Hester Peirce SEC nomination
Cryptocurrencies,  Regulation

“Crypto Mom” tells Senate crypto is here to stay

At a hearing for a second term on the Securities and Exchange Commission, Hester Peirce called for clearer regulations on selling cryptocurrencies, and took issue with the project-killing lawsuit against Telegram

The cryptocurrency industry’s favorite member of the Securities and Exchange Commission, Hester “Crypto Mom” Peirce, told the Senate that crypto is here to stay and needs a more welcoming environment to thrive.

Speaking at a hearing on her nomination for a second term on the Commission, the Republican appointee promised to “redouble” her effort to create such an environment in order to spur innovation and attract new entrants to the industry.

Peirce’s assertion came during a July 21 hearing for her second term. It would be her first full five-year-term, having replaced Daniel Gallagher, who left mid-way through his term.

The more welcoming environment that needs to be created is a workable regulatory structure, she asserted. That means it is vital to set up clear criteria for when a cryptocurrency offering is a security. She has previously proposed creating a three-year “safe harbor,” giving cryptocurrency projects time to prove that their tokens are utility tokens rather than securities.

On the same day, Peirce complained to the Blockchain Association Singapore in a webcast that too often regulators squash innovation.

“I believe that investor protection includes ensuring that investors have a wide range of investment opportunities so they can build portfolios appropriate to their objectives,” the Commissioner asserted. 

That said, she did tell the Senate that there is still “a lot of fraud” in the industry, so caution is required.

Regulatory overreach

Speaking to the Senate, she called the Telegram case an example of SEC regulatory overreach.

In late June, the Telegram Group and reached a settlement with the SEC to return $1.2 billion to investors in the Telegram Open Network blockchain, and pay $18.5 million in civil penalties. The SEC sued Telegram in federal court, alleging that TON’s “gram” tokens were an illegal unregistered securities offering with serious disclosure deficiencies—the same complaints the agency brought against initial coin offerings (ICO).

Peirce explained that Telegram used a Simple Agreement for Future Tokens (SAFT) offering structure, which divides the sale of tokens into at least two distinct stages.  

First, Telegram raised funds to develop the TON blockchain technology underlying the Grams by pre-selling $1.7 billion in grams to accredited investors. 

Next, in return for providing the necessary funds, the accredited investors would receive an allotment of grams upon the launch of the TON blockchain, which they could resell to the general public. That had originally been scheduled for Oct. 31, but was delayed by the SEC lawsuit.

According to Telegram, the first stage—raising funds from accredited investors in a private offering—involved a securities transaction conducted in reliance on Rule 506(c), a frequently used exemption from U.S. registration requirements, the Commissioner said.

Good faith

“Telegram had built an operational network, made good faith efforts to comply with the federal securities laws in raising funds to build that network, and engaged extensively with the SEC staff,” Peirce emphasized.

She called the SEC’s enforcement action wrong because the message that distributing tokens inherently involves a securities transaction was wrong.

Peirce noted Telegram was not a United States-based company. And, its major operations are not in the United States. Only 39 of the 175 accredited investors were from the United States.

It’s worth noting that the SEC did not win a court ruling against Telegram or SAFTs. Because the court refused to allow non-U.S. accredited investors to sell grams outside the U.S., the delay Telegram faced was too great to overcome, so it killed the project. The $1.2 billion original investors received came to about 70 percent of the $1.7 billion they originally invested.

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Ted Knutson is a veteran Washington financial reporter. Knutson does not own any cryptocurrencies.