After years of uncertainty ranging from deer-in-the-headlights Jay Clayton to Gary Gensler’s outright hostility, freedom has finally come to crypto. After his election, President Trump set up a working group to streamline and clarify cyrpto’s status in the federal panorama. The group produced a 166-page report emphasizing the need for clear rules and interagency cooperation.
Unlike so much of government, plagued by inertia and buck-passing, this time something actually got done. According to Chair Paul Atkins,
In line with the PWG Report, a key priority of mine will be to establish—as swiftly as we can—a regulatory framework for distributions of crypto assets in America. Capital formation is at the heart of the SEC’s mission, yet for too long the SEC ignored market demands for choice and disincentivized crypto-based capital raising. As a result, crypto markets pivoted away from offering crypto assets and deprived investors of the opportunity to use this technology to contribute to productive economic enterprises.The SEC’s head-in-the-sand posture—as well as its shoot first, ask questions later approach—are days of the past. (Emphasis Added)
SEC Frees Crypto Assets from Balderdash Commission Directives
The SEC’s contentious relationship with the crypto industry has reached levels of lore in the insular world of securities lawyers. First came afraid-of-his-own-shadow Jay Clayton. The typical ‘Big Law’ guy serving a stint as Chair to increase his waiting billables, Clayton was known mostly for being perpetually perplexed when queried by media on crypto policy.
Commissioner Hester Peirce famously delivered the kill shot a mere month after release:
While Howey has four factors to consider, the framework lists 38 separate considerations, many of which include several sub-points. A seasoned securities lawyer might be able to infer which of these considerations will likely be controlling and might therefore be able to provide the appropriate weight to each. Whether the framework gives anything new to the seasoned securities lawyer used to operating in the facts and circumstances world of Howey is an open question. I worry that non-lawyers and lawyers not steeped in securities law and its attendant lore will not know what to make of the guidance. Pages worth of factors, many of which seemingly apply to all decentralized networks, might contribute to the feeling that navigating the securities laws in this area is perilous business. Rather than sorting through the factors or hiring an expensive lawyer to do so, a wary company may reasonably decide to forgo certain opportunities or to pursue them in a more crypto-friendly jurisdiction overseas.
Under his leadership the SEC brought 125 crypto enforcement actions and racked up $6 billion in fines while providing no guidance on how to avoid commission crosshairs. The typical commission response of ‘come in and talk to us’ led always to a Wells Notice and immanent litigation. Gensler beame so despised, Trump’s promise to fire him at a Bitcoin conference during the 2024 campaign drew racous appuse.
SEC frees crypto from the shackles of chairs past
Now comes Paul Atkins, a well-known free marketer into the chasm and confusion created by his two most recent predecessors.
The 2026 Interpretative Release provides the road map entrepreneurs and industry builders have been pleading for, for years. First it removes all doubt that Layer 1s, are commodities not securities. The Release ties their salient properties to the functional “programmatic operation” of the “associated functional crypto system” and market dynamics not the managerial efforts that invoke securities laws.
This recognizes the realities of blockchain economics and fundamentally different from corporations or cultivated oarange groves. Managerial efforts without the inclusion of programmers, users, and others means a failed project.
Based on our understanding of their characteristics, terms, and functions as of the date of this release, the Commission concludes [Layer 1s] is a digital commodity because they are intrinsically linked to and derive their value from the programmatic operation of a crypto system that is functional, as well as supply and demand dynamics, rather than from the expectation of profits from the essential managerial efforts of others.
CFTC now regulates Layer 1 tokens
Layer 1 tokens aren’t securities because they don’t meet the classical definition or evoke Howey test analysis. Instead, the Release describes their purpose as to “facilitate and incentivize the validation, ordering, and confirmation of transactions on the associated functional crypto system, serve as a mechanism to maintain the functioning and/or security of the associated functional crypto system, and foster network effects.” This work is done through users and programmers, not managers. Despite token holders having certain technical and governance rights, Layer 1 tokens derive value from the goods and services that may be produced through them as well as market dynamics. They are thus commodities and regulated through the CFTC.
Through their commodity-like properties, the release distinguishes them from securities via the Howey test and investment contracts. Howey focuses on managers soliciting investment and investors reasonably expecting profits from the managerial work. But in a working Layer 1, the managers have little influence over the value of the assoicated tokens.
The release describes “functional” crypto systems as infused with users and developers working in tandem to bring value to the Layer 1 protocol. This excises it from Howey analysis because “the value of a digital commodity is intrinsically linked to the programmatic functioning of the associated functional crypto system. Therefore, given that a digital commodity is associated with a functional crypto system, a purchaser would not reasonably expect to profit based on the essential managerial efforts of others.”
No managerial efforts, no investment contract, no security, no SEC.
In the next post we’ll explore what does qualify as a security and when a security can lose it’s status.
In February, experts testified before the House Financial Services Subcommittee on Digital Asset, Financial Technology, and Artificial Intelligence. They minced no words about former SEC Chair Gary Gensler’s tenure during the Biden Administration:
He sucked.
The hearing titled “A Golden Age of Digital Assets: Charting a Path Forward,” exposed the frustration industry players felt under Gensler’s ‘regulation by enforcement’ crypto approach.
Given his background as a Wall Street hack, knee-capping a potential competitor should not be surprising. But the erstwhile securities doyenne’s tenure nonetheless marked a significant regression for an industry poised to upend decades of financial stagnation by elites.
Spot crypto markets now top over $3.5 trillion in market capitalization. Products like dollar-pegged stablecoins not only juice trading but offer the world’s poorest a lifeline to maintain purchasing power in a world of government monetary debasement. It’s no secret why Venezuela is now dubbed the “stablecoin capital of the world.”
Given their salability over time and space assets like BTC and ETH are increasingly producing an asset class that outshines fiat, as harder currencies always do.
Gary Gensler sucked by protecting Wall Street
The federal government’s response to these phenomena over the past four years was not to embrace the potential for human flourishing crypto represents but to force it into archaic factoring tests and endless litigation.
Gensler let the charge. According to written testimony by Ji Hun Kim President & Acting CEO Crypto Council for Innovation, “the SEC initiated more than 125 enforcement actions related to digital assets but issued no clear guidance or rulemakings.” This led Kim to conclude, “The unmistakable message to industry from the last administration was that crypto was not welcome in the U.S.”
Gensler’s modus operandi during his tenure was to encourage digital-asset companies to “come in and register,” only to be whiplashed with a lawsuit. Jonathan Jachym, Global Head of Policy and Government Relations, at crypto exchange Kraken recounted one such incident. The SEC had sued Kraken over its staking services. They settled the lawsuit. Then the day after a company representative testified before Congress, the SEC called and said it would sue them again. “This has been the past three years of our story.”
Gary Gensler sucked, but a new day has come
Both members of Congress and the expert panel, except the Democrat pick, academic Timothy Massad, whose testimony focused on Gensler-esque ways to exert more government control over the industry, expressed hope for the future. Experts pointed to a new vision bolstered by President Trump’s personal support for the industry. Then acting Chair Mark Uyeda announced the formation of a Crypto Task Force “dedicated to developing a comprehensive and clear regulatory framework” on his first day in the new role. “Crypto Mom” commissioner Hester Pierce has led the task force. Her leadership was invaluable during the dark days under Gensler. New SEC chair Paul Atkins has also signaled a new, market-friendly approach.
Gary Gensler’s tenure is fast becoming a distant memory at the storied commission. His actions have been undone, his lawsuits dropped, and his antagonism replaced. But industry players and the public would do well to remember his tenure as a stark warning of bureaucratic overreach run amok.
A prominent crypto professor and a former SEC lawyer discussed the digital-asset landscape in a recent Federalist Society webinar. President-elect Donald Trump’s victory ensures new blood and new policies with invade the staid commission.
In fact, Chair Gary Gensler, the crypto community’s Lord Voldemort, together with Native Ice Queen Elizabeth Warren have spent the past four years trying to subjugate the emerging industry into the Wall Street prison both prefer.
Once there, they can regulate it into oblivion if they don’t pay their political Dark Lords tribute in the form of campaign contributions, staffers-turned-lobbyists, and overall obeisance.
But something happened on crypto’s path to the pokey. Having defeated Lord Gensler and exiled Queen Warren, the upstarts are starting to explore their new fear-free lives. Attorney Wallace DeWitt and Professor JW Verret discussed what Crypto’s Brave New World may look like now that 2025 won’t be regulatory 1984.
This assumes the SEC will remain the federal agency that oversees crypto. It’s no secret the SEC and CFTC have battled to be the crypto regulator.
Conventional wisdom states the CFTC is more industry friendly, but Verret avers that may not be the case, given one CFTC commissioner’s insistence DeFi would have to include KYC rules. “I don’t know what KYCed DeFi is, but it’s not DeFi. You can’t have a Chief Compliance Officer to a decentralized protocol, that’s not a thing.” Indeed.
This also excludes the Federal Trade Commission, which as attorney Greg Zerzan stated in 2022 written House testimony already protects Americans from “unfair or deceptive acts or practices in or affecting commerce,” which would include Web3 activity. Thus the most hands-off approach would have the FTC prosecute hacks and rug pulls and leave the disclosure to the innovators and public.
Will the SEC oversee Crypto?
Assuming arguendo, the Gensler-less SEC gets the nod, then what? Verret, a veteran academic crypto advocate discussed various proposals that may await the newly composed board with a yet-to-be-named new chair.
Verret’s first fitting suggestion was to learn from the open-source ethos of blockchain development to open the process to the wizards heretofore sidelined under Lord Gensler.
This is apt on two counts. First given crypto’s technical properties: open source, permissionless, censorship resistant, and decentralized, allowing fresh ideas to infuse regulatory thinking suits.
Second, it would break from Lord Gensler’s insistence that entrepreneurs and their legal teams must fit crypto projects into factors created by an ancient Supreme Court case, which the SEC famously bungled further in 2019.
SEC Crypto Proposals
Some specific proposals the webinar discussed:
“Regulatory Sandbox” echoing Commissioner Hester Peirce’s idea. New projects would get a regulatory grace period for a certain number of years, whereby they would have the ability to sufficiently decentralize and escape SEC jurisdiction.
“Reg X” the brainchild of lawyers Gabe Shapiro and Sara Brennan. This proposal also includes a Safe Harbor but includes certain disclosures about token ownership, tokenomics, and other basic disclosures.
Exemptive Reliefs for DeFi and Air Drops, which acknowledge that protocols are code they are not publicly traded companies. Their governance and rules is available at all times for anyone to view. And that giving away tokens for free does not constitute a securities offering.
Inviting TradFi and CeFi into the space through ETFs and other financial instruments without as Gensler wanted and as Verret explained as his “nightmare” the “TradFi-zation of crypto. In other stripping crypto of its technical properties like decentralized and permissionless.
Verret also suggests regulators dive into cypherpunk philosophy. Read Timothy May, Vitalik Buterin, Satoshi Nakamoto, Gabe Shapiro, Zooko Wilcox, and Nick Szabo.
This may be the only chance to get crypto regulation right, the next four years may decide the future of individual financial sovereignty.
Bye Bye, Gary. Donald Trump’s election means the certain exit of SEC Chair Gary Gensler. The controversial Biden appointee sees the writing on the wall and will reportedly exit by Thanksgiving. Many people will cheer this news. Gensler’s anti-crypto stance chafed the burgeoning community of Web3 entrepreneurs, coders, and wonks. For example, Trump drew raucous cheers at a Bitcoin conference, when he announced he would fire Gensler “on day one.”
Gensler departure means Reg CF outlook bright
But while crypto gets the attention, other parts of the emerging decentralized economy are also cheering new blood at the stodgy commission. Regulation Crowdfunding (Reg CF) got a revamp in the closing days of the first Trump administration. The regulator increased offer limits, increased investor limits, loosened communication rules, and allowed cap-table-friendly special-purpose-vehicles (SPVs). These moves as well as a generally business-friendly administration helped boost Reg CF’s profile and prowess according to Crowdfund Capital Advisors (CCA)—the leading Reg CF data curation outlet:
From 2016 to 2020, the percentage of successful campaigns grew from 49% to over 70%
Investor participation also surged, with investor checks increasing from 21,750 in 2016 to 360,702 by 2020
From 2019 to 2020, the industry saw a jump in total funds raised from $133 million to $247 million, correlating with Trump’s tax policies and deregulation efforts
Of course, some of this surge is due to COVID and investors becoming more comfortable with online investing. Nonetheless, hopes are high for Trump’s second term for Reg CF and investment growth in general.
Industry insiders see bright outlook for Reg CF in second Trump term
When asked about Trump’s second term prominent industry lawyer Doug Ellenoff told Crowdfund Insider:
Obviously, the speed and expressions of change will be determined in part by the specific new replacement [for Gensler], but directionally, I believe that the impact of deregulation will be seismic. . . The activity level of capital formation transactions will accelerate off of a nicely forming 2024 base. I would fully expect broad support for many crowdfunding changes to advance and expand it as a useful marketplace. I would begin to push now.
Among the proposals that may come with the push, CCA suggests increasing the Reg CF offer cap to $20 million. (Good). This would likely toll the death knell for Reg A+ Teir 1, which has a similar cap but forces issuers to deal with shuddersome state regulators.
CCA also suggests creating a $2 billion “co-investment fund” whereby retail investors would invest alongside the government so as to “[mitigate] risk for individual investors.” (Bad). As I have written before this is a terrible idea and the opposite of a deregulatory stance. The government has no business using taxpayer dollars as public venture capitalists. Startups should rise or fall on the benefits they bring to the market, and individuals should not invest money in these relatively risky ventures they can’t afford to lose.
America First for the private capital markets
Overall, however, along with the rest of the capital markets, the Reg CF future looks bright. CCA estimatesReg CF investments could “jump from an estimated $563 million in 2024 to nearly $750 million in 2025.” This would mean more jobs, more innovation, and more robust economic growth. “America First” in the private capital markets looks “Great Again.”
As Elizabeth Holmes, the disgraced founder of Theranos, tries to rehabilitate her image and stay out of jail, the story of her meteoric rise and fall keeps reverberating through startup world.
Wall Street Journal reporter John Carreyrou initially broke the story of Theranos’ shady practices in 2015. He later wrote the definitive account of the entire saga in the best seller Bad Blood.
For those familiar with the Theranos story, the book doesn’t provide any new revelations, but it does explain, in sharp detail, the many, and in hindsight, obvious, mistakes Theranos made during its short time as Silicon Valley’s hottest startup.
Here are five lessons startup founders should take from the downfall of Theranos and Elizabeth Holmes as described in Bad Blood.
Do the damn work: One obvious takeaway from Bad Blood was how far Holmes’s ambition exceeded her willingness to become proficient in her field. She majored in chemical engineering at Stanford, but famously dropped out after two semesters. When presenting to investors and later at conferences and talks with fawning attendees she spoke in airy terms about “changing the world.” This sentiment along with her arresting facial features and cultivated image worked most of the time. But on the rare occasions she pitched to technically competent audiences her charm quickly turned to hostility and the meetings abruptly ended. Of course, Theranos hired scores of technicians with impressive credentials, but Holmes never allowed them the time needed to produce the machine that would fulfill her vision (or even fully investigate whether it was technically possible.)
Choose your team carefully: Another obvious Bad Blood takeaway is the impossible management structure at Theranos. Holmes ran the startup with her erratic boyfriend and live-in lover Sunny Balwani. The couple apparently kept their relationship secret from the board of directors. Throughout the book, Carreyrou portrays Balwani as a toxic tyrant prone to sudden outbursts who fired people near daily. The poisonous management situation resulted in constant turnover where no one from upper management to low-level technicians was safe from unwarranted tirades. This atmosphere contrasts with the ‘we’re-saving-the-world’ sentiment expressed at company parties and all-hands meetings. Perhaps it would not have mattered in the end, but the unease Balwani’s omnipresence provoked negated any chance Theranos would ever fulfill its mission.
Never lose sight of the mission: Elizabeth Holmes’s goal was to become famous, she wanted to be the female Steve Jobs—a force of nature whose sheer will could mesmerize crowds and whose ideas could change the lives of billions. In at least one respect, she got her wish. Whilst PhDs slaved away under Sunny Balwani’s tyrannical gaze, Holmes’ star rose. Particularly, after going “live” with the Walgreens partnership, her life seemed to consist of unending talks, glowing profiles, and conferences. Holmes, with a security detail fit for a president, constantly schmoozed VIPs. Celebrity can be intoxicating but unless it’s earned, it’s worthless. A founder’s main duty is to her investors/shareholders. Holmes treated this cohort as an expendable ATM. The Theranos board, despite numerous warnings, also failed to guard shareholders’ interests.
Don’t lie to people: Fraudsters exist in every industry. But the amount of lies that Holmes told was stunning. She lied about the technology, the reliability of the machines, the use of commercial analyzers, the patents she filed and so on. She and Balwani relied on NDAs, legal threats, and the omnipresent “trade secrets” whenever lies were exposed. The inability to level with anyone including shareholders, employees, media, business partners, regulators, and eventually medial patients was stunning. The mantra ‘fake it until you make it’ popular in Silicon Valley can’t mean blatantly lie to everyone and hope everything works out. The Theranos situation was worse than most because people’s actual lives were at stake, but a clean conscience is good policy for any founder.
Never run when you’re right. The last lesson applies to everyone who discovered the rampant deceit at Theranos. The media portrayed lab technicians Tyler Schultz and Erika Cheung as the heroes of the story. No doubt their courage in the face of unrelenting bullying by lawyer David Boise and his hatchet team deserves plaudits. But what is striking is how many people stood up to Holmes and Balwani. Holmes fired her CFO immediately when he warned her not to lie to potential investors. A lab manager and medical doctor provided the first proof to Carreyrou that something was awry. One scientist even committed suicide. Outside the company, as well, numerous people refused to be taken in by Holmes’s charm. A consultant hired by Walgreens repeatedly warned the company things did not add up. A regulator held his ground in the face of a four-star general who tried to fast-track Theranos machines to fields of combat. Even people at Theranos’ PR firm tried to warn their superiors. In the end, all these people came out of the affair with their integrity intact.
Will the Theranos debacle change anything? Probably not, larger investors may demand more proof before entrusting millions of dollars to charismatic, messianic founders. But then again maybe they won’t. As hype surrounding crypto reached a fever pitch, VCs lined up to back fraudsters like Sam Bankman-Fried and Do Kwon.
In the end, the human desire to be seen as virtuous combined with the human trait of greed will usually supplant the business need for boring, forensic due diligence. But that doesn’t mean individual startup founders can’t take the lessons of Theranos to heart, particularly if they’d prefer not to share a prison cell with her.
Who will own the internet? The question is up for grabs according venture capitalist and author Chris Dixon in his new book Read Write Own, Building the Next Era of the Internet. The future internet could be an open-air bazaar where people skip through various apps taking their followers with them, where no one worries about being censored or being demonetized for upsetting corporate overlords, and where everyone who brings value is rewarded accordingly.
That’s not the internet today. Who owns the internet today is simple. According to Dixon, the top 1 percent of social networks account for 95 percent of the social web traffic and 86 percent of social mobile app use. The top 1 percent of search engines account for 97 percent of search traffic, and the top 1 percent of e-commerce sites account for 57 percent of e-commerce traffic. The top five biggest tech companies gain massive market cap and leave alternatives in the dust.
Thus, the internet is intermediated by five companies. In some circles this is fine, don’t like the stranglehold Google, Meta, et al have on the internet? Don’t like that you’re at the whim of specious and ever-changing terms of service? That’s just the market at work. You can always build an alternative yourself. That’s fine in theory, but network effects and sunk costs mean switching from tech behemoths is impractical at best and impossible at worst.
Corporate Networks Own the Internet Today
According to Dixon, the oligarchy isn’t actually part of the internet, certainly not as it was originally designed as an “information superhighway” exists adjacent to the stack the internet was built upon. “Corporate services like Facebook and Twitter operate networks that interoperate with the web, using components like HTTP, but they are not part of the web in any meaningful sense. They do not adhere to the web’s entrenched customs and norms. Indeed, they break the web’s many technical, economic, and cultural tenants—like openness, permissionless innovation, and democratic governance.”
This set up has deleterious effects for everyone except the corporations themselves and their shareholders. The companies cheat the internet of its original innovation, energy, and promise by making it permissioned. In business, writes Dixon, “permission becomes a pretense for tyranny.”
Examples of corporate tyranny aren’t hard to find.
Corporate networks rob the people who make them valuable; the ones who create and consume platform content by keeping all the money in “take rates” which hover around 1% except for YouTube which is an outlier at around 45%. “Publishing” has been democratized, but with strict controls about who can publish. If you happen to be controversial or start moving the needle in a direction the oligarchs don’t like you’re deplatformed. Or your story is banned if it’s about a presidential candidate’s son that may hurt the oligarchs’ preferred candidate.
We All May Own the Internet Soon
But a new era may already be here. Crypto or “blockchain networks” as Dixon refers to them can change the current power structure by making internet a bottom-up bazaar—an open-air market where creators and private enterprises sell their wares on top of a “public” infrastructure, open source and permissionless. This design structure costs money, hobbyists can tinker but building out and maintaining the infrastructure costs real money. That’s where tokens come in. As more people use a blockchain network the tokens that are inherently part of its design become valuable creating the right incentive for people to dedicate themselves to using, creating, and maintaining its functioning and security.
As Dixon writes,
Tokens have all the earmarks of a disruptive technology. They are multiplayer, like websites and posts, the disruptive computing primitives or earlier internet eras. They become more useful as more people use them—a classic network effect that primes them to be must more than mere playthings. The blockchains that underpin them are also improving at a rapid rate, driving by platform app feedback loops that generate compound growth.
The bonus of this system is everyone becomes owners, creating a virtuous cycle. As tokens gain value, everyone—coders, content creators, validators, and users—have an incentive to maintain and grow the network. Moreover, everyone is paid fairly for their contributions, and if they’re not, switching costs approach zero. Open source means a new “fork” is always available. Code ensures stability which invites ever more investment and innovation. Major changes require votes not the whims of CEOs or “Trust and Safey Councils.” Code limits human meddling. DeFi applications, for example, kept running smoothly amid the tumult caused by Sam Bankman-Fried, Do Kwon, and others unjustly associated with crypto because their frauds involved tokens.
Dixon Swings and Misses on Proof-of-Stake
But Dixon doesn’t get everything right. An obvious supporter of the Ethereum blockchain, he brushes off concerns about its vulnerability to centralization and political capture. Ethereum switched from the energy intensive but decentralized Proof-of-Work to the less secure Proof-of-Stake as its consensus mechanism in 2022.
Others, no less knowledgeable, have real concerns about the long-term viability of Proof-of-Stake. Brian Brooks, former acting Comptroller of the Currency, describes Proof-of-Stake as an “electronic means of traditional corporate governance – the shareholders with the most shares can control the system and could in theory act contrary to the interests of other users who have smaller token holdings.”
Nic Carter, nobody’s crypto fool, describes Proof-of-Stake this way:
[A] cornerstone of the anti-Bitcoin energy argument [is] the notion that you can have something for nothing with Proof of Stake. No energy consumption, yet still a functioning decentralized consensus. . . . [T]his is fantastical. ‘Proof of Stake’ is just a fancy phrase meaning “those who have the most wealth wield political control.” That sounds a lot like our current system, which Bitcoin is specifically designed to solve. Bitcoin explicitly rejects politics, and doesn’t grant any special privileges based on coins held.
Perhaps Dixon may prove correct and new-Ethereum will prove as secure as its “classic” predecessor. But Ethereum made the switch over specious energy concerns that have plagued the West. We are not running out of energy and wouldn’t even approach it for centuries. Further Bitcoin’s energy use is miniscule and potentially quite valuable for human flourishing.
Overall, however, Dixon has written an interesting valuable book for how the internet may change in the coming decade. If he’s right, it will be a massive improvement from the current iteration and may spur ways of communicating and creating not yet imagined.
