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Shed Light on Cryptocurrency 'Dark Matter' Regulation at SEC

A few days ago, the Trump administration issued a memorandum strongly discouraging what the Competitive Enterprise Institute’s Wayne Crews has called “regulatory dark matter.” The memo instructs federal agencies to submit all policymaking rules to Congress to be vetted under the Congressional Review Act, even if these rules come in the form of informal “guidance.” Crews called the Trump memo “an important affirmation of Congress's primacy in lawmaking, and a major symbolic and real step toward curtailing the abuses of the administrative state.”

And right now, no federal agency should read this more carefully than the Securities and Exchange Commission, which for almost two years has been ruling the cryptocurrency and blockchain technology sectors, including areas in which it has no jurisdiction granted from Congress, through arbitrary enforcement actions and “dark matter” guidance documents. I write in my new CEI study, “Cryptocurrency and the SEC’s Limitless Power Grab,” that: 

Without changes in the law, stated intent of Congress, or even a formal rule, the SEC has been sending signals through enforcement actions and statements from officials that new issuers of cryptocurrency may need to go through the same cumbersome securities registration process as do issuers of stocks and bonds.

In the study, I argue that the SEC has been regulating products under its jurisdiction, such as exchange-traded funds (ETFs), more stringently if they involve cryptocurrency. Since 2017, the commission has rejected proposals for more than ten Bitcoin-based exchange traded funds, sparking a strong dissent last year from Commissioner Hester Peirce. Peirce wrote that the SEC’s rejection “signals an aversion to innovation that may convince entrepreneurs that they should take their ingenuity to other sectors of our economy, or to foreign markets.”

More troubling is the SEC’s assertion of jurisdiction over cryptocurrency products that clearly do not fit the definition of a “security” from either Congress or the courts. A recent guidance document form the SEC, properly classified as “dark matter” since it was never submitted to Congress for review as a rule, states that even in cases where cryptocurrency can be used in a functional market for goods and services, “there may be securities transactions if … there are limited or no restrictions on reselling those digital assets.”

This ultra-broad definition of a security could set a precedent for the SEC regulating not just cryptocurrency, but everyday consumer goods, as “securities.” In an interview for the CEI study, prominent fintech attorney Georgia Quinn said that after reading the SEC guidance, “I think airline miles and retailer points could be considered securities,” noting that some brands of these items are transferrable and therefore could be deemed to have a secondary market. For instance, the website points.com enables users to both manage and exchange rewards points, creating what could be deemed a secondary market. And then there are the numerous physical goods, from comic books to baseball cards, which are often bought in part as investments and can be sold on secondary markets.

Then, there are reports of the last couple days that the SEC is bizarrely attempting to censor the word “blockchain” from the names of ETFs, even if the funds invest in companies that utilize blockchain. If true, this would raise constitutional issues of free speech and due process, as well as constitute a major rule change without formal notice-and-comment or even submission of the rule to Congress. The Trump administration and Congress definitely need to shed light on the “dark matter” at the SEC.