It's all about replacing SEC, CFTC, and banking regulator oversight with a "self regulatory organization."
A dedicated self-regulatory organization (SRO) should be established to strengthen the oversight regime and provide more granular oversight of MDAs.
All registered MDAs should be required to be members of the SRO.
The SRO should establish the self-certification process that an MDA would use to make a digital asset available for trading on its platform.
The framework would preempt state-by-state registration and related regulatory requirements.
It's the scammer's dream. In a world where 79% of ICOs turned out to be scams[1], self-regulation cannot work. The percentage of crooks is too high.
The SEC's Howey Test[2] for "is it an investment" applies to "digital assets", just like it does to non-digital assets. The crypto community hates this, because it interferes with Make Money Fast schemes.
Your 79% figure is misleading because counting number of scams unweighted by size is meaningless. To quote your source:
> In relatively direct contrast, looking at our classifications as a percentage of the US dollars raised to-date (~$12B)
we found that only ~$1.3B (~11%) of ICO funding went to Identified Scams,
> Although ~1/10th of all ICO fundraising went to Identified Scams, the vast majority of the $1.3B was from just
three projects, which were all relatively old school frauds by no means unique to ICOs (Pincoin ($660M),
Arisebank ($600M), and Savedroid (~$50M)).
> Outside these three projects, Identified
Scams got away with just $30M in fundraising (or ~0.3% of all time ICO fundraising). We hypothesize this is
because the community is relatively adept at discovering scams and adding them to lists.
11% is still large enough to make your point, and people inclined to agree with you would probably also be inclined to take the 11% figure and not the 0.3% figure, so there was no need to talk about 79%.
At the moment the shiny new thing appears, the 79% figure applies. As time goes on, reality ensues, and it becomes clear which ones are scams. But you don't know that up front. For an investment class marketed by Fear of Missing Out, you have to look at the early odds.
The 11% is the early odds. The investments were made up front when everyone was driven by FOMO, and 11% went to scams. After reality ensues is now, and if everyone were choosing to invest now, the number would be 0%[1], not 11%.
[1] With the caveat that it's possible there are some long cons that haven't yet been exposed yet.
I would like to be able to invest in whatever I want. As an American, I cannot, because US exchanges can't list all the cryptocurrencies that Asian exchanges can, due to fears that the coins / tokens could be flagged as securities.
Right. Many of these things are zero-sum or worse. They need fresh suckers to keep them going.
Most of the crypto scams are not novel. The almost two century-old "Extraordinary popular delusions and the madness of crowds" (1841) has the classics from the first time around, when newspapers first got going. (Newspapers made possible scams at scale. There has to be some way to reach large numbers of suckers.)
There are two main scam formats. One is "We're going to take your money and do this profitable thing and you're all going to get rich". That's a classic blue-sky investment scam. Some of those succeed. Most fail. In the crypto world, the "doing the profitable thing" part is often skipped or deferred. (Right now, the "we're going to build a metaverse Real Soon Now so buy our NFT now" thing is big.)
Then there's the "Loan us your money and get a regular high payback, but we're vague about where the money goes". That's a Ponzi scheme. Those always fail. (That's Axie Infinity and their Smooth Love Potion token. And, of course, Madoff.)
If you miss that some of the laws are literally so the elite can stay in power, and the common folks have restrictions on what they can invest in, then I just can't take the rest of what you say about this subject seriously.
FWIW, I also invest in an S&P 500 index, so I'm not totally anti traditional finance.
Right, we generally assume that if you hold a certain amount of money you can opt-out from protections both because the risk of you losing money is lower (you presumably are a bit more savvy) and the cost of damages is relatively lower.
That isn't some great scheme to keep the common man down. It's to protect the average consumers from the kinds of crypto scams that are advertised daily, even on little cardboard signs around my own neighborhood.
That's just a conspiracy theory. I mean, yes, Protection of Entrenched Interests is a real thing, Regulatory Capture is a real thing. There are real issues to discuss there.
But to argue that the purpose behind the SEC et. al. is to ensure "the elite can stay in power" or that "common folks are restricted" is just ridiculous tinfoil hattery, sorry.
Outrageous scams in crypto are a real and significant threat. Everyone can see that. That they aren't traditional finance is quite clearly because of the regulatory regimes that control them.
> That's just a conspiracy theory. I mean, yes, Protection of Entrenched Interests is a real thing, Regulatory Capture is a real thing. There are real issues to discuss there.
> But to argue that the purpose behind the SEC et. al. is to ensure "the elite can stay in power" or that "common folks are restricted" is just ridiculous tinfoil hattery, sorry.
Thanks for this. Your argument is really simple (in a positive, elegant way) that it functions as a framework to rebuke most conspiracy theories people spew out nowadays. I've just never been able to present it so cleanly.
Some investments would turn out to be scams and the cheated would decry the lack of oversight, so rigorous oversight is what they got —- since you’re not rich enough to handle risk, we’re going to prevent you from taking any at all. So yeah, the rich get rich and remain unchallanged, while the common folk is protected from scams. Perhaps not a conspiracy per se, but the good ol bureaucratic status quo.
Correct. I’m not American and not subject to them, but I believe people should make their own decisions, while the protection offered by the state should come in the form of education and catching bad actors. Restricting access is a form of throwing one’s hands in the air and deciding the issue is too complicated so we’ll just hide it under the rug. This goes beyond accredited investor status. All too often laws and regulations hide issues under the rug rather than actually addressing them, perhaps because the systemic changes required to fit a framework around the world are too difficult to achieve vs fitting the world inside the framework. We’re trapped in legacy code.
> I believe people should make their own decisions, while the protection offered by the state should come in the form of education and catching bad actors.
I agree with this. I think education and prosecuting scam projects are both good.
Although I suppose one could also argue that to catch bad actors ahead of time, there needs to be a way for new cryptos to file with the SEC, to then be audited to see if they are legit. However, I just don't see the SEC being capable of that, at least not yet. Crypto technology is moving too fast for them to keep up. We also still don't have clarity on some basic questions like if Bitcoin or Ethereum are securities or not. Former members of the SEC have alluded that they are not [1], but there are no clear statements on this yet from the SEC. Maybe there need to be more legal precedents set, like from the Ripple case currently going on [2], in order more clarity to be provided and for the path forward to become more clear.
It's hard to fathom why people wouldn't know why regulations exist.
Without regulatory bodies, markets would not exist.
This is because regular consumers don't have the energy or ability to evaluate the quality of products or services, so in certain areas (health, safety, finance), where it 'really matters' - we regulate.
Without a drug regulatory body, there would be no way to know what drugs work, and the market would be almost entirely scammers.
Have a look at 'moisterizers' - it's a ridiculous game of false and misleading information by so called 'reputable' companies using technology totally out of context i.e. 'collagen' in order to be able to put it on the label. There's nary a way to understand what is effective and what is not. It's a completely distorted market. Now, it's just moisturizer, so it doesn't matter.
But we don't want the same thing for diabetes drugs, now do we?
The financial system is highly, highly regulated because it used to be full of outright scams and the system couldn't grow without it.
Integrity is key to all long term growth, it's why we have rules.
Now it should be possible to invest in highly speculative, risky things - sure - that should be up to you - but the reason we don't want to allow that in some instances is because the mechanism itself is fraudulent and misrepresentation i.e. a Ponzi Scheme is a Ponzi Scheme and it's bad to have them going around, even if you want to invest in them.
The entire field of Crypto thus far has been a giant distraction and waste of time, while there is definitely the possibility of some good coming out of this, it hasn't happened yet, we should be in the experimental stage, not the 'using up more electricity than Argentina stage'.
I can't disagree more. Crypto is a new market that should have a different set of rules, based on new technology, and what is happening now, not in 1933.
> Now it should be possible to invest in highly speculative, risky things - sure - that should be up to you
(i.e. invest in things that are securities, but without having to follow the securities regulations).
Sorry, but no.
This is not a matter of just 'risk' to you - you are allowed to take on as much risk as you want - you may need to be an accredited investor, sure, but you can still take on risk and invest in whatever you want.
As long as it's not a scam.
'We' (i.e. everyone else) does not want 'you' putting money in giant scam vehicles, they're toxic to a functioning market.
If you want to sell/buy/participate in a market for something that is like a security, then it has to follow securities regulations.
If you want to sell a drug that says that 'it cures cancer' - it has to be approved.
If you want to sell a car, it has to pass safety checks.
If you don't want to do those things, then you can go a place like Afghanistan to see how it works out. FYI even the Taliban (!) are trying to fight against fraud because they know it's bad.
There is no advantage to to society to skip these regulations. The only advantage to cheating on the regulations, is for early movers, to leverage themselves over dupes in an otherwise zero-sum game.
There are opportunities for things that transcend regulation but we don't have any examples of that quite yet.
For example, 'some future crypto' (not BTC or ETH) might provide the possibility for less oversight etc..
> you may need to be an accredited investor, sure, but you can still take on risk and invest in whatever you want
How is this not a contradictory statement? Are you claiming that anybody can become an accredited investor? That's incorrect, you need to be pretty damn close to the 1% to qualify.
> This is not a matter of just 'risk' to you - you are allowed to take on as much risk as you want - you may need to be an accredited investor, sure, but you can still take on risk and invest in whatever you want.
This is not true. As an accredited investor in the US, I cannot invest in any crypto that I want to due to domestic restrictions.
FWIW, I'm not against regulation, I just find it funny that we think laws from 1933 are applicable to any technology released in the future. That seems completely absurd to me. I think crypto should have its own set of regulations. I'm not against the SEC going after specific scams, I think they should do that, but I think people should have choice of what they invest in.
...which is exactly what opens the door to people being defrauded.
Can you explain how this is different to requiring approval for new drugs or medical devices?
Fwiw, if you are arguing for a review of how existing laws should apply to crypto, I'm fully on board. But that's not what Coinbase is trying to do at all. They are trying everything in their might to circumvent all of it.
> Fwiw, if you are arguing for a review of how existing laws should apply to crypto, I'm fully on board.
Yes, I think we are on the same page. I don't think crypto should be, or it is even possible to be, the wild west, indefinitely. Something should be in place, but we should have some clarity, and it would be great if the organization coming up with the laws understands the technology at a technical level. Gary Gensler seems promising, but time will tell.
Come up with an actual proposal that isn't "deregulate it all because 1930s laws don't apply" and people might listen to you.
Until then, bona fide intentions to "evolve" regulation are virtually impossible to tell apart from fraudulent intentions and most of us can't be bothered to spend the time or effort to engage in such a fruitless exercise.
FWIW, I'm not saying Coinbase is right here, and I'm not saying deregulate it all. I do think regulatory clarity in crypto would be good, and possibly we should revise some laws that were made almost a century ago.
I do not have an actual proposal but I am not a law maker.
Maybe it's my money and I should be able to do whatever I want with it?
I don't want the SEC "protecting" me from things like ethereum. I don't even want the SEC "protecting" me from things like cardano, or "SHIBE" or "safemoon".
Maybe provide recommendations, but it's my money. Or is it not my money?
It is incredibly frustrating watching The US turn its back on what is quite obviously a major technological/financial paradigm shift. I understand the detractors 10 years ago, but...guys it's been 10 years now and blockchain technology has only increased in penetration into industries. It's not going away. The idea that the US is going to regulate itself away from being the epicenter of this is pathetic.
Here's how far along it is: coinbase was a YC company that has already gone through the entire cycle of conception, startup, raising money, and going public with a $50B market cap. People like this stuff. It's not going to go away like a fad.
I don't see anything being "regulated away". Just that an almost 90 year old law hasn't stopped applying. Coinbase could just stay in line with that law.
They don't want to, of course, because that would put them on the same footing as regular investments.
> blockchain technology has only increased in penetration into industries. It's not going away.
Financial security laws applying to investment in defi is the epitome of accepting that crypto isn't going away. Don't you think?
> Maybe it's my money and I should be able to do whatever I want with it?
I feel your pain, but you are deeply deluded: it never was your money in the first place. There are letting you play with it if you agree to play by their rules.
If you don't, the government can take it back anytime it wants to, using any manufactured pretext it wants.
Two things popped out to me, under the disclosure requirements section:
> c. Digital tokens that are earlier in the life cycle, and not yet decentralized, should have a minimum set of disclosures.
This seems odd to me, because aren't tokens "earlier in the life cycle" full of scams and dishonesty? Shouldn't the disclosure requirements be higher?
> d. Asset-backed tokens, like stablecoins [...] require a different type of disclosure. The disclosures should be appropriate to how they are being used, which is inherently different from money market funds.
Disclosures "appropriate to how they are being used" seems like it could easily be interpreted as "whatever the stablecoin provider thinks is appropriate." In any case, since stablecoin providers promise a specific amount of value in assets for every coin, they should require full transparency to ensure that value actually exists.
Overall, this piece seems like a clear attempt at bypassing regulation, instead of actually trying to obey the existing regulations. The question I have is "what problems do you have with the existing regulations", and I suspect the answer is "because we would be caught doing shady shit."
This is optimistic, it would require traditional financial service regulators like the SEC to ceed power to a new agency. That's very unlikely to happen. Most of the regulatory institutions in America work to increase their power not hand it off to a new agency. We see this in coinbases own fight with the SEC and other agencies about who regulates yield earning stablecoins.
Probably, but for Coinbase to even manage to steer the conversation in this direction it’s a victory. They are the best positioned in the industry to even attempt it and if they’re rejected they are first in line to provide the infrastructure.
Have they steered the conversation at all, though? From Bloomberg:
> “There’s trading venues and lending venues where they coalesce around these, and they have not just dozens but hundreds and sometimes thousands of tokens on them,” Gensler said Monday at the Code Conference in Beverly Hills, California. “This is not going to end well if it stays outside the regulatory space.” [1]
Coinbase already got a Wells notice, and whined about the SEC being "sketchy" as a result. [2]
I really don't think this conversation is moving in their favor in the actual regulatory circles.
Is this a summary or the entire text? I think I saw messaging from Coinbase in anticipation of this proposal earlier this week. [1]
Not a lawyer but the definitions and language seem a little shallow to me considering how lofty the proposal of a new regulatory agency is.
Wouldn’t one expect a higher level of detail, supporting evidence, citations or legal precedent from consultations with “30+ crypto firms, 25+ members of congress and/or staff, 4 major law firms, and 3 trade groups”?
> The primary purpose of the '33 Act is to ensure that buyers of securities receive complete and accurate information before they invest in securities. Unlike state blue sky laws, which impose merit reviews, the '33 Act embraces a disclosure philosophy, meaning that in theory, it is not illegal to sell a bad investment, as long as all the facts are accurately disclosed. A company that is required to register under the '33 act must create a registration statement, which includes a prospectus, with copious information about the security, the company, the business, including audited financial statements. The company, the underwriter and other individuals signing the registration statement are strictly liable for any inaccurate statements in the document. This extremely high level of liability exposure drives an enormous effort, known as "due diligence", to ensure that the document is complete and accurate. The law bolsters and helps to maintain investor confidence which in turn supports the stock market.
Crypto falls under regulation when regulators believe it falls within the scope of their regulatory obligations. Whether the code is open source is immaterial.
This is the result of the "code is law" gang running into the "law is law" gang.
Crypto falls neatly into either a securities or commodities basket from a regulatory perspective (depending on implementation), no new category required.
It seems, from a cursory glance, those asking for new regulation are asking for the avoidance of regulation, not similar regulation to other asset classes. That isn't regulation, and hence the tone of responses to these sorts of efforts by the crypto "industry". Even worse is the stance "our technology doesn't support regulatory intervention" (ie smart contracts that have no support for when regulators or the judiciary intervene).
The reason it's sometimes not clear, is because companies want to go right up to the line of 'crypto' without it actually being a security, in order to defraud people.
'Insider Trading' isn't always perfectly clear either, but it's really clear if you want to steer clear of it.
Is Bitcoin a security? How is something that is decentralized a security? If it was a security, should there be charges against Satoshi Nakamoto, who no one can reliably tie an identity to, and who might even be deceased? Or should the Bitcoin Core dev team be charged, in that case? Or should Bitcoin miners be charged? In my opinion, it's more nuanced than you make it out to be.
The way I'm interpreting what you are saying is that you would like if everyone would just abandon crypto and avoid it, because some / all of them could be considered a security (or because you and others don't like it, for other reasons, I'm not sure, exactly). The only way that it could be "clear" is if the SEC explicitly says which ones are securities, which has not happened, except for a few specific cases [1][2][3][4][5]. By the way, I'm for the SEC going after bad actors / scams, although I'm not convinced that that is what's happening with all of these cases, although perhaps some of them.
Anyway, since you mentioned companies, I'll give you the benefit of the doubt here, and I generally agree that crypto companies should maybe reconsider the position of skirting regulation. However, if we are talking about the crypto ecosystem as a whole, then I do not agree. I personally think this is new territory and crypto will play an important role in the future of our financial systems.
Reference [4] from my comment was about Kik. I think we agree there.
Also, FWIW, reference [2] from my comment was about Ripple / XRP, which I figured if any crypto project was a security, they were, since it was linked to a for profit company. I was not surprised to see that they were charged.
Anyway, I'd love for the SEC to say BTC is not a security, when asked a direct question about it, however, they have not yet, which is one of the reasons why I don't agree that the regulatory framework is clear, yet.
Ethereum also did an ICO so it probably was a security to start with (Gary Gensler said most ICOs are probably securities), but then Ethereum became decentralized enough, so then it's probably not still considered a security. So where do we draw the line for new projects? If they aren't prosecuted within a certain amount of time, then they are fine?
This is what I mean. It's a nuanced discussion. I don't think there should be scams, and it would be great if the regulators protected against bad actors. I agree that new projects should not market themselves like stocks / securities. However, in my opinion, not all cryptos should be considered securities. Based on all this, would you consider Bitcoin and Ethereum to be a separate class of assets? This is what I'm trying to get at. We can't group all crypto into existing securities laws. There probably should be regulation, but let's be clear about which ones are and which ones aren't. I have yet to see that clarity from US regulators.
Yes, they should provide guidance on BTC and probably should provide a bunch of test cases with clearer parameters. They're acting like Justices where they need to see the case, instead of providing exemplary framework for classification. Yes, I think in that case it's fair for them to be more proactive in delineating between groups.
It's a good point, and I think I would generally agree with this. I just wish the SEC was keeping up with technological innovation. At this point crypto is moving faster than they can keep up with, so I don't think they can accurately judge new crypto projects (or even older ones like Bitcoin and Ethereum), because they don't have the technical skill on their staff, or a modern regulatory framework, to understand and regulate it properly.
The Chair of the SEC taught crypto at MIT [1]. As much as the SEC needs to upskill, crypto needs to accept they are not going to replace the existing systems and they deserve no exceptions in regulation.
What we need is competition in rule making, generally. See "Rules for a Flat World"
I know who Gary Gensler is and I respect him for the teaching he did at MIT. I'm talking about the staff of the SEC as a whole. In my opinion, they are not moving fast enough or keeping up with technological innovation. I'm just wondering, have you read Gary Gensler's comments at the Aspen Security Forum [1]?
I particularly like this quote:
"Before starting at the SEC, I had the honor of researching, writing, and teaching about the intersection of finance and technology at the Massachusetts Institute of Technology. This included courses on crypto finance, blockchain technology, and money.
In that work, I came to believe that, though there was a lot of hype masquerading as reality in the crypto field, Nakamoto’s innovation is real. Further, it has been and could continue to be a catalyst for change in the fields of finance and money."
I have not read, but will look up, "Rules for a Flat World". Thank you for the reference.
Personally, I find the "shitcoin" part of crypto the least interesting target for potential regulation. Some are outright scams (say 1 in 10), many just poor investments (about 8 in 10), but for the most part the crypto community willingly engages with these coins, knowing the risk.
What I find much more important in terms of consumer protection is exchange regulation. Mainstream use of crypto will overwhelmingly be via exchanges and wallet apps, and quite obviously, your money shouldn't just disappear because of incompetence, a hack, a bug or bad intent. Adding protection or regulation here may make crypto far less scary.
I extend this concern to DeFi, which largely means staking. Right now, it basically means giving up custody of your coin to others, whom in some cases may "lose" it.
I would consider both use cases, just parking a coin and staking it, absolutely critical for mainstream usage and as the amount of money exponentially increases, it becomes ever important that at least basic protection is in place. At the same time, you don't want to add so much regulation that it crumbles the entire space.
A dedicated self-regulatory organization (SRO) should be established to strengthen the oversight regime and provide more granular oversight of MDAs.
All registered MDAs should be required to be members of the SRO. The SRO should establish the self-certification process that an MDA would use to make a digital asset available for trading on its platform.
The framework would preempt state-by-state registration and related regulatory requirements.
It's the scammer's dream. In a world where 79% of ICOs turned out to be scams[1], self-regulation cannot work. The percentage of crooks is too high.
The SEC's Howey Test[2] for "is it an investment" applies to "digital assets", just like it does to non-digital assets. The crypto community hates this, because it interferes with Make Money Fast schemes.
[1] https://research.bloomberg.com/pub/res/d28giW28tf6G7T_Wr77aU...
[2] https://www.sec.gov/corpfin/framework-investment-contract-an...