US Securities and Exchange Commission (SEC) Commissioner Hester Peirce and the SEC’s Crypto Task Force recently underscored the new administration’s commitment to engage with digital asset market participants in the near term. Commissioner Peirce issued a statement titled “There Must Be Some Way Out of Here” calling for public input on more than 50 questions with the goal of understanding how to better regulate crypto assets.
Commissioner Peirce’s statement signals a significant shift in the SEC’s approach to engaging with the digital asset community compared to the prior administration. By engaging directly with the crypto asset industry in this way, Commissioner Peirce and the Crypto Task Force are demonstrating their desire for collaboration. The Crypto Task Force’s questions cast a wide net for particularized knowledge to advance a crypto asset regulatory framework that balances investor protection with technological innovation.
The statement invites digital asset industry participants to engage with the SEC’s Crypto Task Force and help shape a more predictable crypto asset regulatory environment.
At the same time, there will likely be increased scrutiny of the industry by state attorneys general and other state regulators.
In the statement, Commissioner Pierce outlines how the Crypto Task Force is exploring innovative approaches to bring clarity and consistency to crypto regulation. The primary areas highlighted include clarifying crypto taxonomy, addressing public offerings and associated disclosure, creating a safe harbor for blockchain projects, addressing secondary market trading challenges, and addressing crypto’s custody and recordkeeping challenges.
With respect to the classification of crypto assets, Commissioner Pierce and the Crypto Task Force drafted questions with the following proposed taxonomy in mind:
Notably, Commissioner Peirce stated her belief that the fourth category is the largest category of crypto assets, which differs markedly from the expressed view of former SEC Chair Gary Gensler. It also suggests the potential involvement of the Commodity Futures Trading Commission (CFTC) for oversight of many of those assets, which is consistent with several pending legislative drafts as well as the administration’s inclusion of the CFTC in its President’s Working Group on Digital Asset Markets.
Commissioner Peirce’s statement notes that the Crypto Task Force is looking for innovative solutions within the SEC’s statutory framework and that align with the tripart mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. Beyond the initial taxonomy, Commissioner Peirce is seeking input from members of the public via written submission and through meetings with the Crypto Task Force.
The 48 questions were split into the following categories as outlined in the statement:
Security Status
The analysis the SEC has historically used to determine whether a crypto asset is a security or is being offered or sold as part of an investment contract can be difficult to apply consistently to crypto assets, particularly when the ecosystem is in its nascent stages of development. Accordingly, the Crypto Task Force has set a goal to make it easier for investors, market participants, and the SEC to categorize crypto assets and crypto asset transactions.
The Crypto Task Force’s questions demonstrate a focus on information that may help establish a regulatory framework that provides clarity, legal precision, and economic rationality in determining the security status of crypto assets. The questions also target crypto assets used in various blockchain technology functions, such as staking and mining, that may not fit within the existing securities law framework, but will nonetheless need to be addressed.
Scope of SEC Authority
In order to provide clarity as to the scope of the SEC’s authority over crypto assets, Commissioner Pierce believes the SEC should focus on the “economic reality” of the offering rather than simply classifying the asset as a security or not a security. The Crypto Task Force seeks to clarify whether specific crypto asset categories, such as stablecoins, wrapped tokens, and NFTs, should have their security status explicitly addressed under federal securities laws, while developing a workable merit- and technology-neutral taxonomy that remains “technology neutral.”
Public Offerings
Commissioner Peirce suggests that the use of registration mechanisms designed for traditional securities offerings may not be appropriate for crypto asset offerings and that a registration regime tailored to crypto asset offerings may be preferable. The Crypto Task Force’s questions with respect to public offerings are focused on whether new mechanisms for registration are needed, or revisions to disclosure and reporting requirements are sufficient. In particular, the Crypto Task Force is hoping to determine whether tailored disclosure requirements should be developed for crypto assets, and what information is essential for investor protection.
Additionally, input is sought on the availability and usefulness of Regulation A, asking “Would revising aspects of Regulation A make it more useful for crypto asset offerings?”, which is of note because during former SEC Chair Jay Clayton’s tenure, which pre-dated former Chair Gensler’s tenure, the SEC qualified the first public offerings of tokens under Regulation A in 2019.
Registration Safe Harbors
Commissioner Peirce previously proposed that the SEC consider adopting a non-exclusive safe harbor that would provide a time-limited safe harbor from the registration requirements under the Securities Act for offers and sales of crypto assets during the development of a blockchain project with the intention that the expiration of the safe harbor’s term would coincide with the decentralization of the network. The Crypto Task Force’s questions generally focus on the availability, boundaries, evaluation, and disclosure requirements of the proposed safe harbor (or other suggested safe harbors) with the mandate that any offering under such proposed safe harbor must be subject to anti-fraud liability.
Trading
Commissioner Pierce suggests that the SEC’s authority in secondary market trading is generally limited to assets that are securities based on their intrinsic economic properties or rights. She notes that a variety of issues arise when regulating secondary market platforms and market participants that trade securities alongside non-securities.
The Crypto Task Force’s questions focus on how to best regulate market participants who facilitate trading in two distinct market structures, especially whether a new registration status for crypto asset trading platforms is required, or if adapting existing regulations would be sufficient to address interoperability between securities and non-security crypto assets.
The Task Force is further seeking input on challenges posed by execution in on-chain and off-chain environments for broker-dealers subject to best execution obligations, and separately, how regulators, self-regulatory organizations, and intermediaries can use open-source data to monitor crypto markets.
Custody
The statement acknowledges the many questions surrounding the custody of crypto assets by the securities industry and, thus, the Task Force is seeking input on questions related to existing custody rules, the need for new custody rules, or providing guidance to facilitate custody arrangements for crypto assets.
In particular, for broker dealers, the Crypto Task Force is considering whether to modify or withdraw its Special Purpose Broker-Dealer statement and how crypto assets should be evaluated under the net capital rule, including their liquidity, risk assessment haircuts, and challenges in applying existing recordkeeping requirements to crypto assets.
For investment advisers, the Crypto Task Force’s questions focus on the compliance challenges faced by registered investment advisers, including best execution, recordkeeping, and disclosure obligations, while examining the feasibility of investment advisers using client assets for staking or governance purposes and mitigating security risks associated with hot/cold storage requirements.
Finally, the Task Force’s questions examine the challenges faced by registered investment companies when holding crypto assets, including the limitations placed upon existing custodians and what potential rule modifications would be required to safely accommodate crypto-related activities like staking, voting, and mining.
Crypto Lending
The statement then focuses on crypto platforms offering custodial and noncustodial services through which individuals can lend their crypto assets in return for interest and seeks input from market participants to ensure the SEC understands these products and offerings.
Crypto Exchange-Traded Products
Commissioner Peirce then focuses questions on how the Commission should address listing applications for crypto asset-based exchange-traded products (ETPs) moving forward. The statement references Exchange Act Section 6(b)(5), which requires exchange rules to be designed to prevent fraudulent and manipulative acts and practices.
Previously, as discussed in the statement, the SEC considered whether the exchange had a comprehensive surveillance-sharing agreement (SSA) with a regulated market of significant size related to the underlying or reference asset. However, moving forward, the Crypto Task Force is seeking input on how the SEC should address listing applications for crypto asset–based ETPs, and whether it should focus on appropriate measures of market size and liquidity, key factors for assessing price integrity, and how the reliability and dissemination of pricing data should be considered.
Tokenized Securities
Commissioner Pierce suggested that tokenization also may give rise to unique risks and challenges, but the Crypto Task Force’s questions in this regard focus on the role of transfer agents in a blockchain environment, the implications of tokenizing registered investment company securities, redeemability of tokenized securities, atomic settlement, and conflicting regulatory regimes, among other questions, including how tokenized securities interact with National Market System requirements.
Sandbox and Other International Issues
Commissioner Peirce also discussed her previous proposal relating to the creation of a “sandbox” environment for small scale projects that could operate cross-border under multiple regulatory regimes. The Crypto Task Force is seeking suggestions on the structure and functionality of the sandbox.
If you would like to respond to the SEC Crypto Task Force’s questions or otherwise engage with the SEC or CFTC on their respective calls for input, particularly in light of the possibility of state action, please contact your regular Morgan Lewis lawyer or one listed below who can facilitate such discussions.
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