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Financial Services Law Insights and Observations

SEC commissioner discusses state of the crypto industry

Securities Digital Assets SEC Cryptocurrency


On January 20, SEC Commissioner Hester M. Peirce spoke before the Digital Assets at Duke Conference discussing cryptocurrency lessons for the future. In her remarks, Peirce discussed the current state of cryptocurrency, stating that “the crypto world is burning.” She encouraged the audience to “not wait for regulators to fix the problems that bubbled to the surface in 2022” within the crypto industry, and instead incentivize good behavior. She also emphasized “the point of crypto,” which she considers “is not driving up crypto prices so that you can dump your tokens on someone else. Digital assets need to trade, so centralized venues or decentralized exchange protocols are necessary, but trading markets are not the ultimate point.” Among other things related to crypto, she said lessons from traditional finance are equally applicable in crypto. For example, she noted that “[h]igher returns come with higher risks.”  She also suggested that the SEC should conduct some form of notice and comment process to resolve the thorniest crypto-related policy issues.

Peirce noted that “sandboxing is coming.” She then explained that SEC Chair Gary Gensler has requested “‘staff to sort through how we might best allow investors to trade crypto security tokens versus or alongside crypto non-security tokens,’[] which is an area in which experimentation through no-action letters and exemptions would be possible.” She also strongly agrees with his sentiment that “‘[g]iven the nature of crypto investments . . . it may be appropriate to be flexible in applying existing disclosure requirements.’”

She also expressed that “[r]egulation is not a silver bullet, but understanding whether, by whom, and how the company is regulated can help you calibrate your own due diligence.” Peirce said that the SEC “needs to conduct better, more precise, and more transparent legal analysis” in crypto. She noted that its continued use of the precedent from the 1946 U.S. Supreme Court case in SEC v. W.J. Howey Co. has “fleshed out the investment contract subcategory of securities, we repeat the mantra that all, or virtually all, tokens are securities,” calling the SEC’s application of the test to crypto tokens “askew.” She then noted that “an initial fundraising transaction involving a crypto token can create an investment contract, but the token itself is not necessarily the security even if it is sold on the secondary market.” Peirce also noted that the SEC often “refers to the crypto assets themselves as securities.”