SEC’s Enforcement Approach is Stifling US Crypto Innovation
The US Securities and Exchange Commission (SEC) under Chair Gary Gensler has adopted an aggressive enforcement strategy that is hindering innovation within the American digital asset sector. This approach fosters uncertainty, leading to job losses, reduced investment, and a shift of development efforts overseas.
To enhance confidence and maintain competitiveness in this emerging sector, the SEC needs to transition from "regulation by enforcement" to a transparent rulemaking process that incorporates public input. Such a change would provide clear guidelines for the digital asset industry, promoting innovation in the US financial landscape.
A potential change in SEC leadership with the upcoming administration should prompt a reevaluation of the agency's regulatory approach toward digital assets.
American digital asset firms have spent over $400 million defending against SEC enforcement actions under Chair Gensler, reflecting significant opportunity costs linked to delayed innovation, job losses, and capital diversion. Recently, a major software company in the digital asset space announced layoffs, attributing these decisions to costly battles with the SEC.
The SEC's current strategy indicates a misalignment between its regulatory methods and objectives. Instead of pursuing proper rulemaking through notice and comment as required by law, the SEC has opted for regulation via enforcement, effectively making enforcement proceedings a form of policymaking while bypassing necessary public engagement.
The digital asset industry has repeatedly requested the establishment of clear rules and sought clarification through various meetings with the SEC. However, instead of constructive dialogue, the SEC has responded with enforcement actions. Some industry participants have even resorted to litigation against the SEC to gain clarity on regulatory issues.
Survey data indicates that voters believe the SEC's heavy-handed approach towards crypto is misguided, favoring clear regulations over enforcement by a two-to-one margin. Moreover, two-thirds of voters feel the SEC should await clearer congressional guidelines. The repercussions of the SEC's approach include unrealized ventures, unmade investments, and shifting innovations to more favorable international markets.
Regulatory certainty is recognized as a driver of economic value, allowing firms to assess compliance requirements accurately and allocate capital efficiently. The SEC's enforcement-first stance disrupts this principle, leading to a challenging regulatory environment where even established legal teams struggle to provide definitive guidance. Consequently, investment is increasingly directed toward jurisdictions with clearer regulatory frameworks, discouraging domestic entrepreneurial activity.
For the US to retain its position as a global financial leader, it must effectively balance innovation with regulation. The current enforcement-centric approach risks ceding leadership in technological advancements to other nations. If the US intends to sustain its leadership in technology development, the SEC must alter its course.
A policymaking process driven by stakeholder input is essential for progress. Regulation through enforcement undermines economic vitality by wasting taxpayer resources, harming investors, stifling innovation, and driving capital abroad. Transparent and thoughtful regulation is now crucial to preserve the US's competitive edge in the digital economy.