SEC – We Lied, We’re Sorry

The U.S. Securities and Exchange Commission (SEC) has increasingly come under fire for its handling of the cryptocurrency industry, exposing its lack of clear guidance and faithful allegiance to the law. The agency’s actions, which have been riddled with inconsistency, have created a legal environment that crypto participants find confusing, contradictory, and outright harmful to innovation. At the heart of the matter is the SEC’s contradictory stance and the unfair application of terms like "crypto-asset securities," which, in several instances, have been used to broadly brush most cryptocurrencies with regulatory and punitive “shade” as well as to promote misrepresentation to U.S. Congressional and Senate inquiries. The SEC has devolved into a rogue agency under the chairmanship of Gary Gensler… and now it is plain for all to see.

A fundamental principle of U.S. law is the requirement for fair notice, which is crucial in the administration of justice. Fair notice ensures that a person of ordinary intelligence is provided with a reasonable opportunity to understand what the law prohibits and the potential consequences of violations. This concept is central to due process, as it protects individuals and businesses from arbitrary enforcement actions by ensuring laws are clear, understandable, and consistently applied. However, the SEC’s actions regarding cryptocurrencies have demonstrated a blatant disregard for this principle.

The SEC’s recent apology found in the footnotes of the current Binance case is just the cherry on top and solidifies the confusion it has caused in the crypto industry. In this instance, the SEC admitted that its use of the term “crypto-asset securities” was problematic and apologised for any confusion it may have caused. What a joke!

This apology is telling because it acknowledges the inherent vagueness of the term, which has the potential to mislead not only judges and juries but also the very participants it is meant to regulate. It’s the vagueness that was designed to halt innovation and set traps for legitimate projects that pushed forward in the murky waters. How many millions of dollars have been collected by the SEC with their “We gotcha!” tactics?

How many millions have been wasted defending against unlawful terms like “crypto-asset securities” and not having fair notice? The answer is sadly a lot, to the detriment of many. It’s like punching smoke. They invented a term with no substance and clouded the eyes of lawmakers for their own financial and political benefit.

The fact that the SEC “regrets any confusion” shows that even it recognises the lack of clarity in its language, this comes after years of enforcement actions that have relied on such ambiguous terms. For the crypto industry, the damage had already been done.

Crypto legal experts like Stuart Alderoty (General Counsel for Ripple) and Paul Grewal (Chief Legal Office Coinbase) have pointed out that the SEC’s shady tactics and use of terms like “crypto-asset securities” could have far-reaching consequences. By employing vague and evolving definitions, the SEC has made it difficult for industry participants to know when they comply with the law. These legal experts argue that such confusion could affect future cases, as judges and juries may be misled into thinking that all cryptocurrencies fall under the category of securities. It could also open the door to future companies and projects to use this blatant SEC lie to fight back with stronger fair notice defences.

Ripple's case, in which the SEC claimed that the company's sale of XRP tokens constituted the sale of unregistered securities, further highlights the SEC's inconsistent approach. While Ripple was able to mount a defence, invoking the "fair notice" argument, retail investors were the ones who ultimately suffered the most. According to Attorney John Deaton who represented 75k XRP investors worldwide, the SEC's lawsuit against Ripple and the XRP token led to over $15 billion being wiped out of XRP’s market cap valuation. Many of these investors had purchased XRP as a long-term investment, only to see the value of their holdings plummet due to the SEC’s actions. This is a glaring example of how the SEC’s enforcement tactics have harmed the people it is supposed to protect.

Deaton’s criticism goes beyond the financial harm inflicted upon investors. He accuses the SEC of abusing its power, noting that its actions against Ripple, Binance, and other cryptocurrency companies have caused unnecessary damage to the market. The SEC has pursued similar enforcement actions against other entities, such as Kraken and LBRY, which have likewise led to financial harm and uncertainty within the industry.

Perhaps the most striking example of the SEC’s overreach is its aggressive stance against LBRY, a blockchain-based platform for sharing digital content. In its lawsuit, the SEC alleged that LBRY’s tokens were unregistered securities, destroying the platform. This aggressive enforcement has led to widespread fear within the industry, as crypto companies face the possibility of being "burned to the ground" by the SEC's actions.

In summary, the SEC’s handling of the cryptocurrency industry has revealed deep flaws in its approach to regulation under the leadership of Gary Gensler. By pursuing enforcement actions without providing clear guidance, the SEC has not only violated the principle of fair notice but has also damaged its credibility as a regulatory body. As the industry continues to push back, there is a growing sentiment that the SEC’s overreach must be addressed before more harm is done. Gensler’s reign of terror and warfare has become a political liability, a reign that needs to end.