In a recent post on social media platform X dated 28 December 2023, Mark Cuban, the influential entrepreneur and television personality, expressed his views on the inadequacy of existing financial regulations in dealing with the complexities of cryptocurrency. Cuban highlighted the limitations of the Howey and Reves tests, long-standing legal benchmarks for defining securities, underscoring the urgent need for regulations specifically tailored for crypto assets. He pointed out that if the U.S. Securities and Exchange Commission (SEC) had adopted a regulatory approach similar to Japan’s, particularly regarding the requirement of collateral for crypto loans, the collapse of numerous crypto services could have been averted, as evidenced by the survival of FTX Japan.
The Howey Test is a legal criterion established by the U.S. Supreme Court for determining whether a transaction qualifies as an “investment contract,” and, therefore, would be considered a security subject to securities laws. Originating from the 1946 case SEC v. W.J. Howey Co., the test stipulates that a transaction is an investment contract if it involves an investment of money in a common enterprise, with the expectation of profits predominantly from the efforts of others. This test is crucial in the financial and legal world, particularly in evaluating various investment schemes, including those in newer markets like cryptocurrencies.
The Reves Test, on the other hand, is used to determine whether a particular financial instrument or transaction should be classified as a “security.” Derived from the 1990 Supreme Court case Reves v. Ernst & Young, this test focuses on the characteristics of the instrument in question. It considers factors such as the buyer and seller’s motivations, the distribution plan, the reasonable expectations of the investing public, and the presence of risk-reducing factors. This test is essential for regulatory bodies and legal practitioners to ascertain the applicability of securities laws to a wide range of financial products beyond traditional stocks and bonds.
Cuban also critiqued the SEC’s effectiveness in its regulatory role, likening it to a proficient bookkeeper rather than a protector of investors. He questioned the SEC’s proactive actions in safeguarding investors, especially before the occurrence of financial misdeeds. Through his involvement with Sharesleuth.com, Cuban has been actively identifying and exposing fraudulent companies. However, he noted with irony that despite these efforts, the SEC has failed to intervene and halt these fraudulent activities, including a case where a company without operational power was issuing releases.
Furthermore, Cuban pointed out the ongoing issues with Pink Sheets / Over-The-Counter (OTC) markets, which despite having registration requirements, continue to be prone to fraud. He also addressed the trading of shares in bankrupt companies, an area where he believes the SEC has been particularly ineffective, suggesting that mere registration is insufficient for real investor protection.
In a recent article for CoinDesk, Michael Selig, a lawyer at the New York-based Willkie Farr & Gallagher LLP, shared his positive outlook on the future of cryptocurrency regulation in the United States for 2024. His optimism stems from a variety of changes and trends in the regulatory arena.
Below is a summary of the key points fueling Selig’s positive stance:
- Potential for Regulatory Agreements: Selig anticipates that 2024 might bring a shift from rigid regulatory actions to a more cooperative model between crypto industry players and regulators. This expectation arises from the improbability of passing all-encompassing crypto laws in an election year, which may lead regulators to seek temporary solutions.
- Legal Setbacks Prompting Regulatory Rethink: Noting major legal defeats for the SEC, particularly in its cases against Ripple and Grayscale, Selig suggests that these outcomes could trigger a reevaluation of the SEC’s existing regulatory methods, possibly leading to more equitable regulation of the crypto sector.
- Judicial Decisions Advocating for Regulatory Precision: Selig points out that decisions like the D.C. Circuit Court of Appeals’ unanimous ruling in Grayscale’s case and the Third Circuit’s order for the SEC to address a rulemaking petition are steering towards more precise crypto regulations. He believes these verdicts may prompt regulators to establish more transparent and just regulatory structures.
- Evolving Attitude of SEC Chairman Gary Gensler: Selig notes a discernible shift in Gary Gensler’s approach to crypto regulation. He cites Gensler’s recent acknowledgments that not every crypto asset is a security as a sign of potential flexibility in adapting regulatory measures to suit the crypto industry.
- Legal Implications Extending Beyond Crypto: Selig observes legal challenges to administrative actions in various sectors, indicating a judicial trend against regulatory excess. He anticipates that this wider judicial scrutiny will impact the development of crypto regulations.
- Strengthening Cooperation Between Industry and Regulators: Selig mentions the increasing need for regulatory approvals due to growing institutional interest in cryptocurrencies. He proposes that this could enhance the dialogue and cooperation between the crypto industry and regulatory bodies, leading to a more sophisticated and effective regulatory landscape.
Featured Image via YouTube (NYU Stern’s Channel)