SEC Commissioner Peirce Urges Crypto Participants to Be Proactive
Commentary by Steven Lofchie
SEC Commissioner Hester M. Peirce urged crypto industry participants not to wait for Congress or regulators, but to be proactive in fixing the problems exposed by recent events.
In remarks at the Digital Assets at Duke Conference, Ms. Peirce said that the value of crypto assets is largely created by the builders of this technology, and because of that, privately designed and voluntarily implemented solutions may be more effective than regulation. She said that new technologies take time to "find their footing" and often need to combine with other innovative developments to "realize [their] full potential." Ms. Peirce urged crypto technology developers to take a step back and reminded industry participants that the original motivating purpose of cryptocurrencies wasn't to derive profits, but rather to solve the pervasive trust issues within centralized banking.
In addition, Ms. Peirce called on the SEC to conduct "some form of notice and comment process to resolve the thorniest crypto-related policy issues." She said that while Congress possesses the ultimate authority to determine which regulatory agency will assume oversight of crypto markets, a formal SEC rulemaking could provide industry participants with a regulatory structure to work from while Congress develops legislation to fill in the regulatory gaps. She noted that if Congress were to give the SEC jurisdiction over crypto markets, the agency would likely need greater regulatory authority than it currently possesses. She highlighted the current disagreement among industry experts as to whether traditional securities tests, like Howey, apply on a one-to-one basis when applied to crypto assets.
Ms. Peirce criticized the SEC's current "regulation-by-arbitrary-and-tardy-enforcement-actions approach" and said that several different approaches to crypto regulation are currently under consideration. That list includes bills introduced in the last Congressional session, a proposed framework from the European Markets in Crypto Assets (as well as a proposed approach by FFRI's Steven Lofchie), that would allow platforms and tokens to pick between SEC and CFTC oversight. She emphasized that the regulatory framework for digital assets should not prescriptively manage innovation, but rather provide an environment for ingenuity to flourish.
Commentary
Commissioner Peirce's remarks are a significant contribution to the ongoing debate on regulating digital assets. While both the SEC and CFTC wish to assert authority over digital assets, neither has developed a comprehensive regulatory scheme, although each regulator ought to be capable of doing so. Rather than put forward comprehensive regulatory plans, the agencies have largely dead-ended into arguments over definitions and jurisdiction; i.e., over which agency should have authority, rather than what the agency would do if it had the relevant authority.
Commissioner Peirce highlighted several paths forward, including one presented in our FFRI thought piece: By Whom Should Digital Assets Be Regulated? The Solomonic Solution. In that article, we opined that Congress might provide both the SEC and the CFTC with authority to regulate digital assets, and then allow the creator of each digital asset to decide whether that asset should be regulated by the SEC or by the CFTC. If the regulatory scheme put forward by one agency is unworkable, creators of digital assets will choose the other regulator. If a regulator develops a digital asset scheme that is too loose, Congress will tell that regulator to get tougher. In this way, regulatory competition should lead to the development of a workable regulatory scheme.
There are other examples where this approach could be considered to help resolve thorny agency jurisdiction issues, for example, banks may choose to be chartered under federal law or state law. Corporations may decide the state under which they wish to be chartered. This type of approach might end the ultimately pointless arguments over which regulator should have authority and whether a particular digital asset is or is not a security, and let the regulators turn their attention to formulating rules that would benefit the public.