Why Regulation by Enforcement Fails Crypto

This is an opinion, and it is not a subtle one: writing crypto policy through lawsuits and settlements, one case at a time, is a poor substitute for writing the rules down in advance and telling the industry what they are. Enforcement has a real and necessary job. That job is not the same as rulemaking, and treating it as a replacement has cost the US market years of avoidable uncertainty.

Two different tools, one confused mandate

Rulemaking and enforcement solve different problems. Rulemaking is prospective: a regulator, or Congress, writes a standard, takes public comment, and publishes something a business can read before it acts. Enforcement is retrospective: an agency looks at conduct that already happened and decides whether it broke an existing law. US regulators have leaned heavily on enforcement against crypto firms in recent years, largely by applying a legal test that predates the internet by more than seven decades: the Howey Test, drawn from the 1946 Supreme Court case SEC v. W.J. Howey Co., which asks whether an arrangement is an investment contract based on an investment of money in a common enterprise with an expectation of profit from the efforts of others.

That test was built for orange groves. Courts and regulators have stretched it, case by case, to cover token sales, staking programs, and lending products. Each stretch produces an outcome for the parties directly involved in that case. It does not produce a rule that a different company, selling a different product, can safely rely on going forward.

What enforcement actually delivers

It would be dishonest to pretend enforcement accomplishes nothing. It does several things well. It can stop ongoing fraud, which matters enormously in a market with heavy retail exposure. It creates real consequences for firms that misrepresented what they were selling, which at least partially compensates harmed users after the fact. It does not require the slow, multi-year process of a formal rule or an act of Congress, so an agency can act relatively quickly against active harm. And it works within statutes that already exist, without needing anyone to agree on new legislative language, which in a polarized Congress is not nothing. Readers who want the mechanics of how these actions unfold, and what a settlement does and does not establish, can see our explainer on how SEC enforcement actions work. That is worth understanding before treating any single case as a verdict on an entire industry.

What enforcement cannot deliver

Here is the part that gets lost in the coverage of any individual case: a settlement is not a rule. Most enforcement actions end in a settlement, and a settled case sets no binding precedent for the next company with a similar but not identical product. A firm reading the outcome cannot reliably extrapolate from “that token was found to be a security” to “my token will be treated the same way,” because the analysis is fact-specific and the agency has not committed, in writing, to a general standard that others can follow. The result is a market where compliant behavior is defined only in hindsight, reverse-engineered by watching who gets sued and guessing at what distinguished them from who did not.

That uncertainty is not free. It pushes legitimate projects to structure around ambiguity rather than toward good practice, sends developers and listings offshore to jurisdictions with clearer, if sometimes weaker, rules, and disadvantages smaller firms that cannot afford years of litigation the way a larger, better-capitalized company can. It also does very little for the retail investor reading the headline, who learns that a product was problematic only after money has already changed hands, which is close to the opposite of what regulation is supposed to accomplish.

The jurisdictional seam makes it worse

Enforcement-first policy would be more tolerable if the underlying jurisdictional map were settled. It is not. US securities and commodities regulators have overlapping and contested claims over different corners of the digital asset market, and which body has authority over which token, or which product wrapper, is itself often unclear until a case forces the question. Our guide on which agency regulates which crypto assets lays out the general shape of that divide, but the honest answer is that the shape shifts depending on the asset, the product structure, and the enforcement posture in play at a given moment. Building policy through litigation in a market where the referees themselves disagree about who is refereeing compounds the problem instead of resolving it.

The case for writing it down

The alternative is not exotic. It is the ordinary way most regulated industries in the US operate: an agency, or Congress, publishes a proposed rule, takes comment from the public and the industry it will govern, and finalizes a standard that applies going forward to everyone similarly situated. That process is public and reasonably predictable, and it produces a document a compliance officer can point to before launching a product rather than after being sued over one. It does not eliminate enforcement, which is still needed for the fraud and misconduct that any rulebook will fail to prevent. It changes enforcement’s role from primary lawmaking tool to what it is supposed to be: the mechanism that punishes people who broke a rule everyone could already read.

A fair caveat

None of this means rulemaking is automatically better in practice. Formal rules can be captured by the industries they are meant to govern, especially when only well-resourced firms have the staff to participate meaningfully in a comment process. Rules can also ossify, describing a market structure that technology has already outgrown by the time the ink dries, and a divided legislature may simply fail to pass anything workable at all. Clear rules are a necessary condition for a functional market, not a guarantee that the rules will be good ones. That is a genuine trade-off, not a reason to prefer the current approach, and it deserves its own honest accounting rather than a slogan on either side.

Where this leaves investors

For now, the practical reality is that anyone holding or transacting in digital assets in the US is operating inside a system where the rules are discovered after the fact, one case at a time. That is a genuine cost, not a footnote, and it belongs in how a reasonable person weighs the risk of this market, alongside price volatility and custody risk. Wanting clearer rules is not the same as wanting looser ones. It is wanting to know, before acting, what the rule actually is. More background on how these fights are unfolding lives in our regulation and policy coverage.

This column is opinion, not investment, legal, or tax advice. It is not a forecast or a guarantee of any outcome. Crypto is volatile and high-risk; consult a licensed professional before making financial decisions.