The SEC Could Take Cues from the IRS to Simplify Crypto Regulations.

In February, the Department of Government Efficiency initiated efforts to gather public feedback regarding the U.S. Securities and Exchange Commission. This move indicates that significant changes might be on the horizon for the agency. Following this, the SEC has adopted a more cooperative approach towards the cryptocurrency sector, aligning with the current administration’s perspective. This is exemplified through the hiring of individuals who are supportive of cryptocurrency and a reduction in the number of legal actions against crypto entities. The DOGE initiative presents an opportunity for further transformation, highlighting the increasing demand for regulatory bodies to reconsider their strategies regarding digital assets.

Responding to the call for public feedback, Paul Grewal, the Chief Legal Officer of Coinbase—now free from SEC litigation—advocated for a policy that would require the SEC to cover the legal expenses of firms that successfully contest enforcement actions. His proposal is evidently motivated by the desire for greater fairness, but the implications of the DOGE initiative on the cryptocurrency space could be broader. Observers note that the SEC’s retreat from aggressive litigation may signal a shift toward collaborative rule-making with the industry that will better define frameworks for crypto operations.

Currently, the absence of clear regulatory guidance complicates long-term compliance planning for companies. Enforcement actions are often retroactive, leaving firms open to unexpected legal challenges. This situation is likely to evolve in the coming months.

Shifting Toward Proactive Regulation

The reliance on enforcement as a primary regulatory tool has forced firms like Coinbase and Ripple to spend substantial amounts on legal defenses to clarify their regulatory status. Recently, the SEC acknowledged errors in its statements regarding Debt Box, resulting in a court order for the agency to pay the company’s legal fees. This verdict raised questions about the SEC’s reliability and raised concerns about its enforcement methods.

In the future, regulatory bodies, including the SEC, are expected to face enhanced scrutiny to align with the U.S. Treasury’s framework, which emphasizes straightforward compliance pathways over punitive measures. The Treasury’s guidance offers clarity on essential topics like tax obligations and anti-money laundering regulations. Streamlining and standardizing what defaults to a security in the digital asset environment is critical for helping businesses effectively structure their offerings from the beginning.

Finding the Right Balance

While taking cues from the Treasury, the SEC could also benefit from looking at the IRS model. Introducing a “safe harbor” for emerging projects could stimulate innovation while also guaranteeing ongoing compliance, as was suggested by SEC Commissioner Hester Peirce previously. The IRS has already employed a similar method, providing temporary compliance relief to cryptocurrency taxpayers in early 2025.

Historically, the IRS has utilized voluntary compliance programs, emphasizing cooperation over punishment. A similar approach would be advantageous for managing the cryptocurrency landscape. Some critics argue that regulation stifles innovation, whereas clear guidelines can actually attract more risk-averse participants to the market, aiding in its growth. A balanced regulatory environment must be supported by effective enforcement mechanisms to mitigate friction between regulatory agencies and businesses.

Enhanced collaboration among the SEC, Treasury, and IRS would likely minimize regulatory clashes and simplify compliance requirements for digital asset firms and their stakeholders. The Treasury’s guidance for digital assets lays a strong foundation for effective inter-agency collaboration. Ambiguity in regulations and a reactive enforcement model hinder industry growth, whereas a coordinated approach could benefit the entire ecosystem.

Moving Forward

With the DOGE initiative’s solicitation for input, the administration’s commitment to re-evaluating digital asset policies, and recommendations from firms like Coinbase, there is potential for reforms that will create a more predictable regulatory environment. Despite being in the early days of the new administration, changes are already unfolding quickly, and the influence of DOGE on SEC regulations is set to be significant. Growing public discussion around these topics further supports the argument for establishing clearer guidelines instead of relying on enforcement actions.

It’s also important to acknowledge that DOGE’s plans for the SEC may encompass areas beyond cryptocurrency, mirroring the multifaceted nature of regulatory efforts in that domain. Ultimately, it would be advantageous for the administration, alongside Congress, to create a legislative framework that clearly delineates what constitutes a commodity, security, or digital asset, allowing businesses and individuals to navigate the industry with confidence. In the interim, the SEC should focus on strategies that facilitate growth while simultaneously safeguarding investor interests.