SEC Commissioner Criticizes US Crypto Regulation: ‘Floor is Lava‘ in the Dark
Hester Peirce, a commissioner at the Securities and Exchange Commission (SEC) and head of the agency’s crypto task force, has taken a critical stance on the current regulatory landscape for crypto in the US. During the SEC‘s “Know Your Custodian” roundtable event on April 25, Peirce drew a stark analogy, comparing the current situation to the children’s game “floor is lava” – but played in the dark.
“It is time that we find a way to end this game. We need to turn on the lights and build some walkways over the lava pit,” Peirce said. The “lava,” according to Peirce, is crypto itself. She explained that SEC registrants, financial institutions regulated by the SEC, are forced to navigate crypto-related activities as if they were playing “floor is lava,” where the goal is to avoid touching the ground (in this case, crypto).
“A D.C. version of this game is our regulatory approach to crypto assets, and crypto asset custody in particular,” Peirce stated.
Peirce highlighted that the lack of clear regulatory rules leaves firms in a precarious position. They are hesitant to hold crypto assets directly, fearing regulatory repercussions. To engage with crypto, they have to resort to navigating complex and often unclear regulatory spaces, constantly seeking to avoid direct contact with crypto assets.
Uncertainties Around Custody, Securities Classification, and Staking
Peirce further emphasized the challenges faced by investment advisers, pointing out their uncertainties regarding:
- Which crypto assets qualify as securities under SEC regulations.
- Which entities meet the requirements to be considered qualified custodians for crypto assets.
- Whether exercising staking or voting rights on crypto assets could trigger custody violations.
Peirce underscored that this regulatory ambiguity creates a significant obstacle for the growth of a robust crypto market, stating: “The twist in the regulatory version is that it is largely played in the dark: burning legal lava and no lamps to illuminate the way.”
Need for Clearer Rules and Custodial Options
Peirce’s call for clearer regulations was echoed by SEC Commissioner Mark Uyeda, who emphasized the necessity of providing SEC registrants with access to custodial options that meet legal and regulatory requirements. Uyeda suggested that the SEC should consider allowing advisers to utilize “state-chartered limited-purpose trust companies” as qualified custodians for holding crypto assets.
The new SEC Chair, Paul Atkins, also expressed his commitment to establishing a clearer regulatory framework for digital assets, acknowledging the current uncertainty and the need for “clear regulatory rules of the road.” Atkins believes that blockchain technology has the potential to deliver significant benefits, including efficiency, risk mitigation, transparency, and cost reduction.
The calls for regulatory clarity from within the SEC reflect a growing awareness of the need to create a more conducive environment for innovation and growth in the crypto sector. As the US strives to maintain its position as a global leader in financial innovation, providing clear and actionable guidance to market participants will be crucial for unlocking the full potential of crypto assets.
