In its live-streamed FinTech Forum on May 31 the staff of the U.S. Securities and Exchange Commission demonstrated high levels of both engagement and patience with cryptocurrencies, distributed ledger technologies (DLT), and digital assets. Along with the Commission’s Chairman, Jay Clayton, and Commissioner Hester “Crypto Mom” Peirce, who both spoke, the SEC staff conveyed a sincere commitment not to quash research and development, investment and business innovation while protecting the investing public. Long story short, however – in the face of demands by the digital assets industry for lighter touch and special handling, the commissioners and staff offered no indication they think cryptocurrencies and digital assets require their own special-purpose regulations.
As you might imagine for an event organized by the government agency which finds itself at the center of a regulatory tempest like the one that swirls around ICOs, cryptocurrency trading, and digital asset investing, the program provided very little opportunity for controversy. Perhaps unsurprisingly, the invited industry speakers were uniformly laudatory about the SEC’s efforts.
Evidencing the SEC’s confidence in its current approach, the opening remarks provided the most regulatory guidance. Representing the SEC were Valerie “Crypto Czar” Szczepanik, head of the SEC’s FinHub; Chairman Clayton; Commissioner Peirce; and Corporation Division Director William Hinman, famous for last year’s remarks about securities morphing into utility tokens. Szczepanik, who served as the day’s master of ceremonies, noted the challenges that the new technologies presented to the Commission, lauding bitcoin, whose “elegant and somewhat enigmatic design” enabled distributed ledgers and kicked off an explosion of development in the field.
Noting that it is not the job of the SEC to be technology innovators, Szczepanik said developments in DLT were causing the SEC to “innovate the way we regulate.” Clayton emphasized the importance to the industry to work with the SEC in “purposeful engagement.” If anyone was going to provide some sparks in the program it might have been “Crypto Mom” Peirce, but she simply noted that the United States has a robust legal framework that should not be allowed to stifle innovation.
Immediately following Commissioner Peirce, Director Hinman pointedly endorsed his division’s April 3 Framework for “Investment Contract” Analysis of Digital Assets, which Commissioner Peirce famously criticized in early May as, “our Jackson Pollock approach to splashing lots of factors on the canvas without any clear message.” Hinman told the audience that they had published the Framework because it is “ . . . what we use.” (Speakers on later panels voiced support for using the Framework, noting that the SEC’s rules are principles-based rather than providing brightline permissions and prohibitions which can be quickly rendered irrelevant by technological progress.)
Hinman also kept the door open to an instrument being issued as an investment security and then transitioning into a utility token, as he famously indicated in a speech last year. Then as now, Hinman did not provide an example of such a transformation and left the audience wondering if he might be referring to Ethereum, the second largest cryptocurrency. ”If someone came to us three years after a token that was security was sold and it later became a non security we could probably work through that and still provide a no action letter,” according to Hinman.
Hinman did indicate that the Division of Corporation Finance is working with a number of applicants who are seeking registrations for their securities. According to Hinman, his division focuses on “what is material to investors” and often finds difficulties with the business plan, especially where the company is in the plan’s timeline. Special DLT-related topics arise in the description of the proposed token issuance, token governance mechanisms if any, token security, and plans for evolving the security into a utility. Some of the applications for registration also raise novel accounting and valuation issues when the registrants are funded with deposits of cryptocurrencies.
Hinman was upfront with the fact that, despite ongoing engagement and dialogue between the SEC and digital assets industry, applicants have not been successful so far in fulfilling the SEC registration requirements even for a Regulation A so-called mini-IPO. Despite these problems, Hinman assured the audience, “We would love to see some issuers succeed.”
We all would.