Yesterday, the Securities and Exchange Commission (SEC) made waves by filing insider trading charges against three defendants in connection with trades of “crypto asset securities.” The case underscores the stark difference between the SEC’s willingness to label crypto tokens as securities in enforcement actions and unwillingness to provide formal rules clarifying the application of securities laws to the crypto ecosystem. Because this approach to crypto regulation is plagued by uncertainty, any insights into the Commission’s latest thinking, however abstract, are noteworthy.

Unsurprisingly, then, SEC Chair Gary Gensler recently made headlines when he acknowledged that crypto tokens might warrant different disclosure requirements than traditional securities like stocks. During a July 14, 2022 interview with Yahoo! Finance’s Jennifer Schonberger, Gensler invoked the SEC’s exemptive authority (the power to grant regulatory relief) as a tool for tailoring securities rules to fit crypto projects. In a second July 19, 2022 spot with Bloomberg’s David Westin, Gensler again cited exemptive authority as a way to “try to rework” some investor protections. Gensler’s recognition that crypto projects might not require traditional equity security disclosures is welcome, albeit noncommittal. However, his invocation of exemptive authority as a way to retrofit rules raises at least as many questions as it answers. Specifically, it is unclear from Gensler’s comments whether exemptive authority would be used to apply new rules to the crypto industry at large or rather to order isolated exemptions for specific projects. The former would signal a positive development, but the latter would offer no real improvement over the status quo.

While exemptive authority varies somewhat depending on the securities law at issue, under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940, Congress essentially gave the SEC the power to exempt individuals, firms, securities, or transactions from securities laws if it is in the public interest and consistent with investor protection. Exemptions can be individualized or class-based and they can come with strings attached or be unconditional. Notably, exemptions can be for specific entities under specific circumstances or provide a basis for novel regulation of a whole swath of industry. For instance, the SEC used exemptive authority in part to promulgate a new set of comprehensive rules for asset-backed securities (Regulation AB) distinct from those for equity securities. By contrast, narrow exemptions can take the form of the SEC granting specific firms strictly cabined regulatory relief from certain rules.

Gensler’s high-level remarks suggested both narrow and broad uses of exemptive authority. On the one hand, the Chair compared the possibility of tailoring disclosure requirements for crypto tokens to the special treatment given to asset-backed securities. He asserted that the SEC has “robust authorities from Congress” to tailor investor protections, including disclosures, and “just as there’s a difference between maybe asset-backed securities and an equity offering, there may be differences” when it comes to crypto as well. If one squints, this could be a subtle nod toward a possible alternative disclosure framework for crypto. On the other hand, Gensler also noted that he has asked industry, including lending platforms and trading platforms, to “come in [and] talk” about possible paths for complying with relevant securities laws, which could suggest more isolated or firm-specific regulatory tweaks.

If Gensler envisions a broadly-applicable alternative registration and disclosure option for crypto projects, such as the token safe harbor proposed by SEC Commissioner Hester Peirce, that would be encouraging news. Commissioner Peirce’s proposal, for example, would exempt crypto token projects from certain securities laws if the developers make crypto-specific disclosures and their network becomes functional or decentralized (i.e., not reliant on a third party’s essential managerial or entrepreneurial efforts) within three years. Such a framework has the benefits of offering industry participants clear rules of the road up front, recognizing that (1) traditional securities laws are not a good fit for decentralized crypto projects and (2) the information that crypto developers would provide to token purchasers is not the same as that required for traditional securities.

But Gensler’s recent comments are far too thin of a reed on which to base hopes that the Commission will adopt something like Commissioner Peirce’s safe harbor. In fact, when pressed on the need for clarifying regulations in the most recent interview, Gensler doubled down on his view that the rules already are clear, stating, “we already have a lot of laws on the books that have been there for decades,” and reverted to discussing isolated settlements and enforcement actions.

To the extent Gensler intended to refer to more case-by-case or project-specific exemptions, those would be of little help to crypto project developers grappling with regulatory uncertainty. Ultimately, a piecemeal approach would leave most market participants in the dark. While some developers might be able to look to the exemptions offered to their peers in an attempt to figure out whether and how laws would apply to their own projects, doing so would entail ambiguity and compliance risk until general rules were promulgated. As the late Supreme Court Justice Benjamin Cardozo wrote, “Law as a guide to conduct is reduced to the level of mere futility if it is unknown and unknowable.”

Whether Gensler’s allusions to exemptive authority were intended to refer to broad or narrow carveouts remains unclear. Of course, one should not expect 16 minutes of combined interviews to provide a comprehensive regulatory solution for a space as complex and novel as the crypto ecosystem. Yet in the continued absence of proposed formal crypto rules from the SEC, observers are left to read the tea leaves as they find them.