SEC Sets New Tone on Crypto Regulation

The Securities and Exchange Commission made history last year by permitting exchange-traded products (ETPs) to hold certain spot cryptocurrency assets, including bitcoin and ether. New guidance released by the agency this month suggests that the SEC is laying out a path for expanding the universe of crypto-related financial instruments. At the same time, financial industry stakeholders and regulators alike continue to weigh in on regulating tokenized securities.

The guidance on disclosure considerations for crypto ETPs provided in a July 1 statement from the SEC Division of Corporation Finance didn’t contain any major surprises. For example, ETP issuers should explain “risks related to the underlying crypto asset(s) and crypto asset markets that pose a risk of investor losses, including price volatility, theft of private keys and other hacking incidents, and the risk of price volatility from other parts of the crypto asset markets,” according to the statement. The agency instructed issuers to be transparent on issues such as calculations of net asset value and describing material information about products’ underlying crypto assets. The statement also covered more crypto-specific concerns like explaining procedures to maintain secure custody of crypto assets.

For all the buzz about innovation and disruption coming from crypto and other forms of decentralized finance, SEC commissioner Hester M. Peirce wants the public to remember that tokenized securities are still financial securities. In commentary issued on July 9, Peirce noted that federal securities laws continue to apply to tokenized stock transactions. “As powerful as blockchain technology is, it does not have magical abilities to transform the nature of the underlying asset,” Peirce said.

Coming from one of the most crypto-friendly voices in the world of financial regulation, Peirce’s warning seems notable. Scott H. Kimpel, a partner at the law firm Hunton Andrews Kurth LLP, wrote in a memo that Peirce’s comments showed there are “outer limits” to her highly permissive position on crypto regulation.

Nevertheless, leaders at the SEC are signaling they are willing to make exceptions in how crypto and similar assets are regulated. “When unique aspects of a technology warrant changes to existing rules or where regulatory requirements are outdated or unnecessary, we stand ready to work with market participants to craft appropriate exemptions and modernize rules,” Peirce commented. In remarks delivered at a panel event in June, Mark T. Uyeda, another Republican commissioner at the SEC, warned that developing proper regulation for crypto and “will likely be frustrating, and may move in fits and starts.”

Ultimately, it seems the SEC is seeking out a middle ground on regulation between the desires of well-funded crypto advocates and skeptics who believe digital assets lack appropriate protections for investors. Meanwhile, more companies are looking to get involved in tokenized equities – to the point that the Securities Industry and Financial Markets Association wrote to the SEC last month calling on the agency to reject requests for immediate no-action relief or exemptions for tokenized securities.

While lobbying over the direction of regulation for crypto-related financial instruments continues, legal, accounting and compliance professionals should keep in mind that tokenization doesn’t negate standard disclosure, reporting and registration rules. The SEC’s tune on the nature of crypto assets may be changing, but its attitude toward issuers playing by the rules is not.