Post-crypto meeting, SEC Commissioner Peirce suggests potential pathway
SEC's Approach to Regulating Crypto Assets: Flexible and Innovation-Friendly
Commissioner Hester Peirce, who leads the SEC's Crypto Task Force, spoke at the DC Blockchain Summit yesterday, outlining the SEC's approach to regulating digital assets.
The SEC treats crypto transactions as securities transactions primarily when the crypto assets qualify as "investment contract" securities under the Howey test. This test considers whether there is an investment of money in a common enterprise with an expectation of profits derived from the efforts of others. When crypto assets meet this definition, they fall under the SEC’s jurisdiction, including registration, reporting, and anti-fraud rules.
In a bid to support responsible innovation, the SEC under Chairman Paul Atkins' recent "Project Crypto" initiative is emphasizing a modernized and flexible regulatory approach. The SEC staff has been instructed to use interpretive, exemptive, and no-action relief where appropriate to avoid stifling innovation.
This flexible approach includes developing purpose-fit disclosures, exemptions, and safe harbors for various crypto distributions including initial coin offerings (ICOs), airdrops, and network rewards. The SEC is also exploring an "innovation exemption" — a principles-based relief framework allowing novel business models that comply with core federal securities law objectives but may not fit existing rules neatly.
Moreover, the SEC is open to inquiries about how to conduct such offerings as either registered or exempt transactions. If a crypto exchange primarily trades commodities but raises funds (investment contracts) under an SEC exemption, the entire exchange could fall into the CFTC's jurisdiction, provided none of the assets themselves are considered securities (apart from the investment contract fundraising).
Commissioner Peirce believes that the crypto sector raises questions that highlight the need to reevaluate existing regulations. She suggested that Congress could appoint certain agencies as regulators for specific types of digital assets to make the roles of these regulators clearer.
The SEC has announced four more Crypto roundtables, each covering specific topics: crypto trading, crypto custody, tokenization, and DeFi. The recording of the first Crypto roundtable is available on YouTube.
While numerous regulators might play a role in regulating digital assets, the SEC maintains anti-fraud authority across these categories when transactions occur on SEC-registered platforms or intermediaries. However, the crossover between the jurisdiction split and the difference between a transaction and the crypto-asset itself can make regulation messier.
The CLARITY Act and similar legislative efforts aim to delineate jurisdiction further by categorizing crypto assets into digital commodities (CFTC jurisdiction), investment contract assets (SEC jurisdiction), and permitted payment stablecoins (banking regulators).
In summary, the SEC handles crypto-as-security transactions through securities registration and reporting requirements, anti-fraud enforcement, and by increasingly providing flexible, targeted regulatory relief via no-action letters, exemptions, and safe harbors to support responsible innovation while applying securities laws where crypto assets function as investment contracts.
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