SEC Launches Crypto Regulatory Task Force

Yesterday, SEC Acting Chairman Mark Uyeda launched a crypto task force to develop a “comprehensive and clear regulatory framework for crypto assets.” Commissioner Hester Peirce – dubbed “Crypto Mom” by the industry for her longstanding support and criticism of the SEC’s enforcement-focused approach – will lead the task force. Commissioner Peirce’s prolific dissents and public remarks provide some insight into potential priorities for the new task force and underscore why her appointment is such welcome news to the industry:

• Commissioner Peirce has criticized the SEC for taking crypto-related enforcement actions before issuing appropriate guidance. On February 9, 2023, the SEC charged Payward Ventures, Inc. and Payward Trading Ltd. (together known as Kraken) with failing to register the offer and sale of their digital asset staking program. In dissent, Commissioner Peirce stated that, “Instead of taking the path of thinking through staking programs and issuing guidance, we again chose to speak through an enforcement action . . . [u]sing enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating.” Underscoring the point in her dissent this fall when the SEC sued Flyfish Club for conducting an unregistered digital asset securities offering when selling non-fungible tokens, she and then-Commissioner Uyeda stated that “[l]eaving crypto to be addressed in an endless series of misguided and overreaching cases has been and continues to be a consequential mistake.”
• Commissioner Peirce has suggested that the SEC has been too harsh on some crypto-issuers. In March 2021, the SEC charged LBRY, a blockchain company, with conducting an unregistered securities offering when LBRY sold tokens that facilitate transactions on the LBRY network. The SEC alleged that LBRY received approximately $12.2 million in proceeds from these sales. Although the SEC initially requested that LBRY pay a $44 million penalty and burn all tokens in its possession, LBRY only had to pay a $111,614 fine, as the SEC acknowledged that LBRY was “defunct, ceasing operations, and without the funds to pay a larger fine.” In a scathing dissent, Commissioner Peirce called the SEC’s initially requested remedies “entirely out of proportion to any harm” given the absence of fraud, adding that LBRY made “significant disclosures [to investors] outside the registration process.” Ultimately, she argued that “The time and resources we expended on this case could have been devoted to building a workable regulatory framework that companies like LBRY could have followed.”
• Commissioner Peirce has advocated for the SEC to obtain advice from market and industry participants when crafting crypto policy. In July 21, 2022, Coinbase petitioned the SEC to create clearer rules on the application of securities laws to digital assets. On December 15, 2023, the SEC denied this petition, claiming that existing laws apply to digital assets, the SEC has been regulating digital asset securities through rulemaking, and the SEC has discretion in respect to rulemaking. In dissent, Commissioner Peirce and then-Commissioner Uyeda wrote, “The Petition raises issues presented by new technologies and other innovations, and addressing these important issues is a core part of being a responsible regulator. Any exploration of these issues should include public roundtables, concept releases and requests for comment, which would afford us the opportunity to hear from a wide range of market participants and other interested parties[.]”
  • Last week, the Third Circuit Court of Appeals required the SEC to provide a more complete explanation for its denial of Coinbase’s petition, and you can read more about that here.

In yesterday’s release, the SEC acknowledged that their regulatory approach toward crypto has not been the hallmark of clarity and that a new path forward is needed. The SEC wrote, “To date, the SEC has relied primarily on enforcement actions to regulate crypto retroactively and reactively, often adopting novel and untested legal interpretations along the way. . . The result has been confusion about what is legal, which creates an environment hostile to innovation and conducive to fraud. The SEC can do better.”

The Acting Chairman has emphasized that the task force will require input from investors, industry participants, and other parties. Accordingly, the task force will likely be holding roundtables in the future, and we will issue subsequent alerts as we hear updates from those roundtables.