By Lene Powell, J.D.
Criticizing a "disproportionate focus on illicit uses" of cryptocurrency and digital assets, SEC Commissioner Hester Peirce drew attention to crypto’s ability to protect people from harm by family or repressive governments. In remarks at a conference hosted by the British Blockchain Association, Peirce used the example of Harriet Tubman and the Underground Railroad to illustrate that peer-to-peer financial tools could allow money to more easily reach people under threat. To facilitate these tools, Peirce urged the SEC to allow people to experiment with new technologies, and to clarify issues around digital asset custody by broker-dealers and move more quickly to approve crypto-related exchange-traded products.
Crypto: aiding or protecting from illicit activity? Peirce noted that Harriet Tubman will soon be featured on the U.S. $20 bill, honoring her critical work in the abolitionist movement and Civil War as a scout, nurse, cook, and military expedition leader. Observing that it must have been incredibly difficult to move cash around to support the movement, in particular the Underground Railroad liberating people from slavery, Peirce said it would have been helpful to have a peer-to-peer tool that enabled easy-to-store money to reach people almost instantaneously where they were, without having to pass through the hands of an untrustworthy or expensive intermediary.
Broadening the example to people living in other dangerous circumstances, Peirce said that government officials often worry about crypto’s use by criminals without considering its value in protecting people from illicit activity. According to Peirce, the numbers suggest that crypto is used for illicit purposes less often than cash is, and evidence-based rulemaking should take this into account.
"Because of its ability to reach people without intermediaries and its ease of storage, transport, and access, crypto can be an important part of the survival story of people living under the threat of harm by their families, people in their communities, or repressive governments," said Peirce.
Custody issues. Peirce pointed to two particular areas as creating barriers that are blocking more widespread adoption of crypto assets. First is custody of digital assets by broker-dealers. The SEC recently initiated a pilot in this area that allows broker-dealers operating under specified conditions, including limiting their business to digital asset securities, will be able to take physical possession or control of customer digital asset securities for the purposes of Rule 15c3-3(b), the customer protection rule under the Exchange Act.
In Peirce’s view, the pilot is too limited. Because participating broker-dealers can only hold digital assets that are securities, people cannot pay for the digital asset securities with stable coins, bitcoin, ether, or other crypto currency. Peirce said the SEC has gotten some early feedback and hopes it will get more, so the agency can craft a more workable long-term way for broker-dealers to interact with digital assets.
Another custody issue that requires clarity is whether a state-charted public trust company is a qualified custodian under the Investment Advisers Act and the SEC’s Custody Rule. The issue recently arose in an SEC staff letter in which staff asked a series of questions and stated that the SEC is not "bound by statements or views expressed by state regulators [including] statements or interpretations regarding custody of digital assets as well as more traditional securities and whether any entity is a ‘qualified custodian.’" In Peirce’s view, rather than raising fundamental questions about custody under the Advisers Act in the crypto context, the SEC should assist advisers in navigating custody in the crypto context, and save the larger questions for a more holistic review of the custody rule.
Exchange-traded products. Another area holding back the expansion of crypto, in Peirce’s view, is that the SEC has moved too slowly in approving exchange-traded products incorporating crypto assets. According to Peirce, the SEC has created a "moving target" in which applicants must provide increasingly sophisticated analyses of the relationship between the underlying spot market and the futures market to determine the susceptibility of these markets to fraud and manipulation.
"Not only is it unclear whether prior non-crypto ETP filings could have passed muster under this more rigorous approach, the ever-shifting goalposts are unfair to innovators who spend ever-increasing amounts of money on attorneys and quantitative experts only to find that they have failed to hit a target that has moved once again," said Peirce.
One effect of this is that investors looking for crypto exposure have gotten around this by investing in other securities products with crypto underliers that trade over the counter and on non-U.S. exchanges, and perhaps also in the stock of public companies that hold crypto or engage in crypto-related business activities, said Peirce. She added that it has also heightened the stakes of any regulatory approval for a mainstream retail product the SEC might one day grant. The delay has magnified the first-approved advantage for any product ultimately approved, and could even be construed as the SEC giving its blessing to the product.
Safe harbor. Finally, Peirce stated that although the SEC has provided guidance on when federal securities laws apply to crypto assets, there is still a lack of clarity. Peirce said she looks forward to working with the incoming chairman and fellow commissioners on a safe harbor along the lines that she has previously proposed, or some other Commission-level regulatory guidance.