Two commissioners at the Securities and Exchange Commission (SEC) used recent speeches to stake out opposite sides on a central debate: Are all cryptocurrencies securities?

Caroline Crenshaw, in remarks at Tuesday’s SEC Speaks virtual forum, made it clear she believes cryptocurrencies are likely securities, and that the agency’s history of enforcement actions dating back to 2017 reflect that opinion.

Meanwhile, Hester Peirce, a well-known supporter of cryptocurrency, questioned whether there is legal clarity around cryptocurrency and other digital assets at the Texas Blockchain Summit on Friday. She reiterated her argument many of these digital assets currently operating outside or astride of the SEC’s regulatory framework should be provided with safe harbors until the regulator provides that clarity.

The fact at the moment is the SEC is controlled by Democrats, led by Chair Gary Gensler, who hold the belief most digital assets, including cryptocurrencies, are securities. Most cryptocurrencies are unregistered, which allows them to operate without disclosing exactly who is offering them and other key details that would help investors determine on what their value is based. From a purely pragmatic standpoint, what Crenshaw and Gensler have to say on the matter currently holds more weight than Peirce, a Republican. That situation won’t change as long as there is a Democrat in the White House.

“[A]nalyzing regulatory compliance has always been, first and foremost, the responsibility of the enterprise and their counsel. That obligation applies with no less force when people choose to design their business around digital assets and blockchain technology.”

SEC Commissioner Caroline Crenshaw

First, a little perspective.

Cryptocurrency has evolved over the last decade from a curiosity into a market force. According to digital asset marketplace Coinbase, more than $7 trillion worth of the most popular cryptocurrency, Bitcoin, has been traded since 2009. There are now dozens of other cryptocurrencies being traded every day, with a total market cap estimated at $2 trillion.

Regulators and governments have taken notice. Earlier this year, El Salvador became the first country to accept Bitcoin as a national currency. China last month took the opposite approach, completely banning cryptocurrency trades and mining within its borders or by its citizens.

In the United States, cryptocurrency and other forms of digital assets are stuck in regulatory purgatory. The SEC has indicated through enforcement actions that all cryptocurrencies are securities and should be regulated by the agency. Even before Gensler came on board, the SEC filed a lawsuit in federal court against Ripple Labs, alleging Ripple illegally raised $1.3 billion by selling 14.6 billion units of XRP since 2013 without registering the cryptocurrency as a security.

The outcome of the case, currently being heard in U.S. District Court for the Southern District of New York, could provide the cryptocurrency market with some clarity about what digital assets are, and which are not, under the jurisdiction of the SEC.

Differing viewpoints

Cryptocurrency advocates and early investors say they want clarity from the SEC on what digital assets the agency considers a security. They aren’t likely to get it, according to Crenshaw.

“While industry may desire blanket definitions or that we proactively label all the specific projects, assets, and activities that are within our jurisdiction, that is not how our regulatory framework functions. We also do not have the resources to do that,” Crenshaw said. “And most importantly, analyzing regulatory compliance has always been, first and foremost, the responsibility of the enterprise and their counsel. That obligation applies with no less force when people choose to design their business around digital assets and blockchain technology.”

Peirce said absent such clarity from the SEC, market participants are forced to rely on court rulings, of which there have been precious few; SEC enforcement actions, which so far have indicated every digital asset is a security; and settlements, which she argued are “not good vehicles for careful legal analysis” because the SEC is usually not forced to justify its position.

“[I]f the SEC cannot easily articulate an unassailable legal theory for why particular assets are securities, is the line as clear as the SEC maintains it is?” she asked. “The ambiguity ultimately serves us well because it effectively forces any actor with any connection to digital assets into our regulatory jurisdiction.”

Crenshaw argued companies offering cryptocurrencies and other digital assets to the market must “conduct their own analysis of their regulatory compliance and be ready to share that with us.” She also urged companies to conduct the analysis before putting the digital asset on the market, rather than afterwards.

The process is admittedly difficult, expensive, and slow and might be why many firms choose not to engage with the SEC before releasing a new digital asset, she said. Another reason is the agency has shown a pattern of disagreeing with firms who argue their digital financial instrument is not a security, as it recently did with Coinbase and its proposed product, Lend. Instead of engaging in a conversation with Coinbase, the SEC threatened to sue if Lend was released to market.

Despite the difficulties of engaging with regulators on digital assets, Crenshaw argued it is what firms are legally obligated to do. Simply continuing to operate outside of the regulatory framework imperils the entire cryptocurrency industry, she said.

“Such a market is likely to succeed long term over those offerings that continue to behave as if regulations do not apply to them,” she warned.

Gensler recently said something similar during a virtual event hosted by the Washington Post.

“I don’t think there’s long-term viability for five or six thousand private forms of money,” he said. “So, in the meantime, I think it’s worthwhile to have an investor-protection regime placed around this.”