• by William Mougayar
    Venture advisor, 4x entrepreneur, marketer & strategist. I live in Toronto, curate a lot, blog a bit, and help startups.

28 (Tougher) Questions for the SEC on Blockchain Regulation

There is mounting pressure on the Securities Exchange Commission (SEC) to further clarify their policies and positions pertaining to the impact of blockchain technology on the financial sector. Of specific interest are the classification and regulatory requirements pertaining to the initial generation of cryptographic tokens that are tied to new companies, protocols and projects.

Arguably, the SEC is the most influential (and largest) securities regulator in the world. By their actions (or inactions), they have considerable influence (and overreach capabilities) over what other financial regulators decide around the world, and how they think about this space.

Despite some innovative directions from other jurisdictions such as Malta, Gibraltar, Liechtenstein, Cayman Islands, Singapore, the UK, Japan, and Switzerland, and the publishing of thoughtful reports from FINMA, FCA (and one from the UK Government), MAS and ESMA, a substantial and well researched report from the SEC is still missing.  

For background, in December 2018, SEC Chairman Jay Clayton was interviewed twice, at the Consensus Invest conference, and by Andrew Ross Sorkin on TimesTalk. Unfortunately, both interviews were dominated by soft ball questions, and neither interviewer challenged him with more pointed questions. Previous to that, on June 6th 2018, Chairman Clayton sat down with CNBC’s Bob Pisani to discuss the SEC’s position. One week later, William Hinman, Director, Division of Corporation Finance gave remarks at the Yahoo Finance conference titled, Digital Asset Transactions: When Howey Met Gary (Plastic).

While Chairman Clayton and Director Hinman tried to clarify some positions, the outcome of their interviews and talks included contradictory implications, continued lack of clarity, and resulted in more market confusion. What is even more problematic (and unfortunate to entrepreneurs) is that the SEC continues to believe that the status quo in continued enforcement of existing rules is the best path forward.

There are some key (and tougher) questions on people’s minds. Here is a list of questions we should be asking the SEC. The industry is eager to see the SEC try to answer them with depth and substance.

Can you define “sufficiently decentralized” more precisely? And clarify whether that is the one and only condition for the classification of tokens as a utility? If not, what are other conditions? And why have you said that only Bitcoin and Ethereum are not securities?

How do you envision the progression process from a token generation event to the classification of a given token as a utility? If you have assumed that all tokens are securities to start with, what evolutionary path could make them cross-over to a non-security status?

Since you are planning to lighten up the filing requirements for small to medium public enterprises, why not consider the emerging token-related projects category in the same league, and provide a lighter regulatory regime?

What are your comments on the recent bills that are being proposed?

Specifically, the Token Taxonomy Act (H.R. 7356), introduced on Dec. 20, 2018, by Congressmen Davidson and Soto; “To amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude digital tokens from the definition of a security, to direct the Securities and Exchange Commission to enact certain regulatory changes regarding digital units secured through public key cryptography…”

Would you consider a moratorium on new actions similar to the historic stance the White House took in 1997, when they issued a seminal report called Global Framework for Electronic Commerce, specifically outlining a “Do no harm” policy?

I have outlined this historical precedent, in this article, Revisiting “Do No Harm” for Blockchain Regulation.

What scares you the most about the cryptographic tokens? What are the open issues and questions that you are currently grappling with? How about sharing them publicly and asking for input?

Do you only see blockchain technology as DLT or also as a business model catalyst? Do you believe that the blockchain ha more profound implications than just being a DLT that offers efficiencies to the financial markets? Why not recognize there is something new here in terms of business models?

During the interview with Bob Pisani, Chairman Clayton’s opening remarks were: “Let me start with the technology: distributed ledger technology; incredible promise. It can drive efficiencies not only in the financial markets but in a lot of markets.”

But, the blockchain is a lot more than “distributed ledger technology” (DLT), which represents maybe 10% of its potential functionality. DLT is a simplified moniker that floats in enterprise circles. It is a limiting way to view the blockchain, and is typically used in the context of: DLT is OK, but cryptocurrency is not.

A more exciting opening statement might have been “the blockchain is a fundamental technology that is potentially as significant as the web, and therefore we recognize its potential disruptive characteristics, not just on the market, but on us as well.”

Is the entire staff at the SEC fully aligned with the same positions, or are you having divergent views on how to tackle the space?

What are your thoughts on “security tokens”? Will you allow the tokenization of native and non-native assets on the blockchain in areas such as real estate and commodities?

Do you plan on releasing clear guidelines that would include the conditions for which not all tokens are perceived to be securities?

Do you recognize that one role for these tokens is to be a currency, therefore it cannot be a security. Is currency considered a security?

In the June 2018 interview, Chairman Clayton said: “… cryptocurrencies, these are replacements for sovereign currencies,- replace the Dollar, the Yen, the Euro with Bitcoin. That type of currency is not a security.”

By acknowledging that cryptocurrencies are replacements for sovereign currencies and not securities, did Chairman Clayton put his foot in his mouth, or is that a bankable statement?. Today, many cryptocurrencies are on that path. By creating their own private economies, cryptocurrencies such as Kin or Steem are fiat replacements where users earn them and spend them. Therefore, they should not be considered as securities.

Under which circumstances are tokens considered a utility?

Are you worried that your current stance and positions have forced companies to seek other jurisdictions and has reduced the level of blockchain entrepreneurship activity in the US?

Would you consider exempting from registration overall or individual investments below a certain level?

What experts have you consulted with in order to educate your staff with a deep understanding about the blockchain?

Have you been consulting with other jurisdictions outside the US? Do you plan on co-ordinated policies or positions across different nations?

Are you co-ordinating with other regulatory entities in the US, such as a joint and common policy is clearly communicated? Do you plan on, or can we hope for universally co-ordinated actions, such as what CFTC Chairman Giancarlo has already advocated?

Why haven’t you published a comprehensive report or asked for public consultation in a meaningful way? Some examples include what the CFTC or FCA have started.

Do you plan on publishing your learnings from the dozens of subpoenas and voluntary information requests you have conducted in the past year and a half?

Would you go out on the field and present your latest thinking while meeting entrepreneurs? Why not engage amicably instead of antagonistically with the industry? (eg. FINMA has done 3 public roundtables in Switzerland)

Can you lay out your plans and priorities for the next 12 months pertaining to cryptocurrency and blockchain technology?

Can you clearly state your position pertaining to alternative trading exchanges?

What specifically are you seeing as lacking in the ETF proposals? Why not make that public?

What innovative steps are you taking that allow entrepreneurs to be innovative while still protecting consumers? Are you not worried that you may be throwing out the baby with the bath water?

What is your viewpoint pertaining to stablecoins, especially those that are pegged to a fiat currency?

Do you realize that a lack of cohesive, comprehensive, published guidelines is actually creating confusion, uncertainty and is equivalent to cryptic messaging where the market is left reading the tea leaves and guessing your next moves?

Are you considering opening a new registration process for ICOs?

Have you undertaken a thorough analysis of what other jurisdictions around the world have been doing, and whether there are learnings or best practices from them?

It is unfortunate that the SEC is digging their heels by saying that the current regulation “will continue to work well”, while not recognizing the blockchain’s novelty elements.

To imply there is nothing new here is an insult to entrepreneurship, startups and the whole US tech ecosystem.

The SEC has not been open with the industry. They have left the industry trying to second-guess them, and read their tea leaves. Their real agenda is not clear. It is hidden.

For the sake of the industry, some further clarity is needed.

The market expects more thought leadership from the world’s leading and most respected regulator. If not now, when?

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