Gary Gensler’s leadership at the US Securities and Exchange Commission is hindering innovation and pushing American companies to develop digital assets outside of the US. In place of clear and constructive regulation, the US Securities and Exchange Commission has placed a heavy emphasis on enforcement, which creates uncertainty while driving jobs, investments and innovation abroad.
The SEC needs to abandon its current approach if it wants to restore trust and remain competitive in the US market. “regulation by enforcement” It is better to use a transparent process of rule-making that incorporates public feedback. The digital asset sector would be able to flourish under the clear guidelines of this shift, allowing American innovation to remain at the forefront in global finance.
The SEC should seriously rethink its approach to digital assets regulation, even if the leadership of the SEC changes with the new administration.
American digital asset firms have spent more than $400 million defending against SEC enforcement actions under Chair Gensler — a figure that should serve as a stand in for the considerable opportunity costs of delayed innovation, loss of jobs and diverted capital. Recently, a large software company within the digital asset industry announced it was laying off hundreds of employees, saying that the battles they had with the SEC have cost them millions. SEC’s anti-innovation strategy has to stop.
This strategy is a mismatch between the regulatory ends and means. Rather than pursuing rulemaking through notice and comment — the legally required pathway for establishing regulatory frameworks — the SEC has opted for “regulation by enforcement.” By avoiding the Administrative Procedure Act requirements of public notification and comments, this method effectively turns enforcement proceedings into policymaking.
The industry repeatedly asked the Commission to set clear rules, and sought clarification through numerous meetings. The commission, instead of engaging in productive dialogue with stakeholders from the industry, has implemented enforcement measures. This strategy of regulation through enforcement is so outrageous that industry participants are suing the commission to gain clarity. Lejilex V. SEC is an example of a company that explains it can’t launch its noncustodial trade due to fearing SEC enforcement. Two artists in Mann v. SEC express their fears of SEC enforcers by creating NFTs.
Consequences are both predictable as well as measurable. HarrisX polling data indicates that respondents believe the US took the wrong approach to crypto and feel the SEC is too harsh. In fact, by two to one voters choose clear rules and regulations over enforcement. Even more important: two-thirds agree that the SEC must wait until Congress issues clearer guidelines. What is even more alarming, however, is what this means for the American digital-asset ecosystem. There are promising projects that have never been realized. Investments were never made. And innovations have now moved to countries where they will be welcomed.
Both the legal and business community have known for years that regulatory clarity creates value. Firms that can assess the compliance requirements accurately can invest capital more efficiently and innovate with confidence. In the current enforcement-first paradigm, this principle is inverted. This creates a regulatory climate where well-resourced law departments find it difficult to give definitive advice to clients. Investors are increasingly choosing jurisdictions that have clearer regulations, and entrepreneurs prefer to create products on markets where there is more predictability.
America’s status as a financial leader depends on its ability balance innovation with regulation. The current enforcement-centric approach risks ceding leadership in an emerging technology sector to other jurisdictions — a mistake that could take decades to correct, if it is even possible. SEC’s current approach must be changed if US wishes to maintain its position as a global leader in technology development.
The only way to move forward is through a policymaking process that incorporates stakeholder input. Regulation by enforcement is not how a vibrant, innovative economy should function — it wastes taxpayer money, harms investors, kills innovation and pushes capital out of the country. The US must now implement a transparent, well-thought out regulatory system before it loses its competitive advantage in digital economies.
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