Regulation by Enforcement: SEC Commissioner Hester Peirce Criticizes Poloniex Enforcement Action

SEC Commissioner Hester Peirce, long a supporter of Fintech innovation, has issued a statement in the wake of the enforcement action taken by the Commission against Poloniex, a crypto exchange.

As was reported earlier today, Poloniex has settled the SEC’s allegations of operating an unlicensed exchange while paying a $10.4 million penalty.

Peirce takes umbrage to the regulation by enforcement as the SEC has long been hesitant to provide bright-line rules for the digital asset sector of Fintech. Peirce slams the “enforcement-centric approach to crypto” noting that Poloniex could have attempted to register as an exchange or become a broker-dealer and tried to be licensed to operate an alternative trading system (ATS) but “had it done so, it likely would have waited . . . and waited . . . and waited some more.”

The criticism by Peirce hits home as the crypto industry has long desired clear regulation and the SEC has fallen short in providing a path for compliant trading in the fast-growing crypto asset marketplace.

Peirce states that given how the market has evolved, and the accompanying desire to be regulated, “[crpto] market participants may understandably be surprised to see us come onto the scene now with our enforcement guns blazing.”

As the SEC has fallen short of its responsibilities in ensuring effective markets, Peirce asks several questions:

  • Can the platform custody client assets, a feature typical of centralized crypto trading platforms? If so, how, given our concerns about custody of digital asset securities?
  • If not, could a sufficient number of broker-dealers navigate the registration process to make a liquid market?
  • Would the conditions placed on their registration permit them to function as market makers or to facilitate trading on behalf of retail investors?
  • Can the platform trade non-securities alongside securities? If not, how can the platform, using two entities—a broker-dealer entity for digital asset securities, and an affiliated non-broker-dealer entity for non-securities, offer a seamless, or at least serviceable, trading platform to customers, who are likely, for example, to want to trade both digital assets and digital asset securities and pay for transactions in digital asset securities using non-security digital assets?
  • How can a trading platform and its customers determine whether a particular digital asset is a security?
  • If a token was sold in a securities offering as part of an investment contract, how long must secondary transactions in that token be deemed to be securities transactions by platforms trading the tokens?
  • What are the mechanics of registering tokens sold as part of an investment contract as a class of “equity security” under the Exchange Act?

So what’s next? Will the Commission empower Fintech innovators that recognize the importance of compliant operations and provide updated rules? Or will it be more of the same, taking the easy path and applying law created before digital assets existed much less the internet. In the end, these questions, along with how they are managed, will define the tenure of SEC Chairman Gary Gensler.


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