Regulation speculation: confusion around crypto

Scott Paer, Managing Director, New York at Bladonmore, explores the future of cryptocurrency regulation in the US, and what that means for investor relations.


The collapse of Santa Clara, California-based Silicon Valley Bank in March 2023, illustrated a truth not always acknowledged: Banks and other traditionally-minded companies often have cryptocurrency exposure that is not well known until a major problem rears its head.

For Silicon Valley Bank, its location made it appealing to companies in the cryptocurrency world; in fact, one of its large depositors was Circle, which issues ‘stablecoins,’ a form of cryptocurrency widely perceived as less volatile than other cryptocurrencies because it’s pegged to a price of $1.

Whether you’re an Investor Relations Officer (IRO) at a crypto company or at a company with less obvious exposure to crypto, rumours of regulation are probably something that you’re considering discussing with investors and other stakeholders.

The problem for crypto, an industry often compared to the ‘Wild West’ because of its freewheeling attitudes, is that the future of regulation is largely unknown. This is down to the complicated nature of cryptocurrency itself and a lack of agreement as to who should be taking the lead on crypto regulation.


Who should regulate crypto?

There are numerous reasons why crypto has slipped the regulatory noose in the United States, not the least of which is that crypto is hard to categorise.

Is crypto a security?  If so, the US Securities and Exchange Commission (SEC) almost certainly has jurisdiction over it.

However, if crypto is deemed a commodity or a currency or something altogether new and different – then other regulators would become the top dogs and could set terms.

In the early days of the regulatory debate in the US, it seemed that crypto would be regulated as a commodity, and many thought that regulation would inevitably fall to the Commodity Futures Trading Commission, or CFTC.

Since then, however, the SEC has appeared ‘set on cleaning up the crypto industry,’ as a June 30 2023 article in Forbes suggests.

SEC Chairman Gary Gensler has opined that the vast majority of cryptocurrencies are securities because of something known as the Howey Test, which arises from a 1946 Supreme Court ruling.

The Forbes article quotes Gensler’s remarks to Congress in April: ‘All of these [cryptocurrency] companies should come into compliance with the law, and until they do, we will continue to pursue them as the cop on the beat, and investigate and follow the facts and law.’


SEC makes the first move

In late 2022, the SEC asked public companies to detail their exposure to crypto entities following the collapse of FTX, a crypto exchange, and the arrest of FTX founder Sam Bankman-Fried.

In its communications, the SEC notes that companies participating in the crypto asset markets may already have disclosure obligations under existing securities law. For this reason, they should be ensuring that their disclosures are ‘specific’ and ‘tailored’ and detail the potential impact on investors of crypto exposure.

Another sign that the SEC was thinking of moving into crypto regulation came on March 23rd. The SEC issued an investor alert urging investors to be cautious when investing in crypto asset securities. The SEC notes that crypto assets may be unregistered and therefore may not be providing investors with key information necessary for making informed decisions.


Congress tries to cut through confusion

A lack of regulatory clarity isn’t only creating a problem for investors. It’s causing angst among operators of crypto exchanges, too.

In May, U.S. cryptocurrency exchange Coinbase appealed to the courts, arguing that the SEC is providing insufficient regulatory guidance for companies operating in the crypto sector, according to news reports. This has been viewed as a pre-emptive strike given the SEC’s threats to sue Coinbase for offering unregistered securities products.

On June 6th, the SEC did, in fact, charge Coinbase with acting as an unregistered broker, exchange, and clearing agency. The SEC’s full complaint is publicly available.

Coinbase was not alone in being an SEC target. On June 5th, the SEC sued currency exchange Binance and its founder Changpeng Zhao for operating an unregulated international exchange.

In the end, the regulatory future for crypto may not be decided by the SEC but by the US Congress. In July, the FIT Act (Financial Innovation and Technology for the 21st Century Act) gained bipartisan support. A great deal of the debate in Congress took the form of a rebuke of the current regulatory regime.


What does this mean for IROs?

For IROs, the prolonged state of confusion over crypto regulation is creating ongoing headaches.

As of now, investor conversations about the future of crypto remain highly speculative. This is a challenge for US IROs and other spokespeople at companies with crypto exposure because investors crave certainty, and certainty is the one thing that’s lacking in the regulatory debate right now.

Without being able to deliver certainty, IROs should at least deliver clarity. Create a narrative around your company’s involvement in crypto, make your exposure as clear as possible, and make it clear how you believe upcoming regulation will affect your position. By being open and honest and providing a narrative, you both build trust with your investors and prevent someone else from telling your story for you.


If you’re looking to start building an investor narrative around upcoming regulation, get in touch.


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Scott Paer

Managing Director, New York

Scott is responsible for driving and overseeing Bladonmore’s New York Office.

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