Toomey Argues Against SEC “Regulation-by-Enforcement” Approach
On Tuesday of last week, Senator Patrick Toomey (R-PA) sent a letter to SEC Chair Gary Gensler arguing that the SEC’s “regulation-by-enforcement” approach is capricious and ineffective when it comes to consumer protection. Toomey further wrote that the agency’s actions have chilled financial innovation and contributed to consumer harm.
This is not the first time Toomey’s office has reached out to the SEC and Chair Gensler specifically. In late 2021, he formally requested that Chair Gensler answer detailed questions on the agency’s regulation of cryptocurrencies in order to give Congress, the industry, and investors clarity. Chairman Gensler notably refused to answer which cryptocurrencies the SEC views as securities.
In last week’s letter, Toomey again called on Gensler to come before the Senate Committee on Banking to explain what the SEC is doing to mitigate the damage caused by the recent failure of large crypto projects and provide clarity to good-faith innovators. Toomey ended the letter by outlining three problems with the SEC’s “regulation-by-enforcement” approach:
(1) It stifles innovation. Market participants who lack the benefit of knowing what the SEC is thinking before designing a product may never be able to create something using emerging technologies.
(2) It creates a legal grey area that allows entities with a higher tolerance for legal risk to offer products that ultimately might be bad for consumers – which is arguably what happened in the case of Celsius.
(3) It has proved time and again that it is not an effective approach.
What does this mean?
The SEC’s almost decade-long refusal to set clear and workable rules of the road for the industry empowers bad actors in the space while discouraging well-intended innovators, all ultimately at the expense of consumers. Chair Gensler’s public exhortations to “come in and register” are a red-herring; In practice, it means “come in and find out you can’t register because we refuse to even slightly tweak regulations designed for traditional financial infrastructure, so you’re out of luck and probably getting a subpoena in short order. Sorry!” Paraphrasing Chair Gensler himself, “no regulation can be static in a dynamic society.” Unfortunately, the SEC’s refusal to allow any digital asset activity within its regulatory perimeter epitomizes a static response to a dynamic innovation, and Senator Toomey’s analysis of the consequences of this approach are spot on.
We recommend Professor J.W. Verret’s arguments for a succinct summary of the phenomenon.
CHIPS Act Creates White House Blockchain Advisor Role
Last week, Congress passed the bipartisan Chips and Science Act which aims to return semiconductor chip manufacturing capacity back to the United States and boost the country’s technological capabilities.
Representative Darren Soto (D-FL), a crypto supporter on the Hill who co-chairs the Congressional Blockchain Caucus, announced that the bipartisan legislation will also establish an advisory position on blockchain and crypto issues within the White House Office of Science and Technology Policy (OSTP).
When asked about the provision in the bill that would create the advisory position, Soto responded, “I am proud to foster the policy needed to ensure innovation continues to take shape in our government.”
What does this mean?
This is a significant step in the right direction. The OSTP not only advises the president on all matters related to science and technology but also engages with industry representatives, academics, and regulators.
We hope that a blockchain-specific advisor with subject matter expertise and a network directly connecting the White House to the industry and experts will facilitate sound policy and robust collaboration between the private and public sector on these issues. At the very least, it signals the government’s serious intent to fully explore the potential of the ecosystem.
Senate Republicans Seeking Bipartisan Support for Stablecoin Bill
More news from Senator Toomey! He is in talks with Senate Democrats to make his stablecoin oversight bill a bipartisan effort. Senate Banking Committee Chairman Sherrod Brown (D-OH) confirmed that he has been involved in discussions with Toomey.
Brown briefly commented on this collaboration last week. “Senator Toomey and I have talked about this,” he said. But Brown also noted that he and Toomey have “a different view generally” on the extent of regulation needed for stablecoins.
Toomey’s proposal pushes for full disclosure of reserve backing by issuers and would grant the Office of the Comptroller of the Currency the authority to regulate stablecoin issuers.
What does this mean?
It’s unclear what the Senate Banking Committee’s efforts will mean for stablecoins and how it will play into the legislation currently being negotiated on the House side by Financial Services Chairwoman Maxine Waters (D-CA) and Ranking Member Patrick McHenry (R-SC). Legislators in both chambers of Congress have made it clear that stablecoin legislation is the most sensible starting point for crypto regulation, so we expect to see more proposals in the future.