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| 1 minute read

Crypto Regulation By Enforcement = Regulation That Stifles Legitimate Innovation

The SEC's policy of drawing the line between securities and non-securities principally through enforcement actions forces innovators desiring to take advantage of decentralized blockchain technology for legitimate commercial purposes to navigate between the untenable Scylla and Charybdis of not innovating or innovating and risking the SEC's litigation wrath.

To date, cryptoassets are the principal fuel that incentivizes decentralized communities to participate in consensus protocols necessary for decentralized blockchains to function. However, it is not clear what level of decentralization satisfies the SEC that a cryptoasset associated with a blockchain is not a security. Moreover, many cryptoassets may start their life cycle as a security but become a non-security over time, like ether.

The SEC and CFTC should work together to propose where that line is, and how to manage morphing cryptoassets in their early stages (see, e.g., SEC Commissioner Hester Peirce's safe harbor proposal) and afterwards. They've done this a few times before (with the help of Congress) with futures on security indices that are futures under certain enumerated scenarios (exclusively under the watch of the CFTC) and security futures (under the joint watch of the CFTC and SEC) under other specified scenarios, and they can do it again. This is a far better path than engendering continuing uncertainty and stifling innovation through enforcement actions in the absence of clear guidance.

Commissioner Peirce's recent speech "Lawless in Austin" provides an outstanding overview of the current regulatory morass regarding the classification of cryptoassets, as well as the consequences (some unintended) of this morass.

Even if we were to accept enforcement as a proper way to provide clarity, it is not working. Definitive determinations of security-ness have only occurred in the few instances in which a court (rather than the Commission) has decided the matter. Even in those instances, a determination that a token was offered initially as a security does not say anything about the token itself being a security, either at the time of the initial sale or in secondary transactions. - SEC Commissioner Hester Peirce


blockchain, crypto, financial regulatory, corporate