Regulation
SEC Now Going After Crypto VCs, Says BlockTower Capital Founder – DL News
- Ari Paul of BlockTower offered a provocative commentary on the Unchained podcast.
- An SEC action against VCs would mean the agency would expand its crackdown on crypto.
The U.S. Securities and Exchange Commission (SEC) is targeting cryptocurrency venture capital firms in a series of new investigations, according to an institutional investor.
Speaking on the Unchained podcast on Wednesday, Ari Paul, chief investment officer of BlockTower Capital, said The SEC has launched a “series of investigations into venture capitalists acting as unregistered securities brokers.”
The discounted token deals that some VCs are striking with cryptocurrency projects put them in violation of the regulator’s strict securities laws, Paul said.
Last escalation
The development would mark the latest escalation in the SEC’s crackdown on the digital asset industry.
Under its chairman Gary Gensler, the agency has sued Coinbase, Kraken and Binance, accusing them of illegally offering unregistered securities to investors.
The agency has also gone after various DeFi apps that it says violate long-standing U.S. securities laws.
“The SEC does not comment on the existence or non-existence of a potential investigation,” an SEC spokesperson said. DL News.
In the podcast, Paul presented a hypothetical situation to illustrate how some VCs can violate securities laws.
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Before a cryptocurrency project launches a token, its team often makes deals with market makers or venture capital firms.
In these transactions, the crypto project promises to sell the VC tokens at a steep discount to what they expect them to trade at in the future. In exchange, the VC is expected to promote the token.
“It’s like hiring a VC as a marketer,” said Paul, a former derivatives trader and portfolio manager at the University of Chicago.
“It’s like you’re acting like a stockbroker. And ethically, you’re acting very explicitly like a stockbroker.”
Battle of the SEC
For the past three years, the SEC has argued that cryptocurrencies fall under the authority of Great Depression-era laws that govern stocks and bonds.
The crypto industry responded by arguing that digital assets are so new that they should be regulated by new statutes and rules.
Even as a final ruling on the debate is still pending due to ongoing litigation, the agency is expanding its crackdown on the industry.
In May, Robinhood, a discount online brokerage, received notice from the SEC that it faced a potential lawsuit for violating securities laws in its crypto business.
Those building DeFi applications have not escaped SEC action either.
On June 28, the SEC accused Consensys has been accused of selling securities without permission through its MetaMask staking service. Consensys denies the allegations.
Also in May, the SEC claimed that DeFi exchange Uniswap is an unregistered securities exchange controlled by Uniswap Labs.
Editor’s Note: This article has been updated to include comments from the SEC.
Tim Craig is a DeFi correspondent at DL News. Got a tip? Email him at tim@dlnews.com.