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Commissioner Peirce Remarks on the Challenges of Cryptocurrency Regulation

On May 2, 2018, Commissioner Hester Peirce shared her views regarding how cryptocurrencies fit within the regulatory landscape of the United States Securities and Exchange Commission (“SEC”). Click here for the full remarks.

Commissioner Peirce, recognizing that not all tokens are alike, acknowledged that the appropriate regulatory scheme for cryptocurrencies will be the product of a function over form analysis. Additionally, Peirce noted that the functionality of a token changes over time, requiring a more nuanced regulatory scheme to ensure market safety.

Peirce confirmed the well-documented stance of the SEC applying the test articulated in United States v. Howey (the “Howey Test”) to determine whether a token is a security.  The central question under the Howey Test is whether the token is an investment in a common enterprise with the expectation of profits solely through the efforts of another.  Although some initial coin offerings (“ICOs”), or at least aspects of some ICOs, satisfy the Howey Test, Peirce cautioned against applying a blanket designation for all ICOs.  Each ICO must be analyzed through a fact and circumstances analysis that does not stop with the Howey Test, but continues as the token’s functionality evolves.

To address the challenges in devising an appropriate regulatory structure, Peirce stated that the SEC must: (1) improve its understanding of tokens and distributed ledger technologies in order to properly apply the HoweyTest; (2) not allow lack of familiarity with tokens and distributed ledger technologies to breed anxiety and bad regulation; and (3) not inappropriately insert itself into the creative process (limiting technological progress by attempting to fit new innovations into existing regulatory frameworks). While Peirce encourages an open interchange with the SEC to ensure better understanding and supervision; she believes government-sponsored “regulatory sandboxes” that allow businesses to develop and test innovative products have the potential to be examples of regulators inappropriately inserting themselves into the creative process.

While much is still to be seen on how the SEC will monitor cryptocurrencies, Peirce’s comments exude a positive and measured approach regarding the need for regulators to adapt traditional regulatory regimes to the non-traditional characteristics of cryptocurrencies.

Copyright 2020 K & L GatesNational Law Review, Volume VIII, Number 136


About this Author

Andrew J. Massey, Investment Management and Funds Attorney, KL Gates, Law firm

Mr. Massey is a partner in the firm’s London office where he is a member of the Investment Management and Funds practice group. 

He provides advice on financial services law and regulation to a diverse range of financial services institutions. His practice encompasses advising on regulated and unregulated investment funds, the scope of regulation, and regulatory issues relevant to all aspects of a financial services business and its products and services. 

Todd Gibson, Investment Management Group, Attorney, KL Gates Law Firm

Mr. Gibson is a member of the firm’s Investment Management Group, and his practice focuses primarily on international aspects of investment management services and globally-distributed fund products. His clients include U.S. and non-U.S. investment managers, U.S. broker/dealers, hedge funds, and private equity funds, and he acts as special U.S. counsel to funds organized under the European UCITS directive. Mr. Gibson also acts as fund counsel to U.S. registered investment advisers and U.S. mutual funds registered under the Investment Company Act of 1940. He also represents companies from various industries on Investment Company Act status issues. 

Mr. Gibson regularly advises U.S. and non-U.S. clients with respect to compliance with U.S. and European regulatory requirements, and advises clients on providing investment management services and selling pooled investment products on a cross-border basis. He has assisted U.S. clients as U.S. advisers, counseled U.S. managers on cross-border acquisitions of foreign asset managers, and has assisted U.S. clients with respect to compliance and various aspects of foreign laws and regulations and how they impact their business. 

Philip J. Morgan, Investment Management Attorney, KL Gates Law Firm

Philip is a partner in the firm's Investment Management practice group and has wide experience in all aspects of law and regulation in the UK financial services industry.  He works closely with U.S. and other colleagues to provide international financial services regulatory advice and his practice also focuses on investment funds, particularly hedge funds, real estate funds, private equity funds and listed investment funds.  His transactional work also encompasses corporate projects such as joint ventures and establishment of limited liability partnerships, with a...

Evan Glover, KL Gates Law Firm, Finance Attorney

Evan Glover is an associate in the firm’s Pittsburgh office, where he is a member of the Investment Management, Hedge Funds and Alternative Investments practice group. Mr. Glover also advises clients on litigation matters relating to disputes involving financial institutions and financial services.