Statement Summary
In a recent address, the Chairman of the SEC outlined the next steps for America in leading financial innovation through the creation of a clear regulatory framework for crypto assets, termed “Project Crypto.” The framework aims to establish a token taxonomy based on the Howey investment contract analysis, facilitating differentiation between securities and non-securities. Key points emphasized include:
- Not all crypto tokens are securities.
- Investment contracts can end.
- Importance of aligning regulations with economic reality.
The Chairman supports Congressional efforts to codify a comprehensive crypto market structure, enhances clarity for innovators, intermediaries, and investors, and ensures that the SEC’s enforcement reflects the evolving nature of digital assets while safeguarding against fraud.
Original Statement
Good morning, ladies and gentlemen. Thank you for that kind introduction and for the invitation to join you today as we continue the conversation about how America will lead the next era of financial innovation.
When I spoke recently about American leadership in the digital finance revolution, I described “Project Crypto” as our effort to match the energy of American innovators with a regulatory framework worthy of them. Today, I would like to outline the next step in that journey.
At its core, this next step is about basic fairness and common sense as it relates to the application of the federal securities laws to crypto assets and related transactions. In the coming months, I anticipate that the Commission will consider establishing a token taxonomy that is anchored in the longstanding Howey investment contract securities analysis, recognizing that there are limiting principles to our laws and regulations.
Much of what I will describe builds upon the pioneering work of the Crypto Task Force that Commissioner Hester Peirce leads. Commissioner Peirce has laid out a framework for coherent, transparent treatment of crypto assets under the federal securities laws, grounded in economic reality rather than in slogans or fear. Let me reiterate that I share her vision. I value her leadership, her hard work, and her perseverance in championing these issues over the years. I am very pleased that she took this task on.
Key Themes
I will organize my remarks around three themes:
- The importance of a clear token taxonomy.
- How Howey applies in a way that recognizes the fact that investment contracts can come to an end.
- What that could mean in practice for innovators, intermediaries, and investors.
Before I begin, I would also like to reiterate that while Commission staff diligently drafts amendments to our rules, I wholeheartedly support Congressional endeavors to codify a comprehensive crypto market structure framework into statute. What I envision aligns with legislation currently being considered by Congress and aims to complement, not replace, Congress’s critical work.
Understanding Crypto Assets
If you are tired of hearing the question “Are crypto assets securities?”, I sympathize. It is a confounding question because “crypto asset” is not a term defined in the federal securities laws. It is a technological description.
Most crypto tokens trading today are not themselves securities. Of course, it is possible that a particular token might have been sold as part of an investment contract in a securities offering. That is not a radical statement; it is a straightforward application of the securities laws.
Investment contracts can be performed and they can expire. They do not last forever simply because the object of an investment contract continues to trade on a blockchain. Yet over the last several years, too many have asserted the view that if a token was ever subject to an investment contract, it would forever be a security.
Regulatory Approach
We are going to draw clear lines and explain them in clear terms. First, that a stock is still a stock whether it is a paper certificate, an entry in a DTC account, or represented by a token on a public blockchain. A bond does not stop being a bond because its payment streams are tracked using smart contracts. Securities, however represented, remain securities.
Second, that economic reality trumps labels. Calling something a “token” or an “NFT” does not exempt it from the current securities laws if it in substance represents a claim on the profits of an enterprise and is offered with the sorts of promises based on the essential efforts of others.
Future Considerations
In the coming months, as contemplated in legislation currently before Congress, I hope that the Commission will also consider a package of exemptions to create a tailored offering regime for crypto assets that are part of or subject to an investment contract. I have asked the staff to prepare recommendations for the Commission’s consideration that facilitate capital formation and accommodate innovation while, at the same time, ensuring investors are protected.
Our goal is not to expand the SEC’s jurisdiction for its own sake, but to allow capital formation to flourish while ensuring that investors remain protected. We will continue to listen and work closely with our counterparts at the CFTC, with the banking regulators, and with Congress.
Conclusion
Let me end where Commissioner Peirce began her “New Paradigm” remarks in May of this year, with a reminder of our history. In a free society, the rules that govern economic life should be knowable, reasoned, and appropriately constrained. When we stretch the securities laws beyond their proper scope, we stray from that core principle.
That is what Project Crypto is about. That is what the Commission should be about. And that is the commitment I make to you today as Chairman: we will not let fear of the future trap us in the past.
Thank you, and I look forward to continuing this conversation with you in the months ahead.
