John Reed Stark's Misguided Critique of the SEC's Approach to Crypto

In a recent long Tweet on X, former SEC enforcement chief John Reed Stark launched a broadside against the crypto industry, arguing that the SEC's enforcement actions have proven repeatedly that digital assets are securities. He dismisses the industry's complaints about the SEC's approach as mere carping from scofflaws who don't want to follow the rules. But as someone who has worked closely with crypto entrepreneurs and companies trying to navigate this regulatory minefield, I believe Mr. Stark's critique is off-base.

First, Mr. Stark vastly underestimates just how challenging it is for well-meaning crypto companies to deal with the SEC. The agency has provided very little concrete guidance on how existing securities laws and regulations should be applied to the novel world of cryptocurrencies and blockchain technology. Instead of upfront rulemaking, the SEC has relied almost exclusively on regulation by enforcement - bringing actions against companies after the fact for violations of unstated rules.

This creates a massive climate of uncertainty and risk for the industry. Entrepreneurs looking to launch new projects or offer innovative products in the U.S. are forced to operate in the dark, unsure at every turn whether they might be in violation of some unknown SEC dictate. When companies attempt to engage directly with the SEC to get clarity, they are often met with unresponsiveness, told to simply consult their lawyers, or are led into a maze of noncommittal discussions.

But securities lawyers struggle to advise crypto clients too, because the SEC refuses to draw clear lines around what is and isn't allowed. We're stuck in a Catch-22 - the SEC won't provide definitive guidance, but crypto companies are still expected to comply with the unknown rules, upon threat of serious enforcement action.

Mr. Stark points to the SEC's litany of successful enforcement actions and court victories as evidence that the law is crystal clear on crypto. But this ignores the fact that most of these cases end in settlements where companies reluctantly capitulate because they can't afford to challenge the unlimited resources of the federal government in court. The few cases that have been litigated to decision involved egregious facts where the law's application was obvious (and tries to dimiss the Ripple case where the SEC lost). That doesn't provide much useful guidance for the majority of crypto projects operating in gray areas.

More fundamentally, the square peg of the SEC's aged legal precedents, like the 1946 Howey test, simply doesn't fit the round hole of crypto innovation. Cryptocurrencies have unique properties that weren't contemplated 75 years ago - decentralization, utility functions, governance rights, etc. Analogizing them to "orange groves" and "whiskey barrels," as Mr. Stark approvingly does, is absurd on its face. We need updated regulatory frameworks tailored to these revolutionary new technologies.

The real-world impact of the SEC's "regulation by enforcement" approach and lack of clear guidelines is that it's seriously stifling the growth of the U.S. crypto industry. Many talented entrepreneurs are reluctant to launch projects here or are moving offshore to jurisdictions with more welcoming regulatory climates. Investors are being deprived of opportunities while the U.S. falls behind in blockchain innovation. And all of this is happening without any meaningful boost in investor protection, since bad actors tend not to be deterred by uncertain regulations.

Mr. Stark may be content with the status quo, but fortunately, change is on the horizon. The incoming Trump administration recognizes the transformative potential of crypto and has pledged to overhaul the outdated regulatory approach of the past. In one of his first policy proclamations since the election, President-elect Trump declared his intention to work with Congress to pass comprehensive legislation to provide clarity and relief for the crypto industry within his first 100 days.

This is welcome news for those of us who have long advocated for a more innovation-friendly approach. The Trump team understands that protecting investors and fostering progress in blockchain technology are not mutually exclusive goals. With sensible, industry-informed rulemaking and a flexible regulatory framework, the U.S. can become a global leader in crypto while ensuring adequate safeguards are in place.

Expect to see the SEC's enforcement-heavy approach give way to a new era of regulatory clarity and collaboration with the legitimate players in the crypto space who want to do right by their users. It won't happen overnight, but the days of regulation by enforcement are numbered. The future for crypto in America hasn't looked this bright in years.