Despite laudable investor protection aims, there are risks to its aggressive approach
email rounding up the latestFor more than a century now, US watchdogs have policed the financial landscape, seeking to protect investors from potential fraud and the consequences of their own blind optimism.
The laudable goal is investor protection. The volatility of bitcoin and other tokens and the implosion of the FTX crypto exchange have cost investors billions; and a bankruptcy trustee is seeking to recover money for loan investors left holding the bag when a drug testing firm went belly up after being investigated for fraud.
But there’s a rub: most of these protections, and the SEC’s policing power, only apply when customers are investing in securities. Stocks and bonds are explicitly named in the original 1933 federal law, while commodities, wine and baseball cards clearly do not count. The key standard for more esoteric investment contracts is known as the Howey test for a nearly 80-year Supreme Court case involving Florida citrus groves.
Some crypto proponents warn this is regulatory overreach that will end up leaving investors less protected. Many tokens have become fully detached from their original creators — or, like bitcoin, never had a single sponsor to begin with. They are unlikely to meet the SEC’s requirements for US securities trading. “Treating tokens as securities is effectively prohibition,” says Lewis Cohen of DLx Law. “Trying to tell people not to do what they want to do doesn’t make sense and isn’t effective”.
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