SEC crypto roundtable debates tailored versus traditional regulatory approach

Crypto industry leaders and US Securities and Exchange Commission (SEC) top brass debated the use of traditional methods for protecting investors with emerging innovation in digital asset trading versus a tailored regulatory approach for crypto.

The discussion took place two days after crypto advocate Paul Atkins was confirmed as the new SEC chair, when the agencyʼs Crypto Task Force held the second in its roundtable series, entitled Between a Block and a Hard Place: Tailoring Regulation for Crypto Trading.

SEC commissioner Hester Peirce opened the discussion by comparing the process to ingesting apple cider vinegar with “the mother”, a mass of bacteria created during fermentation. “A close look at the tangled mass might scare you, but ingesting it is good,” she said. “So, too, the topics before our panel: we are looking at an unsightly legal and technical knot of issues, but the conversation — among our expert panel — will be good for us.”

The roundtable discussed whether portions of existing regulatory frameworks could be adapted to crypto trading. The industry leaders also discussed a desire for the SEC and the Commodity Futures Trading Commission (CFTC) to cooperate better and avoid jurisdictional conflicts.

Vertically integrated

Commissioner Caroline Crenshaw warned that regulatory bodies must consider how crypto trading platforms may or may not fit into the US’s existing regulatory regime for national securities exchanges and alternative trading systems.

In traditional finance, brokerage, clearing, and custody are typically performed by separate registered entities because of the high risk of conflicts of interest and risks for investors. Crypto exchanges, however, operate as vertically integrated firms.

Despite this, Mark Uyeda, who is still serving as acting chair at the SEC, pointed out that blockchain technology could offer the potential to execute and clear securities transactions in ways that “may be more efficient and reliable than current processes”, while decentralised finance software protocols could allow users to transact on a 24-hour, seven-days-a-week basis via smart contracts.

“The drafters of the federal securities laws did not contemplate the use of blockchains or smart contracts to perform the functions of a transfer agent, facilitate the exchange of securities, or clear securities transactions,” he added.

Real benefits

During the roundtable, Dave Lauer, co-founder of Urvin Finance and We the Investors, emphasised the “real benefits” of crypto technology, such as the opportunity for real-time settlement, collateral management and transparency.

However, he said: “Thereʼs nothing magical about the blockchain that eliminates the core principles of investor protection. If you want true adoption as an industry, you need to have guardrails, and you need to give the public confidence in what theyʼre buying or selling.”

Throughout the three-hour roundtable, the nuanced concept of whether digital assets and decentralised finance could exist within a traditional finance framework — and, therefore, be subject to existing regulatory requirements — was debated.

Katherine Minarik, chief legal officer at Uniswap Labs, commented that it was her “wish” that the SEC not deliberately or accidentally undermine the benefits and future potential of this technology by requiring it to “look just like C-Fi [centralised finance]”.

According to Minarik, the SEC should “champion” peer-to-peer transactions, self-custody technology and “the value of privacy and safety”, which can serve as a “check against the level of trust investors, [and] everyday people, are required, to place in third parties”.

Minarik went on to argue that peer-to-peer transactions should not fall under the SEC’s authority, because intermediaries present certain risks that decentralised platforms do not. “Many of those risks substantially or entirely disappear when, for example, a participant in a transaction retains custody or control of their own assets,” she added. 

Regulatory co-operation

One idea that came up often during the roundtable was a merger — or, at least, better collaboration — between the SEC and the CFTC.

Lauer was one of many at the event who commented on jurisdiction confusion over which agency should regulate crypto, dubbing it a “turf war” between the two agencies. This “turf war” stems from differing opinions as to whether crypto assets should be considered commodities or securities and, he believed, has directly caused “investor harm”.

Gregory Tusar, VP, institutional product, at cryptocurrency exchange Coinbase, said there should be a recognition that commodities and securities need “not to just live side by side” but be integrated in a way that offers a holistic market structure.

Tusar also pointed out that there is a broad universe of potential token types that need to live side by side in applications such as consumer wallets. The conversation about securities “leads us to believe that there are these very clear swim lanes, but in actual fact, itʼs nowhere near going to be that clean and precise”, he added.

Chelsea Pizzola, associate general counsel at Cumberland DRW, commented that as one of the alumni of the SEC, she felt the commodities regulator’s principles-based approach to regulation is beneficial for crypto and innovation because “it offers flexibility” and “a less prescriptive approaches to regulation”.

Other roundtable participants included: Nicholas Losurdo, partner, Goodwin Procter (moderator); Tyler Gellasch, president and CEO, Healthy Markets Association; Jon Herrick, chief product officer, New York Stock Exchange; Richard Johnson, CEO and founder, Texture Capital; Christine Parlour, chair of finance and accounting, UC Berkeley; and Austin Reid, global head of revenue and business, FalconX.