“Regulation By Enforcement” Is Phrase That Former SEC Chairman Calls ‘Bogus’

Key Points:

• SEC enforcement operations have been referred to as “regulation by enforcement” by “cryptocurrency lobbyists,” according to a former Securities and Exchange Commission (SEC) staffer, who called the phrase a “Bogus Big Crypto Catch Phrase.”
• Stark claims that when the SEC Office of Internet Enforcement was established in 1998, detractors claimed that the SEC’s policies were too ambiguous and that regulating the Internet through enforcement would stunt its development.
• Ripple General Counsel Stuart Alderoty also questioned the strategy, arguing that it is ineffective in light of the well-publicized failure of FTX and the subsequent epidemic that claimed BlockFi.

SEC enforcement operations have been referred to as “regulation by enforcement” by “cryptocurrency lobbyists,” according to a former Securities and Exchange Commission (SEC) staffer, who called the phrase a “Bogus Big Crypto Catch Phrase.”

The reasoning is “sorely erroneous,” according to John Reed Stark, a former director of the SEC’s Office of Internet Enforcement and an opponent of cryptocurrencies, who wrote in a blog post on January 22. This is because this is how securities laws function.

“Litigation and SEC enforcement are actually how securities regulation works,” he argued. “The flexibility of SEC statutory weaponry is an SEC hallmark, enabling SEC enforcement to keep fraud in check.”

“In fact, the repetitive chorus of RBE [regulation by enforcement] is not only a misguided, deflective effort designed to tap into sympathetic libertarian and anti-regulatory mores – it’s also utter nonsense.”

Stark claims that when the SEC Office of Internet Enforcement was established in 1998, detractors claimed that the SEC’s policies were too ambiguous and that regulating the Internet through enforcement would stunt its development.

“In hindsight, relying upon the flexibility of securities regulation to police the Internet cleared out the more egregious instances of early online securities fraud,” he argued.

“Moreover, vigorous online SEC enforcement efforts also paved the way for legitimate technological innovations to flourish, rendering markets more efficient and transparent, thereby allowing investors more opportunities for success,” he said.

The SEC has filed numerous high-profile lawsuits over the past few years against cryptocurrency firms like Ripple and LBRY, leading some detractors to claim that rather than establishing clear regulations, the SEC has been using enforcement actions to build the law case-by-case.

In a post on November 28, Ripple General Counsel Stuart Alderoty also questioned the strategy, arguing that it is ineffective in light of the well-publicized failure of FTX and the subsequent epidemic that claimed BlockFi.

In Stark’s opinion, however, the SEC is following the law with its actions — and he cited legal victories where courts have found in its favor.

“Indeed, courts have upheld a broad array of SEC cases involving crypto-related offerings. In fact, in the 127 crypto-related enforcement actions already filed by the SEC, the SEC has not lost a single case,” Stark said.

“The SEC’s approach is rarely improperly expansive, nor does it involve rogue SEC enforcement efforts.”

“Rather, the SEC typically adopts a reasoned, common sense application of the basic requirements of the federal securities laws to new and evolving market conditions and technologies,” he added.

Timothy Cradle, a former Celsius employee and the current director of regulatory affairs at the Blockchain Intelligence Group, replied to Stark’s post, questioning whether clear regulations would ultimately be a better policy than regulation by enforcement.

“I agree with the argument, however, would it be too much to ask that the SEC and CFTC issue guidance much in the same way FinCEN did in 2019?” he said.

“If big crypto is saying it needs clear rules of the road, wouldn’t it make sense for the regulators to clarify in an official communication, such as guidance, that their rules do apply to cryptocurrencies?” Cradle added.

A second commenter, Chris Hayes, a former member of the PA [Pennsylvania] Blockchain Coalition’s advisory board, asserted that the SEC should issue a request for comments on the possibility that digital assets might not be able to comply with registration requirements because of their digital nature on blockchain.

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