SEC Commissioner and outspoken proponent of cryptocurrency acceptance, Hester Peirce, released a riveting speech on why she believes the SEC needs to consider tokens that are sold for use on functioning networks as not being securities.
She further advised the SEC to tread lightly when approaching crypto regulation so as not to smother or stifle the growing industry.
She also suggested that it is entirely possible that the US Government will need to create an entirely new asset class in order to accurately define and regulate cryptocurrencies.
Fighting the Good Fight
The fight to get cryptocurrency regulated in such a way that the government of countries like the United States helps it grow has been a grueling one. We’ve seen hundreds of projects smacked down by the hammer of the SEC, companies that deal with cryptocurrency being investigated, and dozens of individual US states taking strong and harsh anti-cryptocurrency stances. But it’s not all gloom and doom, thankfully. That’s because the crypto community has a powerhouse fighter in our corner – Hester Peirce.
This week, Peirce made several very relevant and hope-inducing comments in a speech given at the University of Missouri School of Law. A copy of the speech was uploaded to the SEC official website.
The theme of the speech was related to the constant battle between entrepreneurs, innovation, and entrenched regulators that are forced to view modern innovators through the lens of the past.
“Congress may resolve the ambiguities engendered by Howey by simply requiring that at least some digital assets be treated as a separate asset class. Congressmen Warren Davidson and Darren Soto recently introduced a bill in the House intended to amend the federal securities laws to do just that, provided that the token truly operated in a decentralized network.”
One common refrain throughout the speech was references about what’s known as the Howey Test. This case is used to determine whether a financial instrument is a security. For those unaware, if any type of investment or financial vehicle is determined to be a security, it is subject to a litany of complex and cumbersome regulations and rules that must be complied with, lest the issuer face severe penalties, fines, or worse.
But the Howey Test is itself becoming increasingly archaic and therefore, much more difficult to apply to complex cryptocurrency and blockchain-based applications. That’s because the test itself, according to Peirce, is already 70 years old and relates to an investment that was tied to orange groves. This begs an obvious question, is it fair to judge cryptocurrencies based on something that happened before most of us – or even most of our parents – were born?
“While the application of the Howey test seems generally to make sense in this space, we need to tread carefully. Token offerings do not always map perfectly onto traditional securities offerings.”
To Be, or Not to Be (a Security)
Earlier, the SEC director Bill Hinman stated in no uncertain terms that bitcoin is not a security. However, as mentioned above, numerous projects or being labeled by the SEC as having released securities, so where do we draw the line?
According to peers, she believes that tokens (as she refers to them) that are sold to be used on active, decentralized networks are not securities. For example, if a project sells a token that can be used to be redeemed for a service, and that network is currently functional and not just a plan, then that would qualify.
If we use the example of a blockchain based VPN provider, if this hypothetical company sold tokens in exchange for VPN network access, and the system is up and running when the sale began, then this is not a security. Of course, we are lawyers, this is just a general example.
Ambiguity Not Completely Evil
If there’s one thing about regulation that frustrates both crypto innovators and investors, it’s the ambiguity of the law. That’s why today, crypto innovators are still bumping into walls and facing seemingly arbitrary action from the SEC.
While this can be frustrating, Peirce looks at it from another angle. In her opinion, some degree of ambiguity can actually be beneficial in the long term. This is how she puts it. If the laws are immediately made clear and concrete from the beginning, then this could artificially limit or restrict potential avenues for growth or adoption before the ever have the chance to exist in the first place.
“Ambiguity is not all bad, of course. We might be able to draw clearer lines once we see more blockchain projects mature. Delay in drawing clear lines may actually allow more freedom for the technology to come into its own.”
A Word on ETF’s
Another hot topic in the crypto versus regulations here, Peirce made mention of the existing demand for cryptocurrency based exchange traded funds. Peirce notes that perhaps regulators need to take a step back and think about their approach. Specifically, she notes her concern that perhaps the SEC is coming at these types of products in a manner that “borders on merit-based regulation”. In civil terms, this means Peirce is concerned the SEC is allowing personal opinions and emotions to interfere with what should be logical decisions based on legal precedent only.
“I am concerned that our approach with respect to such products borders on merit-based regulation, which means that we are substituting our own judgment for that of potential investors in these products. We rightfully fault investors for jumping blindly at anything labeled crypto, but at times we seem to be equally impulsive in running away from anything labeled crypto. We owe it to investors to be careful, but we also owe it to them not to define their investment universe with our preferences.”
We <3 Hester Peirce
In a world that seems increasingly anti-cryptocurrency (especially following the ICO madness of 2017), it’s good to know that we have someone with real political clout backing us up and helping to be a voice of reason to the SEC. And so to Hester Peirce, on behalf of the cryptocurrency community, thank you for sticking up for us in helping calm and cool, rational decisions have a place in the SEC’s public and private discourse.