A new paper from Competitive Enterprise Institute senior fellow John Berlau contends that the Securities and Exchange Commission (SEC) has engaged in regulatory overreach with its approach to cryptocurrency innovation.
In his paper, Cryptocurrency and the SEC’s Limitless Power Grab, Berlau argues that the SEC has targeted cryptocurrency firms for “more stringent treatment,” and exceeded its Congressional grant of authority by claiming jurisdiction over a growing number of digital currency products. Berlau even questioned the theory used to justify classifying cryptocurrencies as securities:
[T]he theory SEC Chairman Jay Clayton is pushing to deem cryptocurrencies as securities stretches the definition of “security” so broadly that even items such as collectible comic books could come under SEC jurisdiction.
Berlau references the SEC’s recent issuance of crypto guidance as an example of how that guidance has stretched the oft-cited Howey test in a way that could define even more products as securities, adding multiple new test prongs to the original three-pronged test established in that case – including the presence of a secondary market for the products in question:
The SEC’s expanded definition of a “security” to be “virtually any instrument that may be sold as an investment,” in Clayton’s words, or a product for which a “secondary market” exists, poses a threat to both cryptocurrency and many business sectors.
The author supported that contention by citing several examples of other products that are sometimes sold as investment opportunities, and that are transferrable in ways that could indicate the existence of secondary markets. Those examples included things like retail points and airline miles, as well as fine wines and even comic books:
There are also many physical goods, from wine to comic books, which consumers buy both for enjoyment and for speculative purposes and which the SEC could claim to regulate as “securities” under its rationale for regulating cryptocurrency. With comic books, for instance, there was even a major industry bubble in the 1980s and 1990s, when publishers printed many new special editions, in part to please collectors and speculators. Many comic book retailers and issuers suffered from a wave of bankruptcies when the bubble burst in the mid-1990s. Yet there was no call for the SEC to regulate the comic book market—or the market for baseball cards, for that matter.
As Berlau notes, the SEC’s approach to regulating cryptocurrency and token offerings has had a chilling effect on the industry and may be preventing smaller investors from accessing potential investment opportunities. He compared the current red tape surrounding crypto offerings to past financial regulation laws that made it more difficult for middle-class investors to participate in stock offerings from “early stage growth companies.”
Berlau concludes that other agencies at the federal and state level have “much clearer jurisdiction than the SEC to police cryptocurrency fraud” and hinted that Congress should act to better define different agencies’ jurisdiction and rely on the marketplace to sort out where the industry goes from here:
Both cryptocurrency and blockchain are entering their second decade. As with many emerging young technologies, they have accomplished much in their first decade, but have yet to bloom fully into adulthood. That is all the more reason to protect them from what Nobel Laureate economist Milton Friedman called the “invisible foot” of government regulation, and instead let their growth be guided by the thousands of invisible hands of the marketplace.