During the latest UBRI on Campus, Yuliya Guseva, Rutgers Law School Professor explains why enforcement creates uncertainty for market participants and is no substitute for regulatory clarity.
She further stated, that “Market actors need to understand what is expected of them and how to effectively comply with regulations.”
This has been stated at a point in time when the SEC “brings more enforcement actions against digital-asset issuers, broker-dealers, exchanges, and other crypto-market participants than do regulators in most other major jurisdictions combined.”
Reportedly, the SEC is exhibiting a high rate of intervention because of the size of the US cryptocurrency market. The SEC using the “Howey Test” determines whether a transaction should be classified as an investment contract and therefore should be registered as a security. The overall scope of the test permitted the SEC to extend its authority for over 70 years to several ranges of financial instruments which at present also consists of digital assets.
Prof. Guseva have warned about the enforcement inconsistencies. The inconsistencies are created due to the unsuitability of judging a 21st century innovation with a Supreme Court ruling from 1946.
Prof. Guseva expressed lot of worries over how there are dynamic inconsistencies in the recent SEC enforcement actions, the broad reach of Howey test and the enforcement in inconsistencies which can exacerbate on the uncertainty which can fail to provide the market participants with a clear ex ante understanding related to securities laws.
Markets need to have predictability and certainty in terms of regulations and it is only then, they will be able to comply with the norms. When there are inconsistencies and unclear rules, it will risk forcing companies to move out of the US and this will lead to affecting the direction of financial innovation of the companies based on the US.
In countries other than the US, they ensure regulatory clarity and then focus on enforcement, but in the US they are focusing more on enforcement without regulatory clarity.
Another expressed concern goes like: “[i]f the SEC can no longer provides clarity through strategic predictability of a transparent enforcement approach, and if the market finds substantial inconsistencies in the regulator’s moves and strategic commitments, the fabric of cooperation between the innovators and the regulators can be undermined.”
The professor further pointed to that when this happens even Bonafide companies will be less inclined to comply with the US securities law and also to seek cooperation with the SEC. Regulators and policymakers need to be educated about the benefits and risks of innovative financial instruments.
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