SEC official: 'Not all tokens can be defined as securities'

Andrew Gillick , 15 May 2018 - BitcoinCryptocurrencyRegulatory Sandbox

A Securities and Exchange Commission commissioner says she would prefer regulators to be the lifeguards of fintech innovation rather than the enforcers of it.

Rarely do we hear sanguine comments from the SEC in regards to cryptocurrencies, so to hear a commissioner say “I am wary of any blanket designation for all ICOs” as securities is something of a revelation.

"There are, for example, cryptocurrencies like bitcoin.  These function perhaps like money… They may be currency, commodities, or something else, but it is unlikely that, on their own, they’re actually securities," said Security and Exchange Commision (SEC) commissioner Hester Peirce, addressing a fintech conference where she espoused a more relaxed approach to regulation of financial technology in its early stages.

As opposed to a startup being confined within a sandbox of regulatory oversight she preferred the analogy of it being given the length and breadth of a beach to freely stretch itself creatively.

“My fear that regulators will grab hold of the shovels and buckets is why I am often wary of so-called regulatory sandboxes.  I am entirely in favor of finding ways to make appropriate regulatory allowances that clear the way for innovation to flourish,”                                                                                                           - SEC Commissioner Hester PeirceWhat most troubled her about the controlled environment of a sandbox is that the regulator sits inside it with the entrepreneurs looking over their shoulder in a parental role that can stifle the creative process: “They seem to be working very well for some regulators. That said, I am mindful of the fact that a regulator’s mere presence can change the tenor of a fruitful conversation. Hence, the beach, not the sandbox, is my preferred approach.”

The commissioner advocated regulators taking the role of the student, for the meantime, rather than the lecturer when approaching the industry, conceding that she and her team are on a steep learning curve.

Pitfalls regulators must try to avoid

Peirce mentioned three bias pitfalls that regulators are prone to falling into:

  1. The Howey test: is the framework in place since the 1930s to define whether an asset is a security or not. However, you must first fully understand what that asset is and how it works, to proceed with the rest of the assessment - and with a weak understanding of cryptocurrencies the rest of the process is skewed.

  2. Fear of the unfamiliar: Lack of familiarity can breed a climate of fear and anxiety and there is a risk that when something truly innovative comes along the incumbents focus on the negative rather than positives of that technology.

  3. Stifling innovation: Even if the regulator side-steps the above it may insert itself inappropriately into the creative process by micromanaging the innovation environment. “The law deserves respect, but technological progress should not be bound by the limits of the regulator’s lawyerly imagination”, Peirce said.  

Constructive criticism

The commissioner regretted that most of the SEC’s communication around ICOs and tokens has come from the Division of Enforcement, which, as the name suggests, is a sort of police force for the SEC that collects evidence of possible securities law violations and recommends prosecution. She acknowledged there is a dearth of understanding about the technology in that department and effort is needed to learn more about it.  

In place of regulating with scrutiny, the commissioner suggested approaching ICOs and tokens with curiosity and recommends the SEC establish a crypto industry FAQ web page devoted to questions and comments, just like the Japanese financial regulator has done

She closed her speech on an almost romantic note: “As we sit atop our lifeguard’s stand and survey the beach, however, let’s not lose sight of the benefits new technology can provide in the area of capital formation, market efficiency, economic growth, and overall societal well-being.”

In a sweltering climate where the letters SEC and CFTC strike fear into hearts of digital investors, this kind of open-mindedness from a top official will be a sea breeze to cool the nerves.