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Experts Explore the Tensions Between Cryptocurrency Regulation and Innovation

October 15, 2021

By Jeremy Conrad

SEC Commissioner Hester Peirce joins J. Ashley Ebersole of Bryan Cave Leighton Paisner for a fireside chat.

On October 12 the D.C. Bar Corporation, Finance and Securities Law Community brought together a group of key figures in cryptocurrency and financial regulation to discuss the delicate task of introducing regulatory structures to the digital financial marketplace.

“The Intersection of Regulation, Investment, and Technology in the Crypto Universe” opened with a fireside chat between U.S. Securities and Exchange Commissioner Hester Peirce and Bryan Cave Leighton Paisner LLP partner J. Ashley Ebersole, who previously served as an SEC attorney. Ebersole raised a concern expressed by many actors within the burgeoning digital financial sector, drawing on the SEC’s determination earlier this year that digital asset trading platform Poloniex had been operating an unregistered securities exchange.

Even if Poloniex had “tried to register as a national exchange, or as a broker-dealer and then filed a notice registration as an ATS [alternative trading system] to allow its trading activities . . . it would have been waiting months or years,” Ebersole said.

Peirce had issued a dissent to this effect in the Poloniex decision and responded with a position that many reflected on during the discussion. “You can’t both help people come in and register, and then tell them when they do come in to register that they can’t do any of the things they wanted to do when they registered,” Peirce said, adding that it was necessary to craft a system that would provide the latitude necessary for innovation.

Expressing a preference for a light regulatory touch, Peirce pointed to decentralized finance, or DeFi, as potentially requiring less regulation than traditional markets since its operation relies on an underlying code rather than actions by individuals.

A panel discussion following the fireside chat was co-moderated by Ebersole and Ji Kim, associate general counsel and head of regulatory affairs for Gemini Trust Company, LLC. They were joined by Kristin Smith, executive director of the Blockchain Association; Mary Beth Buchanan, president (Americas) and global chief legal officer at Merkle Science; and Gus Coldebella, a partner at True Ventures and formerly general counsel of Paradigm.

Crypto’s reach goes beyond the business and financial sectors to include individual investors, programmers, currency miners, and content producers, Smith said. “Crypto has a superpower and that superpower is that it isn’t just an industry, it’s a whole ecosystem.” Actors in the marketplace are widespread, passionate, and in constant communication through platforms like Twitter and Reddit, and their interest and involvement in the regulation of their investments separates them from traditional investors, she added.

Acknowledging that regulation was inevitable, Smith said that the community’s organization and involvement would help ensure that it had a seat at the table in determining what that regulation might look like.

Many of the attendees were formerly employed in government regulation, and Coldebella said that the increasing exchange between the regulatory sector and private sector was helping to advance their ability to understand and communicate with each other. He said that he hopes the possibilities of the marketplace aren’t stifled by conventional approaches to regulation.

“There’s a regulatory tendency to put new technology into old baskets — to take a decentralized technology and re-centralize it because it’s easier to regulate, or to take an open technology and to treat it like a closed technology,” he said.

DeFi, in particular, has open code and operates outside of the control of a central authority, making it more transparent and less subject to abuse than the traditional financial models the government is accustomed to regulating, said Coldebella.

Peirce has proposed that the SEC adopt a token safe harbor that would permit a three-year grace period within which creators of cryptocurrency would develop their products with the promise of exemption from the registration provisions of national securities laws. This would permit space within which products could develop without the shadow of potential liability looming over them.

Lack of regulatory clarity could have consequences, Smith said, pointing out that companies dealing in cryptocurrency and other digital financial assets have migrated overseas, seeking friendlier regulatory environments. “They don’t really need to be in the U.S. to build the things that they want to build,” she said.

Buchanan, however, noted the advantages the United States offers. “We have a lot of venture capital here in the U.S., which is one of the edges we have. And for crypto companies that are already here trying to sort out the vagaries of U.S. regulation, I think those companies will stay and try to figure it out. It’s the companies that have not yet come to the U.S. that are probably hesitant to do so, particularly when there are clear regulatory frameworks that have been developed in jurisdictions like Singapore, Abu Dhabi, Japan, and Switzerland,” she said.

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