A Who’s Who in The Fight for Better Blockchain Regulation in the US
Who is challenging US regulators and primarily the SEC for friendlier blockchain regulation?
Although Kik has displayed the most public (and formal) face of dissent as it takes the SEC head-on, and challenging the applicability of its 73-year old regulatory framework on blockchain technology, several influential companies, associations and people have also been voicing their dissatisfaction with the state of current US regulation.
Here’s an alphabetized who’s who list, what they are saying or asking for, and the type of changes they are requesting.
Andreessen Horowitz (A16Z)
Venture firm A16Z has been vocal publicly and behind-the-scenes, pushing the need to modernize current Securities regulation to better fit the new realities of blockchain technology. Katie Haun is the general partner of the A16’s Crypto Fund, and a former federal prosecutor. In a recent blog post, Katie opined that the Kik case might be important in bringing more clarity to the field of cryptocurrency regulation, and she enumerates several strong points in favor of Kik’s case.
The Blockchain Association is the most recent Washington-based industry group working on blockchain advocacy and education of policy makers. Their Board of Directors includes some of the most reputable and well respected blockchain industry participants, and that’s a statement by itself. They are Coinbase, Circle, Protocol Labs, DCG, Polychain, Cumberland, and Anchorage. Recently, the Blockchain Association has taken oversight of Defend Crypto, the initiative that was originally spearheaded by Kik. In addition, its blog doesn’t mince words when it comes to critiquing the SEC.
Key Asks or Viewpoints:
- Policy should be made in an open rulemaking process or open legislative process, where ideas can be vetted, debated, improved upon, and anyone who is impacted can share their views.
- Congress needs to keep an open mind pertaining to understanding the impact of cryptocurrencies.
- The potential Kik case has major consequences for the open blockchain ecosystem.
- The SEC staff guidance poses more questions than it answers.
Congress Representatives Letter to the White House
On May 24, 2019, a non-partisan letter was sent to Lawrence Kudlow, Director, National Economic Council at the White House. It was signed by Reps Trey Hollingsworth, Darren Soto, Bill Foster, Tom Emmer, Ted Budd, Josh Gottheimer, and David Schweikert.
Key Asks or Viewpoints:
- Hold a forum on blockchain technology for stakeholder input and support.
- Include blockchain technology in the Administration initiatives.
Congress Representatives Letter to the SEC Chairman
On September 2018, more than a dozen members of the House of Representatives sent a letter to SEC Chairman Jay Clayton urging his agency to tell investors, in plain English, how it plans to regulate cryptocurrency.
Key Asks or Viewpoints:
- Clarify the criteria used to determine when offers and sales of digital tokens should properly be considered “investment contracts” and therefore offerings of securities.
- Clarification on whether, if a token originally sold in an investment contract can, nonetheless, be a non-security
- Describe the tools available to the SEC to offer more concrete guidance to innovators on these topics
Congressional Blockchain Caucus
In September 2018, the Congressional Blockchain Caucus was founded in the 114th Congress and is enjoying significant growth and an ever-expanding focus. This bi-partisan group believes in the future of blockchain technology, and understands that Congress has a role to play in its development. The Caucus believes in a hands-off regulatory approach to allow this technology to evolve the same way the internet did; on its own.
The Caucus includes the following Congressmen as members: David Schweikert, Bill Foster, Tom Emmer, Darren Soto, John Delaney, Stephen Lynch, Denny Heck, Mark Meadows, Jeff Duncan, Jerry McNerney, John Larson, Greg Gianforte, Warren Davidson, Ted Budd, John Curtis, Denny Heck, and Eric Swalwell.
Led by Rep. Emmer, the Caucus introduced 3 Bills to kick-off this initiative:
Like the Internet, this Bill advocates that the federal government should provide a light, consistent, and simple legal environment, and it expresses support for the industry and its development, requesting the United States to:
- Prioritize accelerating the development of blockchain technology to support transparency, security, and authentication in a way that recognizes its benefits and allows consumer protection while supporting future innovation;
- Create an environment that enables the American private sector to lead on blockchain innovation and further the growth and success of blockchain networks and digital currencies;
- Have its Federal agencies work onward a coordinated framework to support digital currencies and blockchain technology;
- Avoid undue restrictions on blockchain networks and the trustworthy decentralized computing services they facilitate;
- Support and enforce a predictable, light touch, consistent, and simple legal environment for services facilitated by blockchain networks; and
- Recognize the potential benefits and broad use of digital currencies and blockchain technology to enhance public services, and enable more business growth, capital formation, and capital investment.
Affirms that certain blockchain related entities that never take control of consumer funds do not need to register as a money transmitter, and seeks protection for non-controlling blockchain services and software developers. Examples of these entities include “miners” that validate network integrity and multisignature providers that provide enhanced asset security to users.
This Bill is meant to provide temporary safe harbor for the tax treatment of hard forks of convertible virtual currency in the absence of administrative guidance. Further it will restrict fines against individuals that attempt to report these assets until the IRS provides any type of guidance regarding the appropriate means of reporting them.
Chamber of Digital Commerce
The Washington-based blockchain/digital asset trade association has been advocating that the U.S. Government needs to indicate its support, both in words and in action, for the development of blockchain solutions, and they are calling on the highest levels of the U.S. government to embrace a comprehensive, national strategy for blockchain. This initiative is titled National Action Plan for Blockchain.
Key Asks or Viewpoints:
- Policy and regulations should be clear and established prior to enforcement.
- Prevent regulatory patchwork.
- Establish an Office that coordinates US blockchain strategy going forward.
In a powerful May 2019 blog post, Circle CEO Jeremy Allaire made his views known, in no uncertain words, that US Crypto Policy Needs to Change. It was followed by another post outlining Circle’s Interpretation of Recent Signals from US Regulatory Agencies. A sad outcome for Circle is that they had to cut 10% of its workforce (30 jobs), directly attributing it to the “restrictive” regulatory conditions.
Key Asks and Viewpoints:
- US regulators are taking an extremely broad view of what crypto assets might be deemed securities. We don’t think that they should be considered securities.
- U.S. regulators are creating an uncertain environment for crypto assets.
- Stop applying laws written in the 20th century to technologies created in the 21st.
- Many token projects do not have some key elements of the Howey, but their absence doesn’t seem to weigh into the SEC’s considerations.
- Frustrated by the consequences of the current guidance.
One of the oldest and most respected Washington-based blockchain advocacy groups, Coin Centerfocuses on research, policy makers education and advocacy facing cryptocurrency and decentralized computing technologies. Their work is enlightening and much of it occurs behind-the-scenes via private briefings and working alongside policy legislators to help them develop and formulate new laws. One of their must read report is the Framework for Securities Regulation of Cryptocurrencies.
Key Asks or Viewpoints:
Securities regulators should avoid chilling promising innovations that are ill-fitted to the Howey test, and presenting less risk to users, such as highly decentralized cryptocurrencies, side chains, or initial distributions made via open competitive mining or proof-of-burn where there is no investment of money, i.e. no risk capital is provided to an issuer or promoter.
Cooley was known for the origination of the SAFT (Simple Agreement for Future Tokens) that was spearheaded by their former partner Marco Santori. The 900-lawyer strong firm has been actively representing a number of companies involved in the crypto sector, including defending clients that are entangled with the SEC. Nancy Wojtas, their Chief Compliance Officer has even hinted that the SEC isn’t the right agency for regulating cryptocurrencies.
Originally conceived by Kik, Defend Crypto is now governed by the Blockchain Association. Going forward, the Defend Crypto fund will be dedicated to helping other projects outside of Kik in their fight to Defend Crypto. Kik has moved its initial $5MM commitment into a separate account and has committed an additional $2MM to the Defend Crypto fund, along with other outside contributions, and is calling on others to do the same. All contributions will be governed by the Blockchain Association and will go towards other litigation that impacts the broader crypto industry.
Electronic Frontier Foundation
The venerable Internet institution has written a 9-page letter to the SEC objecting to the recent ruling against decentralized exchange EtherDelta creator Zachary Coburn, suggesting that the SEC actions violate the First Amendment, free speech.
Key Asks and Opinions:
- Computer code is constitutionally protected speech (and that should include smart contracts).
- those engaged in developing protocols, verifying transactions through mining, and writing code are not held liable for operating, or assisting with operating, a securities exchange.
- The current SEC language could chill blockchain innovation, even beyond decentralized exchanges.
The outgoing CFTC Chairman also holds the endearing title of “Crypto Dad” after recounting narratives of Bitcoin discussions around his family dinner table. He is a known proponent of progressive regulation, as witnessed by his on-going pro-innovation work at the CFTC. Specifically, his mid-term testimony to the Senate Banking Committee is worth noting, as he emphasized the need for a “do no-harm” approach to regulation.
Key Asks or Viewpoints:
- “Do no harm” is the right overarching approach for distributed ledger Technology.
- We would support policy efforts to revisit these (existing) frameworks and ensure they are effective and efficient for the digital era.
- We cannot put the technology genie back in the bottle. Virtual currencies mark a paradigm shift in how we think about payments, traditional financial
- processes, and engaging in economic activity. Ignoring these developments will not make them go away, nor is it a responsible regulatory response.
Global Digital Finance
Based in London, UK, Global Digital Finance (GDF) includes a few dozen global industry leaders who are working on establishing industry standards on custody of assets, compliance with laws and regulations, and the protection of customers. Among other topics, the GDF is working on establishing codes of conduct for stablecoin issuers, security token offerings, secondary market trading platforms, principles for Know Your Customer, and Anti-Money Laundering.
Via its own case, Kik has been challenging the SEC. While the SEC complaint can only be taken seriously on its face value (because Kik hasn’t responded yet), the Kik Wells Response clearly laid out a measured challenge to the Howey Test, and to the SEC’s heavy overreach, as they attempt to regulate currency, a part that hasn’t been within their traditional scope.
Key Asks or Viewpoints:
- Drop the Howey Test
- Don’t regulate cryptocurrency
- Let entrepreneurs innovate via token models
Kraken has recently strongly recommended against Canada imposing a security law framework on crypto currency exchanges, in a public response to the Proposed Framework for Crypto-Asset Trading Platformspublished by the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC).
Key Asks and Viewpoints:
- Need to differentiate between crypto assets that are securities under existing Canadian law and crypto assets that operate solely as a form of payment.
- Exchanges operate as custodiansThe exchange explains that “the assets are legally owned by the customer and not the Exchange operator.
- The application of a securities law framework, accordingly, is both unnecessary and inappropriate
Libra / Facebook
The ink is only beginning to flow pertaining to the recent Facebook tectonic announcement to mint a new type of cryptocurrency and their desire to let it propagate into the global financial system. Evidently, they hit a nerve with US and European regulators who almost immediately began typical stalling tactics by requesting hearings, inquiries and investigations. Suffice to say that if Libra is successful, they would have kicked the door open further for the rise to prominence of non-sovereign currencies at the Bitcoin or Ethereum scale. Undoubtedly, Libra will be a trail-blazing initiative from a regulatory perspective.
The former CFTC Chairman witnessed first-hand the actual eruption of blockchain technology under his watch (2014–2017), and he is credited for keeping the CFTC open-minded about blockchain technology, a practice that was further amplified by his successor Christopher Giancarlo. More recently, Timothy authored a well researched and in-depth report, It’s Time to Strengthen the Regulation of Crypto-Assets, published by Brookings, where he makes a series of recommendations, leaning heavily on Congressional action as the lynchpin for change.
Key Asks or Viewpoints:
- The SEC has jurisdiction over crypto-assets deemed securities, but many crypto-assets — including the most widely traded ones such as Bitcoin — are not securities.
- Favor congressional action to create a comprehensive regulatory framework
- The crypto industry should not wait around for regulators to act. It should
- Formulate self-regulatory standards now — for trading, custody and other functions.
Via its Disclosures Registry, Messari believes that a self-disclosure regime can go a long way in alleviating some of the SEC fears. In the absence of an official SEC registration process for token offerings or crypto-based businesses, Mesari is probably the closest option that aims to raise the bar on much needed transparency.
William Mougayar (Me)
I’m not sure where to begin. Via my numerous blogs on this topic, outside interviews, running panels at my Token Summit, and on-the-ground interactions with the top regulators in the US, Canada and Europe, my messages have been targeting both entrepreneurs and regulators. With entrepreneurs, I have been promoting safe ICO practices and better disclosures, and for regulators, I have advocated they do no harm, let the market evolve a bit longer before they attempt to regulate it, and revisit how to interpret current laws, with the goal of updating them. Most certainly I’m an advocate of a new type of regulation, instead of applying the existing one.
As the most positively outspoken SEC Commissioner, Herster Peirce is also affectionately known as “Crypto Mom”. More importantly, Commissioner Peirce has been a breath of fresh air inside the SEC, not afraid to critique the institution she serves, although her remarks are always prefaced by the customary disclaimer that these opinions are hers, and not the SEC’s. Nonetheless, Peirce has been fierce and fearless, giving hope to some of us, via her several speeches and interviews. Many blockchain enthusiasts would love to see her become the next SEC Chairwoman.
Key Asks and Opinions:
- Approve cryptocurrency ETF’s
- Tokens sold for use in a functioning network, rather than as investment contracts, should fall outside the definition of securities
- Enforcement actions are not my preferred method for setting expectations for people trying to figure out how to raise money. For this reason, it is important for the Commission, in conjunction with Congress and its fellow regulators, to offer something more concrete and carefully considered.
- Token offerings do not always map perfectly onto traditional securities offerings.
- The SEC’s old framework may not apply squarely to the new world of crypto-assets
- The SEC shouldn’t be stifling innovation.
- Urges the SEC to consider whether new regulatory framework might work better for cryptocurrency.
- Would rather see innovators and entrepreneurs spend their time and attention on making better products, providing better services, and revolutionizing the way we interact with one another.
Similar to Cooley, Perkins Coie (1,100 lawyers) is a prominent San Francisco-based law firm that has also been active in advising companies on the subject of crypto-regulation and token offerings. The firm advocates for a friendlier regulatory regime within the SEC.
ProShares, Direxion, GraniteShares, Bitwise
These companies are among at least 9 ETF applications that have been rejected by the SEC, citing inadequate resistance to price manipulation.
The third largest cryptocurrency and the organization behind it continues to voice its dissatisfaction with the SEC’s lack of regulatory clarity, and asserts that it is hindering progress. In June 2019, Ripple’s CTO David Schwartz made his views public via a presentation to the CB Insight Future of Fintech conference in New York.
Key Asks and Opinions:
- SEC is leaving crypto companies in an awkward place due to uncertainties that keep looming.
- SEC needs to provide more clarity, not more enforcement.
Token Taxonomy Act
Sponsored by Rep. Darren Soto and Warren Davidson, and re-introduced in 2019 with an invigorated focus and expanded list of sponsors, the Token Taxonomy Act of 2019 is quite comprehensive and ambitious in its scope and intent.
Key Asks and Viewpoints:
To amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude digital tokens from the definition of a security, to direct the Securities and Exchange Commission to enact certain regulatory changes regarding digital units secured through public key cryptography, to adjust taxation of virtual currencies held in individual retirement accounts, to create a tax exemption for exchanges of one virtual currency for another, to create a de minimis exemption from taxation for gains realized from the sale or exchange of virtual currency for other than cash, and for other purposes.
Union Square Ventures
Union Square Ventures has been an early supporter of the Coin Center and more recently of the Blockchain Association. USV partners Brad Burnham and Nick Grossman have participated in briefings and education sessions with various policy makers and regulators, while partner Fred Wilson has been a prolific blogger and online activist on the topic of progressive crypto regulation (see separate paragraph below on Fred Wilson).
As the most publicly outspoken partner of Union Square Ventures, and primarily via his blog, Fred Wilsonhas written close to 150 posts covering many angles pertaining to cryptocurrencies, the state of blockchain entrepreneurship and crypto regulation.
Key Asks or Viewpoints
- Crypto networks are different than companies and crypto tokens are different than securities.
- The SEC cannot seem to understand that not all of these assets are securities, that most are commodities, currencies, or utilities like frequent flyer miles, and they cannot understand that crypto tokens are unlike any assets that have come before them and that crypto tokens need new regulatory structures.
- The SEC cannot understand that their unwillingness to come up with new rules paired with their “regulate by enforcement” strategy is hurting the crypto sector, pushing it offshore, and is causing most of the new projects to raise capital outside of the US and/or put together legal structures that look like Frankenstein monsters.
Winklevoss Brothers, Cameron and Tyler
The twin brothers are known to be long-time Bitcoin investors and supporters, and they run one of the largest cryptocurrency exchanges, Gemini. Their Winklevoss Bitcoin Trust proposal for listing a cryptocurrency ETF has been rejected twice already, and they recently decided to withhold another submission until further notice, in part due to the SEC’s dissatisfaction with the necessary conditions exist for such approval to take place. Last year, they launched The Virtual Commodity Association (VCA),- a consortium of exchanges focused on self-regulation principles. More recently, the VCA has created 6 regulatory committees in preparation for presentations to Congress.
Wyoming (and Cailin Long)
The State of Wyoming is lucky to have Caitlin Long as its most fervent advocate and ambassador. A Wyoming native, Caitlin is the co-founder of the Wyoming Blockchain Coalition, and was instrumental in ushering Wyoming to enact a total of 13 blockchain-enabling laws, making it the only US state to provide a comprehensive, welcoming legal framework that enables blockchain technology to flourish, both for individuals and companies.
Wyoming is already the “Delaware of digital asset law,” a reference to Delaware’s lead in corporate law.
Here are the top highlights regarding Wyoming’s newest blockchain laws:
- Recognizes direct property rights for individual owners of digital assets of all types (virtual currencies, digital securities and utility tokens) and applies the super-negotiability rules of commercial law to virtual currencies — which foster their liquidity — by applying the very same rules that apply to money. Wyoming’s commercial law reflects the true nature of digital assets (directly owned, peer-to-peer assets), and I strongly encourage other states to adopt Wyoming’s same commercial law protections;
- Creates a fintech sandbox to provide regulatory relief to financial innovators from existing laws for up to 3 years. It’s broadly reciprocal with fintech sandboxes both in the US and globally;
- Authorizes a new type of state-chartered depository institution to provide basic banking services to blockchain and other businesses. The bank is required to have 100% reserves, cannot lend, is for business depositors only, and FDIC insurance is optional. Such banks could be operating as soon as March 31, 2020;
- Authorizes the first true “qualified custodian” for digital assets which is a bank.
The above collection is representative of the industry and market, and there are plenty of reasonable voices among them. One would think there has been enough collective thoughts that would amount to some very interesting and progressive legislation.
Sadly, these voices are often met with continued confusing and often contradictory signals from the SEC or its Commissioners, as if the regulatory agency is oblivious to the market needs, and mostly disengaged or disinterested in thinking outside their box.
Of course other regulatory regimes around the world have adopted friendlier regulation, but there is no other single region where this matters the most.
Via their actions (and inactions), the SEC is ensuring that most new US blockchain entrepreneurs are staying as far away from the US as they possibly can.
These viewpoints and initiative underscore the gravity of the situation.
To think that the SEC is single-handedly suffocating the full emancipation of the blockchain industry in the US would not be an exaggerated statement.
While many of these initiatives amount to a lot of activity, the reality is that the SEC will move fast (and in the right direction) only following an Act of Congress. In the meantime, the SEC is embracing a status quo position, despite meagre attempts to provide so-called guidance that barely moves the needle.
Sadly, there is no current government champion that is setting the tone and moving the ball forward. Back in the Internet days, Vice President Al Gore was that Internet champion who saw the need to hire an electronic commerce Czar, a rare move that is yet to be duplicated today for the blockchain.
In collecting this body of influencers, my goal was to show the magnitude of the dissent, and to figure out if the industry can band together more uniformly to compensate against the SEC’s divide and conquer strategy.
Regulators don’t define innovations, entrepreneurs do. Regulators are supposed to let innovation thrive and not become a hindrance to it.
The entire blockchain market wants to innovate, but they are continuously bogged down by the daunting question “what will the SEC think?”. Truth is the SEC has instilled Fear, Uncertainty and Doubt in the eyes of the market and entrepreneurs in the US. This has forced real innovators to grow their businesses elsewhere in Asia or Europe, and they are doing it unburdened from the heavy hand of the SEC.
Given that the US eventually gets it right, will it be possible to recover lost ground? That is a quintessential question.
The pressure is mounting. And the clock is ticking.