Jay Clayton’s Legacy SEC
Bitcoin,  Cryptocurrencies,  Ethereum,  Regulation,  Ripple,  United States

Jay Clayton’s Legacy at the SEC

Will the Chairman be Remembered for Surrendering Crypto to China?

Now is the time when government officials pay attention to how they will be remembered. Even more than usual. The New York Times, for example, ran a story about the Treasury Secretary last week that was headlined “Legacy on the Line, Mnuchin Gambles by Ending Fed Programs.” 

So how will Jay Clayton be remembered? As the Chairman of the Securities and Exchange Commission during all of President’s Trump’s term, Clayton has notched major successes. But his record of supporting innovation is less impressive. And right now he stands at a crossroads. Jay Clayton has a chance to be remembered as the SEC Chairman who launched the next great wave of American financial technology. Or he can forever be recalled as the man who handed America’s crypto industry over to China.

From the moment in 2010 that Laszlo Hanyecz paid about $41 for a pizza using bitcoin, it was clear that one of the chief attributes of cryptocurrency was its resistance to government interference. Unlike fiat currency, whose supply could be expanded or contracted to suit the political goals of a regime rather than the economic needs of its citizens, cryptocurrency existed outside of politics.

At least that’s what many naïvely believed at the beginning.

Jay Clayton’s tenure has proven that politics and the political interests of competing nations still play a decisive role in picking winners among cryptocurrencies.

That’s why it’s so puzzling that time and again Chairman Clayton has seemed to place the interests of American companies at a crippling disadvantage. Why has the SEC granted its seal of approval to ether and bitcoin, both of which are dominated by Chinese miners? Why has the SEC declined to grant the same status to American developed technologies? By failing to afford the same status to lumens (the token native to Stellar) or XRP (a token native to Ripple’s technology) or any other American coins, Clayton has allowed technologies dominated by the Chinese to cement their place as the number one and two cryptocurrencies in the world. This is devastating to American interests.

Clayton’s hostility to American Tech is all the more surprising coming from the Trump Administration, with all of its America First rhetoric.

As Leo Jakobson noted in Modern Consensus, the threat of Chinese dominance—“particularly of bitcoin and ether”—is indeed much on the minds of government officials. According to the Washington Examiner, Director of National Intelligence John Ratcliffe wrote a letter to Chairman Jay Clayton last month about concerns that China has achieved de facto control over bitcoin and ether because more than half of all mining takes place there.

But it’s not just the failure to elevate other currencies to the exalted status the SEC awarded bitcoin and ether. Now, there have even been whispers that one or more of these American-developed cryptocurrencies could soon be deemed by the SEC as a security. That will be a crippling blow.

Hurting companies not currencies

Make no mistake: the damage will probably not be severe to the currencies themselves. XRP, for example, would presumably be just fine. It’s traded on over 200 exchanges around the world and more than 95% of that trading occurs outside the United States. But for the American companies that innovate around XRP or any currency not named ether or bitcoin, it’s a much darker picture.

For example, American-based exchanges such as Gemini and Coinbase would instantly have to delist all such cryptocurrencies. Even if only one currency is declared a security, any lawyer would advise the exchange of liability if they continue to list one currency after the other has been declared a security, since they all were born and essentially function the same way. Any American exchange that listed a coin other than ether or bitcoin would require a broker-dealer license. It would be the death knell for the American cryptocurrency industry. It would be precisely the opposite of the stance the U.S. government adopted at the birth of the internet, when rules were quickly established to grow and nurture American innovators.

And it would hand a critical technological industry over to the Chinese, who are already hard at work creating the digital yuan, a central bank-issued digital currency.

The threat to the entire crypto ecosystem doesn’t seem to be properly understood or appreciated, especially by bitcoin maximalists. They have long viewed Ripple and other for-profit companies as somehow antithetical to the cowboy spirit of bitcoin. However, chilling competition is never in anyone’s interests. Moreover, the dominance of mining in China makes it especially dangerous, given the way an authoritarian regime could simply order miners not to clear transactions between disfavored participants. That’s hardly the libertarian ideal.

According to the Bitcoin Mining Map published by Cambridge University, China controls a whopping 65.08% of global hash rate for bitcoin, far outstripping the 7.24% of second-place U.S.

The Bitcoin Mining Map produced at Cambridge shows the percentage of bitcoin hashrate mined in different countries based on geo-location data (i.e. IP addresses) of minder connected to the Bitcoin mining pools BTC.com, Poolin, and ViaBTC. (Source: University of Cambridge, Judge Business School)

Stuart Alderoty, general counsel for Ripple, asked in an August blog post, “Is the U.S. really willing to allow China to win this new technological and economic Cold War and, with it, allow China to dictate important parts of a new global payment system?”

Another C-suite executive at an American crypto company put it even more starkly. Insisting on anonymity, this executive told Modern Consensus, “If the SEC declares any of the democratic consensus currencies to be a security, it’ll be as if the SEC has decided to ban this industry, save for two Chinese-controlled technologies. It will drive all alt-coin activity outside the United States.”

A prominent asset manager involved in a crypto investing fund agreed, saying, “This would be bad for the entire industry. It forces everybody outside the United States.”

Indeed, Ripple has recently held a very public discussion about leaving the U.S. over the lack of regulatory clarity.

Time for clarity

Jay Clayton has announced that he will be leaving the SEC by the end of this year. It is not certain where the other commissioners stand on this issue, but at least one is against harsh regulation. “You can’t slap a label on tokens and say they are all securities because there are a lot of differences,” Commissioner Hester Peirce—also known as “Crypto Mom”—told a blockchain law symposium in October.

Calling for greater regulatory clarity, she added, “[y]ou can’t take the marketing language [of a crypto’s promoter] and tell if it is a security.” 

On Dec. 11, she told the libertarian Federalist Society, “crypto poses new challenges [and] those challenges are only growing as crypto evolves.”

But what is certain is that a vote to declare American-based technology a security will sound the death knell for the entire American crypto industry.

As SEC Chairman since 2017, Jay Clayton has secured important victories against targets such as Theranos and Elizabeth Holmes, to say nothing ot Telegram and TON blockchain promoter Pavel Durov, who was forced to return $1.2 billion to investors in June after the SEC sued calling TON a security.

Clayton’s SEC has pursued more than 3,100 enforcement cases and raked in almost $17 billion in financial penalties—both totals stand up to any four-year tenure. These are impressive achievements. But if Chairman Clayton kills the American crypto industry, he will have forever tarnished his legacy. Instead of being remembered as the SEC Chairman who launched the next great wave of American financial technology, he will be recalled as the man who handed America’s crypto industry over to China.

 You May Also Like

Kevin Sanders is the President and co-founder of Sea of Reeds Media. He has written for the New York Observer, PolitickerNJ, Everything PR and PR Newswire. He holds small positions in multiple crypto currencies.