Former SEC Chair: SEC Needs to Embrace Crypto Before Regulating It
Former SEC chair Jay Clayton says in a new Wall Street Journal op-ed that regulators need to embrace the benefits of crypto before pursuing any regulation.
He discusses the importance of quick payments alongside custody of assets digitally and called on the SEC to provide guidelines for the “custody of tokenized assets.”
To move forward, the U.S. needs, first, to embrace the efficiencies provided by tokenizing such well-understood services as payments and custody of assets in digital form. The presidential working group, led by the Treasury, should move forward on stablecoin rules, identifying the characteristics that make stablecoins a means of payment (akin to money transfer) and not a security or commodity.
He also talks about how there is fear among those in the crypto space that heavy securities regulations, which are appropriate to TradFi and Wall Street fundraising, are opposed by crypto investors, stifling the lightning fast innovation of the tech funding model.
Securities laws and regulations are important. It’s what has allowed the United States to have a stock market that, since the enactment of the Securities Exchange Act of 1934, is relatively free from fraud. But, working through the system is expensive, time consuming, and requires teams of lawyers. That’s a problem because big banks and TradFi have the funding for that, while tech startups don’t. If you’re doing something revolutionary and you are fundraising, there’s a non-zero risk you can run afoul of the piles of regulations on the books.
People in the tech sector on the bleeding edge understand and accept that there are greater risks to gain the innovation they are pursuing. That’s a tradeoff bankers and regulators need to understand.
The problem isn’t that the SEC is regulating, per se, but they’re regulating from the past. They need to step into the crypto and tech space to understand it. This is where Clayton is exactly right.
We believe the best way to square this circle is what was proposed in March 2020 by former SEC Chair Hester Pierce and revised in 2021 – the Token Safe Harbor Proposal 2.0.
Her proposal would create a three-year safe harbor period in which developers would be allowed to distribute tokens to facilitate the development of a decentralized network, exempt from the registration requirements of the federal securities laws, so long as certain conditions are met and disclosures are made. It requires a mandatory exit evaluation at the end of the grace period wherein outside counsel analyzes the network and decides that either the network is decentralized or functional, or that the product is a security and must be registered as one.
We believe this is the kind of action the SEC could take to ensure proper regulation while leaving crypto developers free to fundraise, flourish and innovate.