The noise surrounding the $2.2 trillion crypto industry often drowns out the reality that we are on the verge of something revolutionary. If things go right, crypto and the blockchain technology could usher in the next Internet revolution.
Things are now going terribly wrong. The US stands the very real chance of killing this business here by driving digital innovation overseas and ceding advancements to other countries including Communist China.
Why? Because our regulators, mainly those at the Securities and Exchange Commission, are either too feckless or too turf-hungry (or a combination of both) to understand the dangers of their asinine approach to overseeing a nascent and important technology.
Yes, there is a need to regulate the crypto world. Hype in cryptocurrencies seems to pop up every day (boxer Manny Pacquiao has one) and criminals use digital coin for payment. Meanwhile, the currencies themselves often seem divorced from improving the all-important blockchain technology that could revolutionize how we buy and sell stuff.
But recall the Internet of 1995, the time of the Netscape IPO, when the digital revolution was about to explode. Criminals certainly used online venues (they still do) to do bad stuff. There was lots of hype. Do not forget the bubble that exploded around 2000, causing significant small investor losses.
Yet the SEC, then run by Arthur Levitt and aided by savvy enforcement officials and policy makers in government, took a commonsense approach to regulating what author Michael Lewis dubbed “The New New Thing.”
It wasn’t perfect, but overall they chose a framework that allowed innovation to flourish where everyone knew the rules of the road. The result is what we enjoy today: The creation of some of the most important and profitable companies the world has ever seen.
Contrast that with the regulatory chaos surrounding crypto. There are no set regulations. Agencies compete over turf and debate legal minutiae. The SEC says it wants to protect the public from fraud, but it has done so through capricious enforcement actions that fail to protect innovators.
The people who created Ripple Labs learned this firsthand. Before the end of the Trump administration, Jay Clayton, then head of the SEC, filed charges that Ripple had violated securities laws by failing to register sales of the XRP cryptocurrency as a security along with the necessary disclosures.
The lawsuit sent shock waves through the digital-currency business. Ripple was founded in 2012 and grew into one of the largest digital platforms, an innovator in cross-board payments involving crypto and currencies.
The case stopped Ripple’s domestic business in its tracks. Various crypto exchanges delisted XRP. Its value tanked. As for the heart of the case: Why is XRP a security, while the SEC deems cryptos like Bitcoin and Ether mere commodities and outside its jurisdiction?
The rationale goes something like this: Ripple continues to use XRP to build out its platform. Ethereum network no longer uses Ether for financing. That makes XRP a security and Ether something else, the SEC says.
I’m no crypto expert, nor am I a securities lawyer, but in talking to both, it’s pretty clear that the case has some holes. Other than the missing disclosure, where’s the investor rip-off? There isn’t any, according to the SEC charges.
While Ripple is fighting the SEC, some XRP investors have launched a class action claiming that the SEC has been capricious in its enforcement action, picking winners and losers without regard to the law.
The lawsuit also says Clayton’s motivation for charging Ripple and not Ethereum may be personal: Since he left the SEC, he has become an adviser to One River Asset Management, which invests in Bitcoin and Ethereum’s Ether cryptocurrency.
Of course, Clayton, a long-time securities lawyer, wouldn’t be the first government official to take advantage of the revolving door. Merely repping someone who owns Ether is a weak conflict at best.
More troubling is the reckless Keystone Cops method the SEC is employing to regulate this crypto. Current Chair Gary Gensler wants to crack down on crypto even harder than Clayton, even though the SEC’s authority is limited based on current law, which means it needs to stretch to make cases. And as the SEC stretches, crypto business is looking for friendlier venues to operate. The people close to Ripple say their US operations have stalled, but they’re flourishing overseas.
More unnerving, there is an easy solution offered by SEC Commissioner and industry advocate Hester Peirce that’s being totally ignored by Gensler & Co.
Known as the “Crypto Mom,” Peirce is proposing a three-year moratorium on these random enforcement actions so the industry can catch its breath, and innovate. Regulators and possibly Congress can create a new holistic approach to monitor the next Internet before forcing it into the hands of the Chinese.
As always, mother knows best.
