The new SEC cryptocurrency head, Valerie Szczepanik, has stated that she is aiming to protect investors, namely Main Street investors, involved in ICOs. The area has been beset by numerous hacks and scandals. In the newly created position as the Senior Advisor for Digital Assets and Innovation, she will be investigating ICOs and advising the SEC on digital currency related matters.
ICOs are an investment mechanism where investors typically trade ether for the digital token on offer. The issue is that it is not known how the token itself is to be regulated and who governs it. To date, the IRS, FinCEN, the CFTC, and the SEC have all claimed some sort of authority over ICOs and cryptocurrencies. The CFTC has by far the strongest claim, but the SEC has always asserted that it has jurisdiction to govern the space. Despite Federal court rulings that dictate that the CFTC are the appropriate regulatory authority, the SEC is proceeding to investigate the industry.
Whether a token is deemed a security or a commodity will determine whether it is governed by the SEC or the CFTC. While Jay Clayton, the SEC chairman, has indicated that every ICO is to be deemed a security, Szczepanik has a much more flexible stance, saying that “Whether a token is a security or not is a fact or circumstance-based thing and you have to really pick it apart”. This is much more nuanced strategy than the sandbox approach endorsed by Clayton where all ICOs are classified as securities. This sandbox strategy is being promoted by a number of different jurisdictions.
In May 2018, SEC commissioner Hester Peirce criticised this approach and advocated for a light touch regulatory policy where the SEC was not “sitting with sandcastle builders monitoring their every design decision.” Concerning sandboxing, Peirce has stated that “What troubles me about sandboxes, however, is that the regulator is typically sitting there next to the entrepreneurs”. This statement does not exactly engender confidence in the SEC coming from a regulatory official.
However, the appointment of the new SEC cryptocurrency czar is likely good news for the ICO industry. Szczepanik’s ideology seems to be much aligned with that of Pierce, where regulation is needed, but not so much to deter investment and innovation. Szczepanik could be the perfect choice to promote the ICO model and lessen ambiguity in the area. But only time will tell whether the hands-off approach is deployed or the sandbox method rules the day.