How Clear and Effective Crypto Regulations are Born

The development of blockchain-based digital assets, and the multi-billion dollar market that has formed around them, has proved to be a tremendous challenge for global legislators and regulators alike.

The digital economy is continuing to surge forward — making it an urgent necessity for a proper legal framework to be created, one that strikes a balance between fostering innovation and maintaining the integrity of our financial system.

The key to achieving balanced rules and regulations lies in good faith actors following the rules where they are clear and pushing for clarity where they are opaque, all while ensuring that both industry participants and regulators alike work together to create a robust framework that promotes innovation and safeguards consumers.

This op-ed is part of CoinDesk’s State of Crypto Week sponsored by Chainalysis. Zac Townsend is the CEO and co-founder of bitcoin-denominated insurance company Meanwhile.

It may seem that the last few years have been anything but productive in fulfilling this mission, but nonetheless, progress is being made.

Well-intentioned actors within the crypto industry have worked tirelessly to comply with the legitimately outlined rules while also advocating for the much-needed clarity in areas where none exist. Their efforts, however, have been historically met with a degree of shrouded hostility from regulatory bodies, particularly the U.S. Securities and Exchange Commission (SEC).

The SEC has time and time again argued that there is no ambiguity in the rules, and that the existing laws are effective and clear when applied to digital assets. In the words of SEC Chairman Gary Gensler, “Some in the crypto industry have called for greater ‘guidance’ with respect to crypto tokens. For the past five years, though, the commission has spoken with a pretty clear voice here.”

However, for industry writ large, including public companies like Coinbase who have done their best to comply with the aforementioned existing rules, the only thing that is clear is that the current framework falls flat in protecting investors and companies alike.

Recently, leaders in this work have built around them a large advocacy community in Washington D.C. and abroad, advocating for a collaborative process in which rules can be written to accommodate this entirely new type of financial technology. Their efforts have generally been answered with silence and lawsuits from regulators, but with increased attention from legislators.

The SEC’s legal actions against legitimate individuals and entities operating in the crypto space have raised the most serious concerns. Cases against entities such as Ripple, LBRY and Coinbase put on clear display that the regulators are not willing to work with the industry, and only seek to crush it.

It is no secret that, like in most industries, there are entities acting maliciously that seek to deceive and defraud in the digital asset space. However, those actors have remained free from the regulatory hammer of the SEC, while legitimate companies who are legitimately trying to comply have been targeted with pricey lawsuits.

These enforcement actions have left industry participants wondering whether they can trust the regulatory environment in the U.S. and have further highlighted the need for clear and well-defined regulations to prevent this booming industry from off-shoring itself.

It is essential to acknowledge that the crypto industry, like any other sector, has its share of bad actors, but punishing those who genuinely seek to comply with the law only muddies the waters and discourages responsible innovation.

Getting better?

Recently, things have been starting to trend in a promising direction. Many of the issues the industry has faced have stemmed from an SEC that is clearly seeking to expand its jurisdiction, and from legislators who are unwilling to understand the meaning of this new technology.

Now, the SEC is taking a beating, both in the court of law, and the court of public opinion. After a massive Ripple victory against the SEC in summary judgment, the SEC filed an appeal that was broadly rejected by the court. This pair of losses essentially guts the SEC’s legal strategy and is a clear sign to the agency that their philosophy is misguided at best, or malicious at worst.

The SEC has also been tripped up by both their filings in the Coinbase case and in congressional hearings. In the Coinbase suit, it is trying to assert that crypto tokens have no inherent value, which as a blanket statement, is undeniably false. Coinbase’s Chief Legal Officer Paul Grewal has brushed this position off as more of the same old nonsense that the SEC has been working off of for years.

During a recent oversight regulatory hearing featuring Chairman Gensler, Rep. Ritchie Torres (D-NY) used his time to offer a very compelling line of questioning using Pokemon cards to highlight the agency’s deliberate lack of clarity. “Suppose I was to purchase a Pokemon card. Would doing so constitute a security transaction?”Gensler said. “I don’t know what the context is,” he continued, before admitting that it isn’t a security if it is bought physically.

Rep. Torres then asked: “If I were to purchase a tokenized Pokemon card on a digital exchange via a blockchain, is that a security transaction?”

“I’d have to know more,” Gensler said.

Representatives like Ritchie Torres, and the current interim Speaker of the House Patrick McHenry (R-NC) are good examples of lawmakers who have familiarized themselves with the digital asset space and have taken the necessary steps to try and create legislation for it.

These allies of the industry are clear beacons of the long overdue legal framework that appears to be closer to reality than ever.

Although the state in which this industry currently exists in America is less than ideal, and certainly far from clear, it is a blunt fact that the road to achieving legal clarity and adoption of new technologies is a long and perilous one.

It takes time and effort, education and funding and above all steadfast commitment from the passionate individuals who have dedicated themselves to innovation. Although these last years have been beyond frustrating, it is clear that so long as we continue to build smart, and work hard in the arena of public policy, we will soon see the fruits of our collective labor.