It’s not particularly common for a commissioner of a federal agency to say it needs less staff, but when Securities and Exchange Commissioner Hester Peirce criticized the addition of 20 new crypto enforcement staffers, doubling the unit’s size, it was par for the course.
When the announcement was made on Wednesday (May 4), Peirce tweeted, “The SEC is a regulatory agency with an enforcement division, not an enforcement agency. Why are we leading with enforcement in crypto?”
She is a longtime advocate of a regulatory regime focused more on encouraging innovation than cracking down on crypto companies trying to remake finance with offerings ranging from initial coin offerings (ICOs) to the recent crackdown on crypto lending, that saw top exchange Coinbase warned not to offer interest-bearing accounts and another top exchange, BlockFi, fined $100 million.
See also: BlockFi’s $100 Million Settlement With SEC Raises Internal Discussion
What’s different is that Peirce’s position has growing support in Congress — far more than it did when she was making the arguments in 2018 and 2019, when crypto had a far shadier reputation and the $74 billion decentralized finance, or DeFi, market was worth about $10 million.
When Peirce tweeted her opposition to the new hires, Rep. Patrick McHenry (R-N.C.), ranking minority member of the House Financial Services Committee, and Rep. Tom Emmer (R-MN), a member, retweeted it.
The regulation by enforcement at @GaryGensler's SEC is stifling American innovation.
If the U.S. wants to lead the deployment of the next generation of internet technology, we must provide clear, thoughtful rules of the road for the digital asset ecosystem. https://t.co/cVkNEyTHiK
— Patrick McHenry (@PatrickMcHenry) May 3, 2022
“The regulation by enforcement at [SEC Chairman] @GaryGensler’s SEC is stifling American innovation,” he wrote. “If the U.S. wants to lead the deployment of the next generation of internet technology, we must provide clear, thoughtful rules of the road for the digital asset ecosystem.”
And it’s certainly possible that McHenry could be the committee’s chairman next year.
Building support
As for her tweeted question, the agency’s answer was pretty clear.
“Crypto markets have exploded in recent years, with retail investors bearing the brunt of abuses in this space,” said Gurbir Grewal, director of the agency’s enforcement division, in the announcement. “Meanwhile, cyber-related threats continue to pose existential risks to our financial markets and participants. The bolstered Crypto Assets and Cyber Unit will be at the forefront of protecting investors and ensuring fair and orderly markets in the face of these critical challenges.”
It’s hard to argue that crypto has a problem: Crypto security firm CertiK tweeted on May 2 that counting the large and small hacks this year, $1.6 billion had been stolen in the first four months of the year, surpassing “the total amount lost in 2021 ($1.3B) and in 2020 ($516MM).”
The sea change in Peirce’s backing has come slowly, as crypto went mainstream — a recent PYMNTS study found 23% of U.S. consumers have bought cryptocurrencies — and corporate America and financial institutions began embracing it over the past three to four years.
Read more: PYMNTS Data: 23% of Americans Owned Crypto in 2021 as Processors Stepped up Support
But Peirce, who picked up the moniker “Crypto Mom” for her early support of the industry, has been consistent.
The only remaining Republican appointee on the SEC, she said on Feb. 1 that a major regulatory proposal — running 654 pages without mentioning crypto or DeFi — “includes very expansive language, which, together with the chair’s apparent interest in regulating all things crypto, suggests that it could be used to regulate crypto platforms … including potentially DeFi protocols.”
Which isn’t to say she’s been against regulation, or that cryptocurrencies can’t be securities — which a fair bit on the crypto industry would be happy to refute.
“I wouldn’t say that everything in crypto should fall under the SEC’s jurisdiction,” Peirce told PYMNTS’ CEO Karen Webster in March. “I think some of it does already, and I can make an argument why, for example, one would say the SEC could regulate crypto trading platforms.”
See also: Workable Exemptions Would Foster SEC, Crypto Collaboration, Says Commissioner Hester Peirce
But, she added, as regulators, the agency needs to say, “OK, you can’t do it that way because of this concern that we have, but we’re willing to work with you to meet our objectives as regulators, but also meet your need, your interest in moving forward with your product.”
Even NFTs could be securities if they are used to tokenize assets she said in January — something Goldman Sachs just said it is working on.
See also: Goldman’s Interest in NFTs Could Speed the Tokenization of Real Assets
More Flexibility Needed
Actually, Peirce has been calling for years for the type of comprehensive regulation being created now after President Joe Biden’s executive order on crypto ordered various agencies to work together on coming up with one.
Read also: Biden’s Executive Order Set to Fast-Track Crypto Policy
But she has a more flexible approach than the one Gensler, who has called crypto the “Wild West” of finance on multiple occasions, wants. And she has been doing that since his Republican-appointed predecessor Jay Clayton, took an almost equally hard line, beginning with a 2018-19 crackdown that called almost every initial cryptocurrency offering (ICO) an unregistered and therefore illegal securities sale.
“You can’t slap a label on tokens and say they are all securities, because there are a lot of differences,” she told a legal conference in late 2020.
Of course, the word play on stock-focused initial public offerings (IPOs) didn’t help, as she acknowledged, adding “you can’t take the marketing language and tell if it is a security.”
She has also been a long-time advocate of a regulatory sandbox, in which crypto companies could experiment with more oversight, but also more freedom to experiment and innovate.
That February she proposed a three-year “safe harbor” that would give cryptocurrency issuers a grace period between an ICO and the determination of whether a token is a security or not — the difference being that a “security token” is mostly sold as an investment whereas a “utility token” has substantial uses as a payments token for transactions on a blockchain — even if it is also bought and sold as an investment. So far, with very few, very small exceptions, only bitcoin and Ethereum’s ether have been ruled to be utility tokens.
But Peirce’s positions on crypto regulation all come down to what amounts to economic philosophy, she said in a Dec. 10, 2020 speech:
“The presumption that people need to entreat a regulator for permission to invest still offends principles of personal liberty, which allow people both to earn and spend money as they see fit.”
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