John Berlau, a senior fellow at libertarian think tank Competitive Enterprise Institute, has wasted no time in blasting the Securities and Exchange Commission (SEC) for its heavy handed treatment of all things crypto. The SEC recently released guidelines to clarify how it applies existing statutes in order to assist legal firms and promoters of Initial Coin Offerings (ICOs) in avoiding the agency’s wrath. Berlau is extremely critical of what he calls an overt power grab by the agency and an attempt by it to stunt crypto innovation with “burdensome regulation.”
In a report entitled “Cryptocurrency and the SEC’s Limitless Power Grab: Why Speculative Consumer Goods Are Not ‘Securities’”, Berlau argues that that “among federal financial regulatory agencies, none poses a greater threat to cryptocurrency and the associated blockchain technologies than the Securities and Exchange Commission.” The SEC claims that its guidelines help “help market participants ascertain whether a digital asset is deemed to be an investment contract, and therefore a security.”
In the past, the government has taken a softer approach to innovative waves like the Internet, but its fear of cryptocurrencies, what they initially stood for, and the unknown power of decentralized ledger technologies has engendered a far too aggressive response, which, in Berlau’s opinion, could stifle entrepreneurial creativity and blunt the early experimentation phase that is so important in defining “novel approaches and applications”.
In the United States capital formation market, the collapse of the Internet bubble, followed by the financial crisis of 2008, has caused a tremendous drain in speculative funding of new ventures. Crowdfunding and ICOs have been a market response to correct this vacuum, so to speak. Previously, venture capital firms and their investors were willing to bet on ten companies, understanding that seven would surely fail, but the remaining three would succeed enough to make the returns worthwhile. Unfortunately, venture capital firms have exited stage left leaving the market without viable alternatives.
Berlau posits that the increased scrutiny of the SEC, deemed by the agency as necessary to protect investors from their apparent ignorance, will actually harm investors and their ability to fund innovation on our shores: “Deeming cryptocurrency as a ‘security’ could put cryptocurrency out of the reach of middle-class investors because of the same red tape — both from SEC regulations and from financial regulation laws such as the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010 — that has hindered small investors’ access to stock in early stage growth companies.”
In April, the SEC released its clarifying document dubbed “Framework for ‘Investment Contract’ Analysis of Digital Assets”. In it, the agency espoused the “Howey Test”, which originated from a Supreme Court case that tested 1933 and 1940 securities law and which the SEC uses today to “ascertain whether a digital asset is deemed to be an investment contract, and therefore a security”.
Berlau contends that this document “appears to stretch the Howey Test even further and broadens greatly what products could be considered securities,” and in so doing, it allows the SEC to “take more drastic measures toward cryptocurrencies than other investments”.
There also appear to be several U.S. lawmakers that agree with Mr. Berlau’s take on the current situation, and they have followed through recently with a re-introduction of the Token Taxonomy Act in the House of Representatives. If and when the bill becomes law, digital asset offerings would become exempt under federal statutes that regulate securities, and the SEC would have to look elsewhere for greener pastures.