SEC Commissioner Hester Pierce Worries Agency’s Lag in Directing Token Industry Will Stifle Growth; FinCEN Issues Guidance on Virtual Currencies

On May 9, 2019, Commissioner Hester Peirce of the U.S. Securities and Exchange Commission (“SEC”) expressed concern that the SEC is moving too slowly in providing meaningful guidance for the digital token industry. Commissioner Peirce acknowledged that the SEC has provided some direction to date by: (1) issuing the DAO Investigative Report in 2017; [1] (2) bringing a handful of enforcement actions where token offerings were deemed to be securities issuances without registration or an applicable exemption; and (3) taking “pains to provide relief where issuers have self-reported,” allowing self-reporters of securities laws violations to rescind the transactions without having a penalty imposed. Commissioner Peirce also acknowledged that both SEC Chairman Jay Clayton [2] and Director of Corporation Finance William Hinman [3] have provided insights on the application of twentieth century securities laws to this modern technology. Commissioner Peirce also applauded the SEC’s FinHub initiative, whereby the agency provides a “common contact point and center of organization for all things financial technology at the SEC” and facilitates engagement with individuals and organizations working on crypto issues.

But the Commissioner still indicated her view that the SEC’s overall efforts have been a “mixed bag.”  In particular, when examining the “Framework” released by the SEC’s Division of Corporation Finance on April 3, 2019, [4] Commissioner Peirce opined that it may “raise more questions and concerns than it answers.” The stated purpose of the Framework is to help market participants navigate whether a digital asset may be a security under the test established by the U.S. Supreme Court’s decision in SEC v. W.J. Howey Co., 328 U.S. 293 (1946) and subsequent case law. Commissioner Peirce noted that despite the Howey test having four main elements, the Framework outlines 38 different factors to consider with various sub-points to those factors. The dozens of factors outlined in the Framework could have a chilling effect on non-lawyers looking to enter the space. If the SEC does not provide more concrete guidance, Commissioner Peirce argues, innovators may decide to forego opportunities in the U.S. or instead pursue them in “more crypto-friendly” jurisdictions abroad.

The Commissioner also called for action on how the SEC will handle questions around custody of a digital asset, adding that the SEC’s silence on such issues could prove “deadly.” Custody concerns are relevant to funds and investment managers wanting to include digital assets in their portfolios, Commissioner Peirce said. Custody issues are also an important consideration for trading on secondary markets, as a platform cannot trade securities unless it is registered with the SEC as an exchange or an alternative trading system, and a broker-dealer generally must register with the SEC and FINRA. While Commissioner Peirce acknowledged a March 12, 2019 letter from the SEC’s Division of Investment Management [5] as providing insight into questions advisers should weigh as they consider whether to buy and hold digital assets on behalf of their clients, she expressed the letter provided no guidance on how one might comply with existing custody rules.

The same day Commissioner Peirce gave her remarks, the Financial Crimes Enforcement Network (“FinCEN”) issued interpretive guidance addressing whether certain cryptocurrency-related businesses need to be regulated as money services businesses (“MSB”) and comply with the Bank Secrecy Act and other relevant laws. The interpretive guidance is a consolidation of FinCEN’s current regulations and related administrative guidance issued since 2011 involving convertible virtual currencies (“CVCs”). While the guidance does not establish new regulatory expectations, it reinforces how broadly “money transmission services” is defined and leaves open the question as to whether utility tokens not subject to regulation under the securities laws may still trigger MSB requirements. The guidance also applies FinCEN’s interpretive criteria to common business models involving CVCs in an effort to address issues frequently raised by businesses, law enforcement, and other regulatory bodies engaged in cryptocurrency.

Commissioner Peirce’s comments and FinCEN’s interpretive guidance both demonstrate the regulators’ recognition of the need for increased and continued market guidance if the U.S. hopes to foster growth in this developing industry.

[1] Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Exchange Act Release No. 81207 (July 25, 2017),

[2] Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission: Hearing Before the Comm. on Banking, Housing, and Urban Affairs, 115th Cong. (2018), available at

[3] William Hinman, Director, SEC Division of Corporation Finance, Remarks at the Yahoo Finance All Markets Summit: Digital Asset Transactions: When Howey Met Gary (Plastic), U.S. Securities and Exchange Commission (June 14, 2018),

[4] Framework for “Investment Contract” Analysis of Digital Assets, U.S. Securities and Exchange Commission, (last modified Apr. 3, 2019).

[5] Letter from Paul G. Cellupica, Deputy Director and Chief Counsel, SEC Division of Investment Management, to Karen Barr, President and Chief Executive Officer, Investment Adviser Association (Mar. 12, 2019), available at