New Paradigm: Remarks At SEC Speaks - SEC Commissioner Hester M. Peirce, Washington D.C., May 19, 2025

Thank you. Welcome to SEC Speaks. Before I begin, I would like to remind you that my views are my own as a Commissioner and not necessarily those of the Commission or my fellow Commissioners.

Exactly one month ago—April 19, 2025—marked the 250th anniversary of the start of the American Revolution. Crouching behind a stone wall at the Battle of Lexington and Concord was Samuel Whittemore, an octogenarian farmer who killed three British soldiers before being—as recorded on a memorial—“shot[,] bayonetted[,] beaten[,] and left for dead.”[1] He defied the odds by living almost two more decades.[2] Among the heirlooms that stayed in the family until my great uncle gave it to a historical society was a teacup with a broken handle that Whittemore had buried in his back yard as a token of protest against the much detested Tea Act.[3] This little act of rebellion, which foreshadowed his much bigger act of rebellion, helped lay the groundwork for a nation that uniquely values human liberty, celebrates the independent spirit, and welcomes dissenting voices.

Mine has been one of those voices over the past several years. Many of my dissents related to the Commission’s approach to regulating crypto assets: an entirely new class of digitally native assets as well as “onchain” versions of currencies, commodities, collectibles, and securities enabled by a shared database architecture for recording ownership of digital property. Having emerged from the crypto dissent years, I am glad to be able speak to you today as the head of the Commission’s Crypto Task Force about a rational and coherent path forward and a new paradigm at the SEC.

My guess is that some of you in the audience are not very interested in crypto. The SEC’s remit is broad, as is clear from the many topics on the SEC Speaks agenda. Important work lies ahead of us in areas such as expanding access to capital, reinvigorating our public markets, regrounding disclosure in materiality, fostering participation by more Americans in the capital markets, carefully implementing rules such as Treasury clearing, streamlining and modernizing the Commission’s hefty rulebook, rethinking the Consolidated Audit Trail and the gag rule, fostering innovation and competition in asset management, permitting the use of modern communication methods, and ensuring continued market resilience.

Crypto is not the most critical issue for the Commission, but it is important—even for those of you who see no value or worse in anything bearing the “crypto” label. First, the Commission’s approach to crypto in recent years has evaded sound regulatory practice and must be corrected. The Commission has relied on enforcement actions to tell people how it views the application of securities laws to crypto and as a substitute for notice-and-comment rulemaking. It has provided little useful guidance about how the securities laws apply under the facts and circumstances of crypto. Second, although much of crypto to date has stood outside the traditional financial markets, change is coming fast both because traditional financial intermediaries are developing and engaging with crypto assets and market participants are experimenting with the tokenization of traditional securities. Finally, providing crypto clarity will allow the Commission to focus on the aforementioned many other things on its agenda.

The Task Force, which Acting Chairman Uyeda established at the start of his tenure[4] and Chairman Atkins has continued,[5] has been around for about four months. In that time, we have hosted four roundtables and planned one more for next month,[6] received more than a hundred written submissions[7] that respond to an extensive request for input,[8] and held over one hundred meetings with industry participants and other members of the public with a diversity of views on a wide range of topics.[9] Staff across the Commission has issued new crypto guidance, including on crypto mining[10] and broker-dealer custody of customer crypto assets.[11] I support the issuance of further guidance to identify activities that are not covered by the securities laws, including on, for example, direct participation in proof-of-stake and delegated proof-of-stake systems and the technical nature of services that assist people seeking to participate in these consensus mechanisms. Staff has also rescinded guidance that has inhibited regulated entities from engaging with crypto assets.[12] In addition, the Task Force, along with staff across the Commission, has provided technical assistance in connection with congressional efforts to develop crypto legislation and has worked with other agencies to fulfill the President’s directives with respect to crypto.

The most popular topic of discussion by far in written input and industry meetings has been security status. My short answer to the question—Are crypto assets securities?—is that most currently existing crypto assets in the market are not. My supplemental answer is that economic realities matter and non-security crypto assets may be distributed as part of an investment contract, which is a type of security.

The federal securities laws apply broadly to situations in which a person takes another person’s money in exchange for a promise to generate value for the person who provided the money. As defined in statute, the term “security” includes a variety of enumerated instruments—such as stock, bonds, and notes—that all have a key feature in common.[13] All are “instruments that, in our commercial world, fall within the ordinary concept of a security.”[14] Securities ordinarily represent rights or an interest in a business entity or other promisor.[15] For example, a share of common stock represents certain voting and economic rights in the business entity that issued it, and a note represents the right to receive payments from a promisor. The intrinsic value of these instruments depends on the financial prospects of the associated business entity or promisor. The drafters of the federal securities laws did not intend the term “security” to include instruments that do not represent economic rights or an interest typical of an ordinary security with respect to a promisor.[16] So despite the broad application of the definition of “security” in the federal securities laws, some financial instruments fall outside of its reach, including some that are sold by fraudsters.[17] Financial instruments outside the Commission’s reach may be within scope for another regulator.

The line demarcating transactions covered by the securities laws from those that are not is still hazy even after the SEC and courts have engaged for decades in following the congressional directive “to decide which of the myriad financial transactions in our society come within the coverage of the statutes.”[18] In assessing whether an instrument fits within the securities regime, the Supreme Court has opined that the “substance” of the instrument is more important than its “form.”[19] An instrument that is called “stock” but does not convey the rights typical of a security will not necessarily come within the scope of the federal securities laws.[20] Similarly, an instrument that is marketed as a good but conveys the rights typical of a security will be regulated as one. Considering the “economic realities” is not necessary for “traditional stock, [which sits] plainly within the statutory definition,”[21] but is for “unusual instruments” that are “not easily characterized as securities.”[22]

The Supreme Court has recognized that this approach, which is “founded on economic reality rather than on a set of per se rules,” may lead to confusion about whether the securities laws apply in some contexts.[23] However, this approach permits “the SEC and the courts sufficient flexibility to ensure that those who market investments are not able to escape the coverage of the Securities Acts by creating new instruments that would not be covered by a more determinate definition.”[24] The Court suggested that Congress may have, “at the expense of the goal of clarity, . . . overvalued the goal of avoiding manipulation by the clever and dishonest.”[25]

The Supreme Court’s acknowledgement of ambiguity accords with the crypto industry’s confusion on the subject and underscores why the Commission should have done its job of providing clarity on security status specifically for crypto asset offerings. So deep was the confusion that many crypto entrepreneurs left the United States or excluded the American public from participating in their projects.[26] Yes, the Commission did issue “The DAO Report” in 2017 to “confirm[] that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies.”[27] But facts in The DAO Report were distinguishable from many other crypto asset offerings.[28] Yes, the Commission staff did issue guidance, but that guidance was so complicated that nobody could follow it.[29] I support staff’s withdrawal of that guidance lest anyone else should still consider incurring the fees of a lawyer to decipher it. And yes, the Commission followed The DAO Report with many enforcement actions against issuers of crypto assets and crypto intermediaries, but many of these actions were premised on violating registration provisions that were not workable for the types of activities at issue.[30]

The Commission has since settled or dropped many of these cases so that our policy divisions have the room they need to develop a sensible path forward. The Commission’s approach to crypto did not work; it neither stopped many of the worst crypto actors, nor provided clarity for the good ones. The fault lies with the Commission; not the hardworking staff who sought to do the best they could under the direction the Commission gave them. The Commission—consistent with its investor protection mission—will continue to vigorously pursue securities fraud, including in cases that involve crypto, but the Commission’s statutory authority does not cover fraud and scams of every kind.

Although much later than it should have, the Commission now has begun the work of providing clarity. Guiding this work is a recognition that whether something resides onchain does not change its substance for purposes of analyzing its security status. Staff already has started to provide guidance, and, as Chairman Atkins mentioned at the Tokenization Roundtable,[31] we are moving expeditiously to codify our thinking through notice-and-comment rulemaking.

Tokenization of real-world assets is in its infancy, so most crypto assets in existence today are not instruments enumerated in the definition of “security.” Common crypto assets are methods of payment, stores of value, access to computing power, artwork, rewards points, video game items, tickets, memberships, and memes. The Commission staff recently clarified that in its view certain meme coins and stablecoins are not securities because, among other things, they do not convey economic rights in a business entity or other promisor.[32] They are blockchain-based versions of things that exist in the offchain world. A meme coin is a digitally native type of collectible that derives its value from an associated meme or popular culture reference. A stablecoin is a digitally native payment instrument that is designed to maintain a stable value, similar to an open-loop gift card. A permanent exclusion from the term “security” for crypto assets that meet certain enumerated criteria—such as collectibles or stablecoins—could be helpful. Crypto assets that do not have indicia of external control or dependency could also be excluded.

Other non-security crypto assets convey to their holder technical powers with respect to a functioning, decentralized, public, and permissionless blockchain network or application. Users must own the protocol’s native crypto asset to interact with the protocol’s features and functionalities. Users freely choose to participate in these protocols and abide by their rules, often in return for crypto asset rewards that are programmatically generated by or derived from use of the network or application. Developers, whose compensation comes in the form of crypto assets, want to build for networks and applications with an active user base because the high demand for crypto assets is reflected in the crypto asset price on secondary markets. An economic mechanism rewards voluntary cooperation and coordination among a distributed set of participants. A flywheel effect emerges whereby users are encouraged to participate in a protocol based on the design of its economic mechanism and developers are encouraged to build for networks and applications that successfully attract users. No central party oversees participation or distributes rewards to participants. As a result, the value of these crypto assets is intrinsically linked to the programmatic functioning of an associated network or application rather than to any business entity or promisor.

Many non-fungible tokens (“NFTs”) also are not securities, including NFTs designed to compensate their creators over time. These NFTs are powered by smart contracts, which can be programmed to transmit automatically a portion of the sale price of an NFT to the creator of the artwork as a royalty each time that it is re-sold. Just as streaming platforms pay royalties to the creator of a song or video each time a user plays it, an NFT can enable artists to benefit from the appreciation in the value of their work after its initial sale. This “creator royalty” feature of certain NFTs does not provide to the NFT owner rights or an interest in any business enterprise or “the kinds of profits traditionally associated with securities.”[33]

Crypto assets that do not represent economic rights or an interest in a business entity or other promisor (including an ownership or debt interest, revenue share, or entitlement to any interest or dividend payment) and are solely for use or consumption should not be subject to the federal securities laws.[34] The analysis does not change even if purchasers are speculating on an increase in the future value of the crypto asset.

The 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. It is common practice today for a software development company, foundation, or related entity (for our purposes here, I will use the collective shorthand, “issuer”) to distribute a crypto asset along with promises of future functionality and decentralization before the crypto asset is functional and while the associated network or application is under the control of a central party. The issuer makes these promises, either directly to the purchasers (who often are venture capital funds or other institutional investors) or indirectly through public communications. The relevant promised efforts are “the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.”[35] These promises shape the purchasers’ expectations; rather than buying a functional crypto asset, the purchaser is buying the crypto asset along with the issuer’s promise to make it functional. The promise arguably runs through these purchases “as the thread on which everybody’s beads [are] strung.”[36] If the issuer were to disappear and cease performing the essential managerial efforts, everybody’s beads would fall to the floor because the crypto asset’s value is intrinsically linked to the promisor’s efforts.

These transactions start to look a lot like other transactions courts have held to be covered by the securities laws. Because the crypto assets are sold with promises to develop the network or application and deliver functionality, the crypto assets may be subject to a contract, transaction, or scheme that qualifies as an investment contract, a type of security under the federal securities laws. The Supreme Court defined this term in SEC v. W.J. Howey Co. as a “contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”[37] The Supreme Court intended to capture “uncommon and irregular instruments”[38] that have “the essential attributes that run through all of the Court’s decisions defining a security.”[39] As the Court explained in Forman, “The touchstone is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”[40] Subsequent courts have elaborated on the definition, and the wide diversity of judicial interpretations has resulted in significant uncertainty for crypto market participants as well as participants in other markets.[41] Additional clarity from Congress on the scope of the term “investment contract” could be helpful in crypto markets and more generally.

The biggest challenge for crypto market participants, including issuers, crypto trading venues, and early-stage purchasers, is determining when a non-security crypto asset subject to an investment contract separates from the investment contract. Some commentators have suggested that it separates immediately and subsequent sales of the crypto asset are not subject to any of the investor protections of the federal securities laws.[42] Others opine that the investment contract travels with the crypto asset until the associated network or application is sufficiently decentralized[43] or no longer controlled by a central party,[44] or the issuer has otherwise fulfilled its promises to purchasers of the investment contract.[45]

Distinguishing the crypto asset from the investment contract allows the asset to trade freely outside of the securities laws. This delinking fosters the flywheel effect that I discussed earlier—a wide range of purchasers can buy the crypto asset easily and thus can use it in a network or application, and developers getting paid in the crypto asset can sell it easily. At the same time, treating all secondary sales of crypto assets as being free of the investment contract runs the risk of facilitating bad behavior: the dumping of crypto assets bought as part of an investment contract on retail investors while the crypto asset lacks function and its associated network or application remains centralized (and thus subject to information asymmetry concerns). If the initial holders are out of the picture because they have sold their crypto assets, the investment contract is unenforceable, and the issuer can dump its crypto assets too and walk away—wealthy and unaccountable for completing the project. Companies looking at capital raising options might even be tempted to use such crypto asset sales instead of other capital-raising methods: promise to build a network or functional product, do a crypto asset presale to venture capitalists, stop developing the network or product once they have sold out to retail, and plow the proceeds of the initial crypto asset sale into building their actual business.

Market participants could solve this problem without a government solution. For example, issuers could place lock-ups on their own and initial purchasers’ crypto assets to demonstrate good faith to purchasers. Alternatively, or additionally, they could embed into the crypto assets specific performance deliverables and enforcement mechanisms using smart contracts. The investment contract would intentionally travel with the crypto asset until it was extinguished by performance of the specified deliverables.

Although such a market-driven solution could reduce the need for government intervention, the Task Force is considering how to establish clear rules of the road for crypto asset transactions. To enable crypto projects to move forward now (while we await legislation and the courts continue to opine on these questions), the Commission could provide both a tailored registration regime for securities offerings involving crypto assets and an appropriately conditioned “safe harbor” from securities registration for transactions involving crypto assets that are (or might be) subject to an investment contract. A time-limited, conditional safe harbor would allow crypto assets subject to an investment contract to be transacted in without being subject to securities registration requirements for a period of time, provided that the issuer satisfies certain disclosure and investor protection requirements.[46] Such a safe harbor would afford issuers time to progressively deliver functionality for a crypto asset or decentralize a network or application, while providing material information to investors about the crypto asset, the issuer, and its promised essential managerial efforts. An alternative would be to regulate offers and sales of pre-functional and pre-decentralized crypto assets by the issuer, its affiliates, underwriters, and large holders as securities transactions, but exempt from regulation subsequent sales of these crypto assets on secondary markets.[47] Additionally, the Commission might establish an exemption framework so that certain distributions of crypto assets as part of an “airdrop” are not deemed “offers” or “sales” subject to registration.

The Commission, acknowledging that some courts have found secondary sales of crypto assets to be securities transactions, could provide clarity around when the link between the investment contract and the crypto asset severs rather than leave this question entirely up to the courts’ ex post assessment. Achieving crypto asset functionality (as described in the issuer’s public statements) may be one way to break the link. Another way may be for control over the network or application to become dispersed so that the issuer is no longer providing essential managerial efforts and the information asymmetries that animated Congress in crafting the securities laws no longer exist. If the network or application would keep running if the issuer disappeared, it is hard to argue that the issuer is providing essential managerial efforts. Some issuers may seek to decentralize a network or application too quickly, to the detriment of the long-term success of the project, but issuers that commit to a progressive decentralization roadmap designed to mitigate against the disclosed risks of exploits, bugs, and governance failures are more likely to attract investors. Pragmatically speaking, the investment contract also might terminate if the issuer publicly discloses that it will no longer engage in the essential managerial efforts. In this case, it would not be reasonable for subsequent purchasers of the crypto asset to expect profits based upon the issuers’ essential managerial efforts, but—given that not fulfilling one’s promises to securities purchasers is bad conduct that securities laws address—the issuer may be liable to earlier purchasers of the investment contract. Upon conclusion or termination of the investment contract, the crypto asset would no longer be tethered to a security.[48]

Regardless of how the SEC ultimately draws the lines, even if a broad swath of the crypto assets trading in secondary markets today were initially offered and sold subject to an investment contract, they clearly are no longer bought and sold in securities transactions.  Many of these crypto assets are functional. With respect to others, purchasers no longer reasonably expect any business entity or other promisor to perform essential managerial efforts with respect to the crypto asset. In other words, the crypto asset’s value is intrinsically linked to something other than rights or an interest with respect to a business entity or other promisor. These assets are not themselves securities, nor are they any longer part of an investment contract, even if they once were.

Forthcoming rulemaking by the Commission and legislation from Congress should continue to provide clarity about which crypto assets are securities. But, as highlighted in the discussion at last week’s roundtable on tokenization, many crypto assets are likely to fall clearly within the “security” definition; traditional securities in tokenized form are still securities. Among other market developments I anticipate is interest in trading tokenized securities alongside non-security crypto assets. Nothing in the federal securities laws or regulations currently restricts broker-dealers with an alternative trading system from offering trading in non-securities alongside securities, but further clarification from the Commission staff on this topic may be helpful to market participants as well. Additional authority from Congress to regulate both sides of these pairs trades could be helpful. I do not know whether blockchain will revolutionize the way our securities markets operate as some people suggest,[49] but we stand ready to work with the public as we have done in the past to incorporate new technologies into our markets.

Two hundred and fifty years after Samuel Whittemore made his stand behind the stone wall, I stand here today grateful for the freedom for which he fought. I hope that all of us can look up from the minutiae of the securities laws for a moment to celebrate a quarter of a millennium’s fight for freedom. Even this seemingly abstruse project of regulating the securities markets that all of us in this room share with one another contributes to the strength of our Nation and the freedom of its people to pursue their dreams. Thank you to those of you who are on the SEC staff, were previously on the SEC staff, hope to join the SEC staff in the future, or are content serving in the private sector. All your voices are important in making sure that the SEC does its job well so that capital markets of this great Nation can continue to thrive.