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SEC selective ICO enforcement might not be so bad; stablecoins hit a wall called FinCEN - The Block 11/22/19,
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SEC selective ICO enforcement

might not be so bad; stablecoins
hit a wall called FinCEN
November 22, 2019, 9:28AM EST · 9 min read
by Stephen Palley
https://www.theblockcrypto.com/daily/48092/sec-selective-ico-enforcement-might-not-be-so-bad-stablecoins-hit-a-wall-called-fincen Page 1 of 29
SEC selective ICO enforcement might not be so bad; stablecoins hit a wall called FinCEN - The Block 11/22/19, 8(36 PM
T H E B LO C K
Q U IC K TA KE
Selective enforcement of ICOs by the SEC has been criticized by some as
creating an unpredictable regulatory enforcement regime
A recent academic paper soon to be published in a law journal suggests
that selective enforcement of ICOs has been a benefit to the space,
made possible accompanied by private class action and state regulatory
activity
Also, recent FinCEN statements make it clear that stablecoins are and
will be subject to BSA compliance obligations, suggesting that SEC
activity that we see as a tail of ICO activity may be followed in similar
measure by FinCEN regulatory activity
Two or three years ago everyone and their Great Aunt Mathilda wanted to
do an ICO and was convinced that if they went to Zug and sold tokens they
wouldn’t have to worry about securities laws. I’d have calls with people where
they would say that they wanted to do a blockchain for wholesale fish
distribution and would issue a token for it “and of course OF COURSE it’s not
a security Steve, it has utility. Also, did I mention we’re in Zug?” Then would
come the ask, that one get paid for designing or advising on the token by
accepting tokens. The first time that happened I laughed out loud, and then I
realized that for some reason they … weren’t joking. (Eventually I just
stopped taking the calls).
We’ve known for some time now that the SEC saw things differently and that,
in fact, most of those ICOs were unregistered securities offering. While we
have by no means seen the end of ICO enforcement actions by the SEC — give
it a few more years for the dust to die down — everyone and their Great Aunt
Mathilda is pretty familiar with the basic parameters of the ’33 and ’34 acts
and even the dimmest ICO bro wannabe can rattle off the Howey Test
without thinking too hard. It’s barely even news anymore when a project and
its initiators get sued by or settle with the SEC.
Some have said that the SEC’s enforcement in the space hasn’t been even
and there have been charges by some of so-called “selective enforcement.”
This term has been used as a pejorative and to challenge the clarity and
fairness of the rules governing ICOs under U.S. securities laws. Telegram has
gone so far as to challenge the constitutionality of SEC enforcement activity,
claiming that, as applied, the rules that they apply are not identifiable with
“ascertainable certainty.” While I have my doubts that this is going to win the
day for Telegram, I also don’t think the argument is going to fall entirely on
deaf ears. There may be some sympathy on the bench for this argument
(though I suspect the argument is a loser, legally, at the end of the day). And
for Telegram, the argument is probably a loser for a really simply reason — the
fact that you have cooperated with an SEC investigation (which is where
Telegram’s efforts seem to have been focused, if one reads their affirmative
defense portion of their answer closely) isn’t an exculpation or excuse.
But back to the generic “selective enforcement” objection — the notion that

the laws aren’t fair or clear because X project paid nothing and Y project paid
a kajillion dollars or got shut down. Set aside the fact that you don’t know
what happened at the negotiation table, there’s another problem with the
“but selective enforcement” argument. Unless you can show that the
government is enforcing a law selectively for improper reasons — say, a law
that you can show is only selectively and intentionally applied against people
because of their race — the government has discretion to do precisely this. In
fact, most laws are selectively enforced (think about speeding as an overly
simplistic example).
A really interesting upcoming article in the Washington Journal of Law and

Policy makes the case that regulation by selective enforcement in the ICO
space is actually a good thing for the most part, though it comes with some
risks. In “Regulation by Selective Enforcement: The SEC and Initial Coin
Offerings”, James Park and Howard Park posit that
The SEC’s Regulation by Selective Enforcement strategy has been

successful in establishing the agency’s authority over ICOs — and has
done so with limited involvement of the courts. The SEC has moved
decisively with these cases, considering their complexity and its
reputation for taking years to resolve enforcement matters. At the same
time, it has been thoughtful in applying the law to a new setting. The
SEC’s various enforcement releases have effectively communicated
basic parameters to the industry with respect to when ICO tokens are
securities. As a result, the number of unregistered ICOs available to U.S.
investors has quickly declined.
On the other hand, a danger of Regulation by Selective Enforcement is
that it can create the illusion that the major legal issues have been
resolved, when there is still a great deal of uncertainty as to when a
token is a security. The SEC’s settlement releases only represent the
agency’s view that a particular token was a security. Though
administrative interpretation of a statute is entitled to some weight,
courts may still disagree. Some of the SEC’s most important ICO cases
have turned on fine distinctions. Slightly different facts could merit
different results. Yet the SEC has acted at times as if the issue of when a
token is a security has been so clearly resolved that subsequent
violations deserve significant sanction. Such a position is troubling.
Another danger is that by only bringing cases against more recent ICOs,
the SEC risks conferring monopoly power to early movers. The ICO of
Ether, the token associated with the Ethereum smart contracts platform,
at least initially was the sale of a security, but the SEC has taken the
position that Ether is no longer a security. Ethereum thus has a
significant advantage over newer smart contract platforms that will have
to comply with SEC regulation.
(You can find a copy of the full essay here). The authors take the position that
regulation by enforcement has been made somewhat easier with the
overlapping hammers of private class action litigation and the work of state
securities regulators. They also close (weakly if you ask me, in an otherwise
nice essay) that there is more work to be done in “clarifying the boundaries”
of SEC jurisdiction. I’m not sure which jurisdictional boundaries need to be
limned but, regardless, the interesting part of this essay to me is that the
authors’ point is that selective enforcement in the space is, well, kind of a
good thing and the SEC has been frankly rather patient with the ICO and
token and space.
This all leads me to another arm of the government that is keenly interested
in crypto, FinCEN, which has been slightly quieter on the enforcement front
but still has plenty of time to act.
FinCEN is part of the U.S. Department of Treasury and is responsible for

overseeing the Bank Secrecy Act, which refers to federal laws that address
anti-money laundering and counter-terrorism financing. The Bank Secrecy
Act has criminal penalties. Though you can be prosecuted under federal law
for securities fraud, the SEC doesn’t have criminal jurisdiction. FinCEN works
with law enforcement (hence the name “Financial Crimes Enforcement
Network”).
FinCEN has provided guidance about virtual currencies and compliance

obligations that specifically reference crypto since at least 2013 and has been
relatively clear that “but it’s blockchain” doesn’t get you out of compliance
with the BSA. (A recent overview from FinCEN is here). My own personal
policy view is that applying an early 1970s law designed to combat money
laundering doesn’t always lead to sensible results. Think for example, of a
protocol that allows a person to transform a token on one chain into a token
on another chain. If the token has notional financial value, is the conversion
of the token money transmission? Have you moved CVC from one place to
another? I mean. Maybe. But you could make the same argument about
converting a database entry from MySQL to postgresql.
Anyway, I happen to think that our securities laws and enforcement

framework are robust and clear enough to deal with crypto without a lot of
change. FinCEN and the BSA are the ten thousand pound slightly rotting
herring stinking up the space. And the problem is that whatever my own view
of the statute’s overly broad and not entirely logical scope, FinCEN’s own
view of the statute and its guidance is that the law is crystal clear and they
have been too.
This brings me to a recent statement by FinCEN Director Ken Blanco about

stablecoins, which you may or may not have read about. According to Mr.
Blanco:
Despite recent reporting, stablecoins are not a new concept in this

space. FinCEN has been looking at stablecoins since the earliest
experiments into virtual currency in the early 2000s. FinCEN published
its first piece of public guidance in this space in 2008, dealing precisely
with the issues that underlie the type of convertible virtual currency we
now refer to as a “stablecoin.” And, because we are technology neutral,
we can say with complete clarity that for AML/CFT purposes, it should
be understood that transactions in stablecoins, like any other value that
substitutes for currency, are covered by our definition of “money
transmission services.” This means that accepting and transmitting
activity denominated in stablecoins makes you a money transmitter
under the BSA. It does not matter if the stablecoin is backed by a
currency, a commodity, or even an algorithm — the rules are the same.
To that point, administrators of stablecoins have to register as MSBs with
FinCEN.
“But Steve,” you say “our stable coin backed by an algorithimic basked of
other crypto is decentralized and run by the community on weekly
conference calls that are recorded and saved on github. He doesn’t mean
that our basket of algorithimic stuff is governed by the BSA, does he?”
I am not going to call out any specific project by name but (to answer your
question), yes, he is saying that a ‘decentralized’ price stable currency
‘controlled by the community’ is subject to the Bank Secrecy Act. Am I saying
that we are going to see a wave of enforcement activity by FinCEN similar to
what we have seen by the SEC? Maybe not, but the comparative quiet should
not be taken for a lack of activity. And it’s worth remembering that the
statute of limitations for BSA violations is five years for criminal and six years
for civil. So for some the clock has barely started ticking. It’s probably unlikely
that I will be making Great Aunt Mathilda and FinCEN comments in two or
three years, but I’d expect to see some enforcement activity coming, and the
market for and value of algorithimic stablecoins impacted as a consequence.
S H A R E T H I S A RT I C L E →
B I TC O I N B LO C KC H A I N DEFI LEGAL STA B L E C O I N S BLANCO DA I FINCEN
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SEC selective ICO enforcement might not be so bad; stablecoins hit a wall called FinCEN - The Block 11/22/19,

BID ASK BID ASK BID

BITCOIN BLOCKCHAIN REGUL ATION RESEARCH MY ACCOUNT

SEC selective ICO enforcement

defense portion of their answer closely) isn’t an exculpation or excuse.

But back to the generic “selective enforcement” objection — the notion that

A really interesting upcoming article in the Washington Journal of Law and

The SEC’s Regulation by Selective Enforcement strategy has been

On the other hand, a danger of Regulation by Selective Enforcement is

FinCEN is part of the U.S. Department of Treasury and is responsible for

FinCEN has provided guidance about virtual currencies and compliance

Anyway, I happen to think that our securities laws and enforcement

This brings me to a recent statement by FinCEN Director Ken Blanco about

Despite recent reporting, stablecoins are not a new concept in this

B I TC O I N B LO C KC H A I N DEFI LEGAL STA B L E C O I N S BLANCO DA I FINCEN

Bitcoin drops below Binance's Shanghai IRS investigators

THE BLOCK DAILY

THE BLOCK DAILY

THE BLOCK DAILY

THE BLOCK DAILY

Inside B2C2: The

“I am not a big bitcoin

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THE BLOCK DAILY

Galaxy Digital Holding Ltd.

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THE BLOCK DAILY

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THE BLOCK DAILY

THE BLOCK DAILY

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Square, the payment

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A Hawaiian vacation, complete

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About Us Join Today Subscribe to our Bitcoin Blockchain

© 2019 THE BLOCK . ALL RIGHTS RESERVED.

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