Blockchain Legal Resource

On September 24, 2019, the House Financial Services Committee held an oversight hearing entitled “Oversight of the Securities and Exchange Commission: Wall Street’s Cop on the Beat.” The format of the hearing was somewhat unusual in that the sole witnesses were the five sitting SEC commissioners. Though it is common for the SEC chair to testify before Congress, the other commissioners testify very infrequently, and the assembly of all five at a single hearing is extremely rare, with the last such joint testimony coming back in 2007. While the hearing covered a wide range of issues related to securities regulation and enforcement, it also touched on a number of topics of particular interest to crypto and blockchain businesses, including the application of the securities laws to digital assets.

Prior to the hearing, the five commissioners produced a joint written statement. It covered the full waterfront of active SEC enforcement and rulemaking initiatives, and mentioned crypto issues only in passing. To that end, the joint testimony did not break any new ground, and instead highlighted the SEC’s well-known initiative targeting unregistered initial coin offerings and the establishment of its FinHub working group to address a range of FinTech-related issues, including distributed ledger technology, automated investment advice, digital marketplace financing and artificial intelligence/machine learning.

Several members of the committee during the hearing expressed skepticism over the evolving cryptocurrency marketplace. Committee Chairwoman Maxine Waters (D-CA), like many other members of the committee, posed questions to the SEC commissioners about the nascent Libra cryptocurrency, in particular the potential systemic risks it could pose to the financial system. She also wondered more broadly about the “blockchain phenomenon” and the role the technology would serve in the future, particularly in respect of cryptocurrency. Congressman Brad Sherman (D-CA) saw no real beneficial use to cryptocurrency at all, expressed concern about its potential to undermine the financial system, and believed it only benefits “terrorists,” “tax evaders,” “drug dealers” and “sanctions evaders.”

On the other hand, other members of the committee were more positive about digital ledger technology. For example, Rep. Warren Davidson (R-OH), a member of the Congressional Blockchain Caucus, emphasized the benefits of blockchain and cryptocurrency. He called upon the SEC to provide clearer guidance on the regulation of digital securities, and pitched his Token Taxonomy Act as a solution for regulatory uncertainty. Congressman David Scott (D-GA) feared flight of blockchain entrepreneurs to jurisdictions outside the United States and hoped for greater regulatory certainty in the US to encourage development here.

Though each of the five SEC commissioners made opening statements and had an opportunity to respond to questions from various committee members, most of the questioning surrounding blockchain and cryptocurrency went to Chairman Jay Clayton and Commissioner Hester M. Peirce, dubbed “Crypto Mom” by some in the crypto community. Of the five commissioners, Peirce made the greatest defense of the potential for digital securities, and cautioned against “overriding investor preferences” regarding new products such as digital assets, which she believes does a disservice to investors.

Ranking Member Patrick McHenry (R-NC) questioned both Clayton and Peirce about the clarity and adequateness of the SEC’s current regime for classifying digital assets as securities. Chairman Clayton reiterated his longstanding view that if a business uses a digital asset to raise capital and generate a return, the digital asset is likely to be classified as a security. He also encouraged businesses contemplating issuance of a digital asset to confer with the SEC staff before issuance if there is any question as to its status under the securities laws. On further questioning by other members he continued to return to these broad principles.

Without directly disagreeing with Clayton, Commissioner Peirce in line with her prior statements opined that the SEC had “more work to do” on the regulation of digital securities, and more generally hoped that regulators would be more forward-thinking in their analysis of digital assets. She also suggested that the SEC consider whether its Howey test is the correct one for utility tokens, a theme repeated several times throughout the hearing. Later, Rep. Ted Budd (R-NC) asked Commissioner Peirce about the effectiveness of the SEC staff’s Framework for digital assets. Peirce has been critical of the Framework’s complexity in the past, and in response to Rep. Budd’s question, she repeated her concern that it “muddied the waters” and could be improved by better weighing the various factors that the staff considers.