There Must Be Some Way Out Of Here, SEC Commissioner Hester M. Peirce, Feb. 21, 2025

[1]Five years ago, I remarked that “figuring out how to deal with the SEC on crypto issues [was] like a regulatory version of an escape room.”[2] Now it is time to help open the door. The Task Force, which is composed of exceptional Commission staff, is working on the unlock with other expert, dedicated staff across the Commission. Greater crypto clarity, however, requires the public’s input. We welcome input from anyone in the public with an interest in these topics, and a wide range of perspectives (including from skeptics) will make that input richer. This document invites such input by posing some of the questions with which the Task Force is wrestling. The Task Force is actively considering solutions to many of the issues presented. However, your input can significantly aid in that process.

As always, let me start with several disclaimers. My views are my own as a Commissioner and not necessarily those of the Commission or my fellow Commissioners. These questions are not a roadmap to actions the Commission or its staff will take. They are not meant to limit the discussion, so feel free to pose and answer other questions and to address topics that we have not raised. The scope of this inquiry is expansive and calls on the particularized knowledge of a broad range of people. The Task Force welcomes your responses to as many of the questions as you would like to address, but do not feel compelled to swim outside your lane.

To aid readers, we have drafted questions with a potential taxonomy in mind:

• First, crypto assets that are securities because they have the intrinsic characteristics of securities;
• Second, crypto assets that are offered and sold as part of an investment contract, which is a security, even though the crypto asset may not itself be a security;
• Third, tokenized securities; and
• Finally, all other crypto assets, which are not securities, in my view, and are currently the biggest category.

The Task Force welcomes your thoughts as to the best paths to improve this taxonomy.

The questions below identify some statutes and rules that may present challenges to firms seeking to innovate with crypto assets and blockchain technology, but please identify other federal laws, or state corporate or commercial laws, that present challenges to innovation by Commission registrants. We are looking for creative solutions that comport with the Commission’s statutory framework. The Commission’s three-part mission will guide our work: 1) protecting investors, 2) maintaining fair, orderly, and efficient markets, and 3) facilitating capital formation. Because we hope to make rapid progress and would like to foster a dynamic discussion among respondents, we would appreciate your timely responses but will welcome input at any time. We plan to continue making progress in the meantime, so the earlier we receive your input the more likely it is to inform the options for consideration. Thank you in advance for your help.

Finally, as the Task Force works on the issues below, the Commission’s efforts continue unabated to combat fraud involving securities, including crypto assets that are securities or that were offered and sold as part of an investment contract, and tokenized securities. The Commission welcomes the public’s tips about securities violations.[3]

Security Status

Blockchain technology has given rise to novel assets that rely on cryptographic protocols for their existence (“crypto assets”). Market participants have expressed a reasonable desire to determine with ease whether such an asset is a security or is being offered or sold as part of an investment contract. When crypto assets that are sold along with promises of future work to develop the ecosystem within which those assets operate, analyzing them under Howey’s investment contract test can be difficult.[4] Market participants have expressed concern that the Howey test, as the Commission has applied it, is a complex analysis that can be difficult to apply consistently. One of the Task Force’s goals is to make it easier for investors, market participants, and the Commission to categorize crypto assets and crypto asset transactions. To that end, the Task Force is considering questions, including the following:

1. What type of regulatory taxonomy would provide a predictable, legally precise, and economically rational approach to determining the security status of crypto assets and transactions in such assets without undermining settled approaches for evaluating the security status of non-crypto assets and transactions?
2. Should the Commission address when crypto assets fall within any category of financial instruments, other than investment contracts, that are specifically listed in the definition of “security” in the federal securities laws?[5]
3. Certain crypto assets are used in a variety of functions inherent to the operation of a blockchain network, such as mining or staking as part of a consensus mechanism or securing the network, validating transactions or other related activities on the network, and paying transaction or other fees on the network. These technology functions may be conducted directly or indirectly, such as through third-party service providers. What types of technology functions are inherent to the operation of a blockchain network? Should the Commission address the status of technology functions under the federal securities laws and, if so, what issues should be addressed?
4. Users of liquid staking applications receive a so-called “liquid staking token.” This token represents their staked crypto asset, and the token can be used in other activities, all while continuing to participate in the proof-of-stake protocol. Should the Commission address the status of liquid staking tokens under the federal securities laws, and, if so, what issues should it address?

Scoping Out

The Commission may be able to provide greater clarity to investors and other market participants by identifying categories of crypto assets (and transactions) that do not fall within its authority. In some cases, these types of crypto assets may be within another regulator’s authority. In determining what falls outside the Commission’s authority, the Commission should look to the economic reality of what is being offered or sold. Simply saying something is not a security does not mean it is not a security.

5. Should the security status of certain categories of crypto assets be addressed, such as stablecoins, wrapped tokens, and NFTs?
6. How can the Commission establish a workable taxonomy while remaining merit- and technology-neutral?

Public Offerings

People who have conducted or attempted to conduct registered or qualified token offerings have expressed frustration about the cost and feasibility of registration. Tokens and their issuers can differ significantly in some aspects from traditional securities and their issuers. Allowing token issuers to use appropriately tailored registration regimes may protect investors better than insisting that they use registration forms and mechanisms that are designed for other types of securities offerings.

7. Could disclosure guidance and/or targeted relief address the concern, or are new forms or other mechanisms needed?
8. Should the Commission develop tailored disclosure requirements for offerings or classes of specific categories of crypto assets? What types of disclosures would be important for investor protection? Should disclosure occur both at the time of sale and on an ongoing basis? If so, what information should the ongoing disclosure contain and how should that disclosure occur?
9. Does Regulation A under the Securities Act, including the disclosure and ongoing reporting requirements, provide a useful vehicle to conduct offerings of crypto assets? Would revising aspects of Regulation A make it more useful for crypto asset offerings?

Safe Harbor from Registration

I previously proposed that the Commission consider putting in place a non-exclusive safe harbor—provisionally called Rule 195—that would, among other things, provide a time-limited exemption from the registration requirements under the Securities Act for offers and sales of crypto assets during the development of a blockchain project.[6] My motivation for suggesting such a safe harbor was to enhance and encourage disclosure and provide network developers with a grace period within which, under certain conditions, they can facilitate broad participation in and the development of a functional or decentralized network. At the end of the safe harbor’s term, token transactions may not be securities transactions if the network had matured into a decentralized or functioning network that is not dependent on a single person or group to carry out the essential managerial or entrepreneurial efforts. The safe harbor, which would include tailored disclosures subject to the antifraud provisions in the federal securities laws, is intended to respond to the concern that the disclosure requirements under the federal securities laws applicable to registration and offering statements, as well as ongoing reporting, are not tailored for blockchain projects and crypto assets. To be clear, any safe harbor the Task Force recommends will not offer protection for perpetrators of securities fraud.

10. Should the Commission consider a version of Rule 195, my proposed token safe harbor? Is the iteration on my proposed safe harbor known as “Safe Harbor X,”[7] or some other iteration, a better approach?
11. Should the safe harbor be available retroactively for projects that comply with the disclosure requirements?
12. If a safe harbor of some form is the right approach, what disclosure requirements would be feasible for early-stage projects to provide to token purchasers the material information regarding the blockchain project, crypto assets, and development team? What information should be required to be updated on an ongoing basis, and how should that information be provided?
13. At the expiration of the safe harbor as envisioned, if the network were sufficiently decentralized or functional, registration of the tokens would not be required. If decentralization is used as an indicator of network maturity, should the Commission define objective quantitative thresholds (such as percentage thresholds for ownership and control) to provide greater clarity for issuers, developers, or minters of tokens regarding whether their networks and protocols are sufficiently decentralized and to allow third parties to verify decentralization?
    1. Is dispersion of control a better framework than decentralization? If so, how should ownership of governance tokens and voting rights be considered in assessing dispersion of control? How should the delegation of voting rights be taken into account?
    2. If an exit marker is achieved, who should be responsible for notifying the Commission?
14. How should the decentralization of a deployed protocol best be evaluated? How should permissioned aspects of crypto-adjacent software or participant roles, such as validators, relayers, and sequencers, be considered? Are there tech-neutral thresholds that can be agreed upon for determining thresholds for decentralization?

Trading

Secondary market trading of crypto assets raises a variety of issues, some of which may fall within the Commission’s authority. The Commission’s authority in secondary markets generally is limited to assets that themselves are securities based on their intrinsic economic properties or rights, so we have to grapple with how to regulate platforms and market participants that trade securities alongside non-securities.

15. Should the Commission create a new entity registration status with tailored registration requirements for any platform that trades crypto assets that are securities? Should the Commission use or adapt the existing requirements for national securities exchange registration or the alternative trading system exemption from such registration, and if so, how?
16. What updates to the Commission rulebook are needed for side-by-side pairs trading of securities and non-security crypto assets to allow for enhanced interoperability and composability in finance?
17. Does execution in offchain order books or on blockchain networks pose complexities for broker-dealers in satisfying any applicable best execution obligations? Does onchain execution pose complexities for broker-dealers in satisfying their best execution obligations, given onchain complexities such as transaction ordering and block construction? Should any rules, guidelines, or disclosures be modified to address broker-dealer execution reasonably available under the circumstances in offchain and onchain trading environments?
18. The crypto markets are inherently transparent because they use open-source data, from public blockchains to open application programming interfaces (“APIs”). Are there programmatic/technological ways that crypto market participants, intermediaries, potential self-regulatory organizations, or regulators can monitor crypto markets using open-source data? How would this take into consideration nested accounts on centralized exchanges, given that this activity may not appear in public ledgers? Is open-source data sufficient for the market to monitor trading and therefore what non-public information might warrant mandatory disclosure? What sort of open-source tools can be used for enhanced transparency, such as proof of reserves, or proof of holdings? What are the limitations of such tools and such data?
19. With the understanding that both APIs and public ledgers can provide order books, what would be a good strategy for regulators to efficiently ingest and analyze order book data? How can the regulators leverage publicly available data to become more efficient and alleviate regulatory burdens?
20. How should Commission registrants assess Maximal Extractable Value (“MEV”) when they consider building or transacting in these environments? How best should Commission registrants delineate between the different types of MEV occurring onchain? In what ways is the market addressing the MEV in which MEV extractors order or re-order transactions to engage in front running, back running, or so-called “sandwich attacks”?

Custody

Market participants have broad and specific questions regarding custody requirements for Commission regulated entities—broker-dealers, investment advisers, and investment companies—including whether existing requirements suffice for custodying crypto assets. The Task Force is seeking input on answers to these questions so that individuals and organizations can safely, legally, and practicably custody client crypto assets themselves or with a third party.

21. Should the Commission amend existing rules, propose new rules, or provide guidance to facilitate custody arrangements for crypto assets? If so, what rule amendments or new rules would be appropriate, and to which types of activities should they apply? Should the Commission propose any specific changes to its rules to accommodate the self-custody of crypto assets by entities registered with the Commission? If so, what conditions should apply to self-custody arrangements to mitigate any related risks? Should the requirements for crypto assets that are securities and those that are not differ?
22. Public, permissionless blockchains are being used to tokenize permissioned assets. To the extent the custody rules for broker-dealers, investment advisers, and investment companies are implicated, how should the Commission differentiate between native crypto assets of permissionless blockchains and tokenized permissioned assets? Does either type of crypto asset present greater risks of theft or loss?
23. Are there commonly accepted practices and standards for auditing and accounting for crypto asset investments and transactions, including those related to valuation? How about with respect to verifying the existence and valuation of crypto assets, both among auditors and attestation providers (including non-accountant providers)? Should the Commission propose additional or specific requirements to address the unique nature of crypto assets?

Broker-Dealer Custody and Other Financial Responsibility Requirements

24. Should the Commission modify its Special Purpose Broker-Dealer Statement (“SPBD Statement”) or formally withdraw it? If the former, what should those modifications be? For example, should the Commission expand the SPBD Statement to cover broker-dealers that custody crypto asset securities alongside crypto assets that are not securities? If the Commission decides to eliminate the SPBD Statement, should the Commission propose any modifications to the customer protection rule (17 CFR 240.15c3-3) to address crypto assets?
25. The net capital rule (17 CFR 240.15c3-1) requires a broker-dealer to maintain sufficient liquid assets to meet all liabilities, including obligations to customers, counterparties, and other creditors and to have adequate additional resources to wind down its business in an orderly manner, without the need for a formal proceeding if the firm fails financially.
    1. Under the net capital rule, assets held by a broker-dealer must be readily convertible into cash to count as allowable for meeting minimum net capital requirements (e.g., intangible assets, furniture, fixtures, equipment, and most unsecured receivables are not readily convertible into cash under the rule and, therefore, do not qualify as allowable net capital). How should a given crypto asset be evaluated to assess whether it is readily convertible into cash?
    2. Under the net capital rule, securities and commodities are treated as readily convertible into cash. However, they are subject to deductions (known as haircuts) to account for the market, credit, liquidity, basis, and other risks inherent in the instrument. The haircuts range from 0 to 100 percent. For example, exchange-traded equity securities have a 15 percent haircut, while securities without a ready market (e.g., securities that are not exchange traded) are subject to haircuts as high as 100 percent. Commodities are subject to a 20 percent haircut. How should crypto assets be evaluated to determine the appropriate haircut to apply?
26. The recordkeeping rules for broker-dealers (17 CFR 240.17a-3 and 17 CFR 240.17a-4) require the creation and maintenance of accounting and operational records designed to assist a firm in tracking and understanding its assets, liabilities, positions, and obligations to customers (e.g., cash owed to customers and securities held for customers).
    1. What challenges, if any, do the requirements of these recordkeeping rules present with respect to crypto assets that are not an issue for traditional securities? What modifications to the rules could address these challenges?
    2. Should crypto assets generally be treated as if they are traditional securities for purposes of these recordkeeping rules?

Investment Adviser Custody and Other Requirements

27. What challenges do registered investment advisers (“RIAs”) face in complying with the Investment Advisers Act of 1940 (“Advisers Act”) as it relates to investments in crypto assets that are securities? What common practices, if any, have developed to address these challenges?
    1. Could best execution or recordkeeping obligations, or compliance with Form ADV or Form PF disclosure requirements, be clearer in the crypto asset context?
    2. Do any crypto asset characteristics or market structures place advisory client crypto assets at a greater or different risk of theft, loss, or misappropriation? If so, how can those risks be addressed?
28. Can RIAs trade, stake, vote, or otherwise participate without moving crypto assets outside a qualified custodian? Should the Commission amend the existing RIA custody rule to provide an exception to allow RIAs to move client crypto assets temporarily out of qualified custodial arrangements to engage in staking, voting, or other novel participatory features of crypto assets? If so, should that exception be subject to time limits or other limitations or requirements?
29. What clarifications, if any, are needed in the Advisers Act regulations to address the cold or hot storage of crypto assets held in custody on behalf of a client?
    1. What requirements, if any, should the Commission consider for the custody of crypto assets held in each type of wallet on behalf of a client? Should the requirements be the same for both types of wallets?
    2. How would a requirement to maintain custody of some or all crypto assets in either cold or hot storage affect an adviser’s ability to transact in those crypto assets or otherwise implement its investment strategy?
    3. What means are available to mitigate the risks related to maintaining crypto assets in hot storage?

 

Investment Company Custody

30. What challenges do registered investment companies (“funds”) face in complying with section 17(f) of the Investment Company Act and the rules thereunder (governing custody) with respect to investments in crypto assets? Are any specific requirements of section 17(f) or the rules thereunder categorically inconsistent with custody of crypto assets? Do funds anticipate that custodians currently eligible to act as fund custodians under the Investment Company Act and the custody rules (e.g., banks, foreign banks, broker-dealers) will offer fund custodial services for crypto assets?
31. Can a fund comply with the requirements of section 17(f) and the rules thereunder when trading, staking, voting, or otherwise engaging with crypto assets in which it invests? Should the Commission consider any changes to rule 17f-2 (the self-custody rule) or any other rules to facilitate transactions in crypto assets, and if so, what tailored conditions should the Commission propose to mitigate any related risks?
32. Should any provisions relating to investment company custody be revised to account for investment activities or other transactions that are unique to crypto assets (e.g., staking, mining, airdrops)? Do the existing custody rules present obstacles to such activities or transactions? How might these activities or transactions place a fund’s assets at risk of theft or loss?

Crypto Lending

Crypto platforms may offer custodial and noncustodial services through which people can lend their crypto assets in return for interest. Crypto lending concepts vary widely, challenging many traditional notions of financial products. I would welcome any input you have on these diverse products to ensure the Commission has an adequate understanding.

33. How should the Commission approach various crypto lending concepts in a way that doesn’t stifle the potential opportunities they provide?
34. Participation in traditional securities lending programs, such as fully paid securities lending programs offered by broker-dealers, generally does not represent a new securities transaction or implicate Investment Company Act registration requirements. How are crypto lending programs similar to or different from traditional securities lending programs?

 

Crypto Exchange-Traded Products (“ETPs”)

Exchange Act Section 6(b)(5) requires that an exchange’s rules be designed to prevent fraudulent and manipulative acts and practices. In reviewing listing applications for crypto asset-based ETPs, the Commission previously has considered whether the exchange has a comprehensive surveillance-sharing agreement (“SSA”) with a regulated market of significant size related to the underlying or reference assets. How should the Commission address listing applications for crypto asset-based ETPs going forward?

 

35. If the listing exchange does not have an SSA with a regulated market and no regulated market for the crypto asset underlying an ETP exists, could the listing exchange address concerns regarding fraud and manipulation based on the size and liquidity of the underlying spot market? What would be an appropriate measure of size and liquidity that would address these concerns? Are there more appropriate ways to address concerns regarding fraud and manipulation?
36. How should the Commission consider market capitalization, unique number of wallets, trading volume, the number of spot markets, geographic distribution of spot markets, size and frequency of price divergences, or speed of price convergence/arbitrage?
37. How should the Commission consider crypto asset-based ETPs that are investing in assets that are already referenced in crypto asset-based exchange-traded funds registered as investment companies under the Investment Company Act?
38. What factors should the Commission consider with respect to an SSA between an
    exchange listing an ETP on a crypto asset and a spot crypto market?
39. How should the Commission weigh the reliability, frequency, and dissemination of pricing information on the crypto assets underlying the ETP in its consideration?

Tokenized Securities

Creating a digital representation of a security on a blockchain or issuing a security directly on a blockchain does not change the substance of the security but may benefit issuers and investors. Moreover, the use of a blockchain-based database may be more secure in some respects than using a centralized database with a single point of failure. Tokenization also may give rise to unique risks and challenges.

40. Tokenization enables dematerialized securities to be mobilized (i.e., not held in and confined to a single centralized ledger). Are there any provisions under the federal securities laws that prevent these securities from being used in new blockchain-based transactions and applications, and, if so, what steps should the Commission consider taking to facilitate this innovation while mitigating any related risks? Are there amendments or new rules that the Commission should consider to ensure a merit- and technology-neutral approach to tokenization? Does the type of blockchain used (i.e., permissioned versus permissionless) bear on this risk assessment?
41. How do the programmability and composability properties of blockchain technology and blockchain-based technologies, such as smart contracts, affect the role of a transfer agent? Are there provisions in the transfer agent rules that prevent transfer agents from using blockchain technology for this purpose to the fullest extent possible? Is an offchain record still needed as an official or a complementary record in a tokenization arrangement? Are there any legal or regulatory impediments to using onchain identity solutions?
42. Does the tokenization of redeemable registered investment company securities, such as those of a mutual fund or money market fund, raise any unique issues under the Investment Company Act or the rules thereunder? Would secondary transactions in these securities (e.g., peer-to-peer transactions or transactions occurring on or through an ATS) require relief from any provisions of the Investment Company Act? If so, should the Commission propose any changes to facilitate tokenization of registered investment company securities, and what should any such conditions be?
43. How should the Commission approach tokenized securities that seek to maintain a stable value and may be designed to be used as a means of payment or settlement? What are the challenges and impediments to the usability and transferability of these tokenized securities, particularly securities issued by offchain entities (e.g., registered investment companies)? Should transactions involving the use of these tokenized securities as a means of payment be treated differently from other security-based transactions?
44. Do other federal laws, or state corporate or commercial laws present challenges to firms seeking to issue tokenized securities or engage in activities involving tokenized securities?
45. The Commission recently adopted rule amendments to shorten the standard settlement cycle for most broker-dealer transactions from “T+2” to “T+1,” subject to certain exceptions. Tokenization is often characterized as an innovation that facilitates instant or simultaneous settlement (“atomic settlement”) if all parts of a transaction are executed and settled on the same blockchain. What are the benefits of atomic settlement, and what are the risks? Should the Commission consider taking any actions that would encourage adoption of atomic settlement?
46. What issues are raised by the tokenization of securities subject to National Market System (“NMS”) requirements? Should the Commission clarify any requirements or provide relief from any requirements under Regulation NMS? Are there any other SEC rules that should be clarified or amended to address the trading of tokenized equity or debt securities?

Sandbox and Related International Issues

Last year, I proposed the creation of a micro-innovation sandbox (“Sandbox”), which could be used for small-scale projects, including tokenization and blockchain projects.[8]

47. Would the Sandbox help foster tokenization and blockchain innovation? What types of products and services across the fintech landscape would firms like to test in the Sandbox? What regulatory, technical, and operational barriers pose the biggest challenges to innovation in this space? Could the Sandbox mitigate those challenges?
48. Could a cross-border Sandbox address challenges that U.S. and non-U.S. firms face when attempting to innovate in multiple jurisdictions? If so, how should the Commission structure it to operate globally? Do sandboxes in other jurisdictions serve as a good model?

How to Provide Feedback

Members of the public interested in providing input on these or other related matters may do so using the written submission form for input to the Crypto Task Force on the Commission’s website. Members of the public also may request a meeting to discuss their feedback on these and other related matters via the meeting request form on the Commission’s website.