The United States has “almost lost the game” in crypto innovation due largely to strained relationships with the Securities and Exchange Commission, according to a former regulator and current head of a digital assets consulting firm.
During a panel on the regulation of digital assets at the WealthManagement EDGE Conference, Mango Digital Strategies CEO Charlene Hill Fadirepo compared crypto’s standing in the country to the internet’s development, saying the U.S. led in innovation during that period, housing most of the premier tech companies in the space.
But CEOs of crypto exchanges doing a risk analysis may find it’s not optimal to stay in the United States, with other areas like Dubai, Malta and Singapore positioning themselves as crypto hubs with more attractive tax environments, according to Fadirepo (who previously served as a regulator leading bank supervision audits and evaluations at the Federal Reserve).
Companies with sizable staff for compliance and policy strategy can afford to tangle with the SEC on enforcement matters, but others may opt out altogether and off American shores, Fadirepo warned.
“If you have the money to fight, and the energy and resources, you’ll fight,” she said. “But if you don’t, you’ll pivot and you’ll just go to the Caribbean.”
The failure of FTX and the rippling economic effects of a failing major crypto exchange led Washington regulators to weigh stepping in, with Mercedes Tunstall, a partner at Cadwalader, Wickersham & Taft, saying the SEC under Chair Gary Gensler has basically committed to sending letters and opening investigations regardless of the specifics of the type of crypto product or service offered.
But it was “untenable” in the long run for regulators to act as if everything remotely crypto-related functions as a security, Tunstall said. The best course of action for exchanges would be to register, but the problem so many encountered was that exchanges saw no place where they could properly register.
Tunstall said a lot of financial institutions were looking at Coinbase’s recent Wells notice scuffle with the commission as a signal companies are pushing back on what they deem to be ‘regulation by enforcement’ (an oft-cited criticism from advocates for crypto leaders and other regulated industries, like the brokerage space).
“I do think in the zeitgeist there is a sense that the American companies are going to say ‘you can’t continue to not give us rules to play by, because this is ridiculous and we’re not going to stand it anymore,’” she said.
When testifying before Congress in late March, SEC Chair Gary Gensler stressed the commission’s ability to investigate crypto violations was “stretched thin,” arguing while the crypto field was small compared to the overall capital markets, it had an outsized number of compliance issues.
Industry members also see storms on the horizon. According to a CoreData report from last month, seven in 10 advisors think there will be more cryptocurrency failures in this year than in 2022, with 26% expecting it to fall apart on a greater scale than the aftermath of the FTX fiasco in Nov. 2022.