What has happened?

Hester M. Peirce, a Commissioner with the U.S. Securities and Exchange Commission (SEC), has said that the agency's unwillingness to provide clear crypto guidance is in danger of "stifling" the industry.

What does this mean?

Speaking in a personal capacity at the Securities Enforcement Forum in East Palo Alto, California last week, Peirce said that one year ago the "burning question" was how to decide when issuing tokens constituted an offering of securities and that, at the time, she had worried that the SEC would "stifle" the growth of the industry.

A year later, and her fears have been far from alleviated.

"I will admit today that I was very wrong, not about whether the SEC would stifle the industry’s growth — it has — but in how it would do it," she said.

Peirce had feared that the "SEC would lead with its enforcement powers", which would have allowed anxieties around the risks of new technology to "overshadow the opportunities it presents."

Instead, it is the Commission's unwillingness to take meaningful steps that is stifling the industry.

Peirce said:

"I worried that hasty regulation would smother the industry in its infancy. My concerns did not become reality. The enforcement actions we have taken to date in the crypto space have — for the most part — exhibited appropriate restraint. On the regulatory side, hasty is not the word I would use to describe the SEC’s pace. It is not the SEC’s overzealous action that has stifled the crypto industry, but its unwillingness to take meaningful action at all."

Further, Peirce argued that the SEC has failed to provide clear guidance on how people can comply with securities laws, which "do not cease to operate as a new industry develops".

One thing the agency did do right, though, was to establish FinHub.

The network provides a point of contact for all things financial technology at the SEC and Valerie Szczepanik, who oversees it, also organised outreach events to engage with the industry.

Still, Peirce said that she viewed other efforts in the crypto space "as more of a mixed bag".

For example, Peirce said she was concerned that the recent SEC framework to assist issuers with conducting a Howey analysis of potential token offerings "could raise more questions and concerns than it answers" and that anyone not steeped in securities laws and "its attendant lore" will not know what to make of the guidance.

Equally, the recent issuance of the first token no-action letter in response to an inquiry from a charter jet company "may in fact have the effect of broadening the perceived reach of our securities laws."

"The staff’s letter did not stop at merely stating that the token offering would not qualify as a securities offering, but highlighted specific but non-dispositive factors. In other words, the letter effectively imposed conditions on a non-security. … I do not believe there was anything gray about the area in which [the company] planned to operate, but issuing this letter may give the false impression that there was," Peirce said.

Unanswered questions

Peirce also said many questions remain unanswered, especially in respect of brokers that buy and sell securities and of investment advisers and funds that might want to include digital assets in their portfolios.

The commissioner said:

"The SEC has yet to provide guidance to the public or FINRA on any of the core questions. The result is that many would-be brokers and trading platforms are stuck in a frustrating waiting mode; they are unable to get clear answers to questions about how they may proceed in this market."

To conclude, Peirce noted that the SEC has taken the first step in developing guidance by giving some explanations as to how it looks at Howey in the digital asset context, but its “Jackson Pollock approach to splashing lots of factors on the canvas without any clear message leaves something to be desired, so we still have work to do in clarifying what factors are the most important in making that determination."

Ultimately, if the SEC does not provide clear guidance for the market to follow soon, stakeholders will seek other jurisdictions that have done so.

“The U.S. securities markets have historically been the envy of the world; I do not want heel-dragging by the SEC in crypto to mar that well-deserved reputation,” she finished.

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