The lack of clarity and guidance from the Securities and Exchange Commission (SEC) is making it difficult for US-based crypto businesses to register their tokens or products.
In a recent interview, SEC Chair Gary Gensler emphasized that the registration process for crypto projects is as simple and easy as registering a corporation. However, many startups have found that the reality is far more complex.
Gensler’s comments came after Kraken, a crypto exchange, failed to register its staking product and had to pay damages and shut down the program. The Chair stated that Kraken and other firms should have known how to register, and that they are choosing not to do so.
Nevertheless, the lack of actionable guidance and a regulatory framework tailored to digital assets has made it impossible for most crypto protocols to comply with registration requirements.
Challenges in the SEC registration process
The recent actions against Coinbase, an SEC-registered company, also highlight the difficulties crypto businesses face in trying to comply with regulations.
The SEC sent a Wells notice to Coinbase for listing tokens it considered securities without registering as a securities exchange and offering an unregistered staking product.
Yet, Coinbase had previously submitted a rulemaking petition to the SEC in 2022, seeking clarity on unresolved issues needed for a functioning market in digital assets, including registration as an exchange and staking. The petition went unanswered.
Starting a new corporation involves filing documents and forms that are relatively easy and straightforward, but registering a crypto product with the regulator is far more complex.
The forms for registration, such as Form S-1, typically require an army of lawyers and millions of dollars to complete, making it difficult for small businesses to comply with regulations.
The current registration forms also rely on a set of disclosures that are inadequate for crypto’s unique aspects and leave investors vulnerable.
Several crypto projects have attempted to register, either as part of an SEC settlement or on their own accord, but most have failed. The struggles and resulting failures of these projects illustrate how the “path to registration” is not currently a viable one.
Lack of clarity
The lack of clarity and guidance from the agency, combined with the inadequacy of the current registration forms, has made it difficult for most crypto protocols to comply with regulations.
Form S-1 is the most common registration form used by private companies when they want to go public or conduct an initial public offering (IPO).
However, the current disclosure framework is fundamentally misaligned with most tokens, as it presumes an issuer-security relationship that does not exist in decentralized systems.
Various gaps in the disclosures are required by the form and places where clarity is needed to make registration a viable path and adequately inform investors.
The SEC’s current position claims that most crypto projects need to be registered, while at the same time making registration impossible. This amounts to a regulatory ban on crypto that exceeds the SEC’s authority.
Building consensus on the viability of crypto projects registering with the SEC under the current regime can spur a true, honest discussion about how this industry should be regulated, with Capitol Hill as the locus of engagement.
