SEC Commissioners Spar Over Crypto Regulation
Commentary by Steven Lofchie
At the Crypto Task Force inaugural roundtable, SEC Commissioner Caroline A. Crenshaw cautioned Commissioner Hester M. Peirce and Acting Chair Mark T. Uyeda against conceding that many crypto assets and related activities should not be subject to securities laws.
Mr. Uyeda acknowledged the ongoing legal complexities in classifying crypto assets under federal securities laws. He noted that, despite Bitcoin's emergence 17 years ago, market participants continue to debate whether and how these assets fit within existing legal frameworks—particularly under the Howey test. He said that rather than relying on enforcement actions, the SEC should have taken a "notice-and-comment rulemaking" approach to defining crypto's status under securities laws.
Ms. Peirce, the head of the SEC's Crypto Task Force, posed a number of questions on security status: (i) "[w]hat makes something a security?;" (ii) "[i]s that status permanent, or might an asset start as a security and convert to a non-security, or vice versa?;" (iii) [h]ow does decentralization affect the analysis?;" and (iv) "[c]an we translate the characteristics of a security into a simple taxonomy that will cover the many different types of crypto assets that exist today and will exist in the future?"
Ms. Crenshaw cautioned against "pok[ing] holes in the foundation [of the securities laws]," warning that modifying the law "to facilitate the success of a chosen product category is fraught with risk" and may "creat[e] a negative domino effect on other areas of the market protected by the same laws." Acknowledging concerns that current laws may not effectively address crypto, she agreed that policy must evolve with new technologies. She also posed a number of questions, including as to the SEC's authority to make changes in the law, the balance between clarity and flexibility in defining a "security" and the implications for investor protection, national security and market stability—especially given crypto's risks, such as speculation, fraud, lack of legal recourse and its use in illicit activities.
Commentary
Commissioner Crenshaw's remarks suggest that because activities involving crypto create risks (most obviously fraud), the SEC should regulate crypto. While understandable, this logic is troubling. A regulator should not be stretching the bounds of the authority granted it by statute in order to address what the regulator perceives to be a problem or to achieve a desired policy result.
By claiming that essentially all crypto assets were securities, without attempting any serious analysis of that claim under the Howey test, the SEC has done real damage to the markets. Had the SEC conceded four or eight years ago that much of crypto does not look much like a security, the process of thinking about how to regulate the asset could have started much earlier, and perhaps negative events such as the FTX fraud might have been averted.
As to Commissioner Crenshaw's statements, she now can claim the right—when something bad happens (as it inevitably will)—to say I told you so. But quite a lot went wrong under the prior SEC positioning. So, it is better late than never for considering how crypto should be regulated.
Related Articles
-
SEC Commissioner Hester M. Peirce filled key senior positions for the new Crypto Task Force.
-
The SEC entered into a joint stipulation with Coinbase, Inc., and Coinbase Global, Inc., to dismiss the civil enforcement action with prejudice against the two firms.
-
Acting Chair Mark T. Uyeda outlined the agency's new priorities grounded in reducing regulatory barriers for small and private companies.
-
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.
-
SEC Commissioner and head of the newly formed Crypto Task Force Hester M. Peirce outlined an agenda for the new initiative.
-
SEC Commissioner Hester M. Peirce will lead a Task Force dedicated "to developing a comprehensive and clear regulatory framework for crypto assets."
