The US Must Pursue a Disclosure-Oriented Regime Rather Than a Permissioning Regime

HodlX Guest Post  Submit Your Post

The US CFTC (Commodities Futures and Trading Commission) argues many digital assets are merely derivatives traded on unregulated exchanges. Responsibility lies with the software developers and governance token-holding voters.

Digital assets, however, are not derivatives in the original meaning Congress contemplated when it passed securities regulations.

And, even if they were, a disclosure-based regime, as authors of Securities Law intended, would suffice to weed out illicit crypto players.

If we assume most tokens are securities, we must also admit these represent an entirely new type of security, for which an entirely new framework seems best.

Any such regime must be firmly disclosures-based, whereby firms and projects need simply to be transparent by making the required disclosures.

It would not be permission-based, in which executive agencies pick and choose winners and losers, most often based on who has the money to pay regulatory fees.

Instead, the emphasis of regulators should be on 17 A of the Securities Law of 1933, which makes it unlawful to “employ any device, scheme or artifice to defraud” and “obtain money or property” by the use of material misstatements or omissions or to “engage in any transactions, practice or course of business which operates or would operate as a fraud or deceit upon the purchaser.”

By merely focusing on 17 A, US regulators could go a long way toward protecting consumers and investors, persecuting criminal elements – all while encouraging innovation.

Permissioning versus disclosure regimes

The initial idea behind securities laws was that one could sell a security by merely producing a quality disclosure about the nature, risks, team and conflicts of interest with the security.

Over the years, securities law devolved into a more authoritarian permissioning regime, which requires submission to costly audits with which only the most monied entities can comply. The SEC could pick and choose who could and could not take part.

The crypto industry must therefore advocate for a disclosure regime, lest the SEC pick and choose which crypto firms can exist and which cannot, based on who has money.

The importance of safe harbors

Crypto has introduced a novel asset with different risks. As long as people accurately disclose information and update required information as needed, they should be permitted to issue a digital asset.

Such ‘safe harbors’ are so