It Is Time for the SEC To Embark on a More Productive Path to Crypto Regulation

In a lengthy speech delivered to the “Regulatory Transparency Project Conference on Regulating the New Crypto Ecosystem: Necessary Regulation or Crippling Future Innovation?” June 15, 2022, SEC Commissioner Hester M. Peirce said that “Watching the SEC refuse over the past four years to engage productively with crypto users and developers has prompted feelings of disbelief at the SEC’s puzzling, out-of-character approach to regulation. The Commission, of course, occasionally has explained its actions—or inaction—but those explanations often have been confusing, unhelpful, and inconsistent. I have communicated my discomfort with the Commission’s behavior to my colleagues and the public, though the results to date seem to be underwhelming: the agency continues to brush off crypto products and services seemingly without consideration for the consequences. A concrete example, and the one on which I will dwell for a few minutes today, is the Commission’s persistent refusal to approve a spot bitcoin exchange-traded product.”

This refusal, says Peirce, “is of a piece with its more general reluctance to build a regulatory framework for crypto using standard regulatory processes. Instead, the Commission has tried to cobble together a regulatory framework through enforcement actions. Enforcement is the appropriate tool to address the rampant fraud in the crypto space. One-off enforcement actions that represent the first time the Commission has addressed a particular issue publicly, however, are not the right way to build a regulatory framework. For that, Congress gave us other tools, including the authority to craft tailored exemptions and notice-and-comment rulemaking.”

“Enforcement actions short-cut the regulatory process,”she said. “Consider the recent $100 million BlockFi settlement with the SEC and 32 states. BlockFi is one of a number of companies that offers crypto lending products, which were determined to be securities products. The Commission, in its settlement, set out a path pursuant to which BlockFi could register under the Securities Act and register or take steps to qualify under an Investment Company Act exemption from registration.

“The specific path laid out in settlement agreement crafted between BlockFi and the SEC, if successful, is likely to become the standard for regulation of crypto lending. Other crypto lenders, users of those services, consumer advocates, and other interested parties were not part of those negotiations, but the results affect them. A preferable approach would have been, once we identified crypto lending as implicating the securities laws, to commence a rulemaking or invite crypto lenders and other members of the public to come in and discuss the appropriate path forward through careful use of our exemptive authority. We might similarly consider, rather than a reactive enforcement approach, a proactive regulatory approach with respect to non-fungible tokens, stablecoins, decentralized exchanges, decentralized autonomous organizations, and other crypto innovations.”

Peirce believes that “people doing things in crypto need to consider whether the laws, including the securities laws, govern their behavior. For this to happen in a more efficient and comprehensive way, the Commission needs to provide a level of clarity that heretofore has been absent. The SEC could think through issues with people in the crypto community with an eye toward achieving our regulatory objectives pragmatically. By doing so, we could both facilitate good actors’ compliance and inhibit bad actors much more effectively than we do through resource-intensive and delayed enforcement actions.”

For more, as well as her  suggestions and examples of how to proceed, go to the full speech at SEC.gov | On the Spot: Remarks at “Regulatory Transparency Project Conference on Regulating the New Crypto Ecosystem: Necessary Regulation or Crippling Future Innovation?”