Konevsky said he expects the SEC’s political appointees to continue in the current direction.
He asserted:
“While career staff changes — albeit senior ones — may impact the pace of current activity, we do not expect it to make a meaningful difference in the SEC’s regulation by enforcement agenda.”
He added that the impact of the election year politics and vote/funding courting in expected tight races, and the unexpected prominence that crypto  topics have risen to in this cycle, including at the presidential level – as well continued legislative initiatives and aggressive oversight in Congress and litigation – are likely to have more of a near term effect.
He said:
“Arguably, we already saw that with the fairly superficial election year about face on ETH ETFs / ETH status (though the devil is in the details of whether staking arrangements wrt ETH would still be Howey securities, etc.).  Beyond that, the outcome of the election and what it signals for the executive branch policy agenda on digital/crypto, changes in SEC leadership, impact that has on senior career personnel appointments and Congressional activity are key.”

SEC’s Crypto Regulation: Clarity Needed, But What Kind?

CCN asked Konevsky about how crucial is regulatory clarity for the SEC to effectively enforce cryptocurrency laws, and what steps could be taken to achieve this clarity.
Konevsky explained regulatory clarity is essential for entrepreneurs to effectively allocate capital and efforts towards new projects, particularly in the realm of technological innovation. This innovation, according to him, focuses on public immutable databases, smart contract automation, and distributed computing resources. The specific details of who sells which native digital asset or cryptocurrency to whom are secondary to the broader technological advancements.

However, Konesvsky added, innovation often operates in grey areas. While regulatory clarity is crucial, it comes with a caveat: the nature of that clarity is vital. Clear regulations can stifle innovation faster than ambiguous guidelines and retrospective enforcement. Therefore, what is truly needed is not just clarity, but positive regulation that supports and advances the various use cases of blockchain technology and native digital assets, tailored to their specific functions.

Regarding the SEC continuing to be the principal enforcement agency for cryptocurrencies without clear and comprehensive regulations governing the crypto space, Konevsky stated “nature abhors a vacuum”.

“So until someone else owns the space regulators will compete, particularly where there is perceived political priority and paths to victories — with the most aggressive regulator winning and owning the field.  rightly or wrongly, that’s the SEC in the US now.”

Konevsky Proposes Use-Case Regulation for Blockchain Innovation

He furthermore elaborated that the regulatory framework for blockchain technology and native digital assets should be based on their specific use cases to foster innovation while ensuring proper oversight. A functional regulatory approach, tailored to how these technologies and assets are utilized, would benefit the industry significantly.

For example, when digital assets are used to enable the functionality of a network, Konevsky says this should be regarded as a technical process. Conversely, if the network’s founders sell the same digital asset in a fundraising campaign, this activity should be regulated under the principles that govern securities offerings.

This balanced approach, thinks Konevsky, would ensure that technical innovations are not stifled by overly broad regulations, while still maintaining necessary protections for investors and users. Ideally, such a regulatory framework  should be developed and implemented by Congress to provide clear, consistent guidelines.

Speaking about the biggest challenges the SEC faces in reining in crypto exchanges and DeFi projects, and how might these challenges be addressed, Konevsky answered that the US judicial system, through its checks and balances on regulatory action, is the best near term safety valve and challenge (which may become an even tougher check and balance if the US Supreme Court rolls back judicial deference to regulatory actions under the 40-year old Chevron case this summer).  He added congressional oversight and pressure are challenges to some extent as well.

CCN asked Konevsky if he thinks that establishing clear regulatory guidelines would make it easier for the SEC to enforce compliance among cryptocurrency exchanges and DeFi projects.

He stated:
“Yes, but again clarity doesn’t necessarily spell good things for the industry, as mentioned above.   We need quality regulation and legislation.  Also dont ignore SEC’s ability to slow walk even the best positive regulations.  Agencies have a lot of leeway before they may be checked (though that may change as mentioned above).”

SEC Détente a Misperception, Industry Needs Use-Case Regulation

When observing the respondance of the cryptocurrency industry to recent SEC developments, Konevsky said there is a perception of an SEC détente, which he disagrees with, largely influenced by election year politics.
He added that some believe that the courts can help roll back regulation by enforcement and address the arbitrary administration of the few positive rules, such as the Special Purpose Broker-Dealer (SPBD) rules proposed by the SEC in December 2020. There is also a sense of positive momentum in Congress, highlighted by the new FIT21 bill and increased oversight.

Konevsky also mentioned that active participation in legislative dialogue and education on Capitol Hill is crucial. In his opinion, it’s important to focus on compliance while also being willing to seek judicial review of agency actions when necessary. Engaging with lawmakers and ensuring they understand the nuances of blockchain technology and digital assets can help shape a more balanced and functional regulatory environment.

Speaking about the future of digital securities evolving in light of recent SEC actions, and what role will regulatory bodies play in shaping this future, Konevsky said the industry could benefit from a functional regulatory approach based on use cases and we would need this action to come from Congress.

He explained:

“For example, when users of a network are using a digital asset to enable the network to function, it should be treated as a technical process. However, if the founders of that network start selling the same digital asset in a fundraising campaign to support the network, that fundraising campaign should be governed by the same principles that govern a securities offering.

SEC would have a key role – but not controlling role – to play in this environment, along with CTF and other agencies (for example role of CFPB hasn’t really been fully explored yet).”