It’s the SEC’s job to protect investors. It has gone on to produce fear and confusion among the crypto community. The agency’s most recent overreaching move, namely its aggressive enforcement stance, is choking out innovation and forcing companies to leave the country. It's time to ask: Is the SEC protecting investors, or protecting its own power?

SEC's Credibility in Tatters?

The SEC’s defeat in the Debt Box enforcement action should serve as a warning. Admitting factual errors in a high-profile, hot-button case presented no easy task. It exposes a systemic lack of due diligence and internal processes within the SEC. Demanding that the SEC pay Debt Box’s legal fees is rubbing salt in the wound. This isn’t only an issue of their willingness to spend money; this is about trust. If the SEC can't get its facts straight, how can we trust it to fairly regulate a complex and rapidly evolving industry?

Coinbase's proposal for the SEC to reimburse legal costs for companies that successfully challenge enforcement actions is another sign of the times. It brings to light the huge financial burden and chilling effect caused by the SEC’s bluff and bluster strategy. Imagine running a startup, pouring your heart and soul into a project, only to be hit with a costly and unpredictable legal battle. It’s enough to send even the most grizzled scrapper running for the hills.

Treasury's Digital Asset Guidelines

The U.S. Treasury’s digital asset guidelines, focusing on establishing clear compliance pathways, provide a refreshing contrast. The latter Treasury approach is much more collaborative, seeking to proactively guide businesses to compliance rather than retroactively punishing them for unintentional missteps.

IRS's Lifeline: A Safe Harbor

Here's where the unexpected connection comes in. In fact, the SEC seems more interested in playing “gotcha." At the same time, the Internal Revenue Service (IRS) is working hard to develop a more rational structure for taxing crypto.

To enforce compliance, the IRS previously relied on voluntary disclosure programs—or employed “safe harbor” provisions seen in early-stage, highly speculative projects. This approach recognizes that the crypto landscape is still nascent and that companies need room to experiment and innovate without the constant threat of regulatory action. In addition, the IRS went so far as to grant temporary transitional relief for crypto taxpayers, given the rapidly evolving landscape and lack of clarity.

Imagine an environment where responsible crypto projects can develop in a “safe harbor.” They should be able to operate without fear, fortified by an understanding of the criteria that, if met, will protect them from SEC enforcement actions. This would leave much needed clarity and promote responsible innovation.

  • SEC: Regulation by Enforcement
  • IRS: Encourages Compliance

The SEC’s proposed approach would be more akin to just setting up a minefield. Second, it criminalizes those who inadvertently trigger the mines. The IRS is doing all it can to develop that road map. They want to give honest, plain-language navigation instructions and danger ahead signs to help taxpayers on their road trip.

Clear Guidance: Fostering Growth?

Well defined regulations will invite more risk-averse players into the crypto ecosystem and help nurture further development. The pervasive regulatory uncertainty and the SEC’s enforcement-first, reactionary approach to regulation by enforcement are killing innovation and deterring new investment in the domestic crypto space.

The Department of Government Efficiency (DOGE) has been seeking public input on the SEC, suggesting there is interest in reform at the agency. The present administration is generally much less adversarial in tone toward crypto. DOGE is going to be making waves in SEC policy moving forward. It will push for more robust guidelines rather than a regulation-by-enforcement strategy.

Guidance without teeth is useless. What we really need is a better balance. Let’s set smart, bright line rules to protect investors while engaging deeply with the business community to help them meet those rules.

A Legislative Framework is Needed

Ultimately, a legislative framework from Congress is needed to define commodities, securities, and digital assets, providing clarity for enterprises and taxpayers.

The SEC, Treasury, and IRS needs to work together. This collaborative effort will avoid regulatory whiplash and make compliance easier for digital asset firms.

This involves moving away from the SEC’s current, reactive, enforcement-first approach on technology and towards a more proactive, guidance-driven approach. It would do better to take a cue from the IRS’s example and adopt a more cooperative approach to regulation. To do that, it has to win back the trust of the crypto space. Only then will it be able to really protect investors while still fostering innovation.

As you likely know, the new administration has a wider pledge to digital asset reform. But we cannot allow them to get away with these replacements. Together, let’s advocate for a balanced regulatory framework that encourages innovation, safeguards consumers, and positions the United States at the forefront of the digital asset revolution. Because as things stand, the SEC isn’t just dropping the ball – it’s working to deflate it.