By Joanne Cursinella, J.D.
In a letter to the Commission, J.W. Verret, associate professor, George Mason University School of Law and member of the SEC Investor Advisory Committee, asked the SEC to consider it a request for a Commission level “genesis block” call for public comment regarding unique issues presented by digital assets. He provided a starting point for discussion in the form of some questions to consider initially in this process.
Genesis block. According to the letter, while submitting his communication using the SEC’s process for a public request for rulemaking, the author is actually calling for comment that might function as a “genesis block,” for the SEC to initiate an open-sourced redesign of regulations enforced pursuant to the Securities Act, the Exchange Act, the Investment Advisers Act, and the Investment Company Act, as well as other laws enforced by the SEC.
The request is consistent with the logic of similar prior requests for information by banking regulators regarding the unique design of digital assets, Verret claims, and he noted that the SEC has similarly opened up calls for public comment when “complex and novel” questions of securities regulation are at issue, such as with Acting Chair Lee’s call for public comment on climate disclosure in early 2021.
Fears harm. As an investor in a number of cryptocurrencies, Verret fears that none of the tokens he has invested in are properly classified as securities under the securities laws. Under the SEC’s “strategically ambiguous” interpretation of the Howey test regarding classification of investment contracts, he said he can’t be sure that the Commission will not at some point target one of his token holdings, under the guise of the Commission’s investor protection mission, such that it would ultimately cause him significant losses as a property owner.
Also, as a professor of securities law, Verret says he has an interest in consistent application of the law. It is his view that the SEC’s current interpretation of the Howey test for determination of investment contracts represents a “substantial departure” from the Supreme Court’s clear language in SEC v. Howey.
The better path. According to Verret, a better path forward for the Commission would be to appreciate that digital assets do not fit within the classic framework of regulations designed for equity investments in firms led by boards of directors, and to acknowledge that the current approach to regulation does not necessarily work for digital assets, so a new approach is needed.
Verret provided a list of some questions that the SEC should include in the call for comment he proposes. The list of questions is only a beginning of what Verret said will no doubt result in “hundreds of questions” that will need to be contained in a legitimate call for comment. “We have to start somewhere, this list of questions below is merely an initial brainstorm,” Verret said.
Suggested questions. Among the questions Verret provided are the following.
What unique investor protections can be designed around digital assets?
How do the federal securities laws need to be amended to holistically take into account unique aspects of token offerings?
What minimum requirements will the SEC attach to any future bitcoin spot ETF approval? Have those requirements been consistently applied to previous ETF approvals?
How would Reg NMS need to be adapted to allow digital assets to trade on registered exchanges?
How would concepts like best execution be measured in the digital asset space?
How do the ‘33 and ‘34 Acts need to adapt to consider the unique design of Defi and other blockchain projects?
If the text of a prospectus is built into the ledger, does it count as delivery?
How should projects that are classified as securities by the SEC, but that function as cryptocurrency (with a foundation that curates the ledger), account for the foundation on its books?
To what extent are the ‘40 Acts an inappropriate fit for projects where the initial developer continues to hold tokens after decentralization?
Unique opportunity. According to Verret, the questions he presents in the letter are suggestions for consideration that he hopes will open a constructive dialogue that can promote both investor protection and capital formation in the digital asset sector and provide meaningful guidance and clear rules of the road for developers. And all five SEC Commissioners have a unique opportunity to stake this development with their own priorities in the design of the call for comment, he concluded.