4 Reasons Why The SEC Will Cease To Exist

Last week I penned an article essentially calling out SEC Chairman Gary Gensler’s recent accusation, that the cryptocurrency industry is “playing a game with his agency”, as downright projection.

Looking past the fact that the SEC is the people’s agency, Gensler’s statement- that the law is pretty straightforward for cryptocurrency ventures to operate legally in the U.S. but that they merely choose not to do so - is utterly disingenuous.

In the piece, I provide an illustration evidencing that it is actually the SEC playing games with the cryptocurrency industry by intentionally stonewalling cryptocurrency submissions.

In doing so, it is obvious that the SEC is working within a larger and more sinister agenda. The commission is either using its regulatory muscle to give legacy finance a means to catch up with innovation, or - more likely - the SEC is trying to destroy the private cryptocurrency market as part of a broader effort to ensure the reign of a government-controlled digital dollar (aka: a CBDC).

Whatever the reason, the SEC is not acting in good faith. It is not within the commission’s mandate to pick winners and losers, impede innovation, nor enforce intentionally ambiguous rules. Its weaponization of the judicial system as a means to harass entrepreneurs simply cannot continue.

Fortunately for the nation - if not the world - these fascist tactics will come to a spectacular end - ironically, by the very innovation that the waning 90 year-old Securities and Exchange Commission is tying to exterminate.

Below are four reasons why the SEC will cease to exist in the future.

Tokenization will Obsolete the IPO

Tokenization is completely reinventing corporate finance. Although, years ago, I predicted that this would eventually happen (see: “Five Reasons Why Crypto will Eventually Displace Equities”), it is finally starting to come to fruition as evidenced by significant changes in venture financing structures.

As we enter what Andreessen Horowitz (“a16z”) calls the golden era of web3, venture capitalists are rethinking what they want in exchange for their capital. A growing number of VCs are beginning to see the value in possessing tokens in addition to equity. Accordingly, “token warrants” are now becoming part of the VC playbook.

This new token element will have a transformative impact on public markets as it will mitigate the reliance on the IPO (“Initial Public Offering”) as a means for liquidity. Without the IPO, the SEC's relevance would be critically diminished.

Today, the SEC needs the IPO more than ever given that its ambiguous and unfriendly regulatory framework for tokens and crypto-related endeavors are already pushing issuers to international jurisdictions and keeping them outside the purview of the SEC altogether.

In playing their self-destructive qualification games, the SEC risks annihilating the capital formation system that made the U.S. capital markets the envy of the globe, and thereby rendering its own agency, utterly inconsequential.

The Community Provides a More Proficient and Cost-Effective Way of Policing Fraud

Not only won’t the SEC be needed to provide liquidity and assist in capital formation, its “policing services” won’t be necessary either.

Since the advent of social media, the crowd-police have been more proficient than the regulator in identifying scams. A perfect example occurred in 2012 when a company called Mythic, a social gaming company, attempted to raise $80,000 on Kickstarter. The project was reportedly being developed by a team of 12 "industry veterans," some of them allegedly former Blizzard and Activision employees. It took the crowd-police all of 48 hours to detect such abnormalities as the artwork had been pilfered from outside sources and the photos of the company's supposed offices had been copied from another site. After being called out by the crowd, the campaign creators cancelled the fundraise and deleted the game's Facebook profile and website. Not one funder lost a dime. Not one.

Fast forward to 10 years later when taxpayers gave “Gensler’s agency” nearly $2 billion - $613,013,000 for enforcement services, alone. All of that money did nothing to help the SEC prevent a videogamer from defrauding investors out of billions of dollars and lining the pockets of politicians with ill-gotten gains.

The SEC could have allocated more of their budget to averting fraud, but it chose not to. Instead, the SEC opted to waste countless taxpayer dollars litigating against innovators for selling what the SEC “alleges” could be unregistered securities.

The Securities and Exchange Commission Doesn’t Even Know What Securities Are

The Ripple Case has uncovered the greatest irony of all - that the SEC, itself, is not clear on what-is-or-is-not a security. In defending itself against the SEC, Ripple has exposed the SEC for its duplicity in insisting publicly that cryptocurrencies are securities while, privately, acknowledging otherwise.

Just wait until the SEC starts claiming that NFTs are securities. Is the regulator going to sue every single American who packages her personal data in an NFT in order to monetize it?

Although the SEC would like you to believe that everything - from crypto to NFTs to emojis - are securities, the fact is the regulator is struggling to fit square peg innovation into a vague, round security hole.

At some point we citizens must ask ourselves why we need a Securities and Exchange Commission that can’t even explain what a security is. Do we really need to keep giving billions of dollars to a federal agency just so it can regulate a figment of its imagination?

Regulatory DAOs Would Better Serve the Public Interest

The SEC could readily be replaced with Decentralized Autonomous Organizations (DAOs).

Think about it.

Instead of a centralized agency, with limited product knowledge, unilaterally deciding which businesses get to reach the investing public, the decision would come from the community of DAO members who not only possess a vested interest in the projects but have a deep understanding of tokenomics and no doubt whatsoever as to what a token is and what a token is not.

Some projects will fail - just like some traditional businesses go under and some equities get delisted. But, tokenholders can help protect against the risk of failures simply by qualifying a greater number of projects and ensuring ample diversification - something the SEC should have been considering when denying crypto-related qualifications and using the accredited investor rule to restrict access to investment opportunities (a story for another day).

What about fraud?

Fraud protections, encoded in smart contracts, would help mitigate misconduct. However, should a fraudster get through the scrutiny of the DAO-police, DAO members have legal remedies through the judicial system.

A DAO would provide a cost-efficient and true democratic solution - something the framers of the constitution would have relished.

The Bottom Line

As innovation progresses, the SEC becomes more dispensable by the day. Every single one of its functions - ensuring fair, orderly, and efficient markets; facilitating capital formation; protecting investors and building public trust in the markets - would be better served with technology and community.

Now, some will argue that having a federal watchdog provides the confidence necessary to attract capital to the markets. But that is a fallacy - probably concocted by a politician to justify more wasteful spending. Wealth is not created by regulations. It is created in spite of them.

Lest we forget, it was the innovators and entrepreneurs - not the regulators - who enabled NASDAQ to become the greatest wealth producing engine that the world had ever seen. And the prosperity will follow them wherever they go.

The truth is that we don’t need the SEC to judge what qualifies as a safe-for-retail investment. We don’t need them to protect us from those big bad issuers of unregistered “securities” (particularly as they let the Madoffs and SBFs slip through their hands). We don’t need them to fight our legal battles. And we certainly don’t need them to draw capital to our markets.

Is the SEC doing more harm than good? I’d love to hear your thoughts.