All Eyes on Digital Assets

The price of Bitcoin recently topped $57,000.  New York’s Attorney General issued an Investor Alert on Virtual Currency Risks, as did the SEC’s Division of Examinations. The SEC’s “crypto-mom,” Commissioner Hester Peirce has been speaking on it daily, and Chair-nominee Gensler touches on it in his March 2 remarks before the Senate Banking Committee.

SEC Chair Nominee Gary Gensler’s prepared remarks for his Mar. 2 hearing before the Senate  Banking Committee indicate he will focus on fintech:

Markets—and technology—are always changing. Our rules have to change along with them. In my current role as a professor at MIT, I research and teach on the intersection of technology and finance. I believe financial technology can be a powerful force for good—but only if we continue to harness the core values of the SEC in service of investors, issuers, and the public.


SEC Commissioner Hester Peirce is scheduled to participate March 2nd in the Bitcoin Association’s “Blockchain Policy Matters.”  The day before, “Commissioner Crypto-Mom” criticized the SEC’s inability to provide regulatory clarity around crypto in her opening remarks for an international bankers’ conference fintech panel.  The remarks are here.

In her February 22 address to the George Washington University Law School “Regulating the Digital Economy” conference, she touched on some aspect of decentralized digital finance:

Decentralized finance will provide a very good test for our ability to regulate with an eye toward protecting the interests of investors and markets, not incumbents.  The anti-Wall Street sentiments coursing through the market events of recent weeks and the growing realization of the power that private and public centralized entities wield in our lives have inspired some to call for throwing the legacy financial system out entirely.  In its place, they would put decentralized finance (“DeFi”).  The nascent DeFi industry—a rapidly growing corner of the crypto world with significant money involved—is working on building an alternative to the legacy centralized financial system (“CeFi”) run through smart contracts rather than financial intermediaries.  DeFi facilitates lending, trading, and investing in crypto-assets.  DeFi users trust in smart contracts rather than counterparties.  Although a work in progress with all the growing pains and rough edges that implies, DeFi’s promises of democratization, open access, transparency, predictability, and systemic resilience are alluring.  The Federal Reserve Bank of St. Louis recently published a primer on the complicated, multi-layered, fascinating DeFi landscape, which warns of risks including security vulnerabilities, scaling problems, and faux decentralization, but concludes that there is promise in the innovation happening in DeFi.  We regulators, mindful of the potential upsides and downsides, need to provide both legal clarity and the freedom to experiment so that DeFi can compete with CeFi to offer investors financial services.


NY Attorney General Letitia James issued a March 1 Investor Alert pointedly listing the risks posed by digital assets, including:

  • Highly unpredictable value
  • Illiquidity
  • Conflicts of interest
  • Heightened risk of market manipulation
  • Limited regulatory protection
  • Lack of transparency

The Alert is here.

Finally, the newly-elevated SEC Division of Examinations (formerly “OCIE”) published its February 26 Risk Alert on digital assets.  The Alert highlights six broad areas the Division will address in its examinations of market participants:

For Investment Advisors:

  • Portfolio Management issues, like classification, due diligence, risk mitigation, complexities from forked or airdropped assets, and continuing to meet fiduciary duties in a changing environment;
  • Books and Records;
  • Custody;
  • Disclosure;

For Broker-Dealers:

  • Safekeeping of funds and operations;
  • Registration requirements;
  • Anti-Money Laundering;
  • Offerings;
  • Conflicts disclosures;
  • Outside Business Activities.

The Alert also addresses digital-asset concerns for national securities exchanges and transfer agents.  The Risk Alert is here.

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