November 17, 2022

Commissioner Lizárraga Questions Viability of Digital Assets as Alternative to Traditional Finance

Steven Lofchie Commentary by Steven Lofchie

SEC Commissioner Jaime Lizárraga asserted that the digital asset market is not currently a viable alternative to traditional finance, and that contrary to popular belief, the industry is highly centralized.

In an address at Brooklyn Law School, Mr. Lizárraga said that many of the problems in traditional finance that proponents of digital assets claimed that the industry would solve are still present in today's ecosystem, and are magnified by a lack of regulation. He cautioned that due to the unregulated nature of the industry, digital assets are especially susceptible to significant risks and misconduct, including fraud and theft. The burden of such misconduct falls disproportionately on low-income and other underserved communities of which Mr. Lizárraga said the traditional financial system "left behind."

Mr. Lizárraga said that digital asset exchanges offer centralized services like custodial services, which creates a natural conflict of interest given the objectives of the platform. Mr. Lizárraga warned that utilizing these services in an unregulated, non-transparent industry poses significant risks due to high levels of volatility, lax security practices and a lack of access to quality investment information.

Mr. Lizárraga also asserted that most of the digital tokens currently offered are securities and would be subjected to federal securities laws. He argued against the idea that the SEC is regulating by enforcement in the digital asset space, saying that "[t]he [SEC's] laws are well-established, and the cases brought to date have clear applications, as has been apparent in court rulings on these issues[,]" which he said, is not "regulation by enforcement, but enforcement of our securities laws as Congress intended."

Commentary

Had the securities and banking regulators allowed regulated broker-dealers and banks to provide custodial services, retail investors would not have been forced to custody through unregulated entities.

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