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Former SEC Chief Blasts ‘Bogus’ Catchphrase: ‘Regulation by Enforcement’

Former SEC employee and lawyer John Reed Stark has come out in support of the SEC’s crypto enforcement activities.

Former Securities and Exchange Commission (SEC) officials have lambasted “cryptocurrency lobbyists” for referring to SEC enforcement operations as “regulation by enforcement,” dubbing the phrase a “Bogus Big Crypto Catch Phrase.”

In a Jan. 22 essay, John Reed Stark, a former chief of the SEC’s Office of Internet Enforcement and a crypto sceptic, said the reasoning is “sorely erroneous” because it was just how securities regulations worked.

“Litigation and SEC enforcement are how securities regulation truly works,” he asserted. “The adaptability of SEC legislative armament is an SEC characteristic, allowing SEC enforcement to combat fraud.”

“In truth, the repeated chorus of RBE [regulation by enforcement] is not only a misguided, deflective effort to tap into favourable libertarian and anti-regulatory mores – it’s also complete nonsense.”

According to Stark, when the SEC Office of Internet Enforcement was established in 1998, detractors said that SEC regulations were too imprecise and that regulation by enforcement would impede Internet growth.

“In retrospect, depending on the flexibility of securities legislation to monitor the Internet eliminated the more egregious cases of early online securities fraud,” he contended.

“Moreover, robust online SEC enforcement activities cleared the ground for legal technical advancements to flourish, making markets more efficient and transparent, so providing investors with additional prospects for success,” he added.

The SEC has filed a number of high-profile proceedings against crypto businesses like as Ripple and LBRY in recent years, prompting some critics to say that the SEC has been using enforcement actions to build the law on a case-by-case basis rather than adopting clear regulations.

In a Nov. 28 post, Ripple General Counsel Stuart Alderoty questioned the method, citing the high-profile collapse of FTX and the accompanying epidemic that claimed BlockFi as evidence it doesn’t work.

However, in Stark’s judgement, the SEC is acting in accordance with the law, and he cited judicial successes in which judges ruled in its favour.

“In fact, courts have upheld a wide range of SEC cases involving cryptocurrency-related offerings. Of fact, the SEC has not lost a single case in the 127 crypto-related enforcement proceedings it has already filed,” Stark added.

“The SEC’s approach is rarely improperly expansive, nor does it involve rogue SEC enforcement efforts.”

“Rather, the SEC often applies a reasoned, common sense application of the fundamental requirements of federal securities laws to new and emerging market conditions and technologies,” he added.

Timothy Cradle, a former Celsius employee and current director of regulatory relations at the Blockchain Intelligence Group, responded to Stark’s piece by asking if clear regulations would be a better policy than regulation by enforcement in the long run.

“I agree with the concept, but is it too much to expect that the SEC and CFTC give recommendations similar to what FinCEN did in 2019?” he said.

“If large crypto says it requires clear rules of the road, wouldn’t it make sense for regulators to clarify that their regulations do apply to cryptocurrencies in an official message, such as guidance?” Cradle was added.

Former PA [Pennsylvania] Blockchain Coalition advisory board member Chris Hayes also commented, arguing that a “sensible regulatory approach would be for the SEC to issue a request for comment on how digital assets might not be able to meet the registration obligations due to their digital nature on blockchain.”

“Take that information and then suggest a rule on how these tokens can conform with the 33 act, taking into account the technological variations that effect custody, secondary sales, and settlement time/structure versus traditional securities.”


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