Brooke Masters, the US Financial Editor at Financial Times (FT), recently expressed concerns over the US Securities and Exchange Commission’s (SEC) approach to cryptocurrency regulation.

In her FT opinion piece, Masters dived into the historical context of financial regulation in the US, highlighting the SEC’s primary role in safeguarding investors from potential fraud and ensuring transparency in financial dealings.

Historically, the SEC’s regulatory efforts have been concentrated on traditional financial products like stocks and bonds. However, the surge in interest in newer investment avenues, such as cryptocurrencies, has sparked debates about the boundaries of regulatory oversight.

Masters pointed out that the SEC is currently grappling with enforcement cases related to cryptocurrencies. Simultaneously, a separate lawsuit challenges long-standing practices in the leveraged loan market. These efforts stem from the SEC’s commitment to investor protection, especially given the recent volatility in the cryptocurrency market and the significant losses investors have incurred.

While the intention to protect investors is commendable, Masters cautioned against potential regulatory overreach. The legal framework governing what constitutes “securities” is ambiguous, especially when applied to newer asset classes like cryptocurrencies. She pointed out that the definition of securities, as established in the 1933 federal law, explicitly includes stocks and bonds but excludes commodities and other tangible assets. The Howey test, stemming from a Supreme Court case from nearly eight decades ago, further complicates matters by defining securities based on specific promises made by promoters to generate profits for investors.

The cryptocurrency landscape has further muddled this definition. While the SEC initially distanced itself from certain digital assets, it has recently taken a more assertive stance, initiating cases against major crypto entities like Binance, Coinbase, and Ripple Labs. Masters referenced experts like Ann Lipton of Tulane Law School, who highlighted the rigorous regulations securities are subjected to, making it easier to establish wrongdoing. However, others, like Lewis Cohen of DLx Law, argue that classifying tokens as securities could effectively prohibit them, given that many tokens, like Bitcoin, don’t have a single sponsor and might not meet the SEC’s criteria.

Masters also touched upon the leveraged loan market, which has grown to a staggering $1.4 trillion. Despite a 1992 court ruling that these loans aren’t securities, the market has thrived, with investors willingly forgoing the protections they’d receive from bonds.

Masters concluded by emphasizing the potential risks of expanding regulatory boundaries, especially for the SEC. She cited concerns from Treasury officials about the potential destabilization of corporate debt markets and referenced a recent federal judge’s decision in New York that partly rejected the SEC’s aggressive stance on crypto. Masters advocated for Congress to draft clear rules empowering the SEC to set standards for cryptocurrencies. Until then, she suggested that the SEC could support the crypto community by approving exchange-traded funds (ETFs) investing in digital assets, which would undoubtedly be classified as securities.

She wrote:

Congress should write new rules that specifically empower the SEC to set crypto standards. Until that happens, the watchdog can help enthusiasts in other ways. Several large asset managers want to offer exchange traded funds that invest in bitcoin. If approved by the SEC, these would without doubt qualify as securities, allowing people to put money into digital assets while still under the agency’s aegis. Trying to shoehorn new asset classes into old definitions is not the wisest course.

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