In early November, SEC Commissioner Hester Pierce delivered a fierce speech emblematic of her pro-crypto stance, offering a critique of her agency’s hostile treatment of digital assets and other innovative financial technologies in the United States.
The following opinion editorial was written by Alex Forehand and Michael Handelsman for Kelman.Law.
Hester Peirce Calls for Clarity as SEC’s Crypto Approach Faces Scrutiny
In an homage to Hobbes, Commissioner Peirce warned how a “regulatory environment that is characterized by instability, uncertainty, and fear renders entrepreneurial prospects ‘nasty, brutish, and short.’” It is hard to describe FTX, 3AC, and Luna/Terra—a cascade of financial fallouts that resulted in the loss of over sixty billion dollars in the span of six months—as anything but “nasty, brutish, and short.” Not to mention Celsius, Voyager, and the countless other U.S. companies that had similarly abrupt failures.
In a world where the SEC “has neither clarified its jurisdictional boundaries nor set out commercially feasible compliance pathways,” Americans will continue to face the fallout of bad actors avoiding compliance, and watch the rest of the world enjoy the innovation provided by those who are happy to comply with a clear and sensible framework.
Clarity and Collaboration Over Enforcement
Commissioner Peirce rightly appreciates the critical role innovative financial markets play in enhancing people’s lives. While recognizing how appropriate regulation encourages people “to take the risks necessary for innovation and investment,” she also appropriately cautions against overregulation, explaining how “[e]xcessive regulation, unclear regulation, or regulation that is enforced capriciously” stifles entrepreneurial efforts that would otherwise benefit society at large.
To sustain this balanced approach to governance, regulators must welcome new and disruptive ideas with a clear and consistent framework. Unfortunately, the SEC’s approach to crypto has often been inconsistent, particularly with respect to crypto-based exchange-traded products (ETPs), as Commissioner Peirce pointed out. The SEC has also failed to abide by a consistent framework for classifying digital asset products as investment contracts under Howey. While recent approvals of spot bitcoin and ether ETPs are a step in the right direction, the restrictive conditions placed on these products and the ambiguity that remains around the SEC’s enforcement of Howey illustrate a regulatory hesitation that continues to stifle market efficiency.
The SEC’s current approach sends a chilling message to innovators: entrepreneurial efforts may face arbitrary hurdles and closed doors, regardless of merit or compliance intentions. Commissioner Peirce’s call for a fair and predictable regulatory environment reminds us that stability and clarity are necessary for innovation to flourish, and the public would be better served by the SEC adopting a more welcoming approach.
The SEC’s decision to regulate via enforcement actions, rather than the provision of clear guidance, has cultivated a climate of fear and uncertainty. Although the SEC advocates a position of “come in and register,” Peirce chided the Commission for “fail[ing] willfully to articulate a viable path to registration.”
Those operating in the crypto space face immense difficulties in attempting to register with the SEC, often finding it impossible to comply due to prohibitive costs or technological complications, or worse yet, facing an immediate enforcement action by the Commission. The SEC’s adversarial approach not only harms the companies involved but also acts as a “major deterrent to operating in the digital assets space in the United States,” ultimately depriving the public of access to transformative technologies.
Commissioner Peirce’s critique underscores the need for a clear regulatory framework. Instead of defaulting to regulation by enforcement, the SEC must work with market participants to develop practical frameworks that enable compliance and maintain investor protection while fostering innovation and technological advancement.
A Path Forward
Commissioner Peirce recognizes the potential of blockchain technology to revolutionize traditional finance, and the resulting need to support its development with a clear regulatory framework. Tools like decentralized ledgers, smart contracts, and asset tokenization offer novel solutions to longstanding industry challenges, from cross-border payments to streamlined trading processes.
Yet, much of this development is happening outside the United States due to regulatory barriers at home. Rather than reaping the rewards of a digital asset industry thriving within the bounds of a clear framework, Americans have been forced to bear the consequences of an oppressed and lagging financial technology industry.
Commissioner Peirce reinforced her support for the micro-innovation sandbox she proposed earlier this year, which would allow digital asset companies to run “pilot projects” without the fear of enforcement actions. Regulatory sandboxes are well-chartered territory and would generate valuable insights for regulators and market participants alike, positioning the United States as a leader in fintech.
Commissioner Peirce has once again reminded us that regulation should provide a framework for progress, not act as a deterrent. With current SEC Chairman Gary Gensler recently announcing his resignation, one can hope the future Chair shares Commissioner Peirce’s vision of a balanced regulatory environment that respects both the rule of law and the spirit of innovation.
Whether you are an investor, entrepreneur, or business involved in cryptocurrency, our team is here to provide the legal counsel needed to maneuver this complex landscape. If you believe we can be of assistance, schedule a consultation here.
This article originally appeared at Kelman.law.
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