Crypto must adapt to laws, not the other way around — John Reed Stark

Former SEC official John Reed Stark has criticized the misuse of “regulation by enforcement” claims in a hearing before U.S. Congress.

John Reed Stark, a former Securities and Exchange Commission (SEC) official, has accused the crypto industry of perpetuating myths to obscure its lack of transparency and accountability, dismissing claims of “regulation by enforcement” taken by the agency.

Starks comments were made at a U.S. House Financial Services Committee hearing on May 7. According to the SEC's former internet enforcement chief , the crypto industry has been refusing to conform to established laws while expecting the legal framework to bend to its needs:

“The catchphrase of SEC regulation by enforcement [...] falls squarely into that last category. Just plain false. [...] Crypto promoters represent the most important recent example of industry players accusing the SEC of unfairly policing the markets. Ive never witnessed such a well-funded, coordinated, and unfounded assault on the SEC and its mission.”

According to Stark, what has been called “regulation by enforcement” within the crypto industry is just the regulator performing its duties. “The rest of us simply call enforcing the law.”

“Digital assets typically have no cash flow, no yield, no employees, no management, no balance sheet, no product, no service, no history of operations, no earnings reports, no proven track record of adoption or reliance. [...] How can any financial analyst, let alone any everyday investor, conduct a proper valuation amid such a boundless data vacuum？” Stark questioned during the session.

John Stark at the Financial Services Committee on May 7. Source: Financial Services Committee

Within the crypto industry, the term “regulation by enforcement” is often used to criticize how the SEC has been enforcing rules and regulations. Rather than developing clear, formal regulations through formal legislation or rulemaking process, the industry argues that the SEC is establishing regulatory precedents through enforcement actions.

“Dont get me wrong, the SEC is far from perfect. There are SEC cases and SEC rules that I believe are unfair. [...] the SEC has not gone rogue but is simply just doing its job. [...] the [digital] asset industry needs to get its act together and adapt to the laws that apply to it, not the other way around.”

The hearing focused on examining and improving the Commissions enforcement practices, with heavy criticism directed at the agencys approach and the effects it had on businesses and individuals.

During the hearing, Nick Morgan, founder of the Investor Choice Advocates Network (ICAN), accused the SEC of producing “piecemeal litigation on a case-by-case basis” in reference to cases in which the Commission “is free to ignore adverse rulings in some jurisdictions to seek more favorable results in other jurisdictions.” Morgan continued:

“Among many problems, the SECs regulation by enforcement policy causes legal uncertainty for ordinary people, including people not accused of fraud who are forced to litigate policy matters on a case-by-case basis, even when a federal appellate court rules against the SEC on a particular policy.”