An SEC dissenter says the regulator needs to ease up on crypto

In the US, regulators are squabbling over not just what needs to be done, but who should do it, with the Securities and Exchange Commission (SEC) and the Commodities and Futures Trading Commission (CFTC) sparring over who has jurisdiction over crypto. Under Chairman Gary Gensler, the SEC in particular has gone after the sector with renewed intensity since the implosion of crypto exchange FTX in November, launching or threatening enforcement actions against major crypto companies, from Gemini and Genesis to Kraken and Coinbase.

But the SEC’s aggressive approach does not sit well with one of its most senior figures. Hester Peirce, one of the SEC’s five commissioners, has formally rejected the agency’s tactics on several occasions. She says the SEC’s actions have been driven by what she calls “jurisdictional maximization” — launching cases to expand its mandate — but haven’t actually helped the crypto sector become more compliant.

“One way to plant a flag is to initiate enforcement. It says: This is our place,” says Peirce. But in pursuing territorial gains instead of creating guidance to help crypto firms color within the lines, she claims , the SEC has lost its way. “We haven’t done our job as a regulator. We haven’t provided a path to compliance.”

Peirce has made several public dissents — most recently against a proposed change to the definition of an exchange that would expand the range of crypto activities overseen by the SEC — which she says is designed to promote public discussion about appropriate checks and balances for crypto and to heal the “dysfunctional ” the relationship between the industry and the regulator.

She describes the SEC’s current moves as a combination of “regulation by enforcement” (a term crypto supporters have also latched onto) and “regulation by ambiguity,” where companies are left in the dark about their compliance obligations until a lawsuit lands in their in trays. Peirce believes the dynamic has eroded any trace of mutual trust between the crypto industry and the SEC.

A common frustration among crypto firms, recently articulated by Coinbase and Binance, is that attempts to discuss with regulators the aspects of crypto that don’t fit neatly into existing frameworks have borne little fruit. Paul Grewal, Coinbase’s general counsel, describes the company’s 30-plus meetings with the SEC as “one-sided monologues.”

Peirce is sympathetic. One reason for the dysfunction, she says, is that discussions are too often held behind closed doors on an ad hoc basis, leading to inconsistency in understanding between different crypto firms about how to bring services into compliance.

“If you sit in the back room and negotiate with individual industry players, as opposed to having a public conservation about the right approach to regulating the space, it leads to all kinds of problems. The big conversations have to be held in a public forum, so that you don’t end up with a set of rules that work for one entity, but not for everyone else, she says. “I’m tired of seeing it done in these one-off situations, where the power dynamics are all wrong.”

The SEC, Peirce suggests, is profiting from a lack of guidance from the US Congress on the proper classification of cryptoassets. In the absence of clear legislation, the SEC is free to take enforcement action based on a belief that most crypto-assets are securities, and by doing so, drags crypto into its orbit.

Without fully specifying how securities laws apply to crypto, Gensler has repeatedly stated that almost all cryptocurrencies are securities, subject to SEC oversight. He has also asked crypto companies to register with the agency — a process that would impose reporting requirements but limit the chances of legal action afterward by bringing the business into compliance from the start.

But crypto firms like Coinbase argue that there is no practical path to registration, because the existing process does not allow for crypto’s specific attributes. The decentralized nature of the underlying technology, they say, and the types of crypto-activities it supports (such as staking), require a tailor-made system. Yesterday, Coinbase filed a motion in federal court to compel the SEC to respond to a petition for new crypto guidelines it filed last July.

Peirce, meanwhile, says that issues surrounding the classification of crypto deserve more attention than the SEC has given them. “We have been in a way broad brushing. I think we need to be more precise, because each case is unique, says Peirce. “[Businesses and consumers] must be able to know whether they are dealing with a security or not, because when they don’t know, they can’t move forward – it paralyzes them.”

Gensler faced questioning to the same effect at a House Financial Services Committee hearing on April 18, where he was the only witness. A chorus of criticism was led by committee chairman Patrick McHenry, Republican representative from North Carolina, who asked Gensler to explain the agency’s enforcement strategy and lack of crypto-specific guidelines. “There’s a lack of clarity,” McHenry said. “Do you think it provides security and solidity for the product? Do you think it provides consumer protection? Do you think it serves the value of innovation? I think ‘no’ should be an easy answer for you.”

Warren Davidson, another Republican on the committee, argued that the SEC has imposed a “de facto ban on crypto” and went so far as to introduce a bill in which the SEC would undergo a restructuring and Gensler would step down from his role as chairman.

Gensler argued that crypto markets are compliant with existing SEC guidelines, that most crypto tokens are securities, and that the crypto market is therefore “riddled with non-compliance.” His office declined to comment further on the matter.

But not everyone at the agency is pulling in the same direction. Peirce says the effort to bring new territory under SEC control threatens to undermine its central goal: “to serve the American people.” She worries that to “seize jurisdiction” only to insist that crypto companies must either squeeze into existing forms or leave the US “defeats the point.” “It’s supposed to be the government working for the people,” she says, “but sometimes you get the sense that the government is working in a way that’s not consistent with what the people want.”

The SEC’s quest for jurisdictional maximization, Peirce says, risks jeopardizing America’s status as a center for technology innovation in finance by pushing companies offshore.

Fed up with what they interpret as a hostile regulatory regime, crypto companies are beginning to filter out of the United States. On March 31, crypto exchange Bittrex (since sued by the SEC) announced that it would wind down its US operations. On April 20, Nasdaq-listed Coinbase announced that it had received a license to set up shop in Bermuda. CEO Brian Armstrong told Bloomberg that “everything is on the table,” including moving.

“It makes me sad, because it’s about a regulator’s ability to deal with a new technology and asset class,” says Peirce. “We show that we are unable to make any accommodation for experimentation.”

The five-commissioner structure at the SEC is meant to bring together different perspectives—something Peirce celebrates. But in her dissents, she tries to convince her agency colleagues that the SEC is clearly wrong on the crypto issue.

So far she has had little joy. “I can’t give you the fly-on-the-wall perspective,” says Peirce. “[But] I have not succeeded in convincing my colleagues that we are going down such a bad path.”