At a FinTech conference on May 2, 2018, SEC Commissioner Hester Peirce shared her thoughts on how the SEC and other regulators should go about regulating the ICO market.
Focusing on the evolving nature of the industry, Commissioner Peirce took the position that regulators should not play a major role in shaping new technologies; rather, they should oversee the activity as lifeguards monitoring a beach. In this way, regulators should stick to what they do best (monitoring the market, providing guidance on the application of legal rules to specific situations, and bringing enforcement actions when violations occur) as opposed to dictating creative decisions about complex technology (which might occur under the “regulatory sandbox” approach being implemented by some regulators).
Commissioner Peirce also took the position that blanket regulation does not work. Instead, regulators should take a “facts and circumstances” approach that promotes function over form. In the case of ICOs, not all ICOs are created equal, and not all tokens are the same. Tokens may present themselves in one form but in fact support many functions, each requiring a different regulatory regime.
The remarks show that the SEC is still very much trying to figure out themselves the answers to the tough questions facing the ICO market, including questions such as: What, for example, are the coins once the environment is completed? Are they still securities, subject to all the regulations that follow securities into the secondary market? Or are they something else? A commodity? A currency? Something in the nature of a Chuck E. Cheese token? When do they change into something new? When the environment is minimally functional? What if its developers make substantial upgrades to its functionality such that the value of the coins increases with the increased access to the new functionality?
That said, the SEC acknowledges that the lack of clarity on the tough questions puts the market in a difficult position in ways that could stunt innovation. In this regard, the SEC is asking the market to help them understand blockchain technology and digital tokens in order to craft appropriate regulatory measures. The Commissioner’s remarks indicate a desire by the SEC to be more accessible to market participants without being viewed as an adversary.
Overall, the Commissioner took a balanced approach of recognizing the need for appropriate regulatory frameworks while at the same time understanding the great innovation presented by blockchain technology and new forms of financing.
Unfortunately, we still have a long way to go on removing the regulatory uncertainty surrounding ICOs, but, fortunately, the SEC appears to be open to figuring out a reasonable path forward with input from market participants.
A full version of Commissioner Peirce’s remarks are available here.
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