The courts need to rein in the SEC before it kills the crypto industry

Bloomberg News

The Securities and Exchange Commission has been on a yearslong power grab, and far too often its main target has been the blockchain and digital asset industry. To an objective observer, the SEC is actively trying to kill innovation in blockchain technology — but not in the way you would think.

Instead of issuing clear rules or restrictions, it's created an environment where entrepreneurs and developers are left in the dark, and where any company using this innovative technology could become the target of federal regulators. This approach not only puts a chill on the nearly $3 trillion digital asset industry, it also creates the real possibility of crypto companies moving offshore to countries with little to no consumer protections. That's bad for America. That's bad for innovation and economic growth. That's bad for the tens of millions of Americans who use digital assets. And that's why we felt compelled to defend our industry and take the SEC head on.

Last month, Blockchain Association joined the Crypto Freedom Alliance of Texas in filing a federal lawsuit challenging the SEC's most recent overreach — the overly broad and vague expansion of the well-established Dealer Rule, which now extends to persons who do not resemble a dealer in the slightest — specifically, any person whose trading activity regularly has the effect of providing liquidity, even if this person has no customers. 

For nearly a century, the definition of "dealer" focused on dealer services to customers. The SEC has flipped that well-established paradigm on its head. Under the new definition, regardless of whether a customer exists, those who trade digital assets and, as a result, provide liquidity, and those who develop these software protocols are now in the SEC's crosshairs. This is true despite many transactions involving the use of automated, unhackable, open-source software — unlike a traditional human intermediary. That's an untold amount of innocent people who could now face an extreme and unnecessary regulatory burden or an SEC enforcement action simply because of their adjacent association with software.

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In the absence of any legal action reversing the rule's finalization and implementation, law-abiding digital asset market participants would be left scrambling. Not only will the regulatory burden of having to register as a dealer lead to a consolidation of market participants and increased market instability, but the unanswered threshold question of which digital assets constitute securities leaves participants unsure of whether the rule applies to them in the first place.

Ultimately, this rule will disincentivize people from providing liquidity in digital asset trading markets, which would lead to an unnecessarily undercapitalized and risky market. Discouraging market participation, especially from well-capitalized institutional investors, has been shown to increase volatility and concentrate market-moving ability among a small group of digital asset holders.

What could be more un-American than making a thriving U.S. industry less safe, more cumbersome and riskier for consumers while reversing decades of progress democratizing financial access for all?

Last week, the U.S. House of Representatives voted in an overwhelmingly bipartisan fashion to pass the Financial Innovation and Technology for the 21st Century Act — a symbolic vote that shows Congress, not the SEC, should make policy. But until new fit-for-purpose crypto regulatory legislation is passed and signed into law, the courts remain our only recourse.

For the U.S. to remain the true global leader in technology and innovation, the SEC must go back to doing what it was designed to do: providing clear and concise guidance and oversight that allows companies to grow and thrive. The industry cannot continue to operate in a constant state of uncertainty and fear of regulation by enforcement of rules which either haven't been properly communicated or were enacted without fair and meaningful engagement with those most impacted.

Failing to do so leaves us, as an industry and as a nation, at a heightened risk of losing millions of jobs, draining irreplaceable human capital and blunting the promise and potential of American innovation.