Casey Wagner

US Securities and Exchange Commission Commissioner Hester Peirce reiterated Tuesday that court cases are not the only path to regulatory clarity for crypto.



“I will say that litigation is not the most effective way to carry out regulations,” Peirce said&nbsp;during an <a href="https://www.bloomberg.com/live/us">appearance</a> on Bloomberg TV Tuesday afternoon. “Certainly enforcement actions are one tool that we have in our toolbox, but we have other tools.”&nbsp;



Peirce’s comments come amid reports that Binance and CEO Changpeng Zhao will plead guilty and <a href="https://blockworks.co/news/binance-regulators-settle-criminal-case">pay more than $4 billion in a deal</a> with the Department of Justice. Zhao <a href="https://blockworks.co/news/changpeng-zhao-binance-steps-down">will also step down</a> from his position, according to a Wall Street Journal report. 



“I can&#8217;t talk about ongoing cases,” Peirce said. “But I will say that with all of these cases that move forward, we should really be thinking proactively about building a regulatory framework…that would work and allow companies to do business in the United States, and that&#8217;s what I&#8217;m hoping we can work on in the coming months and years.”&nbsp;



The DOJ, alongside the Commodity and Futures Trading Commission (CFTC), is <a href="https://blockworks.co/news/doj-announcing-crypto-actions">slated to announce</a> “separate but related cryptocurrency enforcement actions” Tuesday afternoon in Washington, DC. No officials from the SEC will be present, according to a statement from the DOJ.&nbsp;



The SEC and DOJ did not respond to Blockworks’ request for comment.&nbsp;



Today’s announcement will include information about the department’s settlement with Binance, according to Bloomberg News.&nbsp;



In 2023, the SEC upped its number of enforcement actions by 3% from fiscal year 2022, <a href="https://www.sec.gov/news/press-release/2023-234#:~:text=In%20fiscal%20year%202023%2C%20the%20Division's%20investigations%20resulted%20in%20litigated,Fried%2C%20and%20other%20FTX%20executives">data</a> released last week shows.&nbsp;



“Fiscal year 2023 was another highly productive and impactful year for the SEC’s enforcement efforts relating to crypto asset securities,” the agency wrote in the report.&nbsp;



Peirce admitted that she does not always see eye-to-eye with other commissioners, but added that the agency’s approach to the crypto industry as a whole needs improvement.&nbsp;



“I would take issue with the characterization that I&#8217;m an advocate for the industry,” she said. “What I&#8217;m an advocate for is people being able to come into the SEC and figure out…what regulations apply, and then comply with those regulations.&nbsp;



“That&#8217;s where I think we&#8217;ve fallen down on the job, and I think that&#8217;s…where the conflict has sometimes arisen between me and my colleagues.”



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha in your inbox. Think like an analyst. </li>
</ul>

Hester Pierce

SEC’s Hester Peirce: We don’t have to regulate crypto through the courtroom

Sebastian Sinclair

<div id="highlights-block_62468b50d4e5d" class="highlights">
 <ul>
 <li>Entities, such as crypto exchanges and custodians, should include clear disclosure over how many digital assets they hold and what is done with them</li>
 <li>SEC Commissioner Hester Pierce said the staff bulletin is a &#8220;scattershot and inefficient approach&#8221; to crypto</li>
 </ul>
 
</div>



Members of the US Securities and Exchange Commission (SEC) penned a bulletin Thursday outlining what they view as particularly troublesome for the current accounting obligations within the crypto industry.



SEC staff said they believed entities should present a liability on their balance sheet to reflect their obligation to safeguard digital assets held for their platform users. 



Staff Accounting <a href="https://www.sec.gov/oca/staff-accounting-bulletin-121" target="_blank" rel="noreferrer noopener">Bulletin Number 121</a> (SAB 121) expresses the staff&#8217;s views and adds &#8220;interpretive&#8221; guidance for entities to consider when they have obligations to safeguard digital assets.



Entities such as crypto exchanges and custodians — who are charged with maintaining cryptographic keys of their users — face several risks when storing digital assets on behalf of their customers, SEC staff said.



Commentary from SEC staff follows one of the industry&#8217;s largest hacks in history, when an Ethereum-linked sidechain — utilized by blockchain game <a href="https://cms.blockworks.co/sky-mavis-ronin-network-bridge-exploited-for-over-600m/" target="_blank" rel="noreferrer noopener">Axie Infinity</a> — was exploited for $625 million in ether and USDC last week. Exploiters used hacked private keys to forge withdrawals on March 23.



&#8220;The obligations associated with these arrangements involve unique risks and uncertainties not present in arrangements to safeguard assets that are not crypto-assets.&#8221; Those legal, technological and regulatory risks can have a &#8220;significant impact&#8221; on the entity’s operations and financial condition, they said.



Statements in staff accounting bulletins are not rules or interpretations of the SEC and simply represent the staff&#8217;s own interpretations and practices of federal securities laws.



The staff believes notes accompanying financial statements should include &#8220;clear disclosure&#8221; of the nature and amount of crypto that an entity is responsible for holding on behalf of its users.



Staff are also guiding entities to form separate disclosures for each significant crypto asset as well as notifying the SEC of any vulnerabilities they may have due to &#8220;any concentration in such activities.&#8221;



SEC Commissioner Hester Pierce, affectionately known as &#8220;Crypto Mom&#8221; within the community, <a href="https://www.sec.gov/news/statement/peirce-response-sab-121-033122" target="_blank" rel="noreferrer noopener">shot back </a>Thursday, calling the staff&#8217;s bulletin a &#8220;scattershot and inefficient approach to crypto.&#8221;



&#8220;My concern is not with the accounting determination itself, which may be appropriate, but with the way the change is being made,&#8221; Pierce said.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">&#8220;A staff accounting bulletin may not be the appropriate vehicle through which to make this accounting change and communicate it to the public.&#8221;</blockquote>



Pierce also said SAB 121 is &#8220;unusual&#8221; among bulletins because of its targeted guidance aimed at a &#8220;very specific, very limited&#8221; number of public companies.



&#8220;While past SABs have included statements suggesting companies should consider the applicability of other disclosure requirements outside of the financial statements, SAB 121’s granular guidance is unique,&#8221; Pierce said. &#8220;If we are trying to encourage companies to enter our public markets, we ought to embrace a more deliberate approach to changing rules — one that involves consulting with affected parties.&#8221;



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha in your inbox. Think like an analyst. </li>
</ul>

SEC Staff Call For Crypto Entities To Show Liability on Balance Sheet

Sam Reynolds

<div id="highlights-block_ea80a286ba6db748f1ba17d7ed15546a" class="highlights">
 <ul>
 <li>Peirce wants US investors to have access to a wider range of investing products, including a bitcoin ETF.</li>
 <li>Regulators continue to flag cryptocurrency as a concern for money laundering, and there’s no sign of that letting up anytime soon.</li>
 </ul>
 
</div>



Allegations of regulators overstepping their boundary and also not doing enough were the parallel themes at <a href="https://www.thebword.org/c/the-b-word" target="_blank" rel="noreferrer noopener">The B-Word</a>’s regulatory panel Wednesday afternoon.&nbsp;



SEC Commissioner Hester Peirce, called the “crypto Mom” by some for her embrace of the digital assets industry, said that regulators were coming down too harshly on the crypto industry, forcing it to play by a stricter set of rules than others.



In contrast, Mike Mosier, director of the Financial Crimes Enforcement Network (FinCEN) expressed concern regulators were not doing enough to address the role bitcoin can play in money laundering and should do something before before “a major event” occurs.&nbsp;



<h3 class="wp-block-heading">Canadian envy</h3>



Canadian traders, and Americans with access to the Toronto Stock Exchange, have been able to buy shares of a <a href="https://cms.blockworks.co/ontario-securities-regulator-approves-first-bitcoin-etf/" target="_blank" rel="noreferrer noopener">number of listed bitcoin ETFs</a> since February.



Of chief concern to regulators in Ontario was the quality of custody solutions available to the market. Their doubt that investment-grade solutions were available cancelled attempts in 2017 to list an ETF.



“I think that they were right to have all those concerns in 2017. The space is very different three years later than it was back then,” Brian Mosoff, CEO of Ether Capital, which acted as a technical consultant to Purpose Investments which listed one of the first bitcoin ETFs, told Blockworks in an <a href="https://cms.blockworks.co/how-the-first-north-american-bitcoin-etf-made-it-across-the-finish-line/" target="_blank" rel="noreferrer noopener">interview</a> in February. “The closed-end funds were in the market long enough and proved the custodians weren’t going to get hacked.”



Fast forward to 2021, and Peirce doesn’t see any technical or infrastructure reason to delay or cancel these ETF applications. It’s more about the regulator not letting the ‘average American’ have access to something it deems risky and complex.&nbsp;



“I would never have imagined that I would be in this situation where we would not yet have approved one and other countries are moving ahead,” Peirce said during the panel. &#8220;We should view it as trying to give people the widest range of options possible.&#8221;



Peirce said that the SEC shouldn’t be a “merit regulator”, determining if an investment product is good or bad because this mindset actually denies the market opportunities that would have been proven profitable.&nbsp;



“We shouldn’t be in the business of deciding whether something is good or bad, an investor is thinking of their entire portfolio, and sometimes we’re thinking in one-off terms of a particular product standing on its own,” she said.



However, Peirce does acknowledge that crypto — with its wild market gyrations — does present more risk than a traditional equities backed ETF, but it&#8217;s up to the consumer to assess their risk tolerance and make the investment decision for themselves.&nbsp;



&#8220;You have to be careful and think about whether you can afford to lose that money and consider what your risk tolerance is,&#8221; she said, mentioning that the idea of accrediting investors needs to change so that more people have access to high-yield opportunities such as private equity sales for startups.&nbsp;



Click on Page 2 to keep reading.







<h3 class="wp-block-heading">Bitcoin on the publicly traded balance sheet</h3>



While the trend of publicly traded corporations like Tesla and MicroStrategy holding bitcoin on the balance sheet has garnered some criticism, particularly as crypto moves from a bull to bear market, Peirce said that this is an issue between executives and shareholders, not a company and its regulator.&nbsp;



&#8220;I don&#8217;t want to be in the business of running companies,&#8221; she said, touching again on her theme of not being a ‘merit regulator’, and declining to comment if this was the right thing or not for listed firms to do.&nbsp;



<h3 class="wp-block-heading">Who’s got the money?</h3>



Aside from the issues surrounding digital assets and securities regulators, the other pinnacle issue for crypto and regulation has been money laundering. At the end of the pipe is usually fiat currency, and with those cold hard dollars comes regulated institutions that they deal with.&nbsp;



Last year, <a href="https://www.reuters.com/article/usa-crime-bitmex-idUSKBN26N08O">the founders of BitMEX</a>, one of the largest digital assets derivatives exchanges, were charged with violating the Bank Secrecy Act. The alleged crime? Not collecting identification documents from its customers, so that an anonymized transaction on the blockchain sent to or from BitMEX’s wallets could be tied to a name.



Prosecutors allege that BitMEX was a conduit for laundered proceeds of ransomware hacks, or a place for those connected to the Iranian regime to clean their crypto and move it to other exchanges to convert to dollars.&nbsp;



Needless to say, this is an issue that the industry takes seriously as it’s impossible to register on account on any exchange without providing multiple pieces of identification and proof of address. But for regulators, there’s still not enough being done.&nbsp;



“Our biggest concern is with foreign exchanges that allow cashing out of illicitly obtained crypto,&#8221; FinCEN’s Mossier said, citing examples of major ransomware attacks with crypto-denominated proceeds as a reason to up the regulatory threshold.



Recently, officials in the EU, <a href="https://www.theblockcrypto.com/linked/112008/eu-officials-unveil-draft-legislation-for-applying-fatfs-travel-rule-to-crypto-transactions">published a draft of a proposed regulation</a> produced in conjunction with the Financial Action Task Force (FATF) that would require virtual asset service providers — crypto exchanges — to provide real name data about senders and recipients for any transaction larger than $1000. In South Korea, <a href="https://cointelegraph.com/news/crypto-exchanges-could-sue-korean-gov-t-for-passing-the-buck-to-banks">a similar move</a> is taking place under the guise of tax reporting.&nbsp;



Aside from what’s already known, Mossier didn’t give any hints of what’s coming down the American regulatory pipeline on this topic. Just that he would like regulators “to do more” before there’s a “major event.”



Get more breaking news and industry insights directly into your inbox.&nbsp;<a href="https://cms.blockworks.co/newsletter/" target="_blank" rel="noreferrer noopener">Subscribe to the Blockworks Daily newsletter</a>&nbsp;for free.

Hester Pierce

Newsletter

Blockworks Research