Yesterday, the US Securities and Exchange Commission (SEC) dropped two more charges against Ripple for selling its XRP crypto the wrong way.
The score stands at Ripple 3, SEC 0.
Ripple isn’t the first crypto business to defeat the regulators. SEC Chairman Gary Gensler seems to lose, like, half of the crypto cases that go to trial.
That’s an abysmal record for a US government agency, but I can’t object to Gary’s interpretation of US securities law.
Legally speaking, he’s right. Under US law, securities have four elements:
- An investment of money
- A common enterprise
- A reasonable expectation of profits
- Profits derived from the efforts of others
Every cryptocurrency has all of those elements.
So does everything else.
When you interpret the law so literally, you start making no sense–-even if you’re right.
It’s all illegal
US law lets the SEC declare anything a security. So, let’s apply Gensler’s interpretation of the law to other assets.
- An investment of money? Yes.
- A common enterprise? Yes, you have Game Freak, Nintendo, and millions of unpaid aficionados who put time and effort into Pokémon and its various business properties (movies, conventions, chat groups, fan fiction and such).
- A reasonable expectation of profits? Yes, in fact, many people buy Pokémon merchandise solely for the purpose of selling to others. They have entire stores and websites dedicated to making money from Pokémon cards and related business properties. Lots of eBay listings, too (including fraudulent and fake items). We all know kids who buy entire packs of Pokémon cards just so they can get the rare ones to sell online—only to get rugged when the pack is full of common creatures.
- Profits derived from the efforts of others? Yes, without the common enterprise’s efforts to promote Pokémon and develop its related business properties, the cards would be worthless.
Certificates of Deposit
- An investment of money? Yes, you literally give money to the bank.
- A common enterprise? Yes, by definition.
- A reasonable expectation of profits? Yes, the bank promises you will make money.
- Profits derived from the efforts of others? Yes, the bank does all the work.
- An investment of money? Yes, probably my son’s biggest expense. In fact, Roblox earns most of its revenue from selling Robux.
- A common enterprise? Yes, Roblox and everybody who builds, plays, and buys things in the Roblox metaverse.
- A reasonable expectation of profits? Yes, many people build experiences and play Roblox games to make more Robux, like we do with crypto.
- Profits derived from the efforts of others? Yes, Roblox creates the platform, hosts the servers, and does lots of other things to make Robux valuable. Also, Roblox creators develop games and experiences while Roblox users put time and effort into playing them.
Do those examples seem convoluted and nonsensical?
It’s clear, but is it correct?
For example, on the Jewish holiday of Sukkot, Jews build huts called sukkahs near or attached to their main houses. They eat and sleep in those structures for a week.
Do they need building permits? They’re literally building new structures. And living in them!
No, they don’t need building permits at all. They don’t even need to update their plot plans.
Sometimes, people fly remote-controlled planes outside of my house. Do they need to contact the Federal Aviation Administration or the nearest flight control tower?
No, they don’t even need a flight plan, even though they’re literally flying planes in a residential neighborhood!
Riding mowers are literally motor vehicles. Dangerous contraptions! Can take somebody’s foot off in an instant.
Do you need a driver’s license or registration to drive them?
Discretion is the better part of valor
Why don’t we apply the laws so literally?
Because that would be unworkable, counterproductive, and needlessly burdensome.
Just because we have the best building codes, aviation regulations, and vehicle laws doesn’t mean we need to treat every structure, flying device, and self-propelled machine the same as every other, even if the regulators themselves say that we should.
What would happen if local governments forced Jews to buy permits to put up four posts in a square with some branches as a roof? If the FAA required safety equipment and flight plans for every model Aermacchi? If the local DMV made you register your lawnmower and get a driver’s license before you operate it?
I don’t know, but I don’t think anybody would say Jews, plane enthusiasts, and landscapers are scofflaws with a culture of noncompliance if they objected or asked for clarification.
God forbid you put wings on a lawnmower and add a canopy on top. Then you’d have to register with the DMV, report your plans to the FAA, and file for building permits!
Who’s in charge?
If you take the US government’s position on crypto to its literal extreme, we should put the Federal Aviation Administration in charge of toy planes, the US postal service in charge of email, and the Commerce Department in charge of online newsletters.
Should the Department of Defense regulate the internet because people use it for espionage and warfare?
The US needs to start from scratch and create new laws for crypto.
Why do we assume the SEC is the proper regulatory authority here? They don’t regulate Pokémon, Roblox, or CDs. They also don’t regulate other assets that fit the Howey test, like baseball cards and bankruptcy claims, even though they have the legal authority to do so.
Can we look at other options?
What about the Federal Trade Commission? The FTC has authority over consumer protection from fraud and deception. Seems like a great fit for NFTs, stablecoin issuers, and crypto exchanges.
What about the Consumer Financial Protection Bureau? CFPB protects consumers against bad faith and abusive activities of financial entities. Why can’t we let them supervise crypto exchanges and new token creators? Go after the actual abusers rather than the cryptocurrencies themselves.
What about the Federal Communications Commission? FCC regulates the internet. Crypto is sent and received on the internet. Some call it “the Internet of Money.” Does the FCC have a role here?
Can we talk about more obscure areas of law?
For example, regulation E forces money transmitters to protect your funds against hacks, theft, and fraud.
Securities and commodities are not “funds” under federal law. So, if you force nodes and smart contract developers to follow regulation E for crypto transactions, does that mean crypto is no longer a security or commodity? Or is this an exception? Given how cryptocurrency networks function, can any government enforce regulation E in the first place?
What about free speech?
Cryptocurrencies are money that runs on computer protocols. Should we give cryptocurrency the same protections we give other forms of money? Should we give the same protections to crypto that we give to computer code?
That would make securities laws unconstitutional as a restraint on free speech (and possibly violate Fourth Amendment protections of personal property) when applied to cryptocurrency.
If US regulators insist on interpreting the laws so literally instead of asking Congress for new ones, they will soon not have to worry about what US cryptocurrency businesses are doing.
The US won’t have any cryptocurrency businesses to regulate.
(Many have already left.)
Regulators will still have to confront all the problems cryptocurrency presents, except without the jurisdiction or administrative reach to do anything about it.
Could you imagine what would’ve happened if, when the internet came along, US regulators said email must follow all the rules of regular mail and email providers must follow all the rules of the postage service?
Was CompuServe supposed to register each of its servers as letter carriers? Did it need to create unions for its workers? Charge a fee for each email?
Would CompuServe be held liable for emails that didn’t go through—even though it had nothing to do with the protocols that delivered the emails to where they were supposed to go?
Did CompuServe need to buy insurance to protect against lost emails or mistakes by its servers even though protocols actually route mail traffic?
I’m sure somebody said “obviously, you’re delivering mail, just because it’s electronic doesn’t mean you get different rules. The rules are clear—or maybe you’re just trying to hide all the messages going to TERRORISTS, SCAMMERS, AND MONEY LAUNDERERS. The problem isn’t ambiguity, it’s a culture of mass non-compliance with existing laws, and email can’t be let off the hook!”
You can bet CompuServe would’ve gone somewhere else, as would AOL, Yahoo!, and all the other early internet companies. We’d still have a robust internet (some would argue a better one), but the US would not matter much.
Mark, the Internet is not crypto!
True, the US didn’t have a massive, entrenched regulatory regime for protecting and delivering mail, like it does for finance. It didn’t dominate the global postage industry to the point where everybody who wanted to send parcels and packages needed to interface with the US postal system as they do for the settlement of most of the world’s financial transactions.
The Internet didn’t threaten the supremacy of the legacy financial system.
And that makes all the difference.