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July 8, 2019

Dealing With SEC on Crypto Issues Feels Like ‘Regulatory Version of an Escape Room’, Says Crypto Mom Hester Peirce

By Daily Hodl Staff

The staffs of the Division of Trading and Markets at the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) just released a statement on the custody of digital asset securities by licensed broker-dealers.

The regulators note that digital assets, digital asset securities and related innovative technologies have created a lot of challenges and complex regulatory issues. Notably, when compared with traditional assets such as stocks and commodities, digital assets, including cryptocurrencies and security tokens, are harder to protect.

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According to the statement,

“The requirements of the Customer Protection Rule have produced a nearly fifty-year track record of recovery for investors when their broker-dealers have failed. This record of protecting customer assets held in custody by broker-dealers stands in contrast to recent reports of cybertheft, and underscores the need to ensure broker-dealers’ robust protection of customer assets, including digital asset securities.”

As the crypto industry expands, the SEC and FINRA report that more and more companies are seeking to become registered entities that can operate lawfully. These are new applicants as well as existing broker-dealers who are trying to expand into digital assets. In terms of approving various entities seeking to custody digital asset securities in full compliance with the broker-dealer financial responsibility rules, the regulators note that informative discussions are in progress.

While noncustodial activities involving digital asset securities raise fewer concerns, the staffs similarly note that the information-gathering phase is an important step in understanding how to move forward.

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They write,

“As the market, infrastructure, and law applicable to digital asset securities continue to develop, the Staffs will continue their constructive engagement with market participants and to gather additional information so that they may better respond to developments in the market while advancing the missions of our respective organizations: for the SEC, to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation; and for FINRA, to provide investor protection and promote market integrity.”

“The Staffs encourage and support innovation in the securities markets and look forward to continuing to engage with investors and industry participants as the marketplace for digital asset securities develops.”  

Nearly a year ago, crypto supporter and SEC Commissioner Hester Peirce issued an official dissent when the SEC rejected the request for a Bitcoin exchange-traded fund by Cboe Global Markets. Commenting today on the regulators’ seeming inability to move forward, Peirce writes,

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“If figuring out how to deal with the SEC on crypto issues feels like a regulatory version of an escape room, here’s the latest clue.”

In circular fashion, Peirce links to the statement issued by the joint staffs.

Crypto lawyer Jake Chervinsky, who serves as general counsel at Compound, a team of engineers and business analysts building an Ethereum protocol for money markets, responds,

“As Commissioner Peirce’s analogy suggests, we’re very much still locked in the escape room, and I don’t this clue is a particularly helpful one. The guidance lays out all the many problems with custodianship, but doesn’t offer any solutions or suggestions to resolve them. Not great.”

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