All Things FinReg


Practitioners, academics, and entrepreneurs joined SEC regulators at the 2019 FinTech Forum hosted by the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) on May 31 in Washington, DC. Panelists discussed a range of considerations on digital assets, including capital formation, trading and markets, investment management, and innovations in distributed ledger technology (DLT). In keeping with a positive trend that has emerged among the federal financial regulatory agencies, the forum demonstrated the SEC’s desire for industry engagement and the depth of its knowledge in the emerging technology.

During the introduction to the first panel on capital formation, William Hinman, director of the Division of Corporation Finance, said the Commission is working under a flexible regulatory framework. Mr. Hinman said no-action relief is possible even when the token is initially used for fundraising. According to Mr. Hinman, the SEC’s disclosure requirements are largely principle-based: “We work diligently and collaboratively with issuers to address disclosure matters.” Mr. Hinman encouraged early-stage enterprises to cooperate with the Commission and be transparent in their filings, focusing especially on the (1) clarity and detail of the business plan; (2) accounting for the sale of the original token; (3) capitalization of the enterprise; (4) consensus mechanism; (5) governance arrangements applying to the offering; (6) risk of loss for investors; (7) transferability arrangements pertaining to the token; (8) rights of token holders vis a vis those of other holders of interest; (9) valuation of tokens as consideration for the offering; and (10) whether the token will be used for its utility.

During the discussion on regulating trading and markets in the digital asset space, Brett Redfearn, director of the Division of Trading and Markets, made clear that this new technology is not exempt from the existing framework for exchange regulation. Mr. Redfearn cautioned that the Commission would take a facts-and-circumstances approach, stating, “An entity facilitating the trading of securities should carefully consider the totality of the activities and functionalities used to bring together the orders of buyers and sellers to determine whether it meets the definition of an exchange.” Mr. Redfearn also noted the distinctive nature of the decentralized platforms, and how the absence of traditional intermediaries could create investor risk, particularly for retail investors. Finally, he recognized the potential for digital assets to innovate settlement and trade reporting.

In one notable exchange, Elizabeth Baird, deputy director of the Division of Trading and Markets, directly questioned the panel on atomic swaps and their role in mitigating risk in decentralized platforms. This question was just one example of the level of technical engagement and sophistication regulators have in this space.

The panel on investment management focused on the unique challenges of valuation, custody, and liquidity in the digital asset space. Dalia Blass, director of the Division of Investment Management, remarked on both fund innovation and digital asset custody and encouraged market participants to review the division’s letters on these topics. According to the division’s January 2018 letter, funds holding cryptocurrency present legal issues under the Investment Company Act. Referencing the letter, Ms. Blass made clear that the existing legal regime would continue to apply. The “Act’s legal framework has served investors well, and provided the trusted underpinning for a vibrant investment management industry. I believe that that should not be sacrificed merely to promote a nascent technology or a new investment type.” Blass also referenced the division’s March 2019 letter on digital asset custody, which sought input on the challenges and practices of the safekeeping of digital assets. The panelists discussed additional concerns, including how the anonymity of the technology raises anti-money laundering issues, as well as the lack of remediation in the digital asset space.

The final panel discussed DLT innovations and how they fit within existing regulatory regimes. In his opening remarks, Peter Driscoll, director of the Office of Compliance Inspections and Examinations, made clear that the SEC embraces new technology and innovations and outlined how OCIE engages with the industry to learn how firms are using this technology. Mr. Driscoll specifically noted the role of examination observations given the significant growth in risks presented by the digital asset market. He focused on, among other things, portfolio management of digital assets, trading, fees and expenses, safety of client funds and assets, pricing of client portfolios, compliance, and overall internal controls, including information security.


With this forum, the Commission showed its deep understanding of the digital asset industry and its commitment to engage with industry leaders to learn more. Despite the potential for new innovations, the SEC signaled that it would continue to apply well established legal and regulatory principles to achieve a balance between investor protection and efficient capital formation. Morgan Lewis lawyers are continuing to monitor this space and will report on new developments as they occur.