Maybe you can see that With crypto law coming sooner or later, the industry has rallied behind efforts to enact a new crypto-only regulatory framework – one that will spare the full wrath of crypto Howie Test. Companies, including Coinbase, have filed a petition with the SEC to enact new rules specific to digital currencies. In the Senate, meanwhile, two different bills would transfer power from the SEC to the Commodity Futures Trading Commission, which is widely seen as lighter and more industry-friendly. At every crypto conference, and in countless commentaries and congressional hearings, you can hear crypto executives and their supporters lament the injustice of “regulation by enforcement.” The government hasn’t set out clear rules, they argue, leaving companies in the dark on how to proceed without being sued.
“The regulatory landscape in the US is nebulous at best,” says Brandon Neal, chief operating officer of Euler, a decentralized finance project. “Not only does it create a lot of confusion in the industry and the public, but I think it potentially stifles innovation.”
For many securities law experts, however, there is nothing nebulous about this. “You do not violate the SEC’s disclosure laws by registering and disclosing,” said Roger Barton, managing partner of Barton LLP. “I think the securities laws are clear enough. I don’t know that the SEC needs to create specific rules related to crypto.”
It sounds intuitive that new technologies require new rules and regulations. But many securities advocates believe that the general approach is exemplified by the Howie The test is one of the reasons US securities regulation has worked fairly well over the years. “The downside of providing clarity – and that’s why we don’t define ‘fraud’ in the law either – is that once you write down the parameters, you get a roadmap to get around it,” says Hilary Allen . “Therefore, the test has to be flexible. The downside to this is that there will be some uncertainty in application.”
Realistically, none of the bills in Congress are likely to become law anytime soon, and the SEC isn’t going to cave in and issue new rules. That leaves ‘regulation through enforcement’ as the only item on the menu. No one can say exactly what will happen to the crypto industry once the SEC starts winning these big cases. The penalty for issuing an unregistered security can range from fines to criminal prosecution if fraud is involved. Perhaps most alarmingly for the industry, anyone who has invested in what later becomes a security has the right to get their money back. That means crypto startups whose tokens have depreciated could face massive class action lawsuits. Meanwhile, would-be crypto entrepreneurs may be put off by the hassle and expense involved in registering a security with the SEC.
“The disclosure requirement would increase costs,” Diamond says, “and probably 80 to 90 percent of those projects would never have gotten off the ground.”
The industry seems to largely agree – hence their resistance. In a court filing, Ripple argues, “Requiring XRP to be registered as a security is to detract from its primary utility. More generally, opponents of the SEC’s approach say it will kill innovation and chase the most talented crypto entrepreneurs to countries with more lax regimes.
Whether this would be good or bad ultimately depends on some philosophical questions about crypto. If you think that cryptocurrencies are an amazing innovation that will unlock all sorts of previously impossible use cases, then you might think that creating a flexible regulatory regime that helps the sector thrive at the expense of sophisticated investor protection is crucial. On the other hand, if you’re not convinced that crypto has done anything but fuel a speculative asset bubble, you probably don’t believe it. They might instead conclude that an industry that can’t exist if it has to obey laws protecting investors isn’t an industry worth saving.