Everyone benefits from clear crypto rules, says SEC’s Peirce

Regulators are also bringing enforcement against other crypto companies and celebrities who pitch tokens. But there is little agreement on how the industry should be regulated or whether the SEC’s “regulation by enforcement” approach is working. Against that backdrop, Barron’s caught up with SEC Commissioner Hester Peirce. One of two Republican commissioners, Peirce, 53, has been called the “crypto mom” for her pro-industry views. She was also elected for 2023 Barron’s 100 Most Influential Women in American Finance.

Peirce, who has two years left on her term, discussed a variety of topics, including how she views her role as commissioner and whether crypto markets need more regulation. An edited version of the conversations follows.

This is a high profile position and any decision you make will be subject to criticism. What do you like about the job?

I love the chance to influence the capital markets, which are a very powerful engine in our country that helps fuel prosperity and can also help change people’s fortunes. Someone who has an idea to build a company can come to the capital markets and get funding and then build generational wealth, pass it on to the next generation, and also pass it on to other entrepreneurs. Being involved in trying to get the rules around these capital markets right is such a privilege.

In December, the SEC came up with several proposals that pull back from Wall Street. The proposals would require almost all retail orders to be submitted to auctions, and for brokers to demonstrate that they are executing clients’ trades in an optimal manner. The SEC also proposed to lower trading increments and access fees on exchanges. Do you feel that private investors are being taken advantage of?

There are proposals, and we’re getting public comments, so I look forward to hearing what the public has to say. I actually did not support a couple of these proposals. I think the markets are working better than they ever have for retail investors. Are they perfect? No. Are there incremental changes we can make? Yes. But by and large, when a retail investor wants to buy or sell a stock, the retail investor is able to do so quickly and for no or very low commission… at a price that is what you see in the market or maybe even better .

The change that was proposed was quite dramatic, to tell brokers that every retail order must follow this particular path. It’s something the government hasn’t done before, and I think, in the absence of a very strong rationale, we shouldn’t be experimenting with the market. I hope we can have a robust dialogue, at least in writing, so we can really think about this before putting it in place.

In the wake of FTX’s collapse and the $2 trillion crash of the cryptocurrency market, do you think the industry has reached a point where its survival depends on a robust regulatory framework? Many investors have lost money through crypto scams and bankruptcy.

I don’t think the survival of crypto depends on a regulatory framework, but it would be better for everyone if we spelled out clearly what regulatory parameters crypto could operate within, because then people would spend a lot less time thinking, ‘What are the rules? ‘ They would know and be able to think about building the things they are trying to build. We all waste a lot of time thinking about issues that we and Congress can solve.

We want to protect customers, whether they are investors or consumers, and we want to protect the stability of the market. What are the best ways to do it? The SEC may have a role to play in that. We have already been able to bring some cases around fraud in the crypto space. It is an important thing for us to do.

Building a regulatory framework that takes into account the challenges and opportunities linked to technology will be a very good development. Europe has just put in place a regulatory framework for crypto. Whether they got it right or not, it’s too early to say, and we might do it differently in the US, but we should think about what kind of framework makes sense.

SEC Chairman Gary Gensler recently said that among cryptocurrencies, “anything but

Bitcoin ” is a security and should be regulated because it is an entity that backs them. Do you agree?

The definition of “security” is broad and you must look at all the facts and circumstances when considering whether to use the securities clause. We haven’t been very disciplined in how we think about the use of the securities clause in crypto. We need to set up some framework that people can operate within, so whether the token is a security or not, people will be able to operate. If you are going to say that they are all securities, how does the law apply in a way that allows these crypto projects to continue to operate?

Do you think the SEC’s “regulation by enforcement” approach is working, given the massive levels of fraud and bankruptcies we’ve seen in crypto? Should exchanges like Coinbase be required to register with the SEC?

I don’t think enforcement is the right approach to bring regulation to a space. If there is fraud, we often have a role to play, and we have brought many cases in that area. But if we try to bring regulation through enforcement, we’ve calculated that, and at the rate we’ve been going, it’s going to take us something like 400 years, so that doesn’t seem like the best approach. What we need to do as a society, and this is where Congress has a role to play, is to think, “Do we think crypto exchanges should have a federal regulator? If so, who should the federal regulator be? Should it be SEC? Is there going to be someone else?”

Do we think that when someone makes a token offer, there should be a disclosure framework around it? If it were to be, who would do it? Do we think stablecoins should have a regulator? Should it be a banking regulator, or should it be the SEC or another regulator?

Do you have a list of top priorities for the next 12 months?

Gary Gensler, as chairman, gets to set the agenda for the agency in terms of regulations, and he’s set a very active agenda, so one of my priorities is to think about all the items on the agenda and see if I can try to push them in a better direction or not. I would like to get us to a better place in terms of crypto regulation, and to do that we should have some public roundtables where we bring people in, preferably in the context of [Commodity Futures Trading Commission], to have these conversations. I would like to see it happen within the next year.

And then I want to turn some of my attention to helping entrepreneurs find the capital they need to build their businesses. That’s been part of our mission that we’ve been neglecting recently, and I’d like us to spend more time thinking about, “What can we do to make it easier for these founders of companies to raise money ?”

Silvergate Capital, a major lender to crypto firms, is winding down its operations in the wake of FTX’s collapse. Do you think there must be rules requiring client funds or crypto brokers to be segregated or clearer rules for safekeeping?

It’s good to think about custody rules beforehand because people need to understand if something happens to the device that holds their crypto, what happens to their crypto? Is it segregated for them, or is it part of the bankruptcy estate and they just have to line up with the other creditors?

We could definitely do a better job of thinking about how entities that we regulate should store crypto. We recently published a proposal regarding custody for investment advisers. It’s a big rule and it covers a lot of different things, but some of it is related to crypto custody, so it will be interesting to see what people have to say about that in general and about that part of the rule.

There have been reports that Binance may have acted improperly to make it appear that Binance.US was a legally separate entity from Binance. Does this suggest that the industry needs tighter regulation?

Without talking about any particular entity or entities, when you have centralized entities, it’s a fair question to ask: ‘What kind of regulatory structure do we want around them?’ Part of the theory behind crypto is that centralized entities bring risk themselves… and blockchain technology allows you to build a trustless network where you don’t actually have to trust any other person. You trust the technology, and everything is open, so you can see everything.

In cases where technology actually plays the role that regulation would otherwise have played, there may be a space where you don’t need to put the same type of regulation in place.

Have you thought about your long-term future and what’s next in your career?

There is so much to think about in this job, I can’t think of what happens next, other than to hope one day to have some hives. It will be my hobby.

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