The Evolution of Crypto Regulation in the United States

As someone who led the SEC's crypto unit from 2017 to 2019, I am frequently asked about the future of crypto enforcement under the new administration. My response is twofold: I am unsure, but I am confident it will be distinct from the past. To anticipate what's to come, it's essential to reflect on the history of crypto enforcement. The SEC's crypto enforcement unit was established in 2017, during the first Trump Administration, with an initial focus on combating fraud and regulating core capital-raising events. The primary purpose of the Securities Act of 1933 is to oversee capital raising, ensuring investors receive essential information about the businesses they invest in. Early crypto investigations centered on unregistered initial coin offerings (ICOs), which were often similar in substance to equity or debt offerings. The industry has since responded responsibly, with many crypto entrepreneurs now raising funds in compliance with federal securities laws. Some offerings are exempt from SEC registration as they are limited to accredited investors, and the capital is used to develop blockchain protocols or other crypto products. Once these products are built, the sale of tokens is unlikely to be considered a securities offering, as buyers are not investing in a business but rather participating in a decentralized network. Over the last four years, the SEC has shifted its focus to secondary markets, including centralized trading platforms and decentralized protocols. However, the application of federal securities laws to these markets is less clear, and transactions often involve anonymous interactions between thousands or millions of participants. The SEC has doubled the size of its crypto unit, dedicating significant resources to litigating non-fraud cases. This approach has not provided useful guidance to the industry, and many SEC rules are incompatible with the anonymous, decentralized nature of blockchain technology. As a result, the industry has faced existential enforcement risks, and economic activity has been driven offshore. I do not believe the crypto industry wants a lack of regulation; instead, it seeks a sensible rulebook that allows for feasible compliance and effective fraud prevention. For the next four years, I anticipate a renewed focus on creating a clear and achievable regulatory framework. The SEC will likely dedicate more resources to developing new guidance and rules, and a new crypto task force has been established to develop a 'sensible regulatory path.' The dedicated crypto unit has been reduced in size and repurposed to focus on cyber and emerging technologies. We can expect a renewed emphasis on combating fraud, with the SEC cracking down on 'liars, cheaters, and scammers.' Once a new rulebook is established, the SEC will enforce those rules, allowing the industry to adapt during a transition period. In conclusion, I expect SEC crypto enforcement to continue, but with a shift in priorities. Investor protection will be balanced with the SEC's mandates of facilitating capital formation and maintaining orderly markets. The crypto industry is filled with good actors who want to comply; they just need a rulebook that makes compliance achievable. A renewed approach will enable the industry to grow while maintaining investor protection. Other federal agencies may emerge as co-equal regulatory leaders, and state authorities are likely to continue or increase their activity in the crypto space. Ultimately, the new regulatory approach must be durable, as it will be subject to change with future elections and administrations.