Inaugural crypto roundtable in SEC’s search for regulatory approach

The US Securities and Exchange Commission’s (SEC) Crypto Task Force kicked off a series of roundtables this month, designed to devise a regulatory approach to crypto asset activities. The first event on March 21, attended by securities law experts, was entitled “How we got here and how we get out — Defining security status”.

Over several hours, the panel debated what defined a security, how this could be applied to digital assets, and the ongoing implications of the 79-year-old Supreme Court case SEC v WJ Howey Co, which provides a framework for identifying whether a transaction is an “investment contract” under the Securities Act of 1933. The so-called “Howey Test” has emerged as a key factor in determining if a digital asset or other investment is subject to securities laws.

The wide-ranging general discussion on what constitutes a security as it relates to digital assets boiled down to “I know it when I see it”.

SEC restart

Acting chair Mark Uyeda and commissioners Caroline Crenshaw and Hester Peirce opened the roundtable, which all three hailed as marking a new era of regulatory clarity on crypto, led by the US. “Spring signifies new beginnings, and we have a new beginning here: a restart of the commission’s approach to crypto regulation,” said Peirce.

However, Crenshaw was more cautious, reminding the panel that they were “discussing the legal underpinnings of the $120 trillion US capital markets, which remain the envy of the world” and that the SEC’s foundation is built on the definition of a security.

“We cannot poke holes in the foundation without expecting the walls may crack,” she said. “That said, I understand there is a view that current law is not working for crypto. And I agree that policy must keep pace with new products and technologies.” She welcomed all views but urged speakers to consider “the potential benefits and costs of proposed actions”.

Former SEC commissioner Troy Paredes moderated the roundtable, which included Chris Brummer, professor of financial technology, Georgetown University law centre; Miles Jennings, general counsel, a16z crypto; Rodrigo Seira, special counsel, Cooley; and John Reed Stark, John Reed Stark Consulting.

Defining a security

The discussion tackled issues such as what made something a security, and whether this was permanent; and if an asset could start out as a security and convert to a non-security, or vice versa. It also examined whether a security’s characteristics could be translated into a simple taxonomy to cover the different types of crypto assets existing both today and in the future.

Brummer of Georgetown Law described the discussions as “difficult”. On one hand, the members of this roundtable are “philosophers”, he said, “because we’re talking about the nature of securities law”. However, he commented that the roundtable should also see themselves as “auto mechanics” whose objective is to come up with “actionable” items. 

Stark of John Reed Stark Consulting commented that he often gets “death threats” after talking on US news shows like 60 Minutes about crypto and how it should be regulated. 

He said the courts decided on the economic reality of digital assets 79 years ago. “People buying crypto are not collectors, we all know they are investors. And the mission of the SEC is to protect investors,” he added.

Over the past few years, crypto firms have hired “the best law firms in the world” to fight the SEC, and “they lost, just about, every single time”, Stark noted. In his view, securities law — even regarding digital assets — had been decided, and the SEC couldn’t abdicate its responsibility and mission to enforce it. 

He cautioned that the risks of digital assets are “tremendous” and don’t outweigh the benefits, concluding: “Where’s the utility? If it all went away tomorrow and you weren’t speculating in it, you wouldn’t care.”

Better guidance needed

However, Jennings of a16z crypto says the discussion was not about ignoring principles-based regulation. Instead, the industry needed to define what a digital asset’s substance actually is.

He criticised SEC actions over the past few years, which did not provide guidance and diverted rulings to court cases. There were “entrepreneurs everywhere” who were “looking to do the right thing, and what they’re faced with every day as a result of this regulatory uncertainty is bad actors taking advantage of [that] to push to the limits of where securities laws potentially apply,” he added.

Jennings recommended the SEC should take a “technology-neutral” approach, which involves looking at what differentiates a decentralised network such as Ethereum from equity ownership in a company like Apple.

“Apple is a system that is controlled by humans, Ethereum is not controlled by humans. As a result, the risk profile of that underlying asset [and] the trust dependencies associated with that asset are very different,” he said.

Not one-size-fits-all

Cooley’s Seira said the current securities regulatory framework is not fit for purpose for all crypto instruments. When you try to “jam [crypto] into securities” the industry risks “deprecating a lot of its unique qualities”, he added.

“The reason I got into this space was because I saw it as a technology that enabled a new form of human collaboration,” he said. “It allows people to come together in a native way and collaborate over open source and public goods in a way that wasn’t possible before, and it gives people technological powers within a system that are different from legal rights.”

By “legal rights”, Seira is talking about traditional understandings of share ownership or company registration, which he sees as different from the decentralised trust network inherent in on chain networks that underpin crypto currencies.

Four more roundtables are planned in the Crypto Task Force’s “Spring sprint towards crypto clarity” series.

Also participating in the roundtable were Collins Belton, managing partner, Brookwood PC; Sarah Brennan, general counsel, Delphi Ventures; Lewis Cohen, co-chair, CahillNXT; Coy Garrison, partner, Steptoe; Teresa Goody Guillén, partner, BakerHostetler; Lee Reiners, lecturing fellow, Duke University; Benjamin Schiffrin, director of securities policy, at non-profit Better Markets.