Warning: SEC’s Caroline Crenshaw Slams ‘Regulatory Jenga’ on Crypto

Concerned about the current approach to SEC crypto regulation? You’re not alone. A top regulator is speaking out, using a striking analogy to describe the situation.

SEC Commissioner Caroline Crenshaw Raises Alarm

According to Caroline Crenshaw, the sole Democratic Commissioner at the U.S. Securities and Exchange Commission (SEC), the agency’s recent stance on the crypto industry feels like a dangerous game. Speaking at a recent event, she described the approach as “playing a game of regulatory Jenga.”

Commissioner Crenshaw cautioned that dismantling established rules, even seemingly discrete ones, could destabilize the entire market. She compared market stability, built over years by careful regulation, to a Jenga tower. Removing key blocks risks the whole structure collapsing.

Undermining SEC Credibility and Enforcement

Crenshaw expressed deep concern over what she views as an “about-face” by the SEC. She highlighted several issues:

• **Rule Reversal via Guidance:** She claims the SEC has used staff guidance to effectively reverse established rules without proper analysis or public comment, particularly concerning crypto assets. This, she said, amounts to a “wink and nod” that suggests laws won’t be rigorously applied in specific situations.
• **Abandoned Enforcement:** Crenshaw is “deeply troubled” by the SEC’s abandonment of certain crypto enforcement actions. She labeled this approach “regulation by non-enforcement,” arguing it weakens the agency’s ability to police the market.
• **Damage to Reputation:** This shift, according to Crenshaw, is problematic because it corrodes the agency’s reputation in court, undermines its SEC credibility, and casts doubt on fundamental legal precedents.

Echoes of Past Crises and Future Risks

Crenshaw pointed to the 2022 FTX collapse as a stark reminder of what a “large-scale crypto crisis” looks like. She warned that the underlying risks highlighted by such events haven’t disappeared, even though public calls for serious regulatory scrutiny have quieted.

Ignoring these complexities and risks, she argued, makes repeating hard lessons inevitable, especially as crypto becomes more integrated with traditional finance.

A Different View from Republican Commissioners

In contrast to Crenshaw’s warnings, remarks from the SEC’s Republican commissioners at the same event welcomed the agency’s current posture towards the crypto sector.

• **Paul Atkins:** Stated that crypto markets had been “languishing in SEC limbo” for years and that the agency shouldn’t stifle innovation.
• **Hester Peirce:** Argued the previous approach “evaded sound regulatory practice.” She questioned whether most existing crypto assets are securities, suggesting many are now functional and not traded in securities transactions, even if initially offered as such.
• **Mark Uyeda:** Echoed the sentiment, stating the SEC should assure the public that “regulation by enforcement” won’t be used for future policymaking.

These differing views highlight the ongoing debate within the SEC regarding the appropriate level and method of regulating the rapidly evolving crypto landscape.

Conclusion: A Precarious Balance?

Commissioner Crenshaw’s “regulatory Jenga” analogy paints a vivid picture of her concerns regarding the current direction of SEC crypto regulation. Her warnings about undermined SEC credibility and abandoned crypto enforcement actions stand in stark contrast to the views of her Republican counterparts, who advocate for a less interventionist approach. The debate over how the SEC should navigate the complexities of the crypto market is far from settled, with significant implications for both market stability and innovation.