Helping Clients Defend Against SEC Actions
In 2017, the SEC established an agency-wide program dedicated to shutting down the cryptocurrency industry: what we call the cryptocurrency-suppression program (“Suppression Program”). The SEC’s rhetorical objective is to protect investors. We think that the real objective is to prevent disintermediation.
Banks are intermediaries between savers and borrowers: they receive funds from depositors and relend those funds to borrowers for profit. Disintermediation is the removal of the middleman standing between savers and borrowers—the banks—and it occurs when depositors and savers move their money to alternative financial products, such as money market funds.
Digital assets, in particular cryptocurrencies, threaten bank products, such as checking and savings accounts, banks’ inventories of lendable funds, and consequently, banks’ profits. The Federal Reserve and national banks of the United States have a strong incentive to prevent the proliferation of private currencies that compete with non-private currencies, fiat money, like the United States dollar (USD).
The SEC’s treatment of cryptocurrencies begins—according to the Agency—with the Securities Act of 1933 (“Securities Act”). The Securities Act requires every business enterprise that seeks to offer and sell to the public units of its “securities” to register those units or have an exemption from registration. Congress created the SEC in 1934 and granted it jurisdiction over securities transactions and the exchanges over which securities are traded. The SEC can only address transactions that involve transfers of one or more units of a security, whether it is a specific, standard security, such as a stocks or a bond, or a generic, non-standard security, called an “investment contract.” If a unit of a financial product to be transferred is not a “security,” in other words constitutes a non-security, the SEC has no authority and cannot lawfully use its powers to intrude in the transfer. The SEC has used elegant sophistry to move cryptocurrencies from the non-security bucket into the non-standard security bucket in order to implement its Suppression Program.
Regardless of what institutions actually profit from the Suppression Program, the SEC’s crusade against PDM stands on a foundation of sand and deserves to be knocked down.
To learn more about the SEC's Suppression Program, how it works, and how to defeat it, please visit our series of articles on the topic, which can be found here.