Crypto companies have been arguing for years that they need more guidance from the Securities and Exchange Commission to understand whether their products are securities and need to be regulated as such.
But so far, the conversation hasn’t been very productive on either side, SEC Commissioner Hester Peirce told PYMNTS’ CEO Karen Webster. For their part, companies have been reluctant to accept an open invitation to work out a solution that balances innovation while protecting the markets.
“We have the authority to provide that kind of relief, but we just haven’t shown that we’re willing to be creative in tailoring that relief in a way that makes sense,” Peirce said. “So that would be the most, I think, productive thing that we could do. And if we did that, I think we’d see lots of people willing to come in and work with us.”
This clarity is important for newly established companies that would like to bring new products to the market but don’t know how to navigate these waters. Additionally, it is also important for incumbents that would like to design their own crypto agenda but, as highly regulated companies, need more clarity before taking that step.
One thing that would bring clarity is to define what crypto assets should be classified as securities, and as Peirce stated, “I wouldn’t say that everything in crypto should fall under the SEC’s jurisdiction. I think some of it does already, and I can make an argument why, for example, one would say the SEC could regulate crypto trading platforms.”
However, there are still many questions unanswered about how to decide that an asset is a security, whether that asset would be a security forever or if it could morph into something that is not a security. Sometimes, the way a crypto asset functions doesn’t quite lend itself to existing securities regulations.
Another important point that Peirce mentioned is the collaboration between agencies as, once again, more guidance is needed.
“I would love for us to work more closely with the CFTC (Commodity Futures Trading Commission) on thinking through some of these issues, but, you know, there is a lot of cross-government interest in crypto now,” Peirce said. “That’s not to say that Congress couldn’t come up with a different model. They could decide we want to have a separate crypto to asset regulator.”
The idea of having a separate crypto regulator has pros and cons, but crypto and traditional finance are going to merge down the road and it may be complicated to have a separate regulator at that point, Peirce said.
In the meantime, Peirce suggests a collaborative approach: Companies should come to the SEC, and the regulator should allow certain experimentation before coming up with rules.
This could take different forms — for instance, before the regulator established rules for exchange traded funds, they had to use an exemptive application approach to allow those to move forward and develop. Safeguards or sandboxes are another option that would allow companies to try new crypto products and decide down the road which rules apply to them.
In the commissioner’s view, companies don’t come forward because they’re not seeing the kind of productive engagement from regulators that they would like to see.
There is a concern that companies may get an answer they don’t like, but as Peirce said, “As regulators, (we) need to say, ‘OK, you can’t do it that way because of this concern that we have, but we’re willing to work with you to meet our objectives as regulators, but also meet your need, your interest in moving forward with your product.’”
So, when will companies have the clarity they need? According to Peirce, 2022 will be a year in which we will have more clarity on several aspects, as there is a lot of interest not only at the SEC, but also among banking regulators, the CFTC and Congress.