Signs emerged at the kickoff of the SEC's crypto rulemaking process Friday that even the crypto skeptical have begun to accept the idea of a tailored regulatory regime.
Why it matters: The U.S. securities regulator has resisted calls for years to craft rules fit to purpose for the crypto industry. That is now changing.
What they're saying: Even if everyone agreed that all digital assets are
securities (and they do not), that still leaves a lot of downstream
questions, noted Collins Belton, managing partner, at Brookwood P.C.,
during the Securities and Exchange Commission's first public roundtable
hosted by the agency's crypto task force.
One of the crypto
skeptics on the panel, Lee Reiners of Duke University, seemed to agree —
at least in part. For example, he noted that digital assets need
disclosure guidelines that make sense."I don't think it's
controversial to suggest that the information an investor in a crypto
asset would want is just fundamentally different than the information an
investor in, you know, Apple stock would want," Reiners granted.
Yes, but: Friday's
discussion also surfaced the challenges the SEC will face in crafting
rules to govern thousands of assets with various distinguishing
characteristics.
The first hurdle is ironing out the major
question of which digital assets the agency should require to get
registered in the first place.
The big picture: The big question before the panel was whether or not the SEC's jurisdiction is the transaction (the moment a thing changes hands) or the thing itself.
"The very top of the funnel is, do we have a securities transaction, or do we have an exempt security?" Belton said.
This
has meant the initial sales of new tokens have been conducted in
private (the transaction), without structured disclosures, and then
those tokens (the thing) have been traded later on secondary markets, explained Lewis Cohen, an attorney at CahillNXT.
Thousands of tokens
Even
if the question is the simple one of whether digital assets are
securities or not, that still glosses over the diversity of the market,
said Miles Jennings, general counsel of investing firm A16Z Crypto.
Bitcoin
is the one digital asset that no one thinks of as a security. No one
controls it. It is completely decentralized. No company can decisively
drive its value up or down, Jennings pointed out.
Meanwhile the failed crypto exchange FTX
made its own digital asset, FTT, which went very close to zero when FTX
failed. Investors knew its value depended entirely on that company.These two assets are not the same at all.
The other side: "So
how do you determine when these dimensions are sufficiently
decentralized enough to ensure profits don't come from the efforts of
others?" Reiners asked.
"I just think again, that is a completely futile task for any agency to try to attempt."
Instead, they should leave it to the courts, he argued.
What we're watching: This is likely to be a lengthy process, but eventually the task force will float a proposal to the full commission.
If that gets through, then everyone in the public will get a chance to comment.
Meanwhile, Congress has been taking on these same questions.