SEC Advisor: Regulator Should Listen to the Crypto Community and Open Debate

As a panel member that advises Securities and Exchange Commission (SEC) Chairman Gary Gensler, Associate Professor J.W. Verret of the Antonin Scalia Law School at George Mason University has more than a passing interest in regulating cryptocurrencies.

In an interview with PYMNTS, the instructor of banking, securities and corporate law at the research university in Virginia said he has filed a regulatory proposal with the SEC that calls for public comment on digital currencies.

“Let the digital asset community tell the SEC that a cookie-cutter application of the current securities laws simply won’t work for most of the multi-trillion-dollar asset,” he said. “It’s a way to get a sincere conversation started. I’m hopeful the SEC listens and moves forward with it.”

While it sounds like a simple idea, so far Gensler’s only response has been in speeches where he suggests that crypto companies should “come in and talk to us” and “unless you have an exemption you must register, and I believe most tokens are securities.”

“That’s it, that’s all we have so far,” Verret said. “Gensler used to be a professor of blockchain technology at MIT. Let’s use that. That’s an incredible asset to the commission and to the digital asset community, and those who support it, like I do. But so far, we’re not there. I hope my proposal will spur the conversation moving in the right direction.”

At the SEC staff level, Verret said, lots of employees are having discussions about regulating digital currency, he added.

“But the tone at the top, so far, has been unwilling to engage in a dialogue,” he said.

Today, the SEC is engaged in what Verret called an “over application” of the Howey Test. In 1946, the U.S. Supreme Court crafted the test in the SEC v. Howey case. It’s SEC’s way to determine if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” If so, the transaction is subject to disclosure and registration rules.

But if the SEC determines the company meets the test, it’s not easy to take on a government agency, Verret said.

“When a regulator points to you and says, ‘You must register,’ it’s hard to fight the good fight,” he said.

Consider the case of Ripple Labs Inc., a tech company that acts as a cryptocurrency and a digital payment network for financial transactions.

Near end of the Trump presidency, the SEC filed suit against the San Francisco-based firm. The complaint alleged two of its executives raised more than $1.3 billion through an unregistered, ongoing digital asset securities offering in violation of the Securities Act of 1933. The regulator said it seeks injunctive relief with interest, and civil penalties.

Ripple has denied the allegations.

The SEC chairman has said that most centralized crypto exchanges have at least one security on its platform and therefore it must register, Verret said.

“But that’s not really fair, can you tell us which ones those are, and which ones aren’t,” he said. “But when you ask him for more guidance about what is and what is not a security, he says ‘we don’t give legal advice.’ I don’t think that’s a fair response. Honestly, it’s not legal advice. I think it’s just regulatory clarity, and I think that’s the least we can expect from our regulator.”

A better approach, he said, is if you’re a company registered with the Commodity Futures Trading Commission (CFTC), an independent agency that regulates the U.S. derivatives markets, the SEC should keep hands off.

President Joe Biden is expected to release an executive order on a comprehensive cryptocurrency strategy. Several reports say the directive will spur federal regulatory agencies to determine the risks and opportunities of digital assets. But Verret said he is unconvinced that it would make any difference.

“I don’t think the White House’s executive order will change anything,” he said. “The regulators are just going to use this as a kind of cover to do what they were going to do already.”