SEC Commissioners Preview Prospective Crypto Regulatory Initiatives
Commentary by Steven Lofchie
SEC Chair Paul Atkins and Commissioner Hester Peirce previewed intended next steps in the agency’s crypto regulatory agenda, including a proposed "innovation exemption" for tokenized securities.
In a session featuring the two Commissioners at ETHDenver, Chair Atkins stated that the SEC must provide clearer guidance to the industry through "Project Crypto," a joint rulemaking and harmonization initiative with the CFTC. He said the Commission and staff expect in the coming months to consider: (i) a framework clarifying when crypto assets involve an investment contract; (ii) a temporary “innovation exemption” for limited trading of tokenized securities; (iii) rulemaking to facilitate capital formation involving crypto assets; (iv) additional no-action and exemptive relief, including for wallets and user interfaces; (v) custody standards for non-security crypto assets, including stablecoins; (vi) revision of transfer agent rules to accommodate blockchain recordkeeping; and (vii) further guidance on how existing securities laws apply to crypto activities.
Mr. Atkins highlighted that the proposed innovation exemption would enable both traditional incumbents and crypto-native firms to experiment with tokenized securities on decentralized platforms. He stressed that the temporary exemption could limit trading volumes and incorporate a "white-listing process," providing targeted relief from certain rules while the agency works toward a longer-term regulatory framework.
Commissioner Peirce agreed that the innovation exemption would be an "important step toward facilitating the integration of tokenized securities," but noted that market participants should moderate their expectations. She warned that while the exemption will not "change the entire financial system overnight," it is a necessary, incremental move toward fit-for-purpose rules. She also emphasized the technology's capacity to protect financial privacy, arguing that Americans have an opportunity to use blockchain to shield themselves from "embedded financial surveillance."
Both Chair Atkins and Commissioner Peirce addressed the recent crypto market downturn and the "Schadenfreude" — a German term meaning "happiness about destruction" or misfortune — exhibited by industry critics, agreeing that regulators should not panic over price volatility. Chair Atkins said that it is "not the regulator’s job to worry about the daily swings of the markets," but rather to ensure investors have adequate disclosures to make informed decisions. Commissioner Peirce echoed this sentiment, noting that "regulation is not the well from which value springs," and urged innovators to focus on building useful products rather than waiting for regulatory changes to boost asset prices.
Commentary
The explicit denunciation by the SEC of the obligation to prevent investors from taking risks (and losing money) is significant. It is not the job of the SEC to prevent risk-taking; it is to assure that investors are provided material information through disclosure.
Effectively making all cryptocurrencies "illegal" under the Securities Laws, the SEC under the prior administration prevented the development of a disclosure system that could have enabled investors to make better decisions.