There are some in the crypto community who—frustrated with the enforcement first approach of (outgoing) SEC Chair Gary S. Gensler—invested heavily to elect Donald J. Trump the 47th President of the United States. Was that a good bet?
In 2017, Trump appointed Jay Clayton as SEC Chair. Clayton remained in the position for four years and clearly remains in Trump’s good graces. Trump has chosen Clayton to be U.S. Attorney for the Southern District of New York after reportedly considering him for Attorney General of the United States. It is a good bet Clayton has Trump’s ear on the choice for Gensler’s replacement. So, to better understand what the SEC’s approach to crypto enforcement might look like the second time around, it might be a good idea to review events from the first time around.
Jay Clayton is an accomplished securities lawyer, having been a partner at Sullivan & Cromwell and a member of its management committee, an independent chair of Apollo Global Management, and on the board of the American Express Company, among other things. He was also a good boss. I worked in the Enforcement Division for Clayton’s entire tenure. Clayton cared about the institution he helmed and believed in its mission. He was a consensus builder. He trusted his staff, he trusted their work, and, in return, his staff respected him. For Clayton in addition to specific policy considerations, there was an institution to safeguard and a mission to defend.
So what did the crypto enforcement record under Clayton look like? Beginning with the beguine, now is a good time to remember that the Munchee case (Remember the alarm bell that was Munchee?!), and the Kik, Telegram, and Ripple (Yes, Ripple!) cases—all pure registration cases—were brought by the SEC during Trump’s first term. On the one hand, there have been those hoping the SEC would focus its energies on fraud cases, myself included. On the other hand, is it realistic to believe that any new SEC chair would be comfortable with the view that the federal securities laws apply to all offers and sales of securities except those done via token offerings? In which case only the antifraud provisions apply? It was under Clayton that influencers like Floyd Mayweather Jr. and DJ Khaled were first sued by the SEC for touting ICOs, individuals one might fairly expect did not even know the federal securities laws could apply to their conduct.
But it was also under Clayton that the SEC attempted to give the public some real guidance when it came to crypto assets and the federal securities laws. The SEC published its Report of Investigation on The DAO. The staff was permitted to publish guidance like the Framework for “Investment Contract” Analysis of Digital Assets. And staff members were permitted to make public comments, including the June 2018 speech William Hinman gave, entitled When Howey Met Gary (Plastic), expressing his view that a digital asset offered as a security can, over time, become a non-security, citing ETH as one such example. For years, that speech has served as a lodestar to us lawyers in private practice tasked with providing sound guidance to our clients. Unfortunately, under Gensler, such guidance was sharply curtailed, and staff members at public events white-knuckled their carefully scripted remarks. In our modest opinion here at SKrypto, any hope that the Gensler SEC might provide guidance to crypto market participants gasped its last breath when Coinbase announced it had received a Wells notice.
Coinbase and other large crypto market participants have invested heavily in regulatory compliance, even in the absence of a clear path with the SEC. Those investments, in addition to meeting regulators’ demands, create a kind of competitive advantage. Many retail investors prefer to transact through market intermediaries who invest in compliance. There are many in our space who do not want to see a toothless SEC, and it is not unreasonable to think that the next administration may be more about regulatory clarity but still carry a big stick when it matters.
For our part, we hope that is the case. The industry can’t return to the early wild west days, or the robber baron FTX days, without significantly damaging its long-term prospects. If the industry wants a permanent seat at the grown-up’s table, it must comport itself that way and seek common-sense, clear regulation and enforcement. We think it’s more likely that the SEC – which successfully maintained its reputation with liberals and conservatives alike during the first Trump administration – will hold similar views of crypto during the next four years.
Of course, all of this prognostication could be wildly off base. After all, the Clayton SEC also sued Elon Musk, now in charge of the forthcoming Department of Government Efficiency (DOGE) which, because I like sarcasm as much as the next guy, I am hoping will adopt the Shiba Inu for its seal and flag. I don’t know what the DOGE will be and, I suspect, Musk does not either, or whether it will have any real powers. But if Musk gets his hand on the SEC’s plug, the prognosis could be more negative.
