SEC Crypto Regulation: 1 Step Forward & 12 Steps Back?

The statement does not use the terms “safe harbor” or “no action,” but does indicate that the SEC is not planning to bring actions against most digital asset security broker-dealers as it navigates how to craft new standards.

In a statement outlining the amended procedure, the SEC acknowledged that the “technical requirements” for transacting and holding custody of digital asset securities are different from the traditional securities realm, and the market itself is still evolving.

The regulator says it hopes the five-year window will foster an environment in which firms are developing best practices to be shared with the SEC in the form of formal comments.

“The five-year period in which the statement is in effect is designed to provide market participants with an opportunity to develop practices and processes that will enhance their ability to demonstrate possession or control over digital asset securities,” said the statement. “It also will provide the Commission with experience in overseeing broker-dealer custody of digital asset securities to inform further action in this area.”

Of course, the timing is raising eyebrows due to the ongoing fight between XRP and the SEC.

The move follows official charges recently brought on Ripple executives. Several crypto exchanges have rushed to delist XRP in the US. And notable hedge fund, Bitwise, has already liquidated all of its XRP (3% of the fund) and moved into other crypto assets. While SEC Commissioner Hester Peirce said the announcement was a baby step, others (especially proponents of XRP) called the move “1 step forward, 12 steps back.”

The SEC, according to the statement, seeks to “encourage innovation” regarding digital asset securities.

While the SEC did not specifically name any companies in the release, some onlookers speculate that the timing is not coincidental. An additional quote from an official supplementary document reads:

Ripple CEO Brad Garlinghouse staunchly criticized the uncertain regulatory landscape back in October. Garlinghouse even hinted that Ripple could relocate to a more favorable jurisdiction outside of the US.

The wordy release continues to raise questions regarding the lack of regulatory clarity surrounding digital securities and custody in the country. The Commission appears stuck between an innovation rock and a protective hard place:

“…the Commission is requesting comment to provide the Commission and its staff with an opportunity to gain additional insight into the evolving standards and best practices with respect to custody of digital asset securities.”