Securities and Exchange Commission (SEC) Chairmen of both parties, Jay Clayton and Gary Gensler, have asserted regulatory power over digital assets and blockchain. They pursued a ruinous “regulation by enforcement” policy to punish innovators like Ripple, LBRY, Grayscale and Coinbase, while they coddled criminals like Sam Bankman-Fried. Courts have pushed back, but only in those cases where litigants have the resources to fight the SEC, but there is no recourse for victim companies or individuals. The SEC is still immune to civil liability (what US House Rep. Todd Tiahrt calls “appalling bad faith”). Only Congress or the White House can stop the SEC’s illegal runaway regulatory train.
Publicly available evidence points to rampant conflicts of interest and ethical questions around senior SEC officials. Clayton and former Director of Corporation Finance William Hinman were revealed to have financial incentives to favor Ethereum over the rival network XRP, and the two officials moved to give the former a regulatory pass and file a blockbuster lawsuit against the latter on Clayton’s final day in office (Full disclosure: I filed a legal motion to compel the release of some of those documents which exposed Hinman’s conflicts.)
Gensler met with Bankman-Fried, the founder of FTX while the latter was carrying out what U.S. Attorney Damian Williams called “one of the biggest financial frauds in American history”. But Gensler hadn’t put FTX under anything like the non-fraud civil wrecking ball he unleashed on the small New Hampshire-based startup LBRY.
The SEC dragged LBRY through years of interrogations over its native token LBC, while an anguished CEO Jeremy Kauffman told a judge he did everything to comply with confusing rules the SEC wouldn’t explain. The eventual lawsuit bankrupted the company. This injustice moved SEC Commissioner Hester Peirce to issue a public statement blasting the agency’s “scorched earth approach” that “was completely out of proportion to any investor harm.
Ripple weathered the SEC’s “regulation by enforcement” strategy because it had $100 million in reserve to cover the legal costs. The ligation exposed the SEC’s thin case was against Ripple for its sales of the XRP token. Magistrate Judge Sarah Netburn scolded the SEC for its “hypocrisy” in failing to show “faithful allegiance to the law” as it repeatedly ignored her pretrial orders and dragged out proceedings. Judge Analisa Torres, in her verdict, slammed the SEC’s made-up legal theory that XRP could itself be a security and give the agency unlimited power to regulate it, vindicating some 75,000 retail XRP holders, who had entered the case against the SEC. But they shouldn’t have had to fight their own government. After all, the job of the SEC is to protect investors, not to abuse them.
Sadly, SEC misbehavior continues. The General Accounting Office (GAO) slammed the SEC for issuing a Staff Accounting Bulletin in 2022 that appeared to tell custodians to double-count digital asset liabilities on their balance sheets. This scared financial services companies away from any crypto adoption and caused “extraordinary damage to the crypto industry” according to Jake Chervinsky of the Blockchain Association. The GAO found that the SEC issued the guidance illegally by not submitting it to Congress.
The SEC also rejected Grayscale Investments’ repeated applications for a spot Bitcoin exchange-traded fund (ETF) for reasons that have no legal basis. A federal three-judge panel said as much in its unanimous decision, saying the rejection of Grayscale’s application was “arbitrary and capricious” and ordered the agency to review it again and apply the law faithfully.
There is no excuse for this SEC lawlessness. The buck should stop with President Biden.
Roslyn Layton, PhD is a leading international expert on technology policy. She is Executive Vice President of Strand Consult, an independent consultancy. She is also a Visiting Researcher at Aalborg University in Copenhagen, Denmark.
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