What the SEC wants and why it won't get it

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After the FTX collapse, the SEC is pushing to make exchanges only accept regulated tokens. The big question is where these regulated tokens will come from.
The US Securities and Exchange Commission (SEC) intends to classify digital assets as securities.
I believe the vast majority of the nearly 10,000 tokens in the crypto market are securities
says SEC Chair Gary Gensler.
Gensler's arguments rely on both the so-called Howey test and the Initial Coin Offering (ICO) process, which is similar in name and function to Initial Public Offerings (IPOs).

The main difference between an IPO and an ICO is that the former involves a rigorous vetting process. Companies looking to go public have to meet a range of requirements and comply with a host of regulations, which can be expensive and time-consuming. Still, hundreds of companies launch IPOs every year.

Even for startups seeking funding from venture capitalists, a convincing business model is usually required. Developers should demonstrate that their project will deliver value, attract customers and generate revenues.

The SEC is concerned that some issuers of digital assets are bypassing all these steps. Those aren't getting the Commission's approval. Companies that become public through an ICO are not subject to the same level of scrutiny. In some cases, token developers are paying for their coins using cryptocurrencies obtained through premining. The SEC is determined to regulate digital assets to prevent similar high-profile crypto bankruptcies from happening in the future.

Crypto companies often argue that the current legislation is not suited to the crypto industry, as it is unclear and subject to debate. While the SEC sees almost everything in crypto as securities, the industry itself disagrees and argues that nothing in the space resembles securities.

Despite this, a small number of developers still attempt to register their tokens with the SEC. However, they often encounter issues due to the existing registration process being unsuitable for digital assets. Due to lapses in documentation, the SEC immediately suspends the registration process. Occasionally the case ends up in court proceedings initiated by the Commission. As a result, very few are willing to cooperate with the regulator.

When FTX collapsed in 2022, Gensler reacted harshly instead of offering transparent and acceptable rules of play. Unfortunately, those days of discussion with the regulator have faded into oblivion. The SEC is now clear in its intent to only allow registered coins on exchanges.

However, the existing registration rules do not leave much room for the majority of tokens to be legalized. The SEC's excessively severe measures could potentially harm not only the crypto market, but also create significant disruption within the traditional finance industry. Gensler is unlikely to want to be the cause of yet another financial crisis, so compromises will have to be made, even if they may be uncomfortable.