The new Trump administration has moved quickly to reverse the Biden administration’s anti-digital asset innovation policies. This week, Commissioner Mark Uyeda was selected as the acting Chair of the SEC. His first act was to create a Crypto Task Force led by Commissioner Hester Peirce, someone who has been highly supportive of the crypto sector. The goal of the Task Force is to pursue a regulatory framework to enable digital asset innovation.
After four years of “regulation by enforcement” and rules designed to crush crypto, the change at the SEC and the executive branch can not be underestimated.
Yesterday, CI connected with Anand Sithian, a partner at the law firm of Crowell & Moring. Sithian currently represents big banks and tech firms managing the emerging digital asset and Fintech sectors. Before joining the firm, Sithian spent time in the government as a trial attorney at the US Department of Justice, where he worked at the DOJ’s Criminal Division for Money Laundering and Asset Recovery Section.
We asked Sithian his opinion as to what the SEC can do quickly to improve the digital asset ecosystem. Sithian said repealing Staff Accounting Bulletin (SAB) 121 seems like the quickest and easiest act either the SEC or the executive branch could take.
SAB 121 prohibited certain regulated firms from providing digital asset custody. The Commission, under the leadership of Chair Gary Gensler, undermined the development of crypto with SAB 121. When the rule was enacted, Commissioner Hester Peirce described it as “yet another manifestation of the Securities and Exchange Commission’s scattershot and inefficient approach to crypto.”
Commenting on a potential crypto framework, Sithian said:
“For a potential digital assets regulatory framework, this will turn on whether the SEC thinks they have existing Congressional authority to issue proposed rules vs. where the SEC thinks a court might strike down proposed rules due to lack of Congressional authority under Loper Bright. The SEC may favor proposing to Congress a broader legislative framework to avoid such judicial setbacks. One key issue the SEC will need to tackle is what kind of transactions in tokens might constitute securities transactions, and for such token transactions, what kind of information should be disclosed, by whom, for how long, and the contours of a potential “off-ramp” from SEC regulation.”
And what about digital securities or tokenization? Sithian said he would be surprised if the SEC exempts all transactions of digital assets from securities laws.
“Based on Commissioner Peirce’s previous writings, a place where the SEC may land is some type of time-limited exemption where token transactions are subject to some period of SEC jurisdiction (without the onerous registration obligations issuers face), but the token’s development team can eventually “off-ramp” from jurisdiction by complying with certain defined criteria within a set period of time. Of course, this will invite questions about how to treat tokens launched years ago where the initial developers have since left.”
Sithian said that under Commissioner Peirce’s “Safe Harbor 2.0,” she would not exempt token development teams from the anti-fraud provisions of the securities laws. He added that it remains to be seen if the SEC proposes a similar framework, but investor protection will likely be a critical consideration.
Addressing collectibles or some NFTs, Sithian said that as regulation by enforcement is now a thing of the past, hopefully, the SEC will not be debating whether physical collectibles could constitute securities.
“However, the SEC may need to issue some guidance here, as the SEC has taken the position that certain NFTs were offered and sold to purchasers as investment contracts (i.e., securities). Further, one federal court decided at the motion to dismiss stage that certain NFTs are investment contracts and, therefore, securities. There may be a role for Congress in addressing potential private civil securities claims relating to digital assets.”