Key Takeaways
- In a recent speech, SEC Commissioner Hester Pierce addressed the question of when securities law should apply to crypto.
- Pierce suggested that regulators should take into account assets’ functionality and decentralization.
- However, Ripple’s Chief Legal Officer Stuart Alderoty has warned against relying on “vague and untested concepts.”
The Securities and Exchange Commission’s (SEC) crypto policy vibe shift under its Trump-appointed leadership has been broadly welcomed by the industry. But there is limited agreement on the best path forward.
As the SEC’s new crypto task force sets about designing a more business-friendly oversight regime, Ripple has warned that the agency shouldn’t rely on “vague and untested concepts” like “fully functional” and “sufficiently decentralized.”
Such terms rose to prominence during the chairmanship of Gary Gensler, when the SEC deployed ambiguous notions of decentralization and technical autonomy to justify a two-tier regulatory classification that deemed all crypto assets except Bitcoin and Ether as securities.
Crypto Regulation and Decentralization
Because Bitcoin and Ethereum are “sufficiently decentralized” and don’t have an easily identifiable issuer, the SEC reasoned that they fall outside of its regulatory perimeter.
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Meanwhile, tokens like XRP that could be traced back to a defined corporate entity were deemed securities.
In a speech on May 19, SEC Commissioner Hester Pierce emphasized her frequent dissent to Gensler-era crypto enforcement and signaled a broad reset in how the agency regulates the sector.
The SEC’s Crypto Reset
“Crypto assets that do not represent economic rights or an interest in a business entity or other promisor,” Pierce stressed in her speech.
Therefore, they “should not be subject to the federal securities laws,” she surmised.
However, Pierce maintained a key pillar of the previous administration’s approach to digital assets: a distinction between functional, decentralized platforms and those that have not yet been released from the control of their developers.
“More difficult security-status questions arise when distributions of non-security crypto assets occur early in the development of an associated network or application before the assets are functional and while the network or application is centralized,” the commissioner said.
During these early stages, a given crypto asset’s value is “intrinsically linked” to the material efforts of its issuer, she noted.
Separating Tokens and Contracts
Pierce’s comments reflect the findings of the court in Ripple vs. SEC, which determined that although XRP isn’t a security in and of itself, Ripple’s initial coin offering (ICO) was an “investment contract,” and therefore subject to securities law.
But that still leaves an important question unanswered: “When does a non-security crypto asset that was once part of an investment contract become separated from that contract?”
Responding to Peirce’s speech, Ripple’s Chief Legal Officer, Stuart Alderoty, called for a framework that excludes all post-ICO token transactions from SEC oversight.
He broadly rejected the notion that tokens should pass some kind of threshold for decentralization or functionality before they are considered separate from their ICO investment contract.
Instead, Alderoty argued that token sales should only be considered investment contracts if they grant the buyer enforceable rights against the issuer.
Ultimately, both Pierce and Alderoty argue that the best way to settle the matter is through legislation.
In their view, the current patchwork of court decisions and SEC rulemakings lacks clarity and Act of Congress is needed to establish the scope of the the scope of the term “investment contract” once and for all.
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