In a wide-ranging interview at the Bloomberg Financial Innovation Summit, SEC Commissioner Hester Peirce asserted that (i) there is no need for a regulator focused solely on cryptocurrencies, and (ii) the regulatory structure eventually built around crypto must recognize the unique aspects of its underlying technology.

She offered the following views:

  • Cryptocurrencies. Ms. Peirce highlighted the need to have a regulatory framework that distinguishes between utility tokens and security tokens, and suggested her safe harbor proposal as a potential solution to this particular issue.
  • Bitcoin ETFs. Ms. Peirce urged the SEC to rethink its approach to "spot bitcoin exchange-traded products," stating that the standard that the SEC applies to such products is different than that applied to similar products. She noted that this distinction in application is likely rooted in the SEC's view that spot bitcoin markets do not have the same characteristics as securities markets with respect to investor protection. She pointed out that there are other ways that investors can be protected, including through self-regulation and arbitrage mechanisms.
  • Stablecoins. Ms. Peirce explained that while there is some sense to taking a prudential regulatory approach to stablecoins, stablecoin products vary and the regulatory approach taken should depend on the facts and circumstances of each product. In particular, Ms. Peirce highlighted the fact that there are potentially stablecoins that fit within the securities framework and that would have to be regulated accordingly.
  • Trade Settlement. Ms. Peirce thought that there was more room to shorten the trade settlement date from T+2. Additionally, she noted that this may be an area in which regulators could learn from the crypto markets, where settlement happens much more quickly.
  • Investor Education. Ms. Peirce said that the SEC should respond to issues such as "gamification" of trading with a heightened focus on investor education in particular, to ensure that investors know what they are doing and are educated about trading and the potential ramifications of such trading. She recommended that the SEC should review the accredited investor definition, so that more people can participate more broadly in the capital markets.

Commentary Steven Lofchie

Crypto-enthusiasts should be mindful that not even Commissioner Peirce, who might generally be regarded as the most supportive of the current financial regulators to crypto markets, believes that (i) digital assets require their own special regulator or (ii) all stablecoins are outside of the securities laws. Proponents of a better and clearer regulatory approach to digital assets need to be realistic and to be respectful of genuine policy interests, including taxation, financial stability, AML, and investor protection. Better regulation is not going to mean no regulation.

Commentary Sebastian Souchet

The question of how to appropriately delineate between utility tokens and security tokens is an important and recurring issue for the regulation of digital assets. In many ways this is one of the fundamental questions of digital asset regulation because it requires that regulators and market participants identify what specific characteristics constitute a "security" within the scope of the Supreme Court's Howey  and/or Reves  tests. Notably, in June 2018, then-Director of the SEC's Division of Corporation Finance William Hinman gave a speech  considering this issue and the related, arguably more complex issue of "desecuritization" (i.e., the idea that a digital asset transaction may change over time such that it is no longer characterized as a security offering). Additionally, as has been illustrated in a number of no-action letters and enforcement actions, and by the SEC's 2019 Framework for Investment Contract Analysis of Digital Assets, the answer to this question is further complicated by the fact that many digital assets exhibit both functional "use" values and the characteristics of an investment in a financial enterprise. 

Whether a token is a utility token or a security token will always depend on the particular facts and circumstances. However, it would be beneficial to the stability of the digital asset markets, and to investors in such markets, if the SEC provided further guidance on what factors it considers in distinguishing between the various tokens. 

Cadwalader's  Steven Lofchie  contributed to this comment.

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