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CoinDesk Publication

February 18, 2020

Peirce’s Safe Harbor is Worth a Look, But It May Not Be Worth the Effort

Authors: Carol Van Cleef and Addison Yang

We confess that, on first read of SEC Commissioner Hester Peirce’s safe harbor (SH) proposal, we were skeptics. It is very limited in scope, is only a rough draft and appears to have little to no chance of becoming law as Peirce’s term as commissioner is scheduled to expire in June and no other commissioner has yet expressed support for the proposal.

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Despite our skepticism, the proposal has attracted much attention and significant praise from the crypto community. Why? First, the community is starved for any constructive, supportive and engaged attention from policymakers in D.C. in addressing regulatory barriers to innovation. 

Second, the proposal offers a potential solution to an important Catch-22 encountered by token-based networks before they are fully functional or decentralized. It would provide relief from federal securities law requirements often viewed as handicapping projects needing to get tokens into the hands of potential users to achieve full functionality or decentralization. 

The important question is whether the crypto community should invest its time and resources in support of the Peirce proposal, given the odds against it. To answer this question, one must first ask (a) whether there are other ways to solve the problem more expeditiously and, more importantly, (b) if this particular proposal provides the most desired solution. 

Alternative pathways. Although a fledgling group in Congress understands the technology and its potential, obtaining a legislative consensus on any one proposal is complicated under the best of circumstances.

Getting a bill to the President’s desk is rare. Based on data over almost 20 years, on average only 2 to 3 percent of all legislation introduced in Congress becomes law. Moreover, election-year calendars usually have fewer legislative days and this year has even fewer due to the recently concluded impeachment process. Realistically, passage of a bill usually requires either (a) a crisis or (b) years of work, lots of money and the buy-in of multiple constituents, including not only other members of Congress, but also the administration and independent regulatory agencies, as well as those outside of government, such as consumer advocacy groups. The process is much like driving over a very rough road with lots of rocks and potholes, any one of which could blow a tire, break the suspension or wreck the car.

Regulatory action involves far fewer people and potential pitfalls but it is not necessarily quicker or more certain. In the case of the SEC, the five commissioners are the decision-makers, supported by competent and respected professional staff. Its actions are governed by the Administrative Procedure Act, which prescribes specific steps the SEC and other agencies must follow if they want to establish new rules. These steps include a formal proposal and comment process that could take months if not years.

Limits on a commissioner’s power. Commissioner Pierce has offered a welcome oasis for the crypto community in a federal bureaucracy that tends to be more reactive than proactive. She earned her the nickname “Crypto Mom” because she is willing to listen and offer solutions, not excuses to difficult issues the industry faces with her agency. But her enthusiasm may not be enough to move the proposal through the SEC.

Without a doubt, as only one of five on the commission, which historically has been dominated by the chairman, Peirce’s ability to influence consideration of the proposal is limited. Without the support of one or more other commissioner and some senior staff, borrowing a football analogy, she is trying to pass from her own end zone with little or no pass protection.

Of course, she realizes there are skeptics: “I suspect some of you are asking, ‘Who cares?’ I get the point. I am one of five commissioners. I cannot write rules unilaterally,” she has said. 

Borrowing another football analogy, she seems to be making a Hail Mary pass, throwing it long and deep, hoping someone will catch and run with it. Quoting from Bruce Springsteen, she says, “You can’t start a fire without a spark,” and asserts optimistically that “[i]t does not hurt to get the ball rolling. People change their minds.”

The monkey’s paw. A decision to support the SH should be based on a good understanding of the proposal itself, how it accomplishes its objective and the potential consequences, both intended and unintended. In this context, we should remind ourselves to be careful of what we wish for.

The proposed SH is narrow in scope: simplify the process of raising capital in certain types of token projects involving the development of a functional or decentralized network, thereby encouraging developers to continue innovating in the United States. 

The SH would offer projects a three-year grace period to raise critical funding through token sales without registering the token as a security, provided certain conditions are met. During this period, the team would be required to make a good faith effort to create “liquidity for users.” Secondary market trading of tokens would be allowed, even encouraged (again, provided certain conditions are satisfied) on trading platforms that are similarly subject to the SH if they facilitate trading of these tokens.

The proposal also contains several provisions the consequences of which should be considered in evaluating the proposal as a whole:

Shifting responsibilities and costs? First, the proposal shifts to the private sector much of the SEC’s oversight responsibilities and eliminates the delays attributable to SEC review that often accompany public offerings. However, it is not a panacea – there will be costs associated with compliance, the burdens of disclosure have not been eliminated and the SEC will still have jurisdiction under the anti-fraud provisions of securities laws.

More transparency? Additionally, a detailed list of information about each project must be made available initially on a freely accessible public website and updated upon change. Undoubtedly, private services will seize upon the opportunity to use access to this information to develop new products and services that will facilitate analysis of the projects, potentially providing greater scrutiny of fundamentals and better oversight of the projects on an ongoing basis. Presumably, all investors in the project would have access to levels of information usually reserved for larger investors.

New de facto regulator? Furthermore, projects would become de facto regulators of trading platforms. If a project team decides to facilitate secondary trading on a “trading platform,” the team is required to seek one that can “demonstrate compliance with all applicable federal and state law and regulations relating to money transmission, anti-money laundering, and consumer protection.” By requiring them to ascertain the regulatory status of the trading platforms, the proposal effectively requires projects to police the compliance efforts of the platforms.

WHETHER THE COMMISSIONER IS PROPOSING A SANDBOX OR A BEACH, NEITHER WILL BE CREATED IN A VACUUM.

To what extent will projects be required to continuously validate platforms’ claims of compliance? Would they be allowed to rely on third-party validations? The only certainty is that lawyers for both projects and platforms will be busy writing opinions to satisfy this requirement.

Out of the frying pan, into the frying pan. Importantly, this requirement also subtly changes the focus on how trading platforms are regulated. Since the proposal exempts them from regulation as exchanges under the securities law, trading platforms for covered tokens are assumed by the proposal almost backhandedly to be regulated under money transmitter licensing laws. In other words, projects are not asked to certify that platforms are compliant with securities laws, but rather to verify the platforms’ compliance with state money transmitter licensing laws, further helping to cement project tokens’ non-security status.

Sandbox vs. beach? Some view this proposal as a sandbox. One publication referred to it as Peirce’s “beach,” borrowing upon a 2018 speech where she favored a beach rather than a sandbox, where “[t]he regulator monitors the landscape [like a lifeguard], steps in to stop violations when they occur, and stands ready to answer interpretive questions as people seek to understand how the rules apply to their situation… but the regulator leaves ample room for innovators to develop their ideas without the regulators sitting at their shoulder taking part in each creative decision.” Whether the Commissioner is proposing a sandbox or a beach, neither will be created in a vacuum.

Can crypto support change the odds? With the support of the crypto community, can the odds of the SH becoming law or regulation change? Should it allow itself to be distracted from other pressing priorities, given the seeming odds against adoption?

Commissioner Peirce is encouraging discussion and feedback on the proposal. That process will not necessarily improve the chances that it will eventually be considered by the SEC, but may help identify and refine what may be feasible in the future. If the community decides this proposal – or another – has value and ultimately should become law, it needs to engage both individually and collectively through industry groups and coalitions. Allies outside the crypto community are also critical, in both the private and public sectors. The consumer lobbies cannot be ignored. And above all, a commitment of time and money will be necessary.


Executives from Celsius Network, TD Ameritrade, Asensys, Amberdata, O(1) Labs, RADAR, Luminous Group, and HerCode comprise initial guest line-up for Season 3 of Crypto Token Talk Podcast

Crypto Token Talk Podcast Kicks Off Season 3 with Distinguished Thought Leaders in the Crypto Community

LOS ANGELES, Feb. 28, 2020 /PRNewswire-PRWeb/ — Crypto Token Talk, the 101 podcast featuring thought leaders in crypto and blockchain produced by premiere blockchain-focused communications firm, Melrose PR, kicks off Season 3 with acclaimed thought leaders and executives in the crypto sphere. The initial line-up features:

Crypto Token Talk host and CEO of Melrose PR, Kelley Weaver, looks forward to discussing transformational projects as well as the topics that don’t receive the coverage in the media that they deserve.

Crypto Token Talk Host Kelley Weaver said, “There are so many blockchain projects running successful testnets, growing their communities, and launching fully-functional dapps right now in 2020, and yet there are far fewer stories reaching the mainstream than in the height of the ICO fervor in 2017. One of the goals of this podcast is to shed light on the un-song tales in blockchain and introduce these world-changing projects to our audience of die-hard blockchain enthusiasts, the crypto-curious, and newbies.”

Sunayna Tuteja, Head of Digital Assets & DLT at TD Ameritrade, expressed, “It’s inspiring to witness how different folks are contributing to the forward momentum of this ecosystem. At TD Ameritrade, we are obsessed with bringing the power of this new tech and asset class to retail investors and the RIA community. Guided by the voice of the client, we are focused on enabling on-ramps that are user-friendly, compliant and complemented by a rich repository of education and best in class service. We’ve always been driven by the ethos of bringing Wall Street to Main Street and crypto offers yet another way to bring customer-focused innovation to life.”

Michelle Chuang, COO of Asensys, has over 20 years of experience in marketing and customer engagement and has led key initiatives for companies such as Starbucks, Chevron, and Staples Inc. She conveyed, “The media and the general public has gotten impatient with blockchain technology’s development. The most commonly-asked question remains, when are we going to reach mainstream adoption? But more so than ‘when?’ we should be looking at which projects have the technology, talent, and backing to successfully power the decentralized web, regardless of timeline.”

Tongtong Gong, Co-Founder and COO at Amberdata, a Blockchain and Digital Asset Data company, said, “When people hear the word ‘Crypto,’ there is still the general sense of enigma and question. However the undeniable fact is that Bitcoin as a digital commodity has already changed the world of finance. We are witnessing a once in a lifetime paradigm shift that originated from this very community of innovators and ‘rebels.’ Like Steve Jobs said, ‘It’s the people who are crazy enough to think that they can change the world, are the ones who do.’ “

Emre Tekisalp, Head of Business Development at O(1) Labs, the team behind the Coda Protocol, said, “Conversation around new blockchains have revolved primarily around throughput. Only examining a project’s potential by transactions per second without accounting for decentralization does a disservice to the crypto community that believes strongly in the values of permissionless access, inclusive consensus, and self-governance. We need to edit the way we are thinking about scalability if we want to design blockchain systems that meet the needs of their users.”

Shala Burroughs, VP Strategy at RADAR, articulated, “In the crypto world no one talks about how big companies and enterprises are engaging until it hits the press. Often that press doesn’t offer visibility into the progress that has been made behind the scenes. The big secret is that these companies are hiring teams, engaging start ups for consulting, creating partnerships, and building technology. They are not going to sit by and be disrupted – they are ready to go deep.”

Carol R. Van Cleef, CEO Luminous Group, looks forward to discussing the stablecoin landscape on the podcast. She shared, “Stablecoins are one of the most talked about subjects in crypto today, but they are also possibly one of the least understood facets of the industry. This is due, in part, to the fact that the term ‘stablecoin’ encompasses many different flavors of stablecoins, many of which share little in common with others. When it comes down to it, you cannot look at all of them in the same way.”

Alex Mashinsky, CEO of Celsius Network, stated, “The crypto sector needs to start talking about how we’re going to actually spur mainstream adoption. Our view at Celsius Network is that interest income will bring the next 100 million people from all over the world into crypto. Once a critical mass of people realizes they can earn far better yield on their stable coins (Crypto dollars) than on their digital Bank dollars, the shift from fiat to digital currencies will rapidly accelerate.”

Nicole Campa, Co-Founder of HerCode, said “It’s exciting to see the blockchain education space really start to come to life alongside the blockchain industry as a whole. Some top universities are implementing blockchain courses into their curriculum now instead of just having a foundational course and nothing more. Since LinkedIn called blockchain the #1 hard skill of 2020, we believe the education space will have to follow in shaping how they set students up for success for blockchain related jobs in various career paths, not just those that focus solely on STEM. We’re excited to be part of blockchain education initiatives that focus on diversity and look forward to seeing this part of the industry grow.”

For cryptocurrencies and blockchain technology to achieve mass adoption, continued conversation and collaboration is key. Crypto Token Talk aims to do its part to shed light on the projects and ideas paving the way to a future powered by blockchain systems.
https://finance.yahoo.com/news/crypto-token-talk-podcast-kicks-140000446.html