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FollowingSEC Commissioner Hester Peirce pointed out that whether the crypto asset custody mechanism applies to securities laws needs to be reviewed on a case-by-case basis.
Hester Peirce said that the crypto asset custody mechanism needs to be reviewed on a case-by-case basis because its structure determines whether securities laws apply. Peirce pointed out that if managers proactively set lending terms and investment decisions, on-chain lending strategies could trigger regulatory review by the SEC. While emphasizing that blockchain technology cannot exempt financial products from securities laws, the SEC also solicited feedback from the industry.
Architecture determines regulatory attributes
SEC Commissioner Hester Peirce recently stated that some crypto asset custody mechanisms and on-chain lending strategies may be subject to federal securities laws due to their structure and operation methods. In a statement released on July 22, she pointed out that blockchain technology does not automatically exempt financial activities from SEC regulation. Instead, each product requires legal review based on specific facts. Peirce believes that there are significant differences in the design and operating model of cryptographic asset custody mechanisms. Some rely entirely on smart contracts that cannot be tampered with, while others allow individuals or groups to make asset allocation decisions.
She said managers of custody mechanisms should assess whether actions such as choosing an income strategy, reallocating assets or appointing decision makers would bring relevant activities within the scope of federal securities laws. In addition, the custody mechanism for investing in securities may also raise legal issues related to investment companies. Peirce explained that some custody mechanisms may be similar to unit investment trusts because they hold fixed investment portfolios and have limited management authority. Others may be more like managed investment companies or independently managed accounts. She also reiterated the position she put forward last year, that is, moving securities-related activities to blockchain networks does not remove them from the scope of application of existing securities laws.
Lending strategies may also raise legal issues
Peirce believes that on-chain lending strategies also require a similar legal analysis. Managers who determine interest rates, backing assets, loan-to-value ratios or liquidation thresholds should review whether securities laws apply. She added that some on-chain loans may have securities characteristics. According to Peirce, regulators will evaluate multiple factors, including participants 'motivations and how loans are allocated.
She further pointed out that people managing custody mechanisms or lending strategies may face investment advisory obligations. However, each assessment depends on the actual situation of a specific product.
SEC seeks industry feedback
Peirce encourages crypto developers and market participants to communicate directly with the SEC when designing custody mechanisms or promoting online lending. She said some projects may not fall within the SEC's jurisdiction, while others may require discussion on compliance issues. She also sought feedback on whether existing SEC rules should be adjusted to accommodate custody mechanisms, on-chain lending and related innovations. Peirce believes that Congress has taken into account the flexibility of technological development when designing securities laws, and these laws should remain flexible.
At the same time, she pointed out that any regulatory analysis must respect congressional limits on the SEC's powers. She also emphasized that when evaluating blockchain-based financial products, developers 'rights to freedom of speech should be protected.
