Count SEC Commissioner Hester Peirce among those believing that the recent crash could give the industry a more sustainable foundation for the future.
“When things are a bit harder in the market, you discover who’s actually building something that might last for the long longer term and what is going to pass away,” said Peirce in an exclusive interview with Forbes last Friday.
But that is not the only benefit that she believes could come out of this market downturn.
It can also be a valuable learning opportunity for market participants and the regulator to see how the crypto market functions during times of acute stress. “It is helpful for us to see the points of connection. It’s a moment, not only for market participants to learn, but it’s also for regulators to learn, so that we can have a better sense of how the market operates.”
Although painful, and Peirce made it clear that she does not make light of anyone’s suffering through the drawdown, she is correct in this assessment.
After all, it has been four years since the industry has seen such a collapse, long before many key officials across the government came into their positions. For her part, Peirce was confirmed as an SEC Commissioner in January 2018, right as the initial coin offering market was about to collapse. However, institutional money had not yet come to the space, derivatives markets were at their infancy, decentralized finance (DeFi) had not yet become prominent, and virtually nobody had heard of an NFT.
Does this mean that the regulator is going to sit idly by and watch from afar? Certainly not.
Peirce noted that the SEC could get more tips to act upon during bearish times than bull runs. “Scammers and fraudsters will figure out ways to take advantage of any set of market conditions to try to take advantage of other people. So I’m sure their tactics are changing and they sometimes prey on people at their lowest points…we’re maybe more likely to get tips from times like this.”
The SEC is also staying on top of any activities within crypto that fall under its jurisdiction as well as continuing to educate people about red flags. For instance, she noted that investors, or depositors, should take a critical eye to anyone that promises to offer consistent double-digit returns. Without referring to any company or service provider in particular, although prominent crypto lenders such as Celsius, BlockFi, and Babel Finance have come under strain in recent weeks, Peirce noted “When you have an attractive return, you need to be asking questions about its associated risks? And if you’re not getting answers, then you need to think about whether you want to make that investment.”
But in our discussion Peirce made it clear that she does not support bailouts for anyone in the industry. Noting that the SEC is not charged by congress with being a systemic risk regulator, Peirce said that she would not support the use of bailouts to save crypto companies anyway. Especially not companies that eschewed mainstream risk management principles, became over-leveraged, and played right up to the edge.
“Crypto does not have a bailout mechanism. And that’s been perceived as one of the strengths of that marketplace. I don’t want to come in and say that we’re going to try to figure out a way to bail you out if we don’t have the authority to do it. But even if we did, I would, I would not want to use that authority, we really need to let these things play out.”
However, that naturally leads to the question of how the industry, and perhaps regulators, can prevent history from repeating once the snow from this crypto winter settles, whenever that may be. Things will not be easy.
A good barometer of the challenge is the tortured history of crypto-focused regulation in congress. There have been several attempts at answering key foundation questions for the industry, such as whether a token should be a commodity, security, or something else. Peirce herself even created a Safe Harbor proposal that would give some regulatory relief to early token projects so that they had enough runway to become decentralized and graduate out of being securities.
All of this matters because these designations determine regulatory jurisdiction. If a token is a security, then the SEC becomes involved. Commodities fall outside of its lane though interestingly its sister agency, the Commodity and Futures Trading Commission (CFTC), which currently oversees derivative markets and contracts based on digital commodities.
The next best change is a piece of recently introduced Responsible Financial Innovation Act, a bipartisan piece of legislation led by senators Cynthia Lummis (R-WY) and Kirsten Gilibrand (D-NY), which aims to provide further regulatory clarity to the industry on everything from token taxonomies to stablecoin regulations and de minimis exemptions for small crypto transactions so that a user does not have to pay capital gains taxes on crypto used to buy a coffee. A major goal is to try to settle messy jurisdictional issues between the SEC and CFTC, and industry observers feel that the proposed legislation would tip the scales in the favor of the CFTC.
For her part Peirce is cautiously optimistic about the legislation and generally supportive of more crypto conversation on Capitol Hill. She does not appear to be territorial about the SEC’s jurisdiction or upset that her Safe Harbor proposal did not get implemented. She just wants clear guidance that everyone can follow. “I don’t have any pride of authorship in that bill [the Safe Harbor proposal. If we move somewhere else and have a regulatory framework that offers clarity, that’s what I’m looking for.”
Of course, that will be easier said than done. After all there is no such thing as a perfect piece of legislation, and technology-specific approaches come with many challenges, such as ensuring that they are adaptable to changing developments and market evolutions. After all, five years ago virtually nobody saw that stablecoins or NFTs would come to dominate popular discourse in the way that they had. Therefore, there is something to be said for regulating based on function rather than technology.
Peirce appreciates these sentiments and tends to prefer the former, but still believes that there is room for exceptions. “I’ve kind of been a critic of technology specific regulation. And to some extent my own Safe Harbor falls into that category of having a special approach for this specific technology. My response to that is that Congress gave us authority in our original securities laws, to adapt and use exempted applications to provide conditions and relief to a specific technology. You want to keep the law as technology neutral as possible so that it ages well…at the same time, I think sometimes you have to recognize unique features of technology.”
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