Defend Crypto is an initiative created to collect donations to take the SEC to court should the agency pursue enforcement action, writes Circle in a recent newsletter.
The founders of Defend Crypto say that funds raised will be used to support crypto projects that face potential enforcement action. Companies and investors that have contributed funds include Messari, Shapeshift, Circle, Fred Wilson, and William Mougyar, among others. The objective for going to court, should the agency pursue enforcement action, is to get the regulator to establish “a new Howey test for crypto tokens to determine which ones are a security” and help token projects and crypto companies get the clarity they need to operate in the United States.
The crypto industry has been awaiting concrete guidance from the SEC for some time. Last November, the agency announced that it is working on putting together “plain english” guidance that would allow issuers to easily determine whether a token sale constitutes a securities offering or not. In April (six months later), the SEC staff published a Statement on the Framework for Investment Contract Analysis of Digital Assets.
While the guidance the SEC shared in this statement is a step in the right direction, it is “staff guidance” which does not carry the same weight as more formal guidance issued by the Commission “so people have a little bit more certainty,” according to Hester Peirce. Many in the crypto community have criticized the agency for its lack of urgency in providing concrete, binding guidance and direction, a sentiment Peirce has echoed. In her remarks at the Securities Enforcement Forum in early May, Peirce articulated that “[the SEC’s] silence is likely to simply push this innovation and any attendant economic growth into other jurisdictions that have done their work and provided clear guidelines for the market participants to follow.” The lack of clarity is a key reason that the Defend Crypto campaign has supporters, as they believe going to court may speed up the process of receiving concrete guidance.
It’s difficult to opine on potential outcomes (1) if we don’t yet know whether the SEC will pursue an enforcement action against Kik/Kin and (2) if it does, what the action would entail — in a recent episode of Laura Shin’s Unchained podcast, Ted Livingston and Patrick Gibbs outlined that they expect the SEC to make the claim that the initial sale of tokens was the offering of securities (should they pursue action), but they do not know whether the regulator would suggest that recent transactions involve the sale of securities.
One scenario is that the SEC pursues enforcement action against Kik/Kin, and Kik/Kin take the SEC to court. The optimistic view is that if the court rules in favor of Kik/Kin, the favorable ruling could help set a precedent for the industry, expedite the process of receiving more concrete regulation and potentially lead to new, concrete, legally binding rules that provide a more supportive environment for crypto firms and help issuers determine, ahead of issuance, whether their token is a security or not.
On the contrary, if the courts rule in favor of the SEC, the regulator may be more empowered to pursue similar actions against other crypto projects and continue to drag its heels on providing more concrete guidance or developing new rules specific to the crypto industry. If this were to happen, it could push even more crypto innovation and investment overseas, out of the U.S. to jurisdictions that have more favorable and concrete guidelines and rules.
There have been some concerns raised by the crypto community regarding the potential effectiveness of the Defend Crypto approach. For instance, the courts may rule in Kik’s favor — but the process of getting concrete guidance and new rules could take just as long. Further, there is no guarantee the SEC would change existing securities interpretations to suit digital tokens. A court ruling alone, according to Blockchain Association’s Kristin Smith, may not provide enough clarity beyond the status quo, as opposed to an open legislative or rulemaking process, which can result in a “much finer instrument.”
Another basis for pushback has been that the SEC’s efforts in regulating the industry thus far have been successful. In an analysis of the SEC’s recently released framework for digital assets, blockchain advocacy group Coin Center stated U.S. securities laws are already “well-calibrated” to address crypto-related scams without stifling true innovations — those built to obviate reliance on third parties — in decentralized technology. Some members of the crypto community have made similar comments, most in relation to concerns regarding the misleading nature of ICOs and the large amount of people burned by participating in ICOs.
The decision now resides with the SEC to either pursue enforcement action against Kik/Kin or not. If the SEC chooses to continue with the case, it is likely Kik will take the government agency to court given its previous actions. In contrast, should the SEC elect to let Kik go, it will probably set a precedent as to which cases will be pursued in the future and provide some clarity beyond the no action letter and the digital asset framework the SEC issued last month.