You can find the first of that conversation here. In Part II, Commissioner Peirce, also known in these circles as Crypto Mom, shared her thoughts on the securities regulator’s role in governing this emerging space.
Commissioner Peirce presciently issued a warning to cryptocurrency investors, saying that a lot of people are making a lot of money. Still, they should be careful and know they can also lose a lot too.
She offered another cautionary statement from a regulator’s perspective, which was to think about how the rules apply to what you’re doing.
According to Crypto Mom, the growth that has been unfolding in DeFi is nothing short of “astounding.” The most interesting thing about DeFi, according to her, is that people are exploring the kinds of financial interactions that determine how they can set up a system in a decentralized way without intermediaries.
That is challenging to regulators. Commissioner Peirce explained:
It requires us as regulators to think about what our role is: If you have truly decentralized financial communities, are people building their own regulatory structure as part of what they’re doing in DeFi? Are smart contracts playing the role of regulators?
Indeed, there is still a cloud of uncertainty surrounding smart contract-fueled DeFi transactions in which ETH is used as collateral. Jesse Proudman, CEO of quant hedge fund Strix Leviathan, recently told the Coinscrum podcast,
This DeFi movement is the first time we’ve had all these interweaving smart contracts. And nobody really understands the risk factors there, particularly when it comes to Ethereum’s price point.
Security vs. Utility Token
One of the sticking points between the cryptocurrency community and the SEC has been the taxonomy of digital currencies. Entrepreneurs still aren’t clear on whether their project’s coin will be classified as a security or utility token by the regulator.
And while the heyday of ICOs has come and gone, new tokens are still being launched, including in the DeFi space where token issuance is on the rise. Commissioner Peirce said:
The question of ‘what is a security?’ is very much alive. A lot of people still have those questions and have their projects on hold and can’t figure out whether or not their token distribution event would be considered to be a securities offering. It’s very much a live issue for trading platforms that are trying to figure out what to trade or not to trade.
She pointed to Telegram’s canceled token sale as a case in point that the crypto industry is waiting for the SEC to act on the classification front. Telegram had to give back $1.2 billion to investors plus play a hefty fine for having an unregistered offering of its GRAM token.
On the other hand, the SEC seems to validate the use case for Telegram, based on Commissioner Peirce’s tweet below.
TFW you realize that the SEC still has requirements that envision communication by telegram.
— Hester Peirce (@HesterPeirce) September 7, 2020
According to Crypto Mom, crypto projects are still trying to figure out how to do things the right way from the get-go. They want to be able to operate without having to worry about the taxonomy issue.
I think there’s a lot of work going on, not just thinking about the regulatory framework.
If the Wall Street watchdog waits too long to embrace innovation, it could come at a hefty price. Commissioner Peirce explained:
I hope that we can do a better job in the United States so that we at least have a regulatory framework that makes people comfortable innovating here. We have always been a country that has been really welcoming to innovation. Then there’s the question where trading is happening. But that’s why we should have clear rules about what you can and can’t do. Ultimately what I’m most concerned about is when I hear innovation is moving offshore because people are too uncertain about what they can do here. Also setting a project up that can’t have U.S. participation, that has become a concern.
Crypto Dad and Central Bank Digital Currencies
While China is already testing its central bank digital currency (CBDC), the e-yuan, the U.S. Federal Reserve has been left in the dust.
Commissioner Peirce pointed to one familiar face who is out there making the case for a U.S. CBDC — her crypto counterpart and former CFTC chairman Chris Giancarlo, also known as Crypto Dad.
Crypto Dad is out there pushing the idea of a digital dollar. There has been work going on in the private sector and the Fed has talked about it, too. One beautiful thing about being an SEC regulator is that a digital dollar is far outside of my purview. Lots of different countries are experimenting with central bank digital currencies, and it is inevitable that people in the United States will too.
Meanwhile, with regulation in the cryptocurrency industry moving at a snail’s pace, the emergence of the COVID-19 pandemic didn’t help on the competitive front.
If there’s an asset class that’s been as volatile as bitcoin, it’s equities. But that doesn’t mean crypto is no longer on the SEC’s radar. Commissioner Peirce stated:
I think a lot of the attention got diverted by the pandemic and by the related effect in the market and the broader economy. And so we had to do things like issue temporary relief. We were getting lots of questions about working from home. We as an agency are working from home, by and large. We also have a very active rule-making calendar that has nothing to do with crypto, just normal market rules. And so yes, there’s a lot going on. That said, in proportion to the size of the crypto market, I would say that we do devote quite a few resources to the industry and to thinking about the novel issues it raises.
Perhaps when bitcoin moves closer to mainstream adoption, the SEC will send in the cavalry.