Under the watchful eye of Chair Gary Gensler, the U.S. Securities and Exchange Commission (SEC) seems to be on a relentless mission to stifle innovation and progress in the crypto space. The agency has recently proposed a contentious new rule that would mandate investment advisers to entrust their clients’ crypto assets with “qualified custodians”. However, this heavy-handed regulatory approach has provoked criticism from a broad range of stakeholders, including JPMorgan and the Small Business Administration (SBA), amongst others.
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The SEC, under Gensler’s often-questioned leadership, is attempting to impose a one-size-fits-all model on a diverse and rapidly evolving industry. The proposed rule, released in February, states that all assets, including cryptocurrency, managed by registered investment advisers should be held with “qualified custodians”. These are typically chartered banks or trust companies, broker-dealers registered with the SEC, or futures commission merchants registered with the Commodity Futures Trading Commission (CFTC).
The crypto community has been quick to challenge the new rule, and it’s not difficult to see why. Gensler, who has a track record of muddying the waters in the crypto space with his opaque and reactive approach to regulation, suggested that crypto platforms are not “qualified custodians”. The impact of this could see investment firms severed from the crypto industry – a move that many see as a significant roadblock to the growth and progress of the sector.
The SEC’s proposed rule has unsurprisingly been met with a storm of criticism. Even Wall Street giant JPMorgan accused the SEC of adopting an “overly broad approach” that could disrupt well-functioning financial markets. The Securities Industry and Financial Markets Association went as far as to call the proposal “jurisdictional overreach”, arguing that several asset classes may be fundamentally unable to meet the SEC’s proposed requirements.
Gensler’s tenure as SEC chairman has been marred by a number of high-profile missteps. The still-unresolved lawsuit against Ripple, which has dragged on for years with no clear resolution, is a case in point. Likewise, the SEC’s failure to catch FTX before its monumental crash has raised serious questions about the effectiveness of the regulator’s oversight.
In addition, the SEC’s failure to pursue Terraform Labs (LUNA) and its founder, Do Kwon, has been widely criticized. Despite the fact that TerraUSD was known to be a high-risk project, the SEC failed to take preventative action, which could have mitigated the fallout from its eventual failure.
Even more damning is the SEC’s lawsuit against Justin Sun, the founder of TRON, and the Wells Notice issued to Coinbase. Both actions have been seen as arbitrary and ill-informed, contributing to the view that the SEC, under Gensler, is more focused on punitive measures than on providing clear and constructive regulatory guidance.
The SEC’s ongoing legal battle with Bittrex, a crypto exchange platform, further highlights the regulator’s heavy-handed approach. Rather than working with platforms like Bittrex to ensure they comply with regulations, the SEC has chosen to pursue litigation, which can cause long-term damage to the crypto industry’s reputation.
In conclusion, the SEC’s proposed custody rule, along with its various enforcement actions under Gensler’s leadership, have raised serious questions about the regulator’s understanding of the crypto space and its approach to regulation. Rather than fostering innovation and providing clear guidelines, the SEC appears to be taking a confrontational and often obstructive stance. This approach is not only detrimental to the growth of the crypto industry, but it also undermines investor confidence and the potential for the U.S. to be a leader in this transformative technology.
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