Regulation by Enforcement: Problems with the SEC's Approach to Cryptoasset Regulation

Abstract

In order to explain how the SEC has, in effect, been regulating by enforcement and to illustrate the problems with this approach while advocating for a legislative response, this article is divided into five parts (and a conclusion). Part one of this article offers a brief and high-level overview of the development of cryptoassets and their functions as well as associated products that the SEC is claiming are securities, while Part two offers an equally high-level explanation of how such interests have generally been regulated in the U.S., with an emphasis on the test used by the SEC to determine how the securities laws apply. Part three examines four distinct instances that illustrate how the SEC’s approach to crypto has evolved and some of the open questions causing confusion in the crypto ecosystem. Part four considers what it means for the SEC to be “regulating by enforcement” and why that approach is sub-optimal. Part five offers some suggestions of how Congress might address how cryptoassets should be regulated. The conclusion is that regulation by enforcement is an inefficient and ineffective way to proceed, but that Congressional intervention is likely to be necessary to resolve the problems that now exist in the crypto ecosystem.

Keywords: cryptoassets, bitcoin, SEC, cryptoasset, Securities and Exchange, crypto, blockchain, cryptocurrencies

JEL Classification: a10,g18,g23,g28,k22,o38