On Friday, February 8, US Securities and Exchange (SEC) Commissioner Hester Peirce spoke at the University of Missouri School of Law. In her speech, she explained the SEC's role in protecting investors while promoting innovation, analyzed different ways of looking at initial coin offerings (ICOs), and addressed issues with how the SEC has approached crypto-backed exchange-traded fund (ETF) proposals. In talking about these issues, she pushed forward her position that, when it comes to regulating the cryptospace, the SEC needs to develop new methods and ways of thinking.
Commissioner Peirce began by talking about the struggle between entrepreneurs and regulators, noting that most of the time regulators interact with people already in the financial industry. Often, these are larger companies that have established relationships with the SEC and teams specifically designed to deal with regulators. The conflict comes with the entry of new entrepreneurs, in this case, cryptocurrency advocates pushing new ideas. According to Commissioner Peirce, "Regulators, for their part, tend to be skeptical of change because its consequences are difficult to foresee and figuring out how it fits into existing regulatory frameworks is difficult."
The commissioner mentioned that while society is often eager to implement and adopt new and emerging technology, innovation is not always good; it could actually hurt aspects of the economic system the SEC is obligated to safeguard. Peirce thinks that advancements in blockchain and cryptocurrency technology have given the SEC an opportunity to "rethink its approach to innovation and ask how existing rules apply in this space and whether a new regulatory framework would work better." Peirce feels that if the SEC acts "appropriately, we can enable innovation on this new frontier to proceed without compromising the objectives of our securities laws – protecting investors, facilitating capital formation, and ensuring fair, orderly, and efficient markets."
One suggestion Commissioner Peirce has in this regard is to revamp the way the SEC evaluates ICOs. Currently, the SEC uses the Howey test, first developed in 1946, to determine if a project falls under the guidelines of an "investment contract which is a particular type of security that includes some token offerings."
While Commissioner Peirce feels that the Howey test does offer some insight regarding ICOs and securities regulations, she also feels this test is not necessarily the best method because "token offerings do not always map perfectly onto traditional securities offerings." In her speech, the commissioner highlighted a Coin Center report stating that because ICOs are often decentralized, the company conducting the ICO may not control or even own the capital being raised. Furthermore, many of the functions traditionally carried out by "issuers or promoters under securities laws" may be carried out by a group of people or "no one at all."
Commissioner Peirce mentioned that there are many different roles in "token environments," be they mining, development services, or other. She wants the SEC to be careful when applying the Howey test to not be so broad. As an example, she used the SEC's decision to declare DAO tokens securities despite the fact that many investors played key operational roles with the company.
Peirce also fears that some of the SEC's regulations may be too rigid, which can stifle innovation. For this example, she used the closing of Basis, which had to shut down and return $133 million due to difficulties complying with regulations. While she declined to give her thoughts on that particular ICO, Peirce did say she would pay close attention to "legitimate projects" that are hindered by laws and regulations, including crypto ETFs.
Commissioner Peirce has been critical of how the SEC looks at crypto-backed ETF proposals. In her speech, she reiterated these concerns, stating that the SEC approach to these proposals is often "merit-based," which Peirce feels causes the SEC to depend on its own judgment rather than the expertise and insight of investors. Peirce stated:
"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."
In her speech, Peirce stated that the SEC is working on developing "supplemental guidance" to help investors and company owners determine whether a specific ICO or crypto-related project falls under the scrutiny of securities regulations. On February 10, the SEC tweeted that some guidelines were already available on the SEC website.