1920s America was characterised by falling government debt, low bank deposit interest rates and a nation of citizens looking to capitalise on the stock market of the ‘roaring 20s’. Investors flocked to US securities hoping to make significant returns, and banks provided the credit to fuel a market boom. Consequently, speculative demand saw a rapid increase in public listings, with an estimated US$50 billion worth of new securities offered in the United States between 1921 to 1929. Inevitably, a lax regulatory environment, rampant stock fraud and years of highly speculative growth resulted in a market collapse in October 1929. The ensuing financial turmoil saw heavy losses for investors and banks, leading to a steep decline in public confidence in US markets. In response, Congress passed the Securities Act of 1933 and, in the following year, the Securities Exchange Act of 1934, paving the way for the creation of the Securities and Exchange Commission.

The SEC operates as the independent, non-partisan regulatory agency responsible for US securities laws. Its primary role is best reflected by its mission to ‘protect investors, maintain fair, orderly, and efficient markets and facilitate capital formation.’ However, a critical issue facing the SEC is balancing protecting investors and facilitating capital formation. Some argue that, in its quest to protect investors, the SEC’s regulatory burden on businesses, particularly smaller ones, has become too heavy, thus hindering capital formation.

Additionally, the SEC’s focus on disclosure-based regulation has been criticised by some, who argue that it leads to the over-disclosure of information that may not be material to investors, leading to high compliance costs for businesses. Another significant issue raised in last week’s hearing was the speed and scale of regulatory proposals being put forward by the SEC and the risk that its radical regulatory agenda may stifle innovation and market growth.

Capital formation is vital for businesses to acquire the necessary funds for expansion, such as purchasing new equipment and buildings. These funds may come from investors or the business’s resources. The US Securities and Exchange Commission (SEC) plays a critical role in ensuring equitable capital distribution to businesses while protecting investors and the economy. However, the SEC’s actions reveal a potential bias against funding from the cryptocurrency sector, possibly aimed at reducing competition with traditional fiat currencies.

These debates highlight the essential question of the appropriate role of government regulation in markets. The SEC must maintain a neutral stance and promote fairness and transparency in all market sectors, including the cryptocurrency industry. However, finding a balance between protecting investors and fostering economic growth is challenging, particularly in recent years, with the SEC under pressure to be more responsive to investors’ interests while encouraging capital formation.

Excessive regulation is causing problems for companies, especially smaller ones. The increasing regulatory burden is making it harder for businesses to meet the SEC’s requirements for disclosing information. Increased regulation is causing many companies to refrain from going public and instead rely on private investors for funding. While this allows them to avoid the costs and regulatory requirements of going public, it could be detrimental to public investors.

If fewer companies continue to go public, fewer investment opportunities will be available in the stock market, which could lead to decreased investor interest and fewer diverse investment options. Additionally, private companies may provide investors with less information about their financial health, leading to increased investment risk. Public investors may also need help to obtain accurate information about private companies, which could further increase investment risk.

The trend of smaller companies staying private could also have a negative impact on the broader economy. Smaller companies are critical to a thriving economy, and if they struggle to raise capital or choose not to go public, overall economic growth could be hindered. Slow economic growth could lead to a reduction in job creation and lower economic output.

It is crucial to strike a balance between regulatory requirements and facilitating capital formation to ensure a thriving economy while protecting public investors. One of the reasons for the shift towards fewer companies going public is the increased compliance costs associated with regulatory requirements. Smaller businesses often lack the resources and personnel to comply with the extensive regulations mandated by the SEC, which makes it harder for companies to meet the heightened disclosure requirements, leading to increased compliance costs that can hinder their ability to compete in the market.

One issue with the SEC’s focus on disclosure-based regulation is that it can lead to the over-disclosure of information that may not be material to investors. The SEC’s disclosure-based regulatory framework requires companies to provide detailed information about their operations, including sensitive personal data, making them more vulnerable to data breaches and cybercrime. This further burdens companies that are already grappling with meeting the requirements. The over-disclosure of information can have severe consequences for individuals and smaller businesses, particularly with the expansion of the surveillance economy.

As the SEC works to balance investor protection and economic growth, it must also consider how to protect individuals’ privacy in an environment where surveillance and data collection are becoming more widespread. Oversight will require careful consideration of data governance, consent, and the use of surveillance technology in the workplace. Ultimately, a more nuanced approach is required that considers the needs of businesses, investors, and the economy to ensure the continued success of the US financial markets.

One of the risks of regulation via enforcement instead of having clear, unambiguous laws is the potential for inconsistent and arbitrary application of rules. When regulations are enforced based on the discretion of regulators rather than clear guidelines, the risk of unfair treatment and lack of transparency increases. Ambiguity can lead to uncertainty for businesses and investors, as it becomes difficult to predict whether their actions will be considered compliant. In addition, companies subject to enforcement actions may expend significant resources defending themselves against charges they believed were not applicable or were applied unfairly.

Furthermore, unclear regulations do inadvertently stifle innovation and growth, which limits the potential benefits that innovative new products and services could bring to the economy. Businesses that are unsure of the legal boundaries may choose to avoid new products or services altogether rather than risk regulatory action. There are also concerns that overregulation via enforcement can lead to a “chilling effect” on free speech and creativity.

These concerns are particularly relevant in industries such as the arts, where regulations can be subjective and difficult to define. Creators may self-censor or avoid certain content altogether to avoid the risk of enforcement action or negative publicity.

The crypto industry has borne the brunt of unclear guidelines, arguably orchestrated to defend the US dollar from further erosion, especially before Central Bank Digital currencies (CBDCs) are rolled out and adopted. To address these risks, regulatory agencies such as the SEC need clear and unambiguous regulations rather than relying solely on enforcement actions. Providing clarity by removing guesswork enhances innovation, with clear frameworks for investors and businesses to follow, helping to reduce uncertainty and the potential for inconsistent application of regulations.

Clear regulations also allow regulatory agencies to focus their enforcement efforts on truly egregious violations rather than minor or technical infractions. These stated suggestions would improve the efficiency of the regulatory process, reducing the burden on businesses and the cost to taxpayers.

While enforcement is essential for regulatory agencies like the SEC, clear regulations are necessary to reduce uncertainty, foster innovation, and protect free speech and creativity. By striking the right balance between regulation and enforcement, the SEC can effectively fulfil its mandate and ensure the continued success of the US financial markets.

Another issue raised is the need for the SEC’s regulatory regime to keep pace with technological developments. As technology continues to disrupt the financial markets, the SEC has a critical role in ensuring that these developments do not pose systemic risks to the markets. While the SEC has made some strides in this area, some believe that more needs to be done to keep abreast of technological changes.

In conclusion, the SEC’s mandate is crucial in ensuring that the US financial markets remain fair, transparent, and efficient. However, as recent debates have shown, it is difficult to balance competing interests properly while keeping pace with technological changes. The instability or failure of the US Dollar could cause significant harm to the global economy, especially if it fails without something of equal or better substance to replace the gap. Consequently, the SEC must continue to engage in these debates openly and thoughtfully to support the stable and sustainable growth of US financial markets and the value of the US Dollar.

Disclaimer: Please note that the information provided in this article is not to be considered as financial advice. Please seek advice for your personal or business matters from a qualified professional or make contact with myself or one of the team at Strategy Hubb to tailor custom solutions to accommodate your circumstances.

The war on cryptocurrencies began with the collapse of Mt. Gox, an early Bitcoin exchange. Mt. Gox was once the world’s largest Bitcoin exchange, but it filed for bankruptcy in February 2014 after 850,000 bitcoins went missing. The missing coins caused the value of Bitcoin to plummet and raised questions about the security of Bitcoin and other cryptocurrencies. Since then, numerous other setbacks have tested the resolve of cryptocurrencies, the most recent being the collapse of Terra Luna and FTX. The collapse of FTX alone saw some $180 billion dollars wiped from the crypto market this month alone. These accumulated losses have caused many investors to lose faith in the security and promise of cryptocurrencies and led to louder calls for stricter industry regulation. Whilst regulation is certainly required, it must be designed and implemented with close industry consultation. Tighter regulation alone could result in declining innovation that may impinge on the ability of market participants to bring new business solutions, concepts, and models to life effortlessly.

While many believe that we are now well and truly heading into crypto winter. Others still say that this is just a temporary setback and that cryptocurrencies will rebound and continue to grow in popularity. Only time will tell which side is right. However, there are other forces at play that require considerable contemplation. A deeper delve into the FTX debacle unravels blatant fraud and potentially sinister activity that ultimately plays into the hands of the US Security and Exchange Commission (SEC). The SEC (and many governments) view cryptocurrencies as an erosion of fiat currencies. Consequently, they have long sought to regulate cryptocurrencies with an iron fist (especially stablecoins) so as not to lose control of financial instruments.

The position of policymakers on cryptos and how best to regulate the industry will continue to be a pressing question. Decentralised activity sits on the outside of centralised governmental control levers, which can cause friction with the long arm of the law. Moreover, the fall of FTX indicates that Sam Bankman-Fried (SBF) could be seen as part of a plan to help the SEC discredit cryptos. Especially given the deep synergies between SBF and the US Government (SBF being a significant donor to the Biden campaign). Even more worryingly, some have reported that FTX participants were part of the hack on Terra Luna and other cryptos to remove competition while lobbying government authorities to tighten the reigns on crypto. SBF’s close ties with the government afforded him a more lenient position with less scrutiny.

Cryptocurrencies are still in their early developmental stages, and as such, the market remains volatile and speculative. The total cryptocurrency market cap is now under USD 800 billion, according to data from CoinMarketCap.com. A significant drop from the all-time high of over $2.5 trillion a year ago but still small when compared to the broader world of finance. In reflection, the massive decline to this new low signifies that much work will be needed to revive crypto and substantiate its presence for the future evolution of money. However, fundamental changes must occur to settle investor confidence and build further usability into crypto to validate its future.

Many cryptocurrencies are still trying to solve critical market issues, such as providing a more efficient way to transfer money or providing more security, scalability, and privacy for users. Nevertheless, until these critical issues are resolved, the market will remain volatile and speculative. Every adverse action that occurs spreads throughout the entire ecosystem creating shocks that scare investors and lower overall credibility. To establish a more robust baseline for trusted digital assets, it is crucial to have solid structural frameworks in place. The underlying technology and protocols for cryptocurrencies must be sound and reliable. In addition, governance structures must be in place to ensure investors have faith in the system. Only when these things are in place can the market for cryptocurrencies be more stable and trustworthy.

Regulatory opacity has further attributed negative friction to the desired outcomes of crypto. Without a clear and concise set of regulations, investors are wary of placing their money into these digital assets. This lack of trust has caused the market to decline in value, and it will be necessary for governments to provide more clarity for the market to rebound.

However, the governments impending introduction of central bank digital currencies (CBDCs) is also at odds with cryptocurrencies. CBDCs are seen as more trusted and stable options for digital payments, which could negatively impact the demand for cryptocurrencies. In addition, CBDCs could eventually replace cryptocurrencies as the preferred payment method in the digital world. These implications further erode the value of cryptocurrencies and could cause the market to decline exponentially. Further declines could see cryptocurrencies reach a point of no return. Such an inflexion point would be detrimental to the entire cryptocurrency ecosystem.

The friction between cryptocurrencies and CBDCs will further divide the world of digital money. On one side of the equation, we have centralised control with governments issuing their own digital currencies. On the other side, we have decentralised networks with cryptocurrencies that are not beholden to any one authority. This division will only amplify the struggles between these two systems and ultimately lead to one winning out over the other. Regulatory enforcement currently prohibits accepting and expanding cryptocurrencies in many countries as crypto competes with fiat currencies, removing governments’ control over the monetary system.

Individuals and businesses alike are conflicted as they desire the security and reliable infrastructure of the long-existing financial system. On the other hand, they hate the inflationary aspects of money printing and the tight controls afforded to banks and intermediaries as the custodians of your money. One way to overcome the conflict between cryptocurrencies and the current financial system is for businesses to start accepting cryptocurrencies as payment. However, some governments have declared that cryptocurrencies are securities that cannot be used as payment for goods and services. Accepting crypto as payment would provide a more efficient way for businesses to transfer money and increase the adoption of cryptocurrencies. Additionally, it would help build investor confidence in cryptocurrencies and show they are viable payment options. Regardless, the fluctuations of crypto pose further challenges when attempting to transact.

The world is an imperfect place from top to bottom, and the financial and economic turns we are all experiencing are part of the improvements process to help redesign alternative structures that supersede the present. Blockchain provides the underlying value upon which the next iteration of the web resides. However, there are still further challenges ahead and improvements that can only be made by finding faults and fixing them.

Regulators and innovators must work together to strike a balance between centralisation and decentralisation. The focus must be maintained on the core factors that will improve business. There must also be better and more fluid capital access points that are inclusive and unbiased, offering a fairer playing field for all. These actions will inevitably increase business activity and narrow the gaps between the haves and have-nots while fostering healthy competition.

Disclaimer: Please note that the information provided in this article is not to be considered as financial advice. Please seek advice for your personal or business matters from a qualified professional or make contact with myself or one of the team at Strategy Hubb to tailor custom solutions to accommodate your circumstances.