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“We, along with other regulators, are asking how existing rules apply in this space and whether a new regulatory framework would work better. If we act 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.”
Commissioner Hester M. Peirce went on to discuss the SEC’s approach towards digital assets. She uses the example of the Supreme Court’s Howey Test to highlight the process the SEC uses to discern whether something is an investment contract (a particular type of security) or not. Peirce has actually been dubbed “Crypto Mom” in the past due to her interest in cryptocurrencies and her favorable opinion of them.
“[I]t is the nature of the transaction that determines whether an offering of securities has occurred, not the item being sold. The oranges in Howey were not securities standing on their own, nor were the groves in which they grew. By contrast, the overall package sold to investors—the ‘opportunity to contribute money and to share in the profits of a large citrus fruit enterprise managed and partly owned by [third parties]’—was a securities offering and therefore triggered federal securities law.”
When relating to cryptocurrencies, she added:
“Tokens sold for use in a functioning network, rather than as investment contracts, fall outside the definition of securities.”
If you’re still unclear exactly how these lines are drawn, you are not alone. There is a tremendous amount of pressure on gaining clarity over these issues; after all, who wants to hold a token that may be regulated obsolete? Cryptocurrency and Blockchain have now been around for 10 years, but in the grand scheme of the finance industry, this is a small amount of time. There are still many teething problems to work through which worry regulators and investors alike.
The SEC is trying to accommodate cryptocurrencies and digital tokens into a system that was never designed for them, trying to fix a square block into a circular hole. Commissioners like Hester Pierce are an important part of the landscape of change.
Commissioners with positive attitudes towards cryptocurrency will be significant in driving the change needed to ensure that cryptocurrencies can be a safe and accepted part of society’s financial fabric.