Dialogue with SEC Commissioner Peirce: How does the SEC view the regulation of the cryptocurrency industry?
Original Author: Revelo Intel
Compilation of the original text: Deep Tide TechFlow
Original Author: Revelo Intel
Compilation of the original text: Deep Tide TechFlow
In this episode, Ryan Adams and David Hoffman invite SEC Commissioner Hester Peirce to discuss her views on the SEC, self-regulation, decentralization and more.
The following are our notes to help you understand better.
Thinking about Banking Crisis
The U.S. financial system is highly interconnected.
Anything that happens in the banking system can affect an already regulated market. There are also associated entities that need to be regulated.
Banks are sometimes public companies, which means their disclosures are regulated.
The situation is being closely monitored to prevent any negative impact directly on regulated entities.
Why is the SEC needed?
Securities laws and the SEC are important in addressing information asymmetries, balancing investor interests, and regulating market infrastructure.
The SEC is responsible for providing adequate information to investors and regulating brokers, investment advisors and stock exchanges.
The cryptocurrency industry should maintain a good relationship with the SEC, which can be achieved by providing guidance rather than strict enforcement, expanding its jurisdiction, and recognizing the uniqueness of the cryptocurrency space.
Self-regulation and decentralization are critical to the success of the crypto industry.
Information asymmetry
Hester Peirce's role at the SEC includes eliminating information asymmetries and promoting transparency.
Listed companies are required to file a declaration, providing information on their financial condition, risks, nature of business and executive compensation. This requirement closes the gap between insiders and investors, but it does not close all information differences.
A person with different information can make a decision based on that information and is under no obligation to provide it to someone else who does not have that information, unless affiliated with the company.
A Healthy Crypto/SEC Relationship
Information asymmetry exists in centralized systems, making it necessary for SEC regulation to address the principal-agent problem in capital markets and formation.
In a decentralized system, information is widely available and there are fewer problems with information asymmetry, making traditional SEC regulation less applicable.
Centralized entities in the cryptocurrency space may benefit from federal regulation, with the SEC a potential watchdog for trading platforms and token issuers.
To realize the potential of decentralized crypto activity requires a different approach to regulation that recognizes the benefits of decentralization rather than simply layering traditional regulation on top of it.
The future state of cryptocurrency will combine healthy SEC regulation and decentralization activity, likely requiring a more nuanced and specialized approach to regulation.
SEC's Security Definition
The definition of a security is broad and includes the category of investment contracts.
The SEC believes that the sale of tokens that promise to build the network and increase the value of the tokens may fall under the category of investment contracts.
The issue is determining whether the token itself needs to be registered as a security and be considered one throughout the process.
Adjustments and more rigorous thinking are needed on the application of securities laws to the cryptocurrency space.
Even if sold as part of a security offering, tokens should be considered a separate entity.
Lack of clarity in the legal structure of cryptocurrencies could lead to dampened activity and adjustments will be required.
Securities Trap
Existing securities frameworks prevent cryptoassets and networks from achieving their maximum performance state because of their centralized origination.
The SEC has taken the position of classifying most tokens as securities to maximize its jurisdictional reach.
Congress needs to engage in the discussion and develop a disclosure framework for token offerings or establish regulators for better legal analysis.
Washington needs to consider whether applying the rules makes the world a better place, or just complicates things in no one's interest.
It is difficult for regulators to step back and realize that by protecting people, they are also preventing people from accessing the products and services they want, and not providing them with the information they need.
SEC registration is difficult for entities and asset classes that were not designed for existing processes.
expand jurisdiction
It is unclear whether the SEC wants to regulate the many digital assets that may be created.
If the SEC were to regulate all digital assets, it would regulate many things that it does not currently regulate.
The SEC's mandate is to regulate activities related to capital raising, so it should focus on regulating that aspect.
The SEC has taken an aggressive jurisdictional stance and has attempted to regulate many entities that Congress has not mandated it regulate.
The SEC's goal appears to be to regulate as much as possible, but respondents suggested that, if so, more commissioners may be needed to handle it.
SEC Advocacy
The cryptocurrency community concluded that the SEC was not interested in their capital markets or assets.
The SEC is more interested in expanding its jurisdiction than in its original first-principles mandate.
It's a dysfunctional relationship, and the SEC takes a lot of enforcement action, but enforcement action has its value.
The industry needs to have a more productive dialogue with the SEC, and people should form like-minded groups and present their use cases.
People need concrete use cases to prove that it can change people's lives.
If those who are legitimately trying to build something within cryptocurrency don't talk to regulators, something much worse will fill the vacuum.
Regulators serve the people, not the other way around, and are accountable to the people.
Impact against the SEC
The chairman has more control, but all five commissioners participate in decision-making on rules and enforcement actions.
Decisions are made by majority vote.
Peirce and another commissioner took issue with bitcoin exchange-traded products, arguing that the SEC applied different standards to them than other exchange-traded products.
Peirce believes the dissent is important because it helps the SEC think through the problem and potential solutions.
It is important to have this conversation openly.
Peirce believes that her colleagues have open minds and are able to change their perceptions.
Mere disapproval by itself probably won't do much, but it does help.
Kraken Staking
The cryptocurrency industry is advised to engage with regulators to restore trust in each other.
The Kraken staking service was shut down by law enforcement action in the US, leading Peirce to object.
Regulatory frameworks should be designed for cryptocurrency staking, not plugged into existing ones.
She was frustrated by the fact that the Kraken staking service was shut down, and felt that this did not produce a win for investors.
The settlement with the SEC cannot be used as a final statement on cryptocurrency staking.
Guidance Vs Enforcement
According to SEC Commissioner Peirce, a common theme in enforcement actions is a lack of guidance.
A more effective approach, she argues, is to establish clear rules through public discussion and then enforce them.
This is much more efficient and effective than taking an enforcement action against everything that could be a security.
The SEC can use tools such as waiver orders or interpretive guidance documents to establish rules.
Bringing people together to discuss guidelines will be functional and effective.
The SEC can establish new ways of doing things in the crypto space by trying new approaches.
Stablecoin Status
Peirce recommends a common-sense approach to stablecoins that are not identical and have different characteristics.
Congress has shown interest in stablecoins and actively discussed legislation related to them in the previous Congress, so Peirce believes it is best to wait for Congress to provide regulatory guidance on the issue.
Peirce would prefer Congress to write a regulatory framework for stablecoins.
Cryptocurrencies should do better
The industry can protect itself by taking lessons from traditional finance, being cautious about bad actors, demanding transparency, and identifying bad actors.
The industry should provide concrete solutions to meet regulatory goals while still allowing the industry to move forward.
It is important not to lose sight of first principles and to defend them, even in the short term.
decentralized
Decentralization is an important principle that the cryptocurrency industry should adhere to, but there are currently many "decentralized farces", so the industry needs to work hard to distinguish what is truly decentralized and what is centralized.
Market failures and weaknesses are opportunities for the market to understand central attacks and improve.
It is important for regulators and the industry to have an honest discussion about whether something is centralized or decentralized, because people can be harmed if they are misled.
Regulators may push for centralization, so there is a need for the industry to push in the opposite direction.
In the cryptocurrency industry, even though they call themselves cryptocurrencies, they are not exempt because they are centralized entities.
self-regulation
There is resistance to regulators in the cryptocurrency world.
However, this resistance creates an environment that invites regulation in the first place.
Self-regulation and an understanding of the securities laws and the reasons for the SEC are necessary to prevent falling into the same trap of inviting regulators.
Views on regulation don’t have to be black and white; there needs to be an honest conversation about finding the balance that empowers people to achieve their dreams and protects them from bad things.
Duke speech
The cryptocurrency industry has a responsibility to self-regulate better than the SEC, which will help build a good relationship with regulators.
