The U.S. will lessen its status as a leader in financial services regulation if it continues imposing arbitrary ‘regulation by enforcement,’ according to a panelist at the 2023 D.C. Blockchain Summit.
Regulation by enforcement has been widely criticized by the cryptocurrency industry as a way to fill the coffers of state treasuries through monetary penalties by imposing new compliance rules created through audits or examinations, according to media reports.
“If we continue to move down this path, I fear that businesses will continue to throw their hands up and geofence out and if that’s the case, ironically, the United States will have less influence on how this space is regulated and that would be a bad thing,” said Daniel Stabile, co-chair of Winston & Strawn’s digital assets and blockchain.
Stabile was among the speakers on the "Pushing Back on SEC Regulation by Enforcement: A Discussion of the Chamber’s Ripple and Wahi Amicus Briefs" panel, along with Lilya Tessler, head of Sidley Austin’s Fintech and Blockchain Group. Annemarie Tierney, the Chamber of Digital Commerce's senior strategic advisor, moderated the panel.
“There is a lot of focus on what's going to happen in the courts,” Tessler said. “It could take years before there are decisions in the lower court and it it get appealed even up to the U.S. Supreme Court for some of these cases potentially.”
Tessler advised the Summit audience to continue proactive discussions with the SEC, its various divisions, and the Chair’s office.
“There is traction being made on the registration path and that is a dual path of waiting for more clarity from the court,” she said. “I wouldn't lose sight of that path. Continuing to have those discussions is important to show that the industry is supportive of a compliant path forward.”
In SEC v Ripple Labs, et al. filed in the U.S. District Court for the Southern District of New York, the SEC alleged that a digital asset token is a security and that secondary transactions in that token are a violation of securities laws.
But the Chamber argued in its Oct. 28, 2022, amicus curiae ‘friend of the court’ brief, that if tokens are the subject of an investment contract, they are not securities.
“Although there is no precedent that meaningfully addresses the independence of the underlying asset from the overall transaction, the Chamber believes that, as long as the underlying asset does not include financial interests, such as legal rights to debt or equity, digital assets are presumed to be commodities,” said Tessler, who authored the Chamber’s 39-page amicus pleading.
The Chamber also filed a 32-page amicus pleading in SEC v Ishan Wahi, Nikhl Wahi and Sameer Raman in the U.S. District Court for the Western District of Washington at Seattle, arguing that the SEC has never clearly defined what digital asset transactions it considers are securities transactions.
Stabile is a co-author of the Wahi amicus brief.
“This purported “insider trading” action represents a dramatic—and potentially disastrous— overreach by the SEC,” the Chamber states in its Feb. 22 pleading. “The continued pursuit of actions like this one promises to open a Pandora’s box of collateral consequences that will harm both participants in the digital assets marketplace as well as the public good.”