Paradigm, a venture firm, published an article critiquing the U.S. Securities and Exchange Commission (SEC) for its approach to regulating cryptocurrencies.
Gensler’s SEC wants to brute force crypto into an ill-fitting disclosure framework
In our latest piece, we show why this is a bad policy that fails to give crypto users and investors the info they need, or provide entrepreneurs w/ a viable path to complyhttps://t.co/jOpxYJSl6U
— Rodrigo (@RSSH273) April 20, 2023
“[…] the current SEC disclosure regime was created in the 1930s and is designed to regulate securities issued by centralized entities to raise funds. However […] crypto asset markets differ fundamentally from securities markets. Not surprisingly, without meaningful changes to the current disclosure regime the SEC cannot effectively regulate the industry”, the article states.
The firm stressed that a securities issuer builds relationships with investors and “inevitably acts as a driver of value” for these assets. Accordingly, the company should provide to the Commission both an S-1 registration filing (or another registration form), and full information about the business and risks.
“Most digital assets do not confer legal rights against an identifiable “issuer”, but rather provide technical capabilities implemented by a blockchain-based protocol,” Paradigm explained.
Moreover, cryptocurrencies can be entirely independent of the issuer and maintain full functionality without its participation, the article states:
“It is important to note that the technological capabilities of a crypto asset may also lie outside the control of the natural or legal person who originally deployed the code.”
According to the authors, the emphasis on disclosure is entirely warranted for securities, but runs counter to the nature of digital currencies.
“Another key difference […] lies in value accrual. […] The price of shares reflects market expectations about the future financial results of the company. However, the value of many crypto assets is not tied to the financial metrics of any centralized organisation”, Paradigm emphasised.
The authors note that projects may be launched by the development firm. But even in that case the coin’s value is often largely determined by factors other than the financial performance of the company.
Paradigm said it regrets that SEC Chair Gary Gensler and his staff “failed to recognise the uniqueness of crypto assets.” In the authors’ view, their campaign will ultimately harm those the regulator is meant to protect.
“While the SEC chair’s repeated catchphrase that crypto projects must “come in and register” may sound good, it will not substitute for thoughtful policy. To fulfil its mandate, the Commission must radically change course and work with the industry to create bespoke disclosure requirements that provide users and investors with the information they need,” the conclusion states.
In October 2022, Gensler called the cryptocurrency market centralised. He urged platforms to approach the SEC on whether a given asset should be recognised as an investment contract. He also warned of possible prosecution of unregistered Bitcoin exchanges.
In February 2023, the agency’s chair hinted at the possibility that all cryptocurrencies—except Bitcoin—could be recognised in this status. His position came under criticism from industry lawyers.
A month later, he suggested that tokens on the Proof-of-Stake consensus algorithm could be considered securities under U.S. law.
This year alone the Commission has filed complaints against Bittrex, Coinbase, Kraken, Gemini and Genesis.
In April, Gensler’s stance on cryptocurrencies drew criticism at congressional hearings.