SEC Director Grewal Defends Enforcement Division Against Crypto Industry Criticism
Commentary by Steven Lofchie and Rachael Hashmall
SEC Director Gurbir S. Grewal defended the Division of Enforcement against criticisms by the crypto industry challenging the agency's authority, motivations and integrity.
During an "SEC Speaks" event sponsored by the Practicing Law Institute, Mr. Grewal said the SEC faced headwinds from crypto industry participants who, he said, were trying to avoid SEC compliance. He said that the SEC has "confronted significant non-compliance and many, many creative attempts by market participants to avoid our jurisdiction, with some claiming that we are making it up as we go or regulating by enforcement, and others arguing that we are recklessly exceeding our authorities." Mr. Grewal argued that the test to determine whether crypto is a security is the Howey Test, not the "essential ingredients" test, or the "Beanie Baby" test, or "some other test that industry folks might like to create for themselves."
Mr. Grewal argued that Americans "have good reason to be concerned" about crypto, citing to specific SEC crypto enforcement actions and a Pew Research Center survey which found that (i) nearly a third of Americans who had ever invested in, traded, or used crypto, no longer held any and (ii) three-quarters of Americans who have heard about crypto do not believe that it is reliable and safe. He said that "crypto enforcement actions have not been, and are not, without challenge," citing to a recent court decision which allowed the SEC to procced with its lawsuit against Coinbase. (See related coverage.)
Mr. Grewal also criticized the treatment of marginalized communities by the crypto industry, arguing that the crypto industry uses "predatory inclusion" tactics, including spreading unsupported narratives that "crypto will increase financial inclusion; that it will uplift the unbanked or underbanked; and that it will help [marginalized communities] build wealth and increase upward mobility."
Commentary
Mr. Grewal gets the problem exactly right, albeit perhaps not the way in which he intends. To quote Mr. Grewal, crypto market participants "want a different set of rules than those that apply to everyone else." That is correct. Crypto market participants want a set of rules that are designed for that asset type. That is not a desire that is unique to crypto. The regulations that apply to corporates are not the same as those that apply to investment funds, which are not the same as those that apply to asset-backed securities. Good regulators have to design regulations that work for particularly products.
Crypto firms are not arguing that crypto assets should not be regulated, as Mr. Grewel implies. They are arguing that the SEC regulatory scheme applicable to securities, debt and other ordinary securities that represent ownership in a corporation are ill-suited for crypto.
If the SEC devised a workable regulatory scheme to oversee crypto, developers would comply. In the absence of a regulatory scheme, which the SEC appears to have no interest in developing, crypto developers have no choice other than to argue the Howey test.
Whatever ill Mr. Grewal may speak against crypto market participants, those market participants can point to their own share of evidence that the SEC has not always acted in good faith with respect to its treatment of crypto assets. See, e.g., Court Vacates SEC Refusal to Allow Exchange-Listing of Bitcoin Trusts (describing the SEC as arbitrary and capricious); SEC Sanctioned for "Bad Faith" in Action Against Crypto Firm.
Commentary
While certain SEC Commissioners and staff may argue otherwise, the current SEC framework and its application to digital assets does raise significant regulatory questions. The existing regulatory framework, primarily designed for traditional securities, fails to adequately address the decentralized nature, potential utility and evolving functionalities of certain digital assets. Further, many argue that the SEC registration scheme is not workable when applied to digital assets.
Despite the dynamic and rapidly evolving nature of the crypto space, there's been a perceived reluctance on the part of the SEC to engage meaningfully with industry participants. During the same "SEC Speaks" event, Commissioner Peirce noted that "some perceive meeting with the Commission is not only unproductive, but inadvisable… Other people have told me that they desperately want to have substantive discussions with the staff but worry that the inevitable result of such a meeting would be a call from enforcement, not a concerted effort to work through complex regulatory issues. The Commission’s announcement of a large ramp-up in its cyber- and crypto-enforcement unit, repeated assertions that the crypto industry is lawless, and treatment of cyber-incidents as fertile ground for enforcement actions add to these fears."
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