A collegial chat between regulators from the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) highlighted an impressive day-long agenda attracting 850 attendees to the DC Blockchain Summit from the Chamber of Digital Commerce in Washington, D.C. yesterday.
The Chamber’s Annemarie Tierney didn’t hesitate in her moderation role in the morning session with the blockchain industry’s two most important regulatory bodies and immediately brought to the fore the key differences in jurisdiction between the two agencies – securities vs. commodities – and under which agency do the various tokens and cryptocurrencies land. Commissioner Hester Peirce of the SEC went first and repeated the gyst of her well-known views that do not necessarily sync with the rest of the SEC commissioners and its Chairman:
“A token [that] is sold as part of securities offering does not in my mind necessarily mean that the token continues on in its entire life to have to be treated as a security. That’s one of the areas where I’d like to see us provide more clarity. It has not been our standard practice over the years to identify what are security offerings and what aren’t. It’s pretty broad rules. And we expect that when people are out there raising capital, they comply with our initial offering rules, regardless of what it is. But that’s led to the treatment of certain things – securities offerings that you might not think the underlying object to be sold is [part of the securities offering]. So that’s the distinction – I would like us to deal with it better (…)”
CFTC Commissioner Christy Goldsmith Romero weighed in next saying that she agreed with her counterpart in the SEC on the overall need for greater clarity – particularly around that which is decentralized. Beyond the jurisdictional question, in order to help her create a regulatory framework, Goldsmith Romero appealed to the audience on educating her and the CFTC on how the blockchain community innovates and also protects consumers:
“So as I’m thinking about what does the framework look like, I am really focused on the specific areas of customer protections as well as the guardrails on market integrity – i.e. there’s the custody, clearing and settlement. And there’s also what I think is very foundational, which is Know-Your-Customer (KYC), Anti-Money Laundering (AML). So, as companies are coming in [to the CFTC], I’m asking them, ‘Let’s start with who your customers are and how you are going to provide customer protections in a way that’s at the same level of our regulated entities now,’ and then the market integrity I just mentioned. So, one of the things that is super important for me as a regulator is to be very open minded.”
Regarding current regulation through enforcement by the SEC versus the rules provided by the CFTC which also provides opportunity for comment by the public, Ms. Goldsmith Romero of the CFTC offered, “We’ll embark on a proactive regulatory approach, and of course, there’s a role for enforcement. We all know there’s plenty of fraud in the space, even once we have the rules in place.” Goldsmith Romero added, “There’s room for enforcement there as well. It’s a balance, but I think we’ve got the balance.”
Ms. Peirce reiterated her view that the “exemptive order process” (similar to no action letters – read about it) should be used rather than enforcement settlements currently implemented by the SEC. She said the the current “balance is wrong.”
On behalf of the Chamber’s membership, Ms. Tierney then broached the subject of blockchain companies’ hesitancy to even talk to the SEC – and its different divisions such as FinHub – in that it could open up an enforcement action.
Ms. Peirce was sympathetic and admitted that the SEC is taking a different approach than what she would pursue and offered herself as a possible navigator of sorts: “It is important for us (the SEC) to hear from you. It’s important for my colleagues to hear from you -and keep me posted when you go in and you have these meetings and you get feedback. It’s helpful if I know what that feedback is. So come talk to me at the same time as you talk to them.”
On her Token Safe Harbor proposal (see proposal – and on GitHub), Peirce was not optimistic that it was going to be implemented at the SEC anytime soon, but she thought that it had potential within recent proposed legislation. She said, “This is an area where Congress could really push the SEC forward. It’s not unusual for the SEC to drag its feet. This isn’t just with crypto – it’s with small business capital formation [for example] which has been an area where we’ve traditionally not wanted to move forward until shoved forward by Congress. So this may be necessary here as well.”
Commissioners Goldsmith Romero and Peirce then discussed where the two agencies are working together with Ms. Goldsmith Romero noting her own employment history at the SEC. She also raised for the audience the Technology Advisory Committee – which includes a subcommittee devoted to digital ledger technologies – that she now guides at the CFTC. She encouraged the blockchain community stakeholders to get involved in the “participant-led” forum as a way to communicate with the CFTC on important innovations and the details therein. Ms. Goldsmith Romero was sanguine, “I feel like we’re all at the cusp of being able to move forward in a way that’s very positive from a federal regulatory standpoint.”
On the White House Executive Order, Ms. Peirce said with a wry grin that she did not expect the SEC to send her to any of the EO discussions with other government agencies and furthermore did not expect to any additional clarity on jurisdictional issues as a result. Still, she said, this was par for the course when it comes to blurred lines that can happen between the two agencies on many different types of matters and cited as an example a previous securities-based swaps issue and working with former CFTC Commissioner Brian Quintenz.
In talking about the EO, Ms. Goldsmith Romero said, “For me, it is hugely important to have the White House recognize the need to develop a regulatory framework around digital assets. It’s maybe less about jurisdictional divide and more about these broad principles to say that the US has an interest in leading in this area, in promoting responsible innovation, and also expanding safe and affordable access to financial services. That’s hugely important. There’s also the reduction of risk in this space. That’s what I’ve been looking at -and then looking at these important guardrails to protect consumers, investors and businesses.” She then specifically pointed to Ms. Peirce as someone with whom the CFTC looks forward to collaborating.
With 42 bills in Congress regarding regulation according to Ms. Tierney, the two commissioners agreed that Congress holds the requisite power for closing the regulatory gap.