Summary:
There has been a significant loss of almost 15 percent of the employees of SEC in the new administration leading to weakness in the regulatory oversight. The greatest threats to retail investors and the small businesses are the continuation of deregulation. SEC Commissioner Caroline Crenshaw cautions that the idea of slicing away the hard-earned financial protections is like the game of regulatory Jenga. New SEC actions against crypto enforcement are similar to a wink and a nod, and may jeopardise their stability. Republican voices in SEC stress that regulation of crypto has slowed down and many tokens are not securities. Similarities are made between the present-day deregulation and the precursor of the 2008 financial crisis.
Rules to Risk
Securities and Exchange Commission (SEC) is experiencing a major overhaul and close to one-fifteenth of its members have left their positions since the new management came to power. As a result of this exodus, the regulatory muscle of the agency is eminently crippled — particularly when it comes to cryptocurrency markets that have rapidly changed.
The only Democratic Commissioner at SEC, Caroline Crenshaw, stated that she was very concerned by the possible direction of crypto regulation. At the SEC Speaks event on May 19 she compared the situation to a dangerous game of regulatory Jenga:
“By removing an essential rule, the SEC can be playing a game of regulatory Jenga — the removal of one piece can bring an unraveling of the regulatory structure as a whole.”
Said Crenshaw, our Jenga tower consists of a series of discrete, yet interconnected rules and laws, which have been long, and thoughtfully, developed over the years.
“How far can you pull the tower without breaking the tower?”
Deregulation: Who Pays the Price?
Crenshaw cautioned against such recent rollbacks as the reversal of rules by guidance by the staff of the SEC without the benefit of analysis or public commentary is eroding the enforcement powers of the SEC. Such a policy of turning a blind eye and winking at crypto, in particular, not only undermines the authority of the agency but also hinders the lessons learned during the previous failures such as the 2022 FTX debacle.
Although the Republican commissioners provided a different perception of this situation — former Chair Paul Atkins said that crypto markets have been stuck in SEC scrutiny over the past several years, and Hester Peirce stated that most cryptocurrencies are not actually securities — the main threat of the whole situation lies in the nature of deregulation and what can it bring to ordinary investors.
Crenshaw made a grim analogy with the situation before in the financial crisis of 2008:
“Before a crisis occurs, every business says it wants regulators out of the way.”
She warned that this kind of deregulation is actually detrimental to the small businesses and retail investors and could precondition new financial crisis in the future.
The Future Road
Given that the SEC is currently struggling with staffing issues and an evolving regulatory philosophy, members of the financial community, especially the retail investors and the small companies, are under threat of being stung now. Such kind of regulatory Jenga is so precarious that protections over decades may be knocked over, and it is critical to search out all the possible implications of deregulation within the new market of crypto.