- SEC Commissioner Hester Peirce sheds light on the agency’s approach to crypto regulations.
- Crypto firms face challenges in compliance with existing SEC regulations.
- The transparency of blockchain technology could shape future compliance.
The rapidly growing cryptocurrency industry has captured the attention of regulators worldwide, with the U.S. Securities and Exchange Commission (SEC) one of the most vigilant. With the eyes of the world on the U.S. regulatory agency, Commissioner Hester Peirce has made her position known.
While the SEC has initiated a litany of lawsuits against crypto projects and exchanges, including Binance and Coinbase, Commissioner Peirce, known to be an advocate for the crypto industry, has argued for a different approach. Seeking her insights into the SEC, DailyCoin approached Peirce to ascertain her thoughts on how she would like the agency to regulate crypto.
DailyCoin aimed to find common ground between the industry and the SEC to bridge the gap between investor protection and promoting innovation.
Do Crypto Companies Need to Be More Transparent?
The United States has a strong framework for investor protection. For instance, only public companies can offer stocks to retail investors, and to do so, these companies must comply with strict reporting requirements, offering transparency to investors.
The SEC claims that crypto companies have that same responsibility to provide transparency, but SEC Chair Gary Gensler insists firms in the space have made a calculated economic decision not to do so. For their part, crypto firms have claimed that current rules make it impossible to comply.
Crypto firms have argued that complying with existing SEC regulations is difficult right now. What is your view on that complaint?
I mean, I would like to know what companies have to do to comply with SEC rules, too, because I don’t know either. The problem is that we haven’t addressed that question seriously as the agency or as the broader U.S. The agency hasn’t.
In terms of stocks and public companies, the U.S. already has clear rules, requirements, and processes outlining what is expected of them. Is there an avenue for crypto firms to follow these same precedents to satisfy the SEC?
This is one possible approach, and companies could try that. The issue is that typically public companies are those that have been around for a while, for decades even. They’ve gotten their financials in order and are ready to go public.
On the other hand, a lot of the token projects that I have seen are different. They are small groups of people who are getting together and want to launch a project. The public company framework doesn’t seem like the right framework for that, from my perspective.
Crowdfunding Rules for Smaller Projects
While smaller companies can’t offer stocks to retail investors on the market, they have another option. In 2012, U.S. Congress passed the ‘Jumpstart Our Business Startups (JOBS) Act,’ enabling companies to crowdfund their projects.
These crowdfunding rules enable companies to seek investment from retail investors while providing additional protections. In these terms, several crypto exchanges have already created separate categories for new, upcoming projects. For instance, Binance and Bitget offer “Innovation Zones” for less risk-averse investors.
Would smaller projects, which may not have the resources to put together in-depth reports as those required by publicly traded companies, be able to utilize the equity crowdfunding framework introduced in the 2012 JOBS Act as an alternative?
Yeah, some people have looked at crowdfunding, which allows you to raise a limited amount of money. It also puts limits on what the investors can invest.
So yes, it is possible, although crowdfunding rules were initially set up for small companies, as opposed to the kinds of crypto projects we see today.
Ask Crypto Traders What Protections They Need
To find common ground between the SEC’s demands and those of crypto firms, DailyCoin asked Commissioner Peirce whether crypto companies would be in the clear if they followed the reporting requirements for public companies.
Do you believe the SEC would be satisfied with crypto projects registering and offering the same disclosures as public companies?
We’ve seen some efforts to go that route. It is definitely a route that you can go, but it is very time-consuming and expensive.
However, if we’re really trying to make this work for the long term, I don’t think trying to force a public company-type model on these kinds of projects makes a whole lot of sense.
This is because my goal, at the end of the day, is for the person buying the token to have the information they need from the project team. Some of that information would be the same as what you’d want about a public company.
But other information would be different. For example, investors might say, “I want to see your code. I’d like to know if someone’s audited it. I’d like to know whether you’re planning to dump a bunch of tokens on the market after I buy mine.”
There are things you want to know that certainly weren’t what we were thinking about when those rules were designed around public company disclosures.
And so, why not instead sit down with people and say, all right, what information is valuable for you to have? And then, let’s come up with a framework for getting that information.
Crypto Industry Does Not See the SEC in the Best Light
While Commissioner Peirce called for an open discussion between crypto firms and the SEC, the agency’s directives have not always been so clear-cut. The SEC is engaged in numerous lawsuits against crypto exchanges, companies, and token issuers, and industry leaders have criticized the lack of open dialogue and clear direction.
In light of this, we asked Commissioner Peirce how she envisions future discussions between regulators and the industry.
Do you think that the crypto industry would be open to discussions with the SEC?
Well, I don’t think it would be that hard for us to have a discussion. Except, people don’t always think the most positive thoughts about the SEC these days from the crypto world.
However, if we decide tomorrow, let’s just start fresh; let’s invite people in; I think people would be willing to come in. But it would have to be in public.
I think it’s really important to have these conversations in public with many people at the table. That way, you’re not just getting one perspective from one person, but you’re getting a perspective, and then you’re having someone else say, “No, I see it differently.”
So, I’d like this kind of public round tables, preferably running them jointly with the Commodity Futures Trading Commission (CFTC). Happy to include other regulators, state and federal as well.
Creating a ‘Regulatory Sandbox’ for Blockchain
While the SEC has its own views on crypto regulation, U.S. Congress has been stirred to action, with legislators on both sides of the party wall submitting proposals for handling the growing industry. Lawmakers are discussing several bills providing much-needed regulatory clarity for the crypto industry.
What do you believe should be the priorities when drafting a new regulatory framework for crypto?
What’s going on in Congress is also very much in discussion now. And as a regulator, I always need to take my lead from Congress. They’re in charge.
But I do think that you could easily design a framework for disclosures in token offerings. That is something we’ve spent a lot of time thinking about. You could build a framework for platforms that trade these tokens. You could build a framework for custody.
And then I think [it is] really important to have a sandbox that would let blockchain companies try out new things on a small scale. We have the authority to do so. This would enable us to create a new framework while protecting innovation.
Regulators Should Take Advantage of Blockchain Transparency
One difference from the SEC’s typical jurisdiction that advocates in the crypto industry have repeatedly highlighted is that Blockchain technology has some unique advantages that could help regulators ensure compliance. By its very nature, blockchain is inherently transparent, and all transactions are public. We asked Commissioner Peirce her thoughts on the technology’s implications in helping regulate the space.
Do you think regulators should consider blockchain technology’s inherent transparency and how they can leverage it for compliance?
I think that is a very important point. It is also another reason why I think it makes sense for us to start with a blank piece of paper and say; “what kind of disclosure makes sense here?”
The technology offers us a level of transparency that you don’t get otherwise, and that is the entire point of regulation. So let’s take advantage of that in designing a regulatory system.
And that’s part of the reason why I think we have to be really careful when we think about regulating. For example, if we take the intermediaries out, you’re directly interacting with code. This means that you can see ahead of time what the terms of that interaction will be.
It could turn out that there are some surprises hidden in the code that you didn’t understand. But everyone is coming in on the same terms. So let’s take advantage of that and realize that maybe we don’t need the same regulatory system there.
I’m very open to the idea of looking at the technology. I think that other people have made the point, too, that there are ways the technology makes it harder to regulate. At the same time, in other ways, it makes it easier.
On the Flipside
- The SEC’s harsh approach toward crypto regulation has been met with significant backlash from the crypto community. Multiple insiders argue that existing regulations are not suitable for crypto.
- On the other hand, Bitcoin maximalists don’t find fault with the SEC’s harsh stance on other cryptos. They argue that Bitcoin is the only crypto sufficiently decentralized to escape SEC’s scrutiny.
Why This Matters
The SEC’s approach to crypto regulation has significantly impacted the industry’s growth and innovation. Understanding these regulations and the potential benefits of blockchain transparency can help crypto firms navigate the regulatory landscape more effectively.
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