Hester M. Peirce is an American attorney specializing in financial market regulation. Peirce is currently a commissioner at the Securities and Exchange Commission (SEC). A discussion about cryptocurrencies and their compliance requirements in the United States.
A lot has happened in the regulatory area around cryptocurrencies in the last year. After a long period of restraint, authoritative legal foundations around digital assets have emerged, particularly in the USA. For example, U.S. banks received permission from the Office of the Comptroller of the Currency (OCC) to hold digital assets for their customers, as well as to use private stablecoins for payment processing. Nevertheless, several authorities are active in different areas.
The Securities and Exchange Commission (SEC), is responsible for regulating the securities market and protecting investors. In dealing with cryptocurrencies, they visibly appeared in the environment of the ICOs launched in 2017/18. This primarily involved the classification of the issued tokens, which can be appropriately classified as securities and are thus subject to specified processes of raising capital. While the developers of the EOS Blockchain reached a settlement with the SEC, last month the then third largest crypto project Ripple (XRP), was charged by the SEC.
As part of last year’s CFC conference, CVJ.CH was able to interview SEC Commissioner Hester M. Peirce and shed more light on the topics of crypto regulation, classification of securities, and the role of the U.S. internationally.
CVJ.CH: Dear Ms. Peirce, first of all thank you very much for making this interview possible. Let’s dive right in: how do I know whether my token will be considered a security by the SEC?
First, I must note that the views I express are my own and do not necessarily represent those of the SEC or my fellow Commissioners. The SEC does not typically say whether something is or isn’t a security. You know, with everything, we make it a little bit more difficult than some other jurisdictions. Our definition of security is very broad and it’s intended to be flexible. The people who drafted our laws feared that if securities were very specifically defined, that people would say: “Oh, yeah, this is not a stock or bond. It’s something else we’ll call it, say a banana. And this banana is not a security because it doesn’t fit within this list, but it acts just like a security”.
So what we tried to do with our rules is to cover anything that functions like a security, even if it doesn’t have a name that sounds like security. And that’s how some of the some of the digital assets get pulled into our regime when they look like any other security. A lot of people in the crypto world are trying to figure out these questions about whether different digital assets are securities. What we at the SEC say is, it’s a judgment you have to make and these are kind of the factors that you need to think about when making that judgment.
We’re always open to have a conversation, but don’t expect that you’re going to get a list of tokens that says yes, this is a security and no, this isn’t. Because that just isn’t the way we work in any area. You always have to figure it out for yourself and we’re happy to talk to you about it as you’re trying to figure it out.
We have seen exchanges move to “crypto-friendly” jurisdictions and not a single exchange I’m aware of has ever moved TO the United States. What is there to say about the regulation of crypto exchanges in the US?
Some exchanges wouldn’t be regulated by us, but regulated at the state level. Some of them are located in New York, for instance, dealing with a New York Bitlicense, so there are some regimes at a state level that would govern exchanges.
Meanwhile, US citizens find themselves unwanted by many international trading platforms. How did it come to that?
One area of concern is that the line about what is, and what isn’t a security, has not been particularly clear in the US. Hence, trading platforms are cautious because if they list a token that we consider a security, and they are based in the US, they would have to be registered as an exchange under our rules. That involves responsibilities that they may not want to take on. And it’s complicated because once you start dealing with securities, you better think of a whole host of issues and the people who are trading those securities have to think about whether they might have to comply with certain rules as well. So everything becomes complicated and that’s why some people have just said, you know what, we’re going to move out of the US and maybe even put a disclaimer on our website saying, we don’t want to deal with you, if you’re American.
So, the lack of clear specifications about what tokens are a security, the trading platforms just leave the country?
Some do, but others have decided to stay here. For instance, there’s been an initiative that involves some exchanges and other participants in the market to try to come up with their own rating system to decide whether or not something should be classified as a security. They are working together to figure out what classifies a security, rather than give up and leave.
Given all that confusion, does the SEC plan to issue more specific rules?
Since most of the day-to-day work is managed by the SEC staff, not the commissioners, the guidance published so far has come from the staff. Now, one of the criticisms that I and others have made is that the guidance does raise more questions than it answers. What’s more, through our enforcement actions, we’ve been taking quite a broad view of what token should be considered to be securities. I don’t think that’s been particularly helpful in giving people comfort that some tokens might not be treated as security.
So what is the SEC gonna do? I don’t know, although I’m hoping to get out a safe harbor that would at least let people not have to worry about the securities laws as they’re developing their network.
What do you mean by ‘safe harbour’?
We’re thinking about one possible way to simplify and accommodate ICOs where the sale of token is used to finance construction of a network and where these token can then be used to access that network. Perhaps the people selling these token should not have to comply with the full set of securities laws. But again, if really what you’re trying to do is just fund a company you may still want to conduct an IPO and it will fall under our rules. So the safe harbor is really for people who are setting out to develop a functioning token network.
And I hope to have some relief for those people. I certainly share the frustration of people who are trying to build a crypto project and are trying to figure out how whether and how it interacts with our security flaws. I do think we need to provide more clarity, and I do understand why people are frustrated, so I’m sympathetic to the need for us to do something.
While it is important to me, we’ve got a lot of other issues on our plate at the SEC. I think sometimes it’s difficult for people in this space to understand why we move so slowly on things. Where FINMA has managed to carve out a fair amount of time and attention to give to this topic, we at the SEC do have a ton of other things on our plate and it’s sometimes difficult to get crypto issues to the top of the priority list.
Do you think this will be solved in 2020 or will it take more time than that?
It’s possible as formulating more precise guidance could be done relatively quickly, but having said that, I am just one of five, so I have to be able to convince some of my colleagues. Another effort I should mention is that there are a few people on Capitol Hill, in the Congress, who are quite interested in this issue. There have been bills proposed on what should and shouldn’t be a security and they’ve been considering different options. Now, as you might have heard, Congress is very busy with a lot of things right now so I don’t know if they’re going to work on that, but it’s a possibility.
So it will eventually depend on the Congress how fast this will proceed?
On the one hand, we at the SEC could act on our own. But Congress could also act on its own and could tell us what to do. So there are two different paths, and we can be working on both of them at the same time.
In Switzerland, we see a growing number of projects where assets, such as real estate, are tokenized. What’s your take on this?
I suspect that we’ll see more of that happening over time as a lot of people are thinking about how traditional securities markets will change as traditional securities are digitized. It’s an area where we will certainly be involved in in a regulatory capacity in terms of other kinds of assets being tokenized. I think it’s also a trend that’s worth watching in many ways, you know, asset backed securities already exist. You can take assets and you can cut them up and you can sell pieces of them. Using a token to sell those pieces may turn out to eliminate some inefficiencies and maybe eliminate some intermediaries. It will be an interesting area to watch. It will probably have many touch points with our securities regulations. Other questions will require us to do some thinking and also require the industry to do some thinking in terms of custody, for example.
Whether or not these tokens can be sold to US investors would depend on the facts and circumstances. In many cases, taking our existing rules into account, there may be no issues. In other cases, there may be certain places where our rules need adjustment. I can imagine that tokenization could help to solve some of the other types of problems that we see in this space. People will be thinking about how tokens can be used in a particular space and to the extent people need us to rethink certain aspects of our regulations, you can come and talk to us and we can think it through.
So, what’s on the SEC’s agenda for 2020?
The agenda is first getting to know the space better and we’ve got a number of people who are spending a lot of time on this. Those folks will continue to meet with market participants and continue to learn more about it. The second aspect, my own agenda, will be for us to work on this safe harbor idea. Then, there are some other folks who are interested in getting more SEC-registered crypto offerings. So far, we’ve seen one or two of those qualified by the SEC as they went through our normal process, and we may see more of those.
There’s also crypto entities that want to have broker dealer or alternative trading system registrations. Some folks would like to see exchange traded products with Bitcoin or Bitcoin futures as an underlying. I’m sure we will continue to work on those topics as people come in and ask us if they can do those things. We’ll also have enforcement actions when people are either engaged in fraud and calling it crypto or not complying with our offering rules.
And then, of course, our inspections: we have a group of people who go out and inspect investment advisors, to look at what they’re doing. This will be a valuable place for us to learn what the market is thinking about crypto and how interested are investors in this space, what are some of the ways that investment advisors are looking at this space? That will help us to learn more about this area.
And then another point I should say is we’ll be working with our fellow regulators at the federal, state, and international level, so we can learn from each other. For example, we can learn from what Switzerland and other jurisdictions are doing and try to improve our own approach.
Talking of foreign regulations, which are sometimes a little bit further than you are, do you see a sense of competition or economic pressure?
I like to see economic activity happening in both Crypto Valley as well as in the United States. I don’t think that it’s a competition necessarily, but I certainly want the United States to be a place where people want to come to build things. I absolutely do feel pressure when I see people leaving the United States, going to other jurisdictions that have the regulatory framework figured out better than we do. My preference would be for us to have a regulatory framework here in the US where people say, “hey, the US is a great place to innovate””. And right now, I don’t hear that very often as it relates to crypto.
The crypto community has experienced you as very open minded and even “crypto-friendly”. Have you used Bitcoin yourself, perhaps even own some?
No, I am not allowed to own any because of my current role. I need to stay objective and make decisions for the right reasons, not because of what I own. Owning some crypto would be a conflict of interest in this regard.
Hester M. Peirce was appointed by President Donald J. Trump to the U.S. Securities and Exchange Commission and was sworn in on January 11, 2018. Prior to joining the SEC, Commissioner Peirce conducted research on the regulation of financial markets at the Mercatus Center at George Mason University. She was a Senior Counsel on the U.S. Senate Committee on Banking, Housing, and Urban Affairs, where she advised Richard Shelby and other members of the Committee on securities issues.