Syed Rahman outlines two politicians’ appeal to the US Securities and Exchange Commission.
In the United States, two Republican lawmakers are calling for clear guidelines on the classification of crypto airdrops.
Patrick McHenry and Tom Emmer have sent a letter to US Securities and Exchange Commission (SEC) Chair Gary Gensler, demanding action.
A crypto airdrop is a strategy used by blockchain start-ups to distribute tokens or coins to specific wallet addresses. At present, they are viewed as unregistered securities by the SEC.
The two congressmen argue that the SEC’s aggressive enforcement and unclear regulations are creating a hostile environment for crypto innovation, which limits the potential benefits that could be gained from blockchain technology.
Mr McHenry, who is Chairman of the House Financial Services Committee, and Mr Emmer say that airdrops are essential for incentivising participation and decentralisation in blockchain networks. They liken them to company loyalty schemes where customers are rewarded for repeated transactions.
The two men want the SEC Chair to detail how it differentiates airdrops from other rewards and the potential economic impact of classifying them as securities. They emphasise that the SEC's current view of them as unregistered securities has led to many crypto projects avoiding the distribution of airdrops to US citizens.
The lawmakers expressed concern that the SEC's regulatory approach could prevent blockchain technology from achieving its decentralisation goal.
In their letter, they say: “Airdrops play a crucial role in the development of a decentralized blockchain ecosystem. We are concerned that a misapplication of the securities laws will prevent this technology from achieving decentralization and its full potential.’’
Balance
This is another example of the fine balance that needs to be struck between regulators implementing robust regulatory regimes for crypto-related markets and providing a fertile environment to promote growth within the sector. As has been seen in other areas, such as sanctions, US regulators adopt a heavy hand in relation to enforcement. This comes as little surprise to many, given the funding and manpower at the SEC’s disposal. However, the concerns of the Republican lawmakers are, in principle, well founded.
Gone are the days of the crypto market being viewed as the ‘wild west’. We have seen various forms of regulation put into action worldwide. But what is different with the US is that, seemingly, greater power has been afforded to regulatory agencies to enforce local regulations. It can be argued – and perhaps will be – that these regulatory agencies are not the correct bodies to set precedent.
In the UK, we have seen the Law Commission call for regulatory progression to be in the hands of the judiciary. Here, there is at least the opportunity for both sides to put forward arguments and for a reasoned position to then be adopted. When the power lies solely with the regulators, development is more likely to be one-sided.
Arguably, the niche issue of crypto airdrops is not the most pivotal aspect of crypto that needs regulating at this stage. It would seem sensible to first focus efforts on establishing a broader regulatory landscape, with key principles on how the crypto market is to be operated and controlled. Ultimately, this is an area that will require – and is likely to see – ongoing development over many years. It is fanciful to expect lawmakers to be able to appropriately regulate this market in one fell swoop. Raising concerns such as the ones voiced by the congressmen is ultimately the way in which piecemeal regulation can and will be implemented.
