What’s the SEC Saying About Crypto?

Interpreting statements from SEC officials may really be just like reading tea leaves.

Key U.S. Securities and Exchange Commission (SEC) officials mentioned enforcement around crypto projects earlier this month: Chair Gary Gensler and Director of Enforcement Gurbir Grewal.

We’ve spent literally years interpreting statements from SEC officials to determine how the agency might approach crypto. This month, Gensler and Grewal mentioned crypto in the context of enforcement actions, which might just be a coincidence, but could also be a signal for those looking for more concrete action.

Breaking it down

SEC Chairman Gary Gensler spoke to the Securities Enforcement Forum at the start of the month, quoting SEC predecessor Joseph Kennedy on “making war without quarter” against those who violate federal law.

This ideal holds today, according to the current head of the agency.

“We will continue to pursue misconduct wherever we find it. That will include the hard cases, the novel cases and, yes, the high-impact cases – whether in special purpose acquisition companies, cyber, crypto or private funds; whether accounting fraud, insider trading, or recordkeeping violations. I know, recordkeeping violations might come as a surprise. While these may not grab the headlines, the underlying obligations are essential to market integrity, particularly given technological developments,” Gensler said.

Grewal, the relatively new enforcement chief, similarly mentioned crypto in comments made as part of a keynote address.

“But these days, most often in the context of crypto matters and our investigations of certain ESG – or environmental, social, and governance – related products and services, we hear that we should avoid ‘regulation by enforcement,’” Grewal said.

I’m not really sure whether these mentions are now cursory, included because everyone’s talking about crypto these days, or if they’re part of a broadening effort to encompass crypto in the SEC’s work.

What I do know is we’re seeing piecemeal actions from the agency against various crypto projects, mainly alleged frauds or alleged securities registration violations. There still isn’t any binding or bright lines guidance on what startups should do if they want tokens to be a significant part of their projects.

To be clear, we should distinguish between crypto projects that are (a) blatant money grabs designed to defraud people, (b) projects that make a legitimate effort to accomplish their goals and cannot due to technical or circumstantial reasons beyond their control, and (c) projects that actually succeed at their goals, at least for the purposes of this column.

The SEC has mostly focused on categories (a) and (b).

Agency officials often say they want to encourage innovation – in his Nov. 8 remarks, Grewal said the SEC welcomes new tools for capital formation. Still, he included the equally common warning that securities should be registered.

“But – equally importantly – all securities offered or sold to U.S. investors – regardless of their form or name – must comply with the U.S. securities laws. The purpose here is to protect investors and the integrity of our markets by ensuring that investors are provided proper disclosures and the products are subject to regulatory scrutiny,” he said.

Anyways, I’m curious to see if or how the SEC might respond to the ConstitutionDAO refund situation and whether there’s an applicable lesson here.