By Amy Leisinger, J.D.
In recent remarks, SEC Commissioner Hester Peirce noted that U.S. regulators must think about regulation of digital assets with a focus on cross-border considerations and cooperation. Much of the activity surrounding cryptocurrencies is taking place outside the U.S., and regulators need to address the uncertainty about what rules apply in any particular country, according to the commissioner. As other countries have taken steps to provide clarity in digital-asset regulation, regulators should continue to learn from one another to fill in gaps, she said.
“Although the existence of many jurisdictions can create regulatory friction, it also can create regulatory competition, which is healthy because it enables us to learn from one another,” the commissioner explained.
Cross-border regulation. Innovations in blockchain and cryptocurrencies have forced the SEC to look beyond traditional finance and think about how to better accommodate innovation, Peirce noted. However, she explained, additional challenges arise in terms of cross-border regulation as technology has facilitated global integration of the financial markets. U.S. regulators are concerned that they may not be able to examine foreign entities registered in the U.S. and that they will be unable to enforce domestic rules, the commissioner said. Further, according to Peirce, there is a lack of clarity as to what assets will be available to meet obligations if a foreign entity fails.
Cross-border concerns in connection with cryptocurrencies are increased, as many countries are still in the beginning stages of determining how and whether to regulate them, Peirce explained. As a result, regulatory uncertainty is heightened because the precise of nature digital assets (currency, commodity, or security) is difficult to determine, she said. International organizations such as the International Organization of Securities Commissions and the Financial Stability Board have begun to consider how to coordinate regulation of blockchain and digital assets, the commissioner noted, but full internationalization of regulations may not be appropriate. Regulatory competition could allow U.S. regulators to see what works well and what does not, Peirce said.
Other jurisdictions, potential approaches. Several Asian countries have provided clarity for digital asset offerings in their regulatory frameworks, and, in Europe, Malta, Switzerland, and France have taken steps to define regulated and unregulated digital assets, the commissioner explained. In addition, she noted that Bermuda has provided a regulatory regime for digital-asset businesses and released draft guidance for custodial services associated with cryptocurrencies.
These “laboratories of regulation” could serve as examples of possible paths forward the U.S. in connection with blockchain and cryptocurrency innovation, according to the commissioner. Peirce suggested that the SEC create a non-exclusive safe harbor for the offer and sale of certain tokens. This approach would permit issuers to offer tokens under an alternative regime with robust requirements and could be time-limited to guard against reliance by projects without a workable plan. A token offering made in reliance on the safe harbor would have to involve clear disclosures of the digital assets’ functionality, she said.
According to Peirce, this concept “might be a way to ensure that the legal regime does not inadvertently choke token networks off before they get off the ground.”