Hester Peirce, commissioner at the US Securities and Exchange Commission, said that in her opinion the regulator should rethink its approach to approving a spot bitcoin exchange-traded fund.

The SEC has approved ETFs based on bitcoin futures listed on the CME but has not yet given permission for an ETF which tracks spot bitcoin. Peirce spoke at the Bloomberg Financial Innovation Summit on November 4. She stressed that her views were her own, not necessarily those of the SEC or my fellow commissioners.

“I think that’s really relevant on this particular point, as going back two and a half years I have urged us to rethink our approach to spot bitcoin exchange-traded products,” she added.

"In the past, I have urged us to rethink our approach to spot #Bitcoin exchange traded products. I think the standard we apply has been different than the standard we apply to similar products." @SECGov Commissioner @HesterPeirce #FinInnovationSummit @adsteel pic.twitter.com/wyiVbAHPhJ

— Bloomberg Live (@BloombergLive) November 4, 2021

Peirce argued that the standard that the SEC applies to bitcoin products is different from that applied to similar products.

“I don’t know whether that will change given that Gensler has signalled pretty strongly that likes to see these products trade in regulated markets,”she said.

Gary Gensler, chair of the SEC, has described the crypto market as the “Wild West” in speeches.

She continued that the SEC published its reasons for rejecting a spot bitcoin ETF – which is that bitcoin markets do not look like regulated securities markets. Regulators are more comfortable with markets that look familiar as they think those are the only ones  in which investors or consumers are protected.

“But there are other ways that that investors can be protected,” said Peirce. “They can be protected through self-regulatory forces and through arbitrage mechanisms, for example.”

She argued that not allowing investors to gain exposure to spot crypto products puts them in a worse position and the SEC should approve products on a case by case basis.

Gensler has also said he would like to see a federal financial regulator for crypto markets, but Peirce was sceptical that Congress will be able to take the time to build a regulatory framework.

“We could do some of it on our own but there are some jurisdictional questions and the CFTC may have a different view of jurisdiction,” said Peirce.

She stated her belief that that regulators should permit two people to voluntary engage in transactions. However, regulators need to consider financial stability concerns and concerns about asymmetric information.

“Regulation should principles-based and technology neutral,” she added. “However, sometimes new technologies come along that require us to rethink our approach.”

Safe Harbour

Peirce has proposed a safe harbor for token distribution events which acknowledges there is regulatory uncertainty around crypto asset offerings and when they become securities offerings.

The SEC has so far relied on enforcement actions and that most digital assets are securities. Peirce argued that crypto enforcement actions have not been litigated actions, but have been settled, which  does not provide for careful legal analysis.

In a dissent in an enforcement action against crypto trading platform Poloniex, Peirce called for answers to a number of questions that arise once at least one digital asset trading on a platform is deemed to be a security:

1.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?

2.If not, could a sufficient number of broker-dealers navigate the registration process to make a liquid market?

3.Would the conditions placed on their registration permit them to function as market makers or to facilitate trading on behalf of retail investors?

4.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?

5.How can a trading platform and its customers determine whether a particular digital asset is a security?

6.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?

7.What are the mechanics of registering tokens sold as part of an investment contract as a class of “equity security” under the Exchange Act?

She has said that as government agencies consider how to regulate, they ought to take their lead from Congress, work collaboratively with one another, and actively consult the public who will be subject to and protected by the rules.