The world of digital assets and cryptocurrencies is rapidly evolving, and the United States is struggling to keep up with the pace of innovation. The US CFTC (Commodities Futures and Trading Commission) has argued that many digital assets are merely derivatives traded on unregulated exchanges. However, this assertion has been met with pushback from the crypto industry, which argues that responsibility lies with the software developers and governance token-holding voters.
At the heart of the debate is whether digital assets are securities in the traditional sense or represent an entirely new type of security that requires a new regulatory framework. The authors of securities law intended for a disclosure-based regime, which would weed out illicit crypto players. However, over the years, securities law has devolved into a more authoritarian permissions regime, which requires submission to costly audits that only the most monied entities can comply with.
The crypto industry advocates for a disclosure regime that would allow for transparency and protect innovations and the developers behind them. A good first step would be to pass a law where developers make certain voluntary disclosures in exchange for safe harbor. This would ensure that if they break other laws using the technology, they will face appropriate charges if caught.
Regulators must respect civil rights and the difference between mere software and a financial services intermediary. They must maximize the value of innovation rather than discourage it. DeFi allows scalable, private, peer-to-peer transactions to occur, all of which are protected by civil rights. Blockchain represents a scalable way to raise money, engage in transactions, and more. If the US takes a hardline approach, the industry will move offshore, which will be another blow to a beleaguered national economy.
Federal securities laws provide that investors harmed by misleading statements or omitting material facts can seek a remedy through litigation. Thus, disclosure requirements are at the heart of federal securities regulation. As Supreme Court Justice Louis Brandeis stated, “Sunlight is said to be the best of disinfectants – electric light, the most efficient policeman.”
In conclusion, a disclosure regime, instead of a permissioning regime, is the right approach for the US regarding the new and exciting crypto industry. Regulators must focus on 17 A of the Securities Law of 1933, which makes it unlawful to engage in any transactions, practice, or course of business which operates as a fraud or deceit upon the purchaser. By doing so, US regulators can go a long way toward protecting consumers and investors, persecuting criminal elements, and encouraging innovation.
