How the Greatest Decentralizing Force for Crypto Projects Is the SEC

October 5, 2021by Laura Shin

How does the SEC determine if a token is a security? Why is DeFi particularly hard to regulate? What will regulators do about stablecoins? On Unchained, Greg Xethalis, chief compliance officer at Multicoin Capital, and Collins Belton, founding partner at Brookwood P.C., dive into crypto regulation, discussing securities laws, DeFi regulation, and why the US should be promoting stablecoins rather than trying to shut them down. Highlights:

• why the SEC and CFTC have not announced bigger crypto enforcement news at the end of their fiscal years
• why the SEC is going after DINO (decentralized in name only) companies
• what the Howey and Reves tests areand how the SEC uses themto determine whether an asset is a security or not
• why Collins and Greg think the SEC has recently begun been applying Reves more often
• why they think centralized crypto lending products should not be considered securities under the Howey test
• whether new legislation needs to be written for cryptocurrency-based products
• what makes Collins think the SEC is being “disingenuous” regarding the SEC registration process for crypto companies, like Coinbase
• how regulators will end up handling DeFi and why both Greg and Collins are long-term optimistic
• how the US government has a “great history” of respecting privacy and encryption
• why regulatory pressure is likely to build up around centralized crypto exchanges and what we can learn from the EtherDelta case
• why Collins thinks most cryptocurrency companies should be regulated 
• why the SEC is the best motivator for forcing protocols to fully decentralize
• how smart contracts could theoretically be used to standardize SEC Commissioner Hester Peirce’s Safe Harbor proposal
• how blockchain data makes cryptocurrency companies more transparent and easier to regulate than centralized entities
• what Collins and Greg think will happen with stablecoin regulation going forward
• why the US should be pushing to make dollar-pegged stablecoins more prominent

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Episode Links

Greg Xethalis

Collins Belton

Cases Mentioned

• SEC charged DeFi Money Market 
• SEC charged EtherDelta
• Howey Test and Reves Test
• DINO

Regulatory Stories

SEC

• SEC Chair Gary Gensler indicated that crypto lending and staking platforms most likely fall under US securities law

•  Gensler noted that Coinbase lists “dozens of tokens that might be securities.” 
• Gensler thinks crypto exchanges need to register with SEC
• dYdX airdrops token, but not to US customers
• Uniswap Labs investigation

Treasury

• Preparing a stablecoin report

Lending Platforms

• BlockFi NJ extension
• NJ, TX, AL move against Celsius
• BlockFi CEO wants federal regulators to weigh in on crypto lending regulation
• Preston Bryne believes lending products are securities

CFTC

• Investigation of Binance

Coinbase

• Contract with the Department of Homeland Security
• Coinbase will not be launching Lend
• Coinbase is prepping a pitch for regulators
• Filing with National Futures Association
• Armstrong tweetstorm referencing “sketchy” SEC behavior

Other

• Possible stablecoin regulations proposed by NYT
• Wall Street Journal article on stablecoins
• a16z on stablecoin regulation
• Former regulators joining a16z
• Former regulators joining Binance
• Sam Bankman-Fried on the importance of USD to crypto markets: https://twitter.com/SBF_FTX/status/1427179474538287104?s=20