The Future of Digital Asset Regulation: Key Regulators Give Their Thoughts at the D.C. Blockchain Summit (Part 1)

By Daniel S. Cohen

On March 6th, the Chamber of Digital Commerce held its Fourth Annual D.C. Blockchain Summit. SEC Commissioner Hester Peirce and CFTC Chairman J. Christopher Giancarlo headlined the event. After the cheers for “Crypto Mom” and “Crypto Dad” died down, Commissioner Peirce and Chairman Ginacarlo shared their general views on next steps for digital asset regulation and principles by which regulators should oversee emerging financial technologies.

Commissioner Peirce encouraged the digital asset industry to engage with the SEC Commissioners, the Division of Corporation Finance, the SEC’s FinHub, and her office directly to discuss the specific regulations that do not achieve their intended purpose when applied to digital assets and blockchain-based services.  Specifically, she emphasized the need for industry participants to submit comment letters to the SEC on issues such as the Custody Rule. She also encouraged industry participants to meet with SEC staff to discuss their eligibility for a no-action letter, and to submit applications for such relief. With respect to regulatory guidance, she stated the various divisions within the SEC, including the Division of Corporation Finance and the Division of Trading and markets, are drafting staff-level guidance regarding the application of federal securities laws to digital assets, but she did not provide a timeline for their publication. She noted that such guidance will provide limited value because such guidance will not be issued by the SEC itself. She expressed her hope that the SEC will issue Commission-level guidance, but noted that no such guidance is forthcoming.

Commissioner Peirce was asked whether companies that have launched a non-compliant initial coin offering can settle voluntarily with the SEC without a penalty. In response, Commissioner Peirce explained that entities have in the past and may in the future “turn themselves in” to the SEC; if they do so, they will likely need to offer their investors the right to rescind their investments, but they might not face additional sanctions. In her concluding remarks, she encouraged blockchain companies seeking capital to file for a Regulation A offering, asserting that a digital asset-based Regulation A offering would prove the viability of the current securities framework.

Chairman Giancarlo shared his views on the key trends driving disruption in the financial services market, and the four principles by which federal regulators should conduct themselves. Chairman Giancarlo explained that the rapid adoption of the internet, particularly via mobile devices coupled with the disintermediation of many financial transactions, including but not limited to, payments and capital formation, and the lack of technological sophistication among regulators’ staff  have disrupted regulators’ ability to regulate the financial services market as well as they could in the past.

To counteract these disruptions, Chairman Giancarlo argued that regulators must:

  1. adopt an “exponential growth mindset”;
  2. create an internal Fintech stakeholder;
  3. adopt a quantitative approach to regulation; and
  4. embrace market solutions.

Regulators must recognize that technology grows exponentially and that industry will implement that growth at a fast pace. Thus, regulators must respond with the same mentality and vigor as industry participants. To do so, regulators should create an internal team dedicated to studying and communicating with FinTech companies and entities. The CFTC created LabCFTC to serve that function. Regulators also need to start gathering data directly rather than relying on market participants. Finally, he encouraged regulators to embrace market solutions rather than select them. He pointed to the bitcoin futures self-certification process as proof that market solutions within a reasonable regulatory framework will promote the outcomes that best serve the market.

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