Crypto Investors Go To Washington To Shape Regulation

In so many ways, the blockchain and cryptocurrency ecosystem is a bit of a goat rodeo.

It would be generous to say that a regulatory framework for blockchain-based assets like cryptocurrencies and tokens is still in its “formative” stages. This created an opportunity for those with vested interests to shape (or at least try to shape) the rule-making process.

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Reporting from the Wall Street Journal indicates that people associated with Union Square Ventures and Andreessen Horowitz, two venture capital firms with extensive exposure to cryptocurrency and blockchain-related companies, met with officials at the Securities and Exchange Commission (SEC) in late March of this year.

The approach to regulating this emerging market has been somewhat mixed. On the one hand, before US Senate Banking Committee, representatives from the Commodity Futures Trading Commission (CFTC) and the SEC said that they would take a “do no harm” approach to regulating cryptocurrencies and other facets of the blockchain ecosystem. This echoes Clinton-era attitudes toward regulating the then-incipient consumer Web.

In that same meeting, which Crunchbase News covered at the time, SEC commissioner Jay Clayton re-affirmed that initial coin offerings (ICOs) are securities offerings, bringing these assets and the companies behind them into his agency’s regulatory purview.

For the most part, the SEC’s investigative and enforcement measures have been exercised against ICO-funded organizations that were engaged in fraudulent or related malfeasant behavior which, to be clear, abounds.

Just a few recent examples of SEC interest in the crypto space include:

• In early April, the SEC brought charges against Sohrab Sharma and Robert Farkas, proprietors of Centra Tech, which raised more than $32 million in an ICO. Readers may remember that boxer Floyd Mayweather endorsed the offering on Instagram. The SEC says Sharma and Farkas made false statements regarding its business dealings with Visa and MasterCard.
• The SEC started investigations into a number of cryptocurrency-focused hedge funds, according to Bloomberg coverage. The ostensible goal of this work is to ensure that these funds properly protect client money, price offerings fairly, and crack down on those who fail to properly register their funds or offerings with the SEC.
• Coinbase, one of the most popular cryptocurrency exchanges, has apparently met with the SEC to register as a regulated brokerage as it mulls listing new assets. Such a move may indicate that other U.S.-based exchange services will follow suit.

On venture capitalists going to Washington, there is a balance to strike here. On the one hand, the ideology backing blockchain is very much anti-oversight and anti-intervention by any government entity. That being said, surging market value brought a concomitant increase in broader consumer adoption, mostly in the form of speculation that exposes more citizens to risk. If the SEC really intends to do no harm, it will have to find a middle ground between inhibiting innovation and protecting people from crypto-entrepreneurs who have historically been somewhat cavalier with the law and consumer funds.

Illustration: Li-Anne Dias