John Berlau, an economist at the libertarian think tank Competitive Enterprise Institute, has slammed U.S. Securities and Exchange Commission (SEC) for what he calls mishandling blockchain and cryptocurrency.
Expressing his thoughts over SEC’s role, he said:
Among federal financial regulatory agencies, none poses a greater threat to cryptocurrency and the associated blockchain technologies than the Securities and Exchange Commission (SEC).
In his recent report, he expressed his thoughts on SEC’s unsatisfactory performance and inefficient policies constraining the prevailing phase of cryptocurrencies and blockchain. He explained that SEC had jurisdiction over financial statements of all U.S. exchange-listed companies using cryptocurrencies. Particularly, the securities laws allowed the SEC to see if companies were truthfully reporting their crypto related activities to their investors and stakeholders. However, Berlau claimed that the SEC had been targeting these firms with stringent treatment. Moreover, he stated that the SEC expanded its jurisdiction to cryptocurrency products although such power or responsibility was never bestowed by Congress.
Berlau holds degrees in journalism and economics and prefers to cover the impact of public policy on entrepreneurship and investment. He has contributed to several publications such as Forbes and Insight. His work has been cited on several recognized platforms that include The Wall Street Journal, The New York Times, The Washington Post, Financial Times, Bloomberg News and many more.
He raised objections in the definition of security which broadly covers even items such as collectible comic books and grants SEC jurisdiction over everything fulfilling the definition. He accused Jay Clayton, chairman SEC, of keenly forcing the definition to cover cryptocurrencies as well and mentioned the negative impact of Clayton’s struggle. According to Berlau, Clayton’s actions resulted in making the crypto market even more volatile and disturbing blockchain’s development as blockchain developers’ incentive mostly comprised of cryptocurrencies.
Berlau disapproved Clayton’s justification for ensuring cryptocurrencies to come under the SEC’s jurisdiction. Clayton had claimed the cryptocurrency bubble to be the primary reason behind attempting to control cryptocurrencies. In economics, a bubble is when the price of an asset surpasses its intrinsic value. Berlau linked dotcom bubble of the early 2000s in explaining that although stocks of numerous internet firms rose, after the bubble burst the innovation of the internet era was accepted by about 80 million Americans. This shows that the cryptocurrency bubble alone doesn’t stand as a valid and substantial justification from Clayton’s side.
‘Howey Test’ for Cryptocurrencies
Berlau also illustrated how the SEC was working its way to deem cryptocurrency as a ‘security’. SEC has often referenced ‘Howey Test’ to regulate cryptocurrencies as securities. All investments considered securities due to the test, are subject to certain registration requirements until and unless they are exempted by the SEC. These requirements include:
- A description of the company’s properties, business purpose and security offered
- Information about the company’s management
- Certified financial statements of the company
Howey Test examines the following conditions to determine if an investment should be treated as a ‘security’:
- It is an investment of money
- Profit is expected from the investment
- The investment of money is in a common enterprise
- Any profit results from the efforts of a third party
Berlau said that SEC expanding its restrictions over cryptocurrency and crypto exchanges by trying to declare cryptocurrency as security to manage investor protection would limit options for investors as new issuers of cryptocurrencies would be required to undergo same cumbersome registration process like issuers of securities, stocks and bonds have to experience. This could mean that even blockchain networks not used mainly for cryptocurrencies will also need to be registered as issuers. SEC has already hinted at categorizing cryptocurrencies as securities in a document titled ‘Framework for “Investment Contracts” Analysis of Digital Assets’. On it, Georgia Quinn, an attorney and general counsel at CoinList, commented:
This stretches the test of what is a security from the three prongs of the Howey Test to more than 40 prongs
Apart from this, Berlau discussed measures that should be employed by governments while regulating cryptocurrency and blockchain. According to him, there must be a balance between punishing frauds and granting the degree of freedom to entrepreneurs so they can experiment new and different approaches while their interests are safeguarded. The optimum approach shouldn’t be entirely addressing the former while leaving no room for the latter. In addition to this, Berlau insisted that governments introduce volatility and hinder innovation while regulating. For instance, the price of bitcoin dropped 10 percent when news informing that China might ban cryptocurrency exchanges broke. A similar drop in bitcoin price happened when China banned the exchanges later on.
Along with SEC’s ongoing efforts in turning cryptocurrencies into securities, there is another issue that the SEC has some sway over: the pending decision of allowing bitcoin ETF (exchange traded fund). While use cases for blockchain and cryptocurrency battle for mass adoption, all eyes are set on the Congress which may change the definition of securities in the future to exempt cryptocurrencies from the likes of Howey Test.