US SEC reconsiders decision to label digital assets, smart or careful?

• US SEC was about to define"digital assets" in its latest hedge fund rule.
• The agency redacted it for fear of denting its position - digital assets are securities subject to the SEC laws.
•  Now the financial regulator will proceed without digital assets holding a formal place in its dictionary.

The US Securities and Exchange Commission (SEC) reconsidered a move to regulate the crypto sector on May 3, erasing what would have been its first official definition of "digital asset" amid the latest hedge fund rule.

Also Read: SEC’s ‘brute force’ crypto regulation attempt is ‘bad policy’ – Paradigm

US SEC thinks twice about an official label for Digital Assets

The SEC plucked the definition of “digital asset” in the final rule approved by commissioners, significantly changing from what it had included in the 2022 proposal to remodel compulsory disclosures for hedge funds. To justify the adjustment, the financial regulator jotted a footnote, saying:

The commission and staff are continuing to consider this term and are not adopting ‘digital assets’ as part of this rule at this time.

Nevertheless, despite the SEC’s decision to abandon the definition, the agency’s hawkish eye on crypto matters remains intact, considering it has taken a huge role in its enforcement actions and ongoing rule proposals. In April, the agency did the complete opposite when it opened a previously proposed rule defining the term “exchange” and articulately added “decentralized finance” (DeFi) to it. The change was criticized by the industry and two of the five SEC commissioners. Nevertheless, it was meant to trap crypto into existing regulations.

There was also another proposal in February, which tried to prevent investment advisers from keeping assets at crypto firms.

Noteworthy, the originally proposed definition of the digital asset in Wednesday’s hedge fund rule had not been vast or contentious. More specifically, it neither described anything as “using distributed ledger or blockchain technology” nor included “so-called ‘virtual currencies, coins, and tokens.”

SEC proceeds without digital assets holding a formal place in its dictionary

Because of the redaction, the SEC will continue without digital assets holding a formal place in its dictionary or vocabulary. Even so, this does not mean it will also not feature in statements by SEC chair Gary Gensler or any other agency officials.

Citing Anne-Marie Kelley, a partner at Mercury Strategies with extensive experience as an SEC official:

The SEC is a regulator that requires transparency from its registrants, but it is continuing to withhold regulatory clarity by not defining digital assets.

Anne-Marie also pointed out that the SEC could have redacted the definition because recognizing the uniqueness of digital assets in the slightest manner as a novel product could weaken the agency’s case and its argument that digital assets are securities and subject to the SEC securities laws.”

If Anne-Marie's suggestion is accurate, then the regulator is smart for not shooting itself in the foot and careful to avoid being called out for its own words.