The securities watchdog has “never handled innovation” well, the SEC Commissioner behind the token safe harbor guidance tells Robert Stevens.
Feb 7, 2023 at 9:07 p.m.
Updated Feb 7, 2023, at 9:41 p.m.
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Speak to Hester Peirce for too long and you’ll leave with the distinct impression that she’s fed up with the Securities and Exchange Commission (SEC). The U.S. securities, and sometimes crypto, the regulator “has not done a good job,” the commissioner told CoinDesk. “We just haven’t made progress in the five years I’ve been here.”
Peirce, sometimes referred to as Crypto Mom by those in the sector, is quick to rattle off the agency’s failures: The SEC has not provided enough clarity on how it regulates cryptocurrency companies, established the kind of regulatory framework that attracts crypto business in the U.S. and not protected Americans from dodgy companies that operate outside of its clutch.
Robert Stevens is a freelance journalist whose work has appeared in Fortune, The Guardian, the Associated Press, and Decrypt.
“If we had a better framework in the U.S. [for crypto], I think you would see more activity happening [here]. But now people have so many questions that a lot of stuff ends up happening outside of the United States. And that means that when U.S. persons participate, they won’t have the protection of the U.S. regulatory framework,” she said.
The SEC’s mandate is to protect U.S. retail investors and regulate fair and orderly markets. But last year a string of collapses led to the bankruptcy filings of FTX, Celsius Network, Voyager Digital, BlockFi, and CoinDesk sister company Genesis – leaving their millions of customers in the lurch.
Peirce declined to discuss the collapse of the Bahamas-based FTX and its founder, Sam Bankman-Fried because they are the subjects of ongoing lawsuits launched by the SEC.
The commissioner has complained about the way the agency regulates the crypto sphere since her term began during the presidency of Donald Trump. In 2020 she told Decrypt, just after being sworn in for a second term, that patchy SEC guidance made things even more complicated for crypto companies.
The 2019 FinHub Framework, for instance, laid out how to determine whether a cryptocurrency network is decentralized – and therefore whether a network can avoid the SEC’s wrath. But the measure left “too many ambiguities” to be practically applicable,” she said. “I don’t know that it’s really even being applied.”
Regulation hasn’t moved along a whole lot since then. When Peirce’s new boss, Gary Gensler, became the SEC chair in April 2021 under President Joe Biden, he continued the agency’s longstanding policy of “regulation through litigation,” where companies learn of their infractions when the SEC sues them for breaking the law.
See also: SEC’s Gensler Holds Firm That Existing Laws Make Sense for Crypto / Opinion
Last year, the regulator sued BlockFi for $100 million over its interest-bearing crypto account, and just last month lodged complaints against Genesis and Gemini for selling unregistered securities. Gensler told Yahoo Finance in December that the SEC has brought over 100 crypto enforcement cases against crypto-related companies.
But while Peirce, who declined to comment on Gensler’s tenure, said enforcement actions are “important work,” she said the agency has not created “an environment within which good activity can flourish.”
Some of the complications of trying to write a regulatory policy through enforcement actions are apparent with the BlockFi settlement, she said. “If we had simply been more proactive in a regulatory way on crypto lending, we could have had a framework in place that would have applied to everyone,” she said.
Such a framework could have “taken into account a wide range of views about what the right approach was there.”
Peirce pointed a finger at her colleagues who “don’t think that any clarity is needed.” Her peers “think there’s plenty of clarity” – and do not see much point in regulating crypto, a technology they do not consider useful.
“It’s disappointing,” she said. “I’ve been here for five years now and I’ve seen very few proactive steps toward trying to [in advance] set up a regulatory regime that makes sense.” Her hope is for crypto builders to spend time thinking about things other than regulation. ”You can’t have this system where everyone is unable to move forward because everything is so ambiguous.”
Pierce’s own efforts include a proposal to give three years to development teams to decentralize their projects before the SEC can sue them. The bill, sometimes called the token safe harbor, was introduced in February 2020, revised in 2021, and never gained traction within her own agency.
However, its spirit was contained within the Clarity for Digital Tokens Act of 2021 introduced in Congress by Rep. Patrick McHenry (R–N.C.), a longstanding advocate of crypto regulation who in December became chairman of the House Financial Services Committee. But that bill died last month after little fanfare.
Congress is still deciding other matters – such as if crypto companies should be subject to restrictions on how they handle customer assets, whether the Commodity Futures Trading Commission (CFTC) should play a greater role in regulating crypto, and whether the Federal Reserve should be able to license stablecoin issuers.
While Peirce hopes that Congress resolves these issues, she said the SEC is often the “natural regulator” of crypto, plus the exchanges on which these currencies are traded – so long as you believe that most cryptocurrencies are securities, as the SEC does.
See also: What If Regulators Wrote Rules for Crypto? / Opinion
Still, she thinks there is space to do some of the groundwork together with the CFTC. “They have some valuable experience that would be useful in helping Congress through the right approach,” Peirce said.
Yet “the agency itself has never handled innovation very well,” she said of the SEC. “It’s just not our strong point.”