But with multiple agencies tasked with overseeing the asset class, the regulatory landscape has been unclear.
“Whenever we get on the phone with a client that’s got some product idea, we have team members that have experience in commodities markets, tax people, persons familiar with money transfers and securities lawyers because these products do touch on all of these areas and it’s sometimes hard to steer the client in the right direction,” said David A. Sirignano, a Washington-based partner with Morgan, Lewis & Bockius LLP, on the complexities of navigating the current landscape.
The SEC does not consider the two biggest cryptocurrencies — bitcoin and ethereum — to be securities, but there is less certainty regarding smaller cryptocurrencies.
Ms. Peirce outlined a plan in February 2020 to establish a three-year safe harbor for cryptocurrency firms interested in offering tokens so they “could facilitate participation in and the development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws,” as long as certain conditions were met.
In April, Ms. Peirce unveiled an updated version of her proposal that would require semiannual updates and an exit report requirement at the end of the three-year grace period. The exit report would include either an analysis by outside counsel explaining why the network is decentralized or functional, or an announcement that the tokens will be registered under the Securities Exchange Act of 1934.
Rep. Patrick McHenry, R-N.C., ranking member on the House Financial Services Committee, on Oct. 5 introduced the Clarity for Digital Tokens Act of 2021, which builds off Ms. Peirce’s proposal and provides a safe harbor for startup digital asset projects.
“The U.S. should be a global leader, not a global follower, when it comes to digital assets,” Mr. McHenry said in a news release. “Unfortunately, our current regulatory framework threatens to push this technology — and the jobs created by this rapidly growing industry — overseas.”
Dechert’s Mr. Spangler likened blockchain, a decentralized system of recording information on which cryptocurrencies are traded, to the early days of the internet. “This technological upgrade many believe is inevitable,” he said. “Just like the internet was inevitable once it was created.”
But U.S. lawmakers and regulators have a choice to make. “If this becomes seen as a blockchain development hostile jurisdiction, then why won’t those companies that succeed in the space just be built and grow elsewhere where you have legal regimes that have certainty and clarity?” Mr. Spangler said. “There’s no inherent right that the U.S. needs to be the leader of this technological evolutionary step change just because we have been the leaders of important technological changes of the past. There’s no requirement that U.S. companies are leaders in the blockchain economy in 10 years.”