Regulators Increase Their Power Over Crypto But With Little To Show For It

Policy Regulators Increase Their Power Over Crypto But With Little To Show For It Ike Brannon Contributor Opinions expressed by Forbes Contributors are their own. Ike Brannon is a senior fellow at the Jack Kemp Foundation Following New! Follow this author to stay notified about their latest stories. Got it! Oct 26, 2022, 10:00am EDT | Share to Facebook Share to Twitter Share to Linkedin Federal regulators are notorious for bogging down industries and stifling economic growth with myriad regulations, which is why most industries are loath to ask Congress to enact more regulations.

Yet, that’s precisely what cryptocurrency companies and investors alike are asking for. The fact that Congress has yet to consider any crypto-specific legislation has left regulators to their own devices, to which they have responded by adopting a strategy of regulation through enforcement: Instead of prescribing what is and is not possible in this space they merely react to the actions of market participants and then determine whether what they did is, in fact, allowable. While such ex post regulations are easier for regulators, it leaves us with a market in which those that innovate in this market risk being subject to retroactive punishment and ruinous lawsuits.

Disruptive tech companies live in fear that the SEC will target them next, and the uncertainty in the market impacts everyday investors. Innovators have the option of moving overseas and adhering to the regulations elsewhere. However, as many as one in five American adults have invested in or used cryptocurrency.

The lack of regulatory clarity is one reason for the market volatility. The Securities and Exchange Commission (SEC), led by Chairman Gary Gensler, has held crypto companies to a regulatory standard that presumes the market will simply not exist in the very near future. Two years ago, the SEC decided to go after Ripple Labs, a software company that uses crypto technology, including a digital asset called XRP XRP , to help banks conduct cross-border payments without cost or delay.

Ripple is one of many users of XRP on a decentralized ledger, but the SEC sued Ripple by claiming every transaction involving XRP dating back to 2013 was an unregistered securities trade as part of an investment contract in Ripple. This included billions of tokens traded on secondary markets by people who had no knowledge of Ripple. MORE FOR YOU Juan Soto Contract Rejection Could Make Orioles A Better Buy Than Nationals Mellon Foundation Helps Music To Life Offer Musicians Entrepreneurial Training To Create Change Brexit And Indirect Taxes At The End Of 2022 The SEC’s case rests on a 75-year-old legal doctrine called the “Howey Test.

” In the decades before the Great Depression, there was a pervasive problem with financial scams, with companies preying on investors by offering worthless stocks, fake real estate, and other fraudulent investment contracts. In an effort to protect investors, states started to enact new financial security laws. When a Supreme Court Justice famously cited that these scams “have no more basis than so many feet of blue sky,” these financial laws became known as ‘blue sky laws.

’ While states began enacting these ‘blue sky’ laws, there was still uncertainty about what could be considered an investment contract and thus be subject to these laws. The resulting series of ‘blue sky’ cases interpreting these laws formed the foundation for the Securities Act of 1933, leading to the landmark 1946 Supreme Court case SEC v. Howey called the “Howey Test” – a four-pronged test for identifying an investment contract security.

The Howey Test states that an investment contract exists if there is (1) an investment of money (2) into a common enterprise with (3) an expectation of profits (4) to be derived solely from the efforts of others. For the Howey Test to be applied to XRP transactions, it would have to be severely stretched and distorted to claim that an investment contract exists between two parties who don’t even know of each other – as is the case with many second-hand XRP transactions. Many holders of XRP have never even heard of Ripple, and the SEC’s own expert testimony states that XRP’s value has not been tied to Ripple’s actions.

In short, the SEC is stretching the bounds of the Howey Test in the Ripple case to maximize its regulatory power, not to protect investors. While predicting what the cryptocurrency market will resemble in a decade is a fool’s errand, absent punitive government restrictions it’s clear that most investors are betting they will play a role in global financial markets. Absenting U.

S. leadership in the development of the market may hinder its growth, but if it does survive in some form it will leave domestic investors vulnerable to the vicissitudes of foreign regulators. It is time that Congress took action to support American innovation and truly protect American investors.

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