Political puppetry or regulatory overreach? SEC’s independence under the spotlight

Has the SEC lost its independence and become a puppet of government policies instead of being a fair regulator of the crypto industry? Experts weigh in.

The Securities and Exchange Commission (SEC) has been in the spotlight lately, and not for good reasons.

President Joe Biden recently vetoed a bill aimed at overturning an SEC bulletin that set certain accounting standards for firms dealing with cryptocurrency.

The bill, if passed, would repeal the SEC’s cryptocurrency accounting rules known as SAB 121. These rules require institutions that hold crypto assets to record them as liabilities on their balance sheets.

In his veto letter dated May 31, Biden said, “My administration will not support measures that would jeopardize the welfare of consumers and investors.

“To capitalize on the potential benefits and opportunities of crypto asset innovation, appropriate guardrails that protect consumers and investors are necessary.”

At the beginning of the month, the House and Senate voted to repeal SAB 121. The House passed the legislation by a vote of 228 to 182, with 21 Democrats supporting it along with mostly Republicans.

The Senate followed suit by a vote of 60 to 38, including support from prominent Democrats like Senate Majority Leader Chuck Schumer.

But overturning a presidential veto is a challenge; A two-thirds majority is required in both chambers, and this seems unlikely in the current political environment.

Critics argue that this complicates financial institutions’ relationships with crypto companies, making it harder for them to innovate and integrate crypto into mainstream finance.

The Blockchain Association tweeted their displeasure, saying they were “disappointed that the administration has chosen to override bipartisan majorities in both Houses of Congress that recognize the harm created by SAB 121.”

1/ Today, despite bipartisan support, Pres Biden vetoed the repeal of SAB 121, the SEC’s anti-cryptocurrency accounting rules. We are disappointed that the Executive chose to override bipartisan majorities in both Houses of Congress that recognized the harm created by SAB 121. pic.twitter.com/F6GP727UBx

— Blockchain Association (@BlockchainAssn) May 31, 2024

Digital Room’s Cody Carbone called the veto “a slap in the face to innovation and financial freedom.”

Biden vetoed the decision to override SAB 121.

Process? Who cares.

Consumer protection? No thanks.

Calming Gensler’s crypto feud? Of course.

This is a slap in the face to innovation and financial freedom. #Crypto #Mistake pic.twitter.com/4QPhKkhN4r

— Cody Carbone (@CodyCarboneDC) May 31, 2024

Sheila Warren of the Crypto Council summed it up: “Disappointed but not surprised by the CRA veto of SAB121. As I often say, silence is golden because once some positions are made public, it becomes difficult to back down.”

I am disappointed but not surprised by the CRA veto of SAB121; As I often say, silence is golden, because some positions once made public are difficult to retract.

This is a mistake and will actually undermine the security that management seeks.

To take care of…

— Sheila Warren (@sheila_warren) May 31, 2024

So where does this leave the SEC? His legacy and authority appear to be on shaky ground. Let’s see if the SEC has truly lost its footing.

Consecutive losses for SEC

The US SEC has been going through a rough patch lately, and the crypto community is taking notice.

The most notable example was a partial victory for Ripple (XRP) in July 2023, when the U.S. District Court for the Southern District of New York decided whether Ripple’s digital token, XRP, was a security.

The court ruled that XRP sold through Programmatic Sales did not qualify as investment contracts, meaning they were not securities.

This was a huge win for Ripple and a setback for the SEC, which was determined to regulate the crypto industry as if it were dealing with traditional securities.

To summarize this, it has been deemed that XRP sales made through exchanges where buyers and sellers do not know each other are not securities. The court found that these transactions did not meet the third prong of the Howey Test, which looks at whether there is an expectation of profit based on the efforts of others.

However, sales made directly to institutional investors were considered securities. This mixed decision demonstrated that the SEC’s regulatory reach, although available, is not absolute.

Moving on to another critical blow, in August 2023, the SEC faced defeat in its lawsuit against Grayscale Investments.

The US Court of Appeals for the DC Circuit ruled that the SEC acted “arbitrarily and capriciously” in denying Grayscale’s application to convert its Bitcoin Trust into a spot Bitcoin exchange-traded fund (ETF).

The court noted that the SEC had previously approved Bitcoin futures ETFs that operate on similar market surveillance mechanisms as the proposed spot BTC ETF.

This discrepancy exposed the SEC’s flawed logic and was a significant win for Grayscale and the entire crypto industry, calling into question the SEC’s regulatory stance.

The SEC’s stance on Ethereum (ETH) has also had its ups and downs. In May 2024, the SEC took the surprising step of approving applications to list and trade Ethereum ETFs.

This was a big deal because until then only Ethereum futures ETFs had been given the green light. By approving spot Ethereum ETFs, the SEC has indirectly recognized Ethereum as a commodity rather than a security.

This classification could limit the SEC’s regulatory power over Ethereum and potentially other crypto assets and shift more regulatory responsibility to the Commodity Futures Trading Commission (CFTC).

The SEC’s latest defeat in its lawsuit against Digital Licensing Inc., also known as Debt Box, adds to a string of setbacks.

Just a few days ago, a federal judge ordered the SEC to pay nearly $1.8 million in attorneys’ fees after the case was dismissed without prejudice, meaning the case could potentially be reopened.

The SEC accused Debt Box of defrauding investors of at least $49 million. But the case was marred by issues including false statements and false statements that led to the resignation of two SEC attorneys.

The judge specifically criticized the SEC’s stance on the temporary restraining order and asset freeze. Deb Box celebrated the decision as a step towards fairness and transparency.

Ongoing conflict intensifies

The SEC has been under fire for its harsh regulations on the crypto industry, and recent developments have only intensified the scrutiny.

First, in June 2023, the SEC initiated a lawsuit against Coinbase, alleging that Coinbase was never registered as a broker, national securities exchange, or clearing house and therefore evaded disclosure requirements.

Coinbase argued that the SEC’s enforcement approach was designed to stifle the digital asset industry.

Notably, the SEC has repeatedly said that it does not matter whether the industry complies with the rules. The SEC is determined to strangle the digital asset industry and is refusing to provide the necessary rules the industry demands to further tighten the squeeze.

— paulgrewal.eth (@iampaulgrewal) May 31, 2024

In a recent filing, Coinbase claimed that the SEC is not interested in creating clear and fair rules for the industry, but instead aims to “stifle” the industry.

Coinbase noted that even SEC Commissioner Hester Pierce, a known pro-crypto advocate, has criticized the agency for its lack of transparency and stifling innovation.

Second, the SEC’s actions against Ethereum-related entities have also raised suspicion. Despite the SEC’s approval of spot Ethereum ETFs, which points to ETH’s status as a commodity, the agency continues to target major players in the Ethereum ecosystem.

Uniswap (UNI), for example, received a Wells notice from the SEC citing potential securities law violations. Uniswap and other Ethereum-based companies argue that the SEC’s classification of tokens as securities is outdated and inconsistent.

There’s also Consensys, founded by Ethereum co-founder Joe Lubin, which took a more proactive approach by filing a lawsuit with the SEC.

The SEC issued a Wells notice to Consensys focusing on the MetaMask wallet and staking features. This lawsuit is Consensys’ effort to counter what it sees as the SEC’s “unlawful seizure of authority.”

Community and experts weigh in

The SEC’s recent actions have sparked a wide range of discussions on social media, with many questioning whether the agency has become a puppet of the government.

On Twitter, the emotion is disappointment and disbelief. Users are expressing dissatisfaction with the SEC’s decisions, particularly President Biden’s veto of a bill aimed at repealing SAB 121.

Biden vetoed the only pro-crypto bill that came to his desk.

It was a turnstile.

SAB 121 is an anti-crypto rule put in place by Gensler’s SEC to prevent banks from holding crypto.

Crypto hates this. Banks hate this.

All he had to do was not veto the cancellation.

This… https://t.co/CoDEMTB6ws pic.twitter.com/V7t2UWYY8b

— RYAN SΞAN ADAMS – rsa.eth 🦄 (@RyanSAdams) June 1, 2024

On Reddit, the discourse is even more intense, with users expressing strong opinions about the SEC’s actions.

User opinions on Reddit reflect deep distrust of the agency and suggest that political motivations may be driving decisions. For example, some users argue that the SEC is acting under the influence of regulators who do not fully understand the crypto market.

One user pointed out the inconsistency in the SEC’s decisions, questioning why the agency would approve a futures ETF it considers an unregistered security.

Another user expressed skepticism about the SEC’s motives, suggesting that the agency may be trying to time the market to dampen bullish trends in the crypto space.

The comments also reflect a sense of frustration over the SEC’s perceived failure to provide clear guidelines, leading to legal uncertainties and challenges for crypto companies.

Financial expert Alexey Krichevsky, author of the Telegram channel “Economism”, echoed these sentiments in comments made exclusively to crypto.news. He suggested:

The SEC lost its independence with Biden’s presidency. Before this, the commission had much more impact not only on the crypto market but also on other assets. It is now clear that the Biden administration is actively flirting with cryptocurrency users in the US, while also trying to limit crypto assets and lobby for a digital dollar.

Alexey Krichevsky

Krichevsky argued that the administration’s actions, including the rapid approval of Bitcoin and Ethereum ETFs, point to a political strategy. He also took issue with the speed at which the SEC approved Ethereum ETFs, implying that such decisions may be politically motivated rather than based on thorough regulatory review. mentioned:

The SEC instructed investment firms to fix several flaws within a few days to approve the launch as quickly as possible. Unless this is a tool in the political fight against Trump, who openly supports cryptocurrencies, there is no other option; The mood of the authorities cannot change so quickly.

Alexey Krichevsky

While frustration and skepticism are palpable, it is crucial to consider the SEC’s perspective and mandate to protect investors. The institution argued that its regulations were designed to protect the financial system and ensure transparency.

Overall, clear, fair and consistent guidelines are required to encourage innovation while ensuring investor protection. The perception of the YSK as a political tool weakens its credibility and effectiveness and needs to change.

Disclosure: The views and opinions expressed here are solely those of the author and do not necessarily represent the views and opinions of crypto.news editorial.