years in Congress where he was the fifth-ranking leader of the US House of Representatives, and four years as Chairman of the US Securities and Exchange Commission (SEC).
The largest question mark in the world of blockchain now is how will the regulators react to tokens and how will they regulate these token marketplaces? Much has already been said about how the SEC views the majority of ICOs to date to be the unregistered sale of securities, which in turns means the majority of crypto exchanges are illegally hosting the trading of those securities. What does a former SEC Chairman have to say about this space? Here is what I learned from Chairman Cox:
1. The SEC has multiple missions, and they can conflict
The SEC’s mission is to protect investors, maintain orderly markets, and promote capital formation. Sometimes those priorities are at odds with each other. The SEC would like to help startups as part of its capital formation business. At the same time, the rules that startups find burdensome are often necessary to protect investors from fraud, including on the exchanges and in the private markets. Over the course of more than 80 years, the SEC’s organization to achieve those objectives has grown quite large. It is decentralized across six divisions and more than two dozen offices. Unlike the blockchain, there are no miners. Each division and office has its own responsibility and philosophy. For crypto and blockchain businesses, this has heightened the challenge of figuring out how to work with the SEC. Fortunately, the SEC recently created the FinHub, a one-stop-shop to talk to the SEC about cryptocurrencies, blockchain ideas, and other innovations in the fintech space.
2. “We’re from the government and we’re here to help” — but in this case it’s true
It was interesting to hear Chairman Cox talk about how the SEC sees itself. While often the agency’s regulations and enforcement actions are a target for business’ anger and frustration, in reality, the SEC is here to serve both investors and markets. Without healthy markets and investor confidence, business can’t survive. Viewed in this way, it’s easy to see that the SEC’s goal is to help, not harm. Plus, enforcement is only one division out of five within the SEC. The others are Corporation Finance, Trading and Markets, Investment Management, and Economic and Risk Analysis. Why is no one talking to the other divisions?
3. The SEC gets it
The SEC has spent quite a lot time thinking about cryptocurrencies and how they should be regulated. The number of bulletins and announcements from SEC demonstrates how their views have evolved and that there is nuance, such as the SEC’s declaration that ETH is not a security even though it was issued through an ICO in 2014.
4. Regulators are everywhere
Chairman Cox reminded people that there are many more regulatory organizations looking at cryptocurrencies than people realize. The SEC has received a lot of attention from the press concerning its stance on crypto, but the SEC is just the top of the list. The list of regulators continues with the Commodity Futures Trading Commission (CFTC), Financial Crimes Enforcement Network (FINCEN), Internal Revenue Service (IRS), and state securities commissions (so-called “blue sky” regulators).
5. Lite-touch regulatory countries
Some countries are more regulated than others. Jurisdictions such as Switzerland and Singapore offer more flexibility for crypto companies, but these are much smaller markets and their rules are not, and will not be, necessarily accepted by other major countries.
Chairman Cox highlighted the recent creation of FinHub to help the cryptocurrency marketplace work with the SEC. This new office within the Division of Corporation Finance is headed by Valerie Szczepanik, who is now coordinating the efforts between offices of the SEC (she was also quickly dubbed the “Crypto Czar” by the financial press). Prior to the creation of FinHub, the agency seemed to want to avoid putting out definitive guidance that would apply across the industry, preferring a more nuanced approach that would allow it to decide things on a case by case basis. It will be interesting to see whether Szczepanik’s FinHub will handle cases on a 1:1 basis, or find a way to scale the agency’s advice for greater clarity.
7. We all want protection from cybercrime and terrorism
The importance of the SEC’s enforcement role isn’t just limited to the financial markets. Cybercriminals, terrorists, and even hostile countries use the financial markets and technology (including cryptocurrency) to accomplish illegal ends. The SEC is ultimately part of the broader network of government law enforcement agencies including the Treasury’s FINCEN and the Departments of Justice, Homeland Security, and Defense. If we want protection from bad actors using technology for nefarious purposes, we need the SEC and these other agencies.
8. What about the JOBS Act 4.0?
The JOBS Act is revolutionary, but it has its problems. As for solutions, there is talk of raising the capital limits of Regulation Crowdfunding and Regulation A+, decreasing the difficulty of filing those offerings, introducing other rules commonly associated with IPOs, and more. Given we are now in an election cycle, the Chairman was not overly optimistic as to when any new JOBS Act legislation might be enacted. After the elections, we will have a clearer picture. If the Democrats win the house, the renewal of divided government could slow down legislation in many areas, including this one.
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