Former SEC Lawyer: ‘It’s Much Easier to Start Your Network Compliant’

As blockchain companies continue to struggle with evolving regulations and an uncertain future, many must decide whether to wait for permission or just release and perhaps beg for forgiveness – if tolerance is on the table.

“It’s a lot easier to start your network in a compliant way,” says Theresa Jody Gillen, an attorney at Baker Hostetler and a former SEC litigant. Decrypt on the Messari Mainnet.

One way to do this, Guillén says, is for it to be fully functional and decentralized at launch, which makes the project less likely to be considered security — a critical compliance test.

Guillén explains that most problems start when a developer is not given guidance or advice before launching their network, only to find out later that regulators consider what they launched to be regulated security.

“It’s so much easier to launch [the network] “Right the first time,” Guillén said, adding that launching as non-security is much easier than trying to claim a code that was deemed security suddenly isn’t. “It’s very difficult to go back and fix it,” she says.

“I think it’s difficult because I think supervision is very strict at the moment,” says Guillén. “There are no more directives, although there are many calls for guidance.”

Saying there is no guidance or no regulatory framework is common in the blockchain industry, and it is an imperative that many regulators and some in the industry see as an excuse not to follow the rules that already exist.

For Guillén, it’s not that there are no rules, it’s that the rules are confusing. “People are trying to follow the rules, and they’re really confused,” Guillen said. “And some of the rules aren’t really specific, and not particularly meaningful when it comes to digital assets.”

Guillen says a strict enforcement regime could dampen innovation in the future.

In the US alone, several government agencies, including the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Department of the Treasury, and the Department of Justice, have targeted cryptocurrencies in the past year. Last month, the Securities and Exchange Commission (SEC) accused crypto influencer Ian Ballina of violating securities rules when he conducted a 2018 ICO of Sparkster.

As Guillén explains, the devil is in the details.

“The Securities and Exchange Commission put what it considers to be a line in the sand in July 2017 when it released the DAO Report.”

Guillen says it’s important to pay attention to what the SEC publishes. “Every time something comes out of the committee, it’s important to include it in your analysis.”

What adds to the regulatory confusion is when a statement comes from an SEC official, Guillén said, it’s a subjective opinion rather than an official SEC statement. For example, SEC President Gary Gensler and former President Jay Clayton have said that Bitcoin and Ethereum are not a security, but the SEC has yet to make a formal decision.

Guillén says that one of the things that is useful in cases like Bitcoin and Ethereum is that someone in the SEC chair is saying something that makes it hard to argue, given the amount of analysis they might have done before making the statement.

But, as Guillén points out, the Ethereum merger could change that.

Before Ethereum completed its long-awaited merger on September 15, 2022, the number one blockchain for dapps and NFTs used a proof-of-work consensus algorithm like Bitcoin. Ethereum is now using a proof-of-stake consensus algorithm, which could solve its bad environmental reputation but could also put it back in the SEC’s crosshairs.

I think Gary Gensler would probably take this as an opportunity to try to discern the previous analysis [of Ethereum] from my current analysis.

Guillén points to an analysis by former SEC director Bill Hinman who said in 2018 that Ethereum was decentralized enough not to be considered a security.

“[Hinman] She said that the Ethereum network is decentralized enough that people do not rely on anyone’s management efforts to increase the value of ETH, she said. [Hinman] He also talked about how securities laws are in this area that it’s a disclosure regime.”

As Guillén explains, the detection system attempts to address the issue of information asymmetry between inside and outside. “With regard to the Ethereum network, there is really no one who has anything to disclose,” Guillén said. “There are no informed persons with material non-public information.”

Unbelievable, Guillén says — and an indication that not all regulators think alike when it comes to innovations in cryptocurrency and blockchain — are agency commissioners resisting what many describe as regulation through oversight.

“The fact that you have a CFTC commissioner publicly pushing back against the Coinbase action and saying ‘this is regulation through oversight,’ for an agency commissioner to speak out in this way against the sister agency, I think is critical to speaking.”

For Guillén, the answer may lie in cooperation between regulators and developers, adding that regulators need industry insiders to help understand this new technology.

“Hopefully, especially when it comes to things like this, [regulators] It will engage more in the industry and allow the sector to inform and educate them.”

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