On May 2, 2018, Commissioner Hester Peirce shared her views regarding how cryptocurrencies fit within the regulatory landscape of the United States Securities and Exchange Commission (“SEC”). Click here for the full remarks.
Commissioner Peirce, recognizing that not all tokens are alike, acknowledged that the appropriate regulatory scheme for cryptocurrencies will be the product of a function over form analysis. Additionally, Peirce noted that the functionality of a token changes over time, requiring a more nuanced regulatory scheme to ensure market safety.
Peirce confirmed the well-documented stance of the SEC applying the test articulated in United States v. Howey (the “Howey Test”) to determine whether a token is a security. The central question under the Howey Test is whether the token is an investment in a common enterprise with the expectation of profits solely through the efforts of another. Although some initial coin offerings (“ICOs”), or at least aspects of some ICOs, satisfy the Howey Test, Peirce cautioned against applying a blanket designation for all ICOs. Each ICO must be analyzed through a fact and circumstances analysis that does not stop with the Howey Test, but continues as the token’s functionality evolves.
To address the challenges in devising an appropriate regulatory structure, Peirce stated that the SEC must: (1) improve its understanding of tokens and distributed ledger technologies in order to properly apply the Howey Test; (2) not allow lack of familiarity with tokens and distributed ledger technologies to breed anxiety and bad regulation; and (3) not inappropriately insert itself into the creative process (limiting technological progress by attempting to fit new innovations into existing regulatory frameworks). While Peirce encourages an open interchange with the SEC to ensure better understanding and supervision; she believes government-sponsored “regulatory sandboxes” that allow businesses to develop and test innovative products have the potential to be examples of regulators inappropriately inserting themselves into the creative process.
While much is still to be seen on how the SEC will monitor cryptocurrencies, Peirce’s comments exude a positive and measured approach regarding the need for regulators to adapt traditional regulatory regimes to the non-traditional characteristics of cryptocurrencies.