What if the SEC Told Crypto "Investors" This?
What if the SEC Told Crypto "Investors" This?
You cannot invest in crypto, you can only speculate on it.
It’s time. You are the hypothetical employee at the SEC who started on June 1. You were tasked with drafting the next investor alert on crypto. Since then, you have been researching the subject rigorously from all angles. After carefully considering the available information that you’ve gathered, you’ve prepared the following draft for management’s review:
Important Disclaimer: The following is not a communication from the SEC. This is a purely hypothetical message that we, NFI, believe that participants in the crypto economy would find useful, should it come from the SEC.
Summary: We continue to refine how we can help investors to make sure they are protected during this volatile crypto landscape. We came to the conclusion that the marketplace largely views crypto and traditional instruments like stocks as interchangeable. We have been continuing to point out that crypto is extremely risky, but we don’t believe that approach has necessarily created the desired result in the marketplace. To further highlight the risks to potential market participants, we believe the most effective approach would be to offer additional guidance regarding the word investing, and highlight the fact that cryptocurrencies are not something that traders can invest in.
Why Do We Exist? - Background Behind Federal Securities Laws. When the first set of federal securities laws were enacted in 1933, which led to the creation of our agency in 1934, the investing public faced some important challenges. Investors needed to make informed decisions, however, absent the force of a federal regime, they were not necessarily being provided the information they needed to make proper decisions. President Roosevelt guided Congress to set forth a regime such that “no essentially important element attending the issue shall be concealed from the buying public.” In response, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934, and our agency was tasked with executing Congress’s mandate of investor protection.
At that time, investing was about cash flows. As such, the information investors needed, but not necessarily receiving, was material information that impacted cash flows. Without the force of the federal securities laws, promoters tended to conceal negative information from the public, which meant a subset of stocks appeared better investments than they were, or worse, they appeared to be good investments when they were speculative investments at best, or arguably not investments at all (depending on the price). This false sense of security effectively meant investors were not being protected. Congress wasn’t in the business of recommending to investors what to buy or what risks to take; however, they felt a responsibility to ensure that investors were aware of all the important elements.
A reversal to the original, and much more conservative interpretation of the word investing might be healthy. In the 1930s, the word investing was associated with conservatism, prudence and safety. It was generally accepted that investing was not about getting rich quick, but rather achieving small and consistent returns over the lifetime of an asset. In fact, some of the leading financial experts at the time even shunned stocks as an investment tool, preferring bonds instead.
Over time, investment came to mean anything purchased for the purpose of financial gain. This group included assets such as art, collectibles, gold, and now, cryptocurrencies. Notably, these assets do not generate any cash flows. Purchasers of these assets can certainly make a profit on them, by selling to somebody else at a higher price than they bought it at, but they cannot earn income.
The market participants, as is the case with stocks, are free to buy non-cash-flow-generating assets. Our responsibility, as an agency with a mission to protect investors, is to decide what the most important elements are and ensure they are shared with them; that was Congress’s intent, after all. With this alert, we intend to refocus the discussion on the interpretation of the word investing and recommend a reversal to its original, more conservative interpretation. Accordingly, as far as non-cash-flow-generating assets are concerned, we believe that the most important disclosure for market participants is this: they are speculative tools and one cannot invest in them.As a trader, you cannot invest in crypto, you can only speculate on it. Consistent with earlier guidance, we continue to believe that market participants are free to choose what risks they take as long as they are fully informed about their choices. We are not advocating a ban on cryptocurrencies, we don’t think that would be effective for many reasons. What we are advocating for is a sense of heightened awareness around what cryptocurrencies are; speculative tools that you cannot invest in. Positioning them as risky investments admittedly has not been effective and we favor a different approach: we will stop characterizing them as investments.
We are aware that this stance is a departure from our earlier alerts. We are not immune from the forces that influence the markets that we are serving. To the extent we may have followed the popular market opinion and adapted an expansive interpretation of the word investing, we take full accountability for our actions. We have a better appreciation of how our earlier approach conflicts with our mission of protecting investors.
At the expense of being perceived as changing our messaging, we have a responsibility to put investor protection above all. Thus, we take the first step toward taking a more conservative approach which is aligned with Congress’s original intent and we recommend that the investing public consider the same.
Do you feel like this could happen? Do you believe that the SEC should simply label crypto as “speculative” and not call it an investment and leave the public to trade as they see fit? We believe that the SEC absolutely should label crypto as “speculative” and not call it an investment, but we are not holding our breath. A similar labeling worked for the tobacco industry, balancing full disclosure of risks and personal choice.
The definition of the word investing has unintentionally expanded over the course of many decades. It might take some time to reverse that. That said, we don’t think society can afford to wait decades and our goal is to make it happen by 2027.
