What to Expect If Crypto Regulations Hit

For years the SEC has taken a minimalist approach to regulating the crypto space, but as we’ve written, the Biden administration’s SEC Chair Gary Gensler has made it clear “he came to regulate.” We’ve written a good deal about the heavy-handed, regulation by enforcement approach Gensler wields. So with reports due next week to the White House on establishing a regulatory framework for crypto, like it or not something is coming.

Coindesk explores what “something” might be.

There are two, maybe three, possible outcomes here. The most likely, unfortunately, is that Gensler’s SEC places mounting legal pressure on both token issuers and exchanges, primarily using even more enforcement actions to treat tokens as securities in a relatively uniform way. That would almost certainly strangle many good crypto projects along with the bad.

The preferable alternative would be a real attempt to structure rules that wouldn’t hamper the potential of this new technology, along the lines of the formal time-limited safe harbor proposed by SEC Commissioner Hester Peirce.

That proposal included data-reporting requirements for token projects (good) but didn’t place any prior restraints on entities that wanted to try something new (also good). Personally, I would love to see additional safe-harbor permissions for tokens with very low value, the sort that might be deployed for small-scale DAOs (decentralized autonomous organizations) or other truly community-driven projects.

But let’s be realistic: Regulation that leaves substantial room for experimentation isn’t particularly likely to come to fruition. In part, that’s because Congress remains a bit of an ineffectual mess, ill-equipped to craft complex and rational new rules.

But more fundamentally, the SEC and other regulators just aren’t set up to grapple with the truly mind-bending complexities of blockchain’s crossover between technology and finance. That disconnect may be inevitable, because regulation implies a normative vision of the way things “should” be.

Embracing risk and chaos and figuring it out as we go is probably the only real way to find out the long-term potential of these innovations.