A couple of remarkable incidents took place over the last couple of weeks in the ever-growing skirmishes between crypto and regulation. It signals a change of battle plan, at least in the US.

The first of these was on 3 October when the SEC, under the baton of chairman Gary Gensler, announced that they had levied a fine of $1.26-million against Kim Kardashian. Her crime? She promoted a cryptocurrency called EthereumMAX in June 2021 to 220 million of her Instagram followers. She had been paid $250,000 by the EthereumMAX promoters and had not told anyone. This is a clear violation of law.

Oh, and EthereumMAX, which has nothing to do with Ethereum, was clearly a piece of junk and a scam for anyone who spent more than three minutes reading about their offering.

Gensler said this: “When a group of entrepreneurs is raising money from the public and the public’s anticipating a profit, they need… full, fair and truthful disclosure. And that’s the core bargain in our capital markets.”

He added, specifically, that Kardashian had violated Section 17(b) of the Securities Act, a law passed in the 1930s. He has convincingly argued elsewhere that all cryptos operate like stocks or bonds, and should fall under his agency’s remit.

Reread that last sentence. EthereumMAX had not yet been declared a security by the SEC, and it was not even clear that the SEC has jurisdiction in this matter. As I said, prosecute first, regulate later.

The second incident concerns a project called OokiDAO. This a blockchain-secured decentralised finance application that allows users to lend, borrow and trade with up 15x leverage on margin. In other words, somewhat like a derivative product. The agency in charge of derivatives markets, the CFTC  (Commodity Futures Trading Commission), decided to take action because OokiDAO had not registered with them. They were sued on 22 September.

This was a problem because OokiDAO is not a company — there are no founders or office-bearers to sue. It is what is called a Decentralised Autonomous Organisation (a DAO). It is a piece of software. The project operates by selling or awarding Ooki crypto tokens, which allows these token holders to vote on the future of the project. Sort of like shareholders voting on future corporate plans.

So what did the CFTC do? They sued every token holder that had ever voted. This was a punch in the gut to all DAOs and decentralised projects who thought they were regulation-proof. But again, this action is unprecedented, not governed by existing laws and untested in courts.

Prosecute now, worry about the law later.

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The third action I have reported previously. The US Treasury’s Ofac sanctioned a piece of computer code. Ofac sanctions people and legal entities that are deemed to be a threat to the US national security. They sanctioned the code because the North Koreans use it to launder money. But many innocent individuals also use it for legitimate purposes. Neither Ofac nor anyone else ever sanctioned a piece of software before. It is probably not legal. 

Again, prosecute now, worry about the law later.

Obviously, this brutalist approach has not gone unnoticed and unopposed, even by insiders.

Both Summer Mersinger of the CFTC and Hester Pierce of the SEC have expressed dissenting views. The CFTC and SEC are regulatory agencies with enforcement divisions, not the other way around. Why are we leading with enforcement? they ask.

At the core of this strategic change by regulators lies two simple truths. The first is that laws and regulation move maddeningly slowly — they have to pass through many hands and many special interests and many votes and many committees before seeing sunlight. On the other hand, technology progresses at the speed of thought and invention.

So if you can’t keep up with the speed of innovation, just threaten everyone with fines and prison. That’ll slow them down. Brilliant idea, right?

The second is that crypto and everything it entails (the tech, the maths, the applications, the use cases, the economics) are both intrinsically complex and laced with scary jargon. There are unlikely to be many lawmakers who have even a superficial understanding of crypto, other than silly headlines in major media. The same is probably true of their staff.

This means there is a lobbying and education problem. The crypto industry needs to do a better job on this.

But all is not lost. Because there actually are a number of pieces of major national regulation, reasonably well thought out and carefully rationalised, slowly taking shape — the results of determined work and late nights by many stakeholders. They are Markets in Crypto Assets (Mica) in the EU, the Digital Commodities Consumer Protection Act (DCCPA) in the US, and the pre-legislation and excellent consultation paper commissioned by the UK Parliament from the Law Commission, simply entitled Digital Assets.

These, or versions of them, will start to enter the law sometime in 2024. And then maybe the jackboots will come off. DM

Steven Boykey Sidley is Professor of Practice at JBS, University of Johannesburg.