• Former SEC chief John Reed Stark has criticized the use of the term “Regulation by Enforcement” to describe SEC cryptocurrency enforcement actions.
• He argues that litigation and SEC enforcement are how securities regulation works and that it is an SEC hallmark to keep fraud in check.
• He further argues that SEC enforcement of Internet fraud in the 1990s paved the way for legitimate technological innovations to flourish.
The former chief of the U.S. Securities and Exchange Commission’s (SEC) Office of Internet Enforcement, John Reed Stark, has come out in defense of the SEC’s enforcement efforts in the cryptocurrency space. Stark, who is a crypto skeptic, has slammed “cryptocurrency lobbyists” for labeling SEC enforcement actions as “regulation by enforcement” — calling the term a “Bogus Big Crypto Catch Phrase.”
In a post published on Jan. 22, Stark argued that the argument is “sorely misguided” as it was just how securities regulations worked. He stated that the “flexibility of SEC statutory weaponry is an SEC hallmark, enabling SEC enforcement to keep fraud in check.” He further argued that when the SEC Office of Internet Enforcement was created in 1998, there were critics who said SEC regulations were too vague and regulation by enforcement would stifle the growth of the Internet. However, in hindsight, Stark believes that relying upon the flexibility of securities regulation to police the Internet cleared out the more egregious instances of early online securities fraud.
Stark also argued that vigorous online SEC enforcement efforts also paved the way for legitimate technological innovations to flourish, rendering markets more efficient and transparent, thereby allowing investors more opportunities for success. He believes that “sound SEC enforcement does not stifle innovation, but rather fosters it.”
Overall, Stark believes that the term “regulation by enforcement” is a misguided and deflective effort to tap into sympathetic libertarian and anti-regulatory mores. He believes that the SEC’s enforcement of cryptocurrency fraud is necessary to keep the markets honest and protect investors from potential losses. He concluded his post by saying that the SEC’s enforcement efforts should be welcomed and not feared, as it will ultimately create a more secure and transparent environment in which legitimate technological innovations can flourish.