The U.S. Securities and Exchange Commission (SEC), is one of the primary regulatory bodies with a definitive say over the future of cryptocurrencies. Their official mandate being “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
The SEC is a huge federal agency with over 4,000 employees working in multiple divisions and offices. As Insiders know, the SEC has increasingly turned its focus on the cryptocurrency world through its ability to enforce US securities laws. These laws impact which new coin offerings, like ICOs, must be registered. And also impact which new crypto investment vehicles are approved or denied, like the Winklevoss ETF that was recently denied.
As we attempt to predict the direction of SEC regulations, at Crypto Law Insider, our focus is less on what individual regulators want to accomplish and more on what regulators can accomplish.
Because the fact is, SEC regulators are not free actors. They exist in a complex regulatory web that forces them to behave in certain ways. These constraints are present at all stages of their careers (beginning, middle and end) and have a great impact on what can actually be accomplished.
Let’s take a look at a few of the factors that influence and restrict SEC regulators’ actions:
Political Appointments of SEC Commissioners
In the SEC, Commissioners come and go, each having a five-year term. Many come from large institutions like JP Morgan and Goldman Sachs and hope to return to those institutions when their terms as Commissioners are over.
Others will go on to lucrative careers in law or consulting. And some will just go on in semi-retirement, earning unreasonably high compensations for serving on the Boards of Directors for Big Businesses.
Regardless of their individual career paths before joining the SEC, all SEC Commissioners are political appointments. That means they are selected by the US President and approved by the Senate. Landing an appointment is not easy. There is tremendous competition to become an SEC Commissioner.
Thus, in order to gain the appointment, a Commissioner needs to have a broad coalition of support, which often means offering some kind of value in exchange for that support. As such, following appointment, each Commissioner is in debt to a number of different constituencies before they even begin.
Collective Decision-Making Processes
Once a Commissioner arrives to the SEC, he will quickly discover even more restrictions on his ability to act.
The first constraint comes from other Commissioners serving within the SEC. There are four other SEC Commissioners, at least half of whom belong to the opposing political party. And on top of political alignment, they face the normal challenges seen in all collective decision making, namely disagreements, personality clashes and conflicting ambitions.
The second constraint comes from below. The SEC is an enormous bureaucracy that exists independent from its political leadership. Beneath the upper layer of political appointees, there are over 4,000 career regulators who are beyond the reach of politicians and have strong protections built in to protect them from political coercion.
In order to get anything accomplished, a Commissioner needs the support of his or her senior leadership. They will be, after all, the ones implementing the Commissioner’s initiatives. This gives senior leaders great power over decision making. They can easily undermine an initiative they don’t like by dragging their feet or by raising the usual set of bureaucratic roadblocks to obstruct the enactment of new rules and regulations.
Competing Regulatory Bodies
The fight is not just within. The US regulatory landscape is complex and overlapping, and the SEC is just one of several regulatory agencies with concurrent authority.
Even if an SEC Commissioner is able to push an initiative through the obstacles within their agency, this is likely to catch the attention of other regulatory agencies trying to push their own initiatives.
Given the intense competition between agencies, other regulatory agencies frequently attempt to push their initiatives ahead of others. To readers of Crypto Law Insider, this should come as no surprise as we constantly discuss tensions between the SEC and CFTC to determine which agency should have ultimate control of the regulation of cryptocurrencies.
Industry Stakeholder Influences Over-Regulation
The final stakeholder in the regulatory decision-making process comes from the financial industry itself. Industry participants, like JP Morgan and Goldman Sachs, have a strong influence over the SEC.
Once news of any initiative is public, an SEC Commissioner will quickly find himself pushed and pulled by various groups who have a lot to gain or lose, by the enactment of any new initiative. These groups leverage their past relationships or the potential for future contracts as means of influencing Commissioners’ activities.
What does this mean for Crypto Law Insiders?
Ignore the noise. What any individual SEC Commissioner wants to accomplish is not important. It’s simply a single data point on our arc to regulatory certainty. Instead, focus on what the SEC Commissioner can actually accomplish. And as we just discussed, this is limited. Constraints are everywhere.