The U.S. Securities and Exchange Commission building in Washington. Photo: Diego M. Radzinschi/ALM

A Libertarian think tank has taken aim at the U.S. Securities and Exchange Commission's approach to cryptocurrency, claiming that the agency's moves to rein in a crypto-bubble could stifle innovation and block access to middle-class investors.

In a white paper released Thursday titled “Cryptocurrency and the SEC's Limitless Power Grab: Why Speculative Consumer Goods Are Not 'Securities,'” John Berlau, a senior fellow at the Competitive Enterprise Institute, claims blockchain and cryptocurrency innovations have the potential to be as transformative as the internet. But Berlau cautioned that innovation could “come to a screeching halt under the weight of burdensome regulation.”

In public comments to explain the agency's watchful approach to the developing market for digital tokens and assets, SEC chairman Jay Clayton has stressed the risks to retail investors.

Berlau writes that to bring cryptocurrency under the agency's jurisdiction, Clayton and SEC officials have stretched the definition of “security” to such extremes that even collectibles such as comic books would fit the bill.

“The world will never know the full potential of cryptocurrency and blockchain if heavy-handed government regulation hinders entrepreneurs from experimenting with novel approaches and applications,” Berlau writes.

Berlau's white paper comes a little over a week after the SEC staff released new guidance on the agency's approach to cryptocurrency offerings. The guidance from the SEC Division of Corporation Finance reaffirmed that the agency would continue to look to the so-called Howey test to determine whether a digital asset constitutes a securities offering.

Berlau, however, criticizes the SEC's application of the four-part Howey test, named for a 70-year-old U.S. Supreme Court case concerning shares and service contracts in citrus groves, to cryptocurrency, and claims that the agency's approach actually gives digital assets more scrutiny than other investments. He also writes that the agency appears to put considerable weight on the existence of a secondary market as evidence of an underlying securities transaction in the new guidance, although that factor plays no part in the Howey test. The phrase “secondary market,” Berlau notes, appears seven times in the SEC's recent cryptocurrency guidance.

Berlau concludes that the SEC's scrutiny could most hurt the retail investors the agency aims to protect. “Deeming cryptocurrency as a 'security' could put cryptocurrency out of the reach of middle-class investors because of the same red tape—both from SEC regulations and from financial regulation laws such as the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010—that has hindered small investors' access to stock in early stage growth companies,” he writes.

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