For Commissioner Peirce, one potential consequence of designating tokens and ICOs as securities is the impact on the trajectory of the underlying technology, as “[i]nnovations that might otherwise have occurred that don’t fit within that ‘security’ framework may never come to fruition.”
Accordingly, she proposed a case-by-case approach to this security status question as the “best path forward, for the time being.” Although she outlined a broad framework in which certain cryptocurrencies like bitcoin perform monetary functions, certain cryptocurrencies perform a utility function, and certain cryptocurrencies used in ICOs “look the most like securities,” she emphasized that “[g]iven the undeveloped nature of this area, I am wary of any blanket designation for all ICOs.”
While noting that the SEC has thus far primarily engaged with cryptocurrency topics in the domain of enforcement on topics relating to securities law violations and fraud, Commissioner Peirce also encouraged market participants to engage with the SEC “in a more neutral space” by meeting with staff in the Division of Corporation Finance. Further, she raised several more fine-grained questions about how financial regulation can evolve to accommodate the cryptocurrency space, including how ICOs inter-relate with current exemptions to securities laws, how governance structures shape the regulatory approach to ICOs and how distributed ledger technology could be potentially applied elsewhere in securities regulation.
Commissioner Peirce’s remarks followed recent testimony that SEC Chairman Jay Clayton provided to the Financial Services and General Government Subcommittee of the House Committee on Appropriations on April 26, 2018 in connection with the SEC’s 2019 fiscal year budget request. Chairman Clayton’s testimony struck a more cautious and skeptical tone on cryptocurrency than Commissioner Peirce expressed in areas including whether cryptocurrencies should be evaluated as securities and what the proper role is for financial regulation in the cryptocurrency space.
Of particular note, Chairman Clayton remarked that a cryptocurrency like bitcoin that functions as a pure medium of exchange and replacement for traditional sovereign-backed currency would not qualify as a security, but that, by contrast, digital tokens used to finance projects would most likely qualify as securities. Further to this point, he noted that to extent the extent that a cryptocurrency qualifies as a security, then it should be regulated as a security, subject to all of the disclosure requirements that accompany that designation.
Additionally, Chairman Clayton addressed the regulatory approaches other financial regulators around the world are taking with respect to cryptocurrency. He pointed out that he has seen “further skepticism” from financial regulators internationally as to whether cryptocurrencies will in fact be a substitute for sovereign currency and whether governments will allow cryptocurrencies to be integrated into their financial systems, particularly with regard to functions like anti-money laundering, anti-terrorist financing and monetary policy.
The views expressed in Chairman Clayton’s testimony do, however, accord with Commissioner Peirce’s remarks in a number of areas. Chairman Clayton commented that there is “undoubtedly” utility in both cryptocurrency tools and their underlying technology, which he characterized as “promising.” He also expressed a concern that a failure to resolve these cryptocurrency questions now would later lead to an “inevitable reaction” that “would make this technology less than it would have been.”
Taken together, Commissioner Peirce’s remarks and the preceding testimony by Chairman Clayton suggest the possibility of an SEC approach to cryptocurrency that would seek to better understand the underlying technology and its potential, and to identify the proper regulatory approach in light of that significant potential.