Former SEC Chief Counsel Says Agency Needs to Make Clear Its Crypto Compliance Rules

The U.S. Securities and Exchange Commission (SEC) is falling short when it comes to addressing how it deals with the digital asset industry, said TuongVy Le, partner and head of regulatory and policy at investment firm Bain Capital.

What the federal agency is doing is regulating “almost entirely through enforcement actions,” Le, a former chief counsel for the SEC’s Office of Legislative and Intergovernmental Affairs, said on CoinDesk TV’s “First Mover” Tuesday.

“When the SEC tells us that something is not compliant, it’s not necessarily the same thing as telling us what they would consider compliant,” Le said in reference to the $30 million settlement the agency reached with Kraken, under which the centralized exchange will shutter its staking service platform to U.S. customers.

In Kraken’s case, Le said, there are still questions about the agency’s stance on staking services, such as whether other forms of staking services, including self-staking and decentralized staking, would fall within the agency’s guidelines.

“We don’t necessarily know just from a single enforcement action or even through multiple enforcement actions,” Le said. “Any single action, like the one against Kraken, can be limited in terms of what we can learn from it and what it means for other staking service providers.”

The Paxos case

The SEC issued a Wells Notice that it would be filing suit against stablecoin issuer Paxos for its alleged sale of an unregistered security, stablecoin token Binance USD (BUSD). Paxos, however, has said it “categorically disagrees” with the agency, claiming that its Binance-branded token is backed one-to-one.

Le said in the case of Paxos, the SEC may not be applying the securities definition of the Howey Test to the BUSD stablecoin but a different set of criteria through the Reves test.

"Enforcement actions are very facts- and circumstances-specific, so it can be difficult to know how broadly to read any single action," she said. "For instance, it can be hard to discern how heavily the SEC weighs particular facts when applying Howey, it can even be hard to discern – if the complaint doesn't contain a fulsome analysis – which facts even apply to which Howey factors."

By "blindly and mechanically applying the existing securities laws" without considering the potential of digital assets and blockchain technology, the SEC "could potentially just kill something like staking."

As for trying to comply with the SEC, "it's actually not as simple as going onto the SEC's website and filling out a form and then you're good to go. Applying the federal securities laws to something like staking services, where a provider takes your crypto and does things with it, that actually raises really novel and complex questions around custody."

Read more: Paxos ‘Categorically Disagrees’ With SEC That BUSD Is a Security, Says It Will Litigate if Needed