SEC Commissioner Peirce Seeks Comment on Crypto Regulation
Commentary by Steven Lofchie
As head of the recently formed Crypto Task Force, SEC Commissioner Hester M. Peirce asked for public input on a variety of crypto-focused regulatory issues. She said this input would help guide the Task Force with its work.
Among both general and detailed questions, Ms. Peirce raised the following:
On Status as a "Security."
Which digital asset products (cryptocurrencies, tokens, stable coins, NFTS) are securities? The Commissioner also asked which technology functions are essential to blockchain networks and if these functions should also be regulated.
On Public Offerings.
If crypto assets are securities, what disclosures should be required for public offerings? Should there be a safe harbor from registration for certain offerings? If so, what should be the conditions of the safe harbor?
On Trading.
Should the Commission create a new registration category for platforms trading crypto assets that are securities? Alternatively, should the existing rules for securities exchanges or alternative trading systems be adapted? What strategies should regulators use to efficiently analyze crypto order book data from public sources, and how can they leverage this data to reduce regulatory burdens?
On Custody.
How should custodial requirements apply to cryptocurrencies held or managed by broker-dealers, investment companies and investment advisers?
On Crypto Lending.
How should the Commission regulate different crypto lending models to allow for innovation without stifling opportunities? How do crypto lending programs differ from or resemble traditional securities lending programs, like those offered by broker-dealers, and do they require different regulatory considerations?
On Crypto Exchange-Traded Products ("ETPs").
What rules should apply to crypto funds or to registered investment companies that invest in crypto? What listing standards should apply to such products?
On Tokenized Securities.
Are special rules required under the Securities Laws (for example the regulation of transfer agents) or under other federal and state laws (such as the UCC) for the regulation of tokenized securities?
Commentary
While there is no one better suited to the task of proposing a regulatory scheme for crypto assets than Commissioner Peirce, she is subject to one fundamental limitation that she cannot control. Every substantive question that she asks must be preceded by first addressing the metaphysical question of whether the asset at issue is a "security."
This is a waste of time and effort and is no different than arguing as to whether a tomato is a fruit or a vegetable. (See A Quick and Dirty Fix for US Cryptocurrency Regulation; and Analysis: By Whom Should Digital Assets Be Regulated? The Solomonic Solution.)
Having to answer this question is not only a distraction; it is a hindrance. Rather than asking the straightforward question—how should trading in cryptocurrencies be regulated?—one must ask (i) is this cryptocurrency a security; (ii) how should trading in this cryptocurrency be regulated if it is a security; (iii) who should regulate the trading if it is not a security; and (iv) what exemptions are needed from the ordinary regulations that apply to trading in securities?
Isn't it better to just eliminate the jurisdictional question by starting with a new crypto-specific statute—as suggested in the Quick and Dirty Fix linked above? (Note: a brief update on that memo will follow.)
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