- Commissioner admitted that any innovation, such as cryptocurrencies, meets resistance from regulators
- The SEC uses the 70-year-old Howey test to determine whether tokens can be considered securities
- The specificities of cryptocurrencies make regulators’ work harder
Innovation Meets Resistance
In a report dated 8th February 2019, Commissioner Hester Peirce said that because every innovation has some associated risks, it is necessary to regulate them, even though the public reception of technology may be overwhelmingly warm. Innovations in the financial sector have the hardest time, with regulators being the strictest of them all. Peirce said:
“As a regulator, when I think about protecting the public, I think not only of protecting investors, but also of ensuring that the capital markets are able to serve the rest of the economy without undue barriers.”
Despite being strict to cryptocurrencies, SEC sees the value in technology that provides “a new way of coordinating human action”.
Peirce pointed out that cryptocurrencies, despite their decentralized nature, often start with the help of centralized fundraising. Because of that, the SEC applies existing securities laws to token offerings, meaning that they must be conducted in accordance with the securities laws.
Using Orange Trees to Regulate Crypto
The SEC is using the more than 70-year-old Howey test, which was first used in a dispute about orange groves, to determine whether tokens can be considered securities.
The test, which is a standard means of determining whether something is an investment in the US, will help the SEC to create a guide for developers on when and how crypto tokens may be classified as securities. No information on when the guidance will be issued was provided.
The commissioner also admitted that even though the application of the Howey test in this space seems like a logical move, SEC has to be careful.
She thinks that it could be impossible for some projects to work under the existing Howey framework and the applicable securities laws, giving Basis project as an example. The project has announced that it will shut down operations and return 133 million USD to investors due to incompatibility between the securities regulations and the team’s vision.
New Challenges for Regulations
Tokens are different from anything the regulators have worked with previously. One of the main reason for differences lies within the whitepapers: they are highly technical and difficult for most investors to understand. This provides an opportunity for scam projects to confuse investors with technical terms and sometimes leads to inconsistencies between the whitepaper and the actual token.
Also, the SEC admits that the cryptocurrency could continue to function without any regulation at all:
“Much as we regulators hate to admit it, we ought not to assume that absent the application of the securities laws to the world of tokens, there would never be any order.”