The laws in the United States present challenges for cryptocurrency advocates, and instead of solely criticizing them, considering a move to the European Union might be worthwhile.
Gary Gensler, the Securities and Exchange Commission Chair, becomes the subject of frustration for the entire crypto community.
Critics claim that Gensler oversimplifies cryptocurrencies, causing distress to well-intentioned entrepreneurs by encouraging them to register, knowing that it puts them in a vulnerable position.
They argue that he understands the need for new regulations but enforces impractical rules to suppress the industry.
Under his leadership, the SEC took action against Coinbase, alleging that several top coins, including MATIC from Polygon and SOL from Solana, meet the criteria for securities due to their involvement in capital formation, despite their fundamental role in operating underlying networks.
These concerns go beyond mere observers, as the United States faces the consequences of this campaign with a decline in venture capital investment in the crypto industry compared to the European Union, jeopardizing its leading position.
The MiCA effect 🇪🇺🚀
The share of VC investment into European crypto projects is up almost 10x in one year – from a share of 5.9% in Q1 2022 to 47.6% in Q2 2023.
Regulatory clarity attracts capital & entrepreneurs from around the world. Great development for crypto in Europe! pic.twitter.com/kUVp3rwlg3
— Patrick Hansen (@paddi_hansen) May 9, 2023
A cynical interpretation of Gensler’s stance suggests a political motive.
Despite having taught a blockchain course at MIT and demonstrating an understanding of digital assets, he pretends to be ignorant to indirectly support the agenda of Massachusetts Senator Elizabeth Warren.
Senator Warren is mobilizing an “anti-crypto army” and has been informally entrusted by President Joe Biden’s administration to shape crypto policy.
If President Biden secures re-election, Gensler’s compliance could pave the way for his appointment as Treasury Secretary.
Lawmakers proposed bills intending to remove Gensler from his position.
Representatives Warren Davidson and Tom Emmer introduced the “SEC Stabilization Act” to oust Gensler and restructure the agency, aiming to reduce partisanship.
Intermediaries for investment contracts are required to comply with securities laws & register with @SECGov.
Instead, many crypto platforms are contending that their investment contracts are something else.
The law cares about what something actually is, not what you call it.
— Gary Gensler (@GaryGensler) April 27, 2023
However, this approach would be misguided, not because Gensler is entirely right, but because his positions are not explicitly wrong under the current laws.
The U.S. relies on the Howey test to determine securities, which assesses whether buyers anticipate profits from the efforts of others.
Buyer expectations can be influenced by factors outside the issuer’s control, such as market trends or group mentality.
Although this approach is difficult to manipulate, it leads to a paradox similar to “Schroedinger’s cat,” where the classification of a token as a security depends on how third parties perceive it.
This poses a significant risk to entrepreneurs and users, impeding capital formation.
In contrast, the European Union’s landmark legislation, Markets in Crypto-Assets (MiCA), tackles this paradox.
It recognizes that utility tokens do not always fall into the category of financial instruments.
It provides clear and practical guidelines for disclosure and behavior that legitimate projects can adhere to.
The EU’s definition of securities focuses on factors entirely within the issuer’s control, such as the structure of the instrument and its marketing approach.
This clarity enables MiCA to effectively accommodate utility tokens while the U.S. struggles with their categorization.
This distinction carries significant importance.
Consider an entrepreneur in the EU who issues a governance token that grants holders voting rights on changes to open-source software.
Under MiCA, the entrepreneur can publish a transparent white paper and refute any misrepresentations.
In the U.S., despite following the same steps, there is no guarantee of meeting the requirements.
The entrepreneur may encounter obstacles if bad actors have conditioned buyers to anticipate profits from tokens in general.
This issue persists because every technological advancement attracts bad actors like Sam Bankman-Fried, who condition buyers when capital formation is crucial for societal progress.
Removing Gensler may offer temporary relief, but it fails to address the fundamental problem—clarity and adaptability.
Replacing Gensler does not ensure a different outcome.
The ultimate solution lies in enacting new legislation that refines the U.S. definition of securities or establishes a separate framework for digital asset issuers and exchanges.
Unless sincere efforts are made in that direction, the U.S. crypto space will constantly face uncertainty, always at risk of disruption due to elections or new leadership.
What are your thoughts about this issue?
Let me know in the comments.
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