Regulatory Autonomy: Should Regulators Determine the Rules They Enforce?

Regulatory self-determination is a topic that sparks debate within the cryptocurrency industry. While federal watchdogs like the Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) enforce the law based on legislation written by congressional lawmakers, there is a question of whether regulators should have the authority to determine the rules they enforce.

In the case of crypto regulations, some argue that regulators should have the autonomy to establish bespoke rules for the industry. Crypto proponents, for example, believe that distributed self-executing ledgers have the potential to disrupt and advance various sectors. They argue that these innovative technologies require tailored regulations that consider their unique characteristics and potential benefits.

However, SEC Chair Gary Gensler disagrees with this viewpoint. He has repeatedly stated that many crypto tokens should be classified as securities under the SEC’s domain, and that blockchain innovations are simply new ways of conducting traditional activities. Gensler has been applying existing rules and regulations to rein in the crypto industry, which has seen fraud and financial experimentation.

A recent filing in the ongoing legal battle between Coinbase and the SEC sheds light on the regulator’s stance on its role in determining the timing and priorities of its regulatory agenda. In response to Coinbase’s petition for new rulemaking specifically tailored to blockchain, the SEC reaffirmed its discretionary powers. Gensler emphasized that the current law appropriately governs crypto asset securities.

Coinbase had petitioned the SEC to either respond to its request for new rules or be forced to do so by a US judge. However, the SEC deemed Coinbase’s request as unworkable without providing further elaboration. In a brief two-page document, the regulator highlighted its broad discretion to act and cited its engagement with market participants. It also acknowledged the possibility of undertaking further consideration of the issues raised in Coinbase’s petition.

However, the SEC’s response left some questions unanswered. It did not delve into the reasons behind its classification of cryptocurrencies as securities, nor did it address Coinbase’s desire for clear disclosure requirements for offers and sales of crypto asset securities. Instead, the regulator vaguely referred to ongoing regulatory enforcement actions against participants in the crypto industry.

Interestingly, the SEC’s view on cryptocurrency appears to be influenced by data and information gleaned from its legal undertakings against crypto firms. This circular reasoning raises concerns about the SEC’s ability to objectively evaluate the rules it enforces, especially in cases where its legal actions may not be justified.

The SEC’s reliance on its previous determinations in lawsuits against other exchanges like Kraken, Binance, and Coinbase further complicates the matter. While the commission has not definitively declared any token as a security, it has used its previous statements as justifications for legal actions. This self-referential approach raises questions about the SEC’s willingness to adapt its rules based on evolving industry dynamics and new information.

The debate over regulatory self-determination continues to be a crucial aspect of the crypto industry’s growth. While the SEC maintains its authority to enforce existing rules and regulations, critics argue that a more flexible and adaptive approach is necessary to foster innovation and ensure the industry’s long-term advancement. Ultimately, the balance between regulatory oversight and industry autonomy remains a complex topic that regulators, lawmakers, and industry participants will need to navigate.