At a meeting of the Investor Advisory Committee, SEC Chair Gary Gensler and SEC Commissioner Hester Peirce continued their debate on the SEC's approach to crypto regulation.

In his remarks, Mr. Gensler reported that the crypto asset class has a $2.6 trillion aggregate market capitalization, making it necessary that this asset class be subject to public policy frameworks that protect investors and financial stability and prevent illicit activity. Mr. Gensler also warned that the lack of investor protections, including through disclosure requirements, is a particular regulatory concern because the crypto asset class is "rife with fraud, scams, and abuse in certain applications." Mr. Gensler maintained that it is extremely unlikely that any given platform does not offer securities. Mr. Gensler asserted that platforms offering securities fall under the SEC's jurisdiction. As such, he urged crypto platform operators and token issuers to engage with the SEC to address regulatory and compliance ambiguities, emphasizing that "it's best not to wait for a big spill on [the crypto] aisle . . . to clean up the investor protection issues."

In her remarks, Ms. Peirce criticized the SEC for embracing a "strategic ambiguity" approach to crypto regulation that prioritizes enforcement action to regulatory clarity. Ms. Peirce encouraged the SEC to address regulatory uncertainties concerning (i) when a token sold as part of an investment contract is traded as a security, (ii) how platforms can offer trades for crypto securities, traditional securities and non-securities at the same time and related registration implications, (iii) who can custody crypto and (iv) if any aspects of non-fungible token markets implicate securities laws.

Ms. Peirce questioned the SEC's permission of bitcoin futures-based exchange-traded funds, but disapproved of all spot exchange-traded product applications that the agency received in the past four years. Ms. Peirce stated that the SEC's continued denials have forced investors interested in crypto exposure through traditional investment products "into more expensive and less efficient wrappers." Ms. Peirce highlighted that the SEC's responsibility is to regulate the securities markets, not monitor all financial transactions or supersede investor decisions, urging the SEC to consider regulating "with a lighter hand so that people can be more free in their financial lives."

Mr. Gensler and Ms. Peirce both expressed support for the Committee's decision to create a Disclosure Subcommittee and the recommendations by the Investor as Purchaser Subcommittee regarding Individual Retirement Accounts.

SEC Chair Gensler has several times urged operators of crypto exchanges to come in and meet with the SEC. But he offers them no reason to do so. If Chair Gensler really wants these exchanges to meet with the SEC, he needs to offer them some inducement to do so. One good way to start would be for Chair Gensler to engage with Commissioner Peirce on better defining those crypto assets that should not be regulated as securities.

Primary Sources

1. SEC Investor Advisory Committee Meeting Agenda (December 2, 2021)

2. SEC Statement, Gary Gensler: Remarks before the Investor Advisory Committee

3. SEC Statement, Hester Peirce: Remarks before the Investor Advisory Committee

4. SEC Investor Advisory Committee Recommendation regarding Individual Retirement Accounts