Hester Peirce may look favorably on digital assets, but ‘Crypto Mom’ is not the only parent at the SEC. The Securities and Exchange Commission continues to regard cryptocurrencies with suspicion, particularly when it comes to ICOs and their status as investment securities.
However, the U.S. regulator could be warming up to cryptocurrencies. In a recent speech at the SUSS Convergence Forum in Singapore on July 30, commissioner Peirce emphasized that the slow pace of regulatory clarity is due to some of the unique difficulties the Commission faces.
Crypto Mom Outlines the SEC’s Challenges
Hester Peirce is the most prominent pro-crypto voice within the SEC, and has dissented with other commissioners on the issue several times. She noted that the SEC has found the crypto landscape challenging:
“It is easier to deal with entities that we know doing things in ways with which we are familiar than to confront new technologies with new players and think about how those technologies and market participants fit within our regulatory scheme.”
Peirce also suggested that the U.S. faces unique difficulties in its regulatory landscape, given the piecemeal makeup of its financial sector regulatory system. The SEC regulates securities, CFTC regulates commodities and futures, and FINRA regulates broker-dealers. The U.S. also has “fifty states, plus several territories and the District of Columbia, that create their own laws and own regulatory regimes.”
It’s particularly challenging for the SEC, which has to parse the new technology according to securities law. Virtual tokens created in ICOs, IEOs, and STOs pose a multitude of definitional problems. Coupled with their requirement to apply Howey standards – now over half a century old – regulating digital assets has not been easy.
The number of SEC critics is rivaled only by the number of legal questions the body has been called to answer. As Peirce described their efforts to use Howey to determine what is and isn’t a security:
“Howey involved interests in an orange grove, so it is clear that an instrument need not look, smell, or taste like a traditional security in order to be deemed one by our laws.”
Learning From Others
Crypto Mom says that a unified, global approach to digital assets would be unfeasible. The SEC has established a Strategic Hub for Innovation and Financial Technology, (FinHub), allowing industry participants and regulators to work together for legal clarity and to help regulators better understand the industry. As Peirce said, the SEC has “not been sitting idle.”
But she also subtly cautions against any attempts for global cooperation when it comes to regulating the industry, preferring an approach wherein regulators in different jurisdictions learn from each others’ insights:
“Just as states take different approaches and learn from one another in the U.S., crypto regulation affords international regulators the opportunity to learn from one another. I often have expressed my concern that the U.S. will fall behind other countries in attracting crypto-related businesses unless we are more forward-leaning in establishing a regulatory regime with discernible parameters. The U.S. SEC can look to our counterparts overseas for ideas in untangling some of our most difficult legal and policy questions in this area.”
Kik-ed to the Curb
Despite Crypto Mom’s assurances, one token issuer isn’t buying it. Kik, the Canadian messaging system which issued the KIN token, is now on the wrong end of the SEC’s regulatory endeavors. In August 6 court filings, the company blasted the SEC for what it described as a number of false assertions.
Kik is now pushing back against the SEC’s enforcement against the 2017 KIN ICO. The company fired back with the Defend Crypto fundraising campaign to bring a countersuit against the Commission.
In its answer to the SEC’s complaint yesterday, Kik slammed the regulator, denying all allegations. In their reply, the defendant claims that:
“… the Commission’s Complaint reflects a consistent effort to twist the facts by removing quotes from their context and misrepresenting the documents and testimony that the Commission gathered in its investigation. The result is a Complaint that badly mischaracterizes the totality of the facts and circumstances leading up to Kik’s sale of Kin in 2017. These tactics may have gotten the Commission a decent news cycle, but they will not withstand meaningful scrutiny at summary judgment or trial.”- Kik Interactive Inc., United States District Court, Southern District of New York
An example Kik cites of the Commission “removing quotes from context” is in the way the SEC characterized the company’s promise to investors of a KIN price increase. The Commission quoted Kik CEO Ted Livingston as saying:
“But I think what we can guarantee is that we are all in on this. You know, this is – this is something we’ve been working to – towards for a long time, but this is something that is in our financial best interest, because of the 30 percent, but actually, like, just to be honest, like, this is something we have to do. We cannot compete with Facebook.”
According to Kik’s defence, that apparent assurance was preceded by language highlighting that Livingston did not intend to promise price gains (excluded text in bold):
“So we cannot guarantee value with Kin. I think once you create a cryptocurrency it sits on exchanges and the price of it is set by the market based on supply and demand. So you know supply is fixed and demand goes down the price is going to go down. But I think what we can guarantee is that we are all in on this. You know, this is – this is something we’ve been working to – towards for a long time, but this is something that is in our financial best interest, because of the 30 percent, but actually, like, just to be honest, like, this is something we have to do. We cannot compete with Facebook.”
Footage at the event appears to support Kik’s position, although a trial judge might be less sympathetic. Take a look at 00:35:35 here:
SEC lawyers may well retort that the general tone of the pitch was bullish, with lots of references to the “fixed supply” of KIN and optimistic about the potential for increased demand. Is positivity about a cryptocurrency from its founder potentially misleading for mom-and-pop investors such that they need protection, via SEC regulation? That is a question the court will have to consider in addition to the question of whether KIN tokens should be classified as securities.
Crypto Mom suggests that the SEC is nearly able to deliver to the industry the regulatory clarity it has long craved. Depending on how long it takes, Kik may die waiting.
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