Category Archives: Hester Peirce

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US Crypto Regulations Between a Rock and a Hard Place

US Crypto Regulations Between a Rock and a Hard Place

In the midst of the delay for the approval of Bitcoin exchange-traded fund (ETF) applications after several rejections, and current uncertainty regarding regulatory framework, US Securities and Exchange Commission (SEC) Commissioner Hester Peirce provided insights into the matter as an opportunity for better industry development.

Last week, Heister made comments on the issues of state regulation at the University of Missouri School of Law where she opined that “entrepreneurship and innovation do not have the happiest relationship with innovation”, which may be the core reason why crypto ventures have suffered in the hands of most regulatory systems.

The SEC’s clamp down on non-compliant ICOs (issuing securities disguised as utility tokens), its rejection of Bitcoin ETF applications, and somewhat deliberate delay in providing a regulatory framework as regards the industry may have a more logical than malicious intent behind it. Innovations, while they make life easier most of the time, always come outside the norms, especially those of the regulatory system and often times drives regulators to accept changes despite skepticism.

“Regulators, for their part, tend to be skeptical of change because its consequences are difficult to foresee and figuring out how it fits into existing regulatory frameworks is difficult,” she said, implying that it’s not an easy task for the SEC to reject what seemingly looks like a financial innovation in an attempt to weigh and understand the situation correctly.

The last financial crisis has made it easier for trust issues to thrive, especially on the part of the regulator, given that some ascribe the crisis to be due to “financial innovations”. Peirce pointed out that “…every innovation — even one that almost everyone agrees is good — carries with it some risk”, something currently agreeable with the cryptocurrency system.

Accordingly, since innovations can be unpredictable, so caution must be applied when drafting regulatory frameworks, especially for a new industry such as blockchain and its underlying assets. Peirce continues by saying that “as regulators, therefore, we must allow innovation to proceed, even as we put in reasonable safeguards and watch for unanticipated consequences”, and still, it has to come with no comprise to the securities laws in place. It behooves one to imagine where the true line of trade-offs will be drawn, seeing that the core structure of the crypto industry lies in decentralization, which by implication makes it harder for any regulator.

Still, the regulatory polarity has created distinct shades of gray areas around the world. With the Chinese government adamant with its crypto ban, the Indian government chose a rather bizarre stance — first with a ban on banking services to crypto related ventures, and then planned to develop a state-backed cryptocurrency, which it shelved later on. Meanwhile, other jurisdictions have launched out to attract the “rejected”, by providing a safe haven to crypto ventures, and a few nations are developing their own state-backed crypto to augment their economies.

In the UK, the principal regulator has extended an invitation to the public through its consultation paper to better assess a possible way forward for industry regulations. It said in late January: “We are consulting on Guidance for crypto assets to provide regulatory clarity for market participants.” Meanwhile, in the Middle East, the United Arab Emirates (UAE) has also hinted on possible ICO regulations to be introduced later this year.

So far, the crypto industry has had checkered developments and have more recently been in a stalemate (regardless of minor spikes in market dynamics), and many have been waiting eagerly for the next bull-run trigger. It’s basically what most crypto enthusiasts talk about these days, consequently, dialing down tech innovation, development and mass adoption of crypto products — at least, for the innovations that they stand for — and are relying on adjuncts gunning for more institutional involvement that would supposedly propel the market further.

While the US SEC does recognize the potential this innovative technology may provide, as Peirce says. “the United States has benefited greatly from the relative importance of non-bank financing”, supposedly placing them on par with the capital market. This further buttresses the point made by SEC boss Jay Clayton who viewed crypto as a “promise for adding efficiency to our [capital] marketplace”.

However, the regulatory watchdog maintains a stance of balance that involved protecting the interests of investors as market volatility, manipulation, hacks, frauds, exchange illiquidity, and a host of other unforeseen consequences from the unstandardized cryptosystem remain legitimate concerns.

Perhaps, when the SEC, as well as other financial regulators, have finally regulated the industry, these problems will be adequately tackled. Meanwhile, the regulator itself is waiting for the maturity of the industry marked by improved oversight on market surveillance, definitive asset classification, and airtight custody solutions, before embracing the industry wholeheartedly. But it still remains to be known at what cost?

The good news so far is that earlier this year, a bill was introduced in the House to help with asset classification, that partly takes care of one problem. Nasdaq introduced its SMARTS Market Surveillance solution which may have provided precedence in the direction of play towards controlling market manipulation. On the subject of custody solutions, crypto ventures are urged to ensure best cybersecurity practices. Fidelity, Coinbase, Gemini, BitGo, Ledger, ItBi and even Goldman Sachs are among many reportedly racing toward that end.

Peirce’s overall sentiment in a manner of speaking, perhaps one shared on both sides of the tussle is that the delay in drawing clear lines may actually allow more freedom for the technology to come into its own.

 

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SEC Commissioner Peirce: ETF “Definitely Possible”

In a podcast aired on 24 November, SEC commissioner Hester Peirce has commented that the launch of a future cryptocurrency ETF is “definitely possible”.

Her comments could signal a change in the SEC’s stance on ETFs which until now have failed to get through the regulator’s screening process.

However, the comments by Peirce are her own, as she makes clear in the podcast, and not necessarily those of the SEC as a whole. Nonetheless, the commissioner has pointed out that she sees “significant intellectual capital” being invested by both institutional investors and exchanges towards the development of a Bitcoin ETF.

It is worth noting that Peirce represents one-fifth of the SEC’s regulatory body in terms of managing the entire regulatory landscape environment for security investments in the United States, so her views carry significant weight in terms of being a mouthpiece for the government body.

Peirce is perhaps better known for her criticism of how the SEC handled the Winklevoss twins’ rejected application for an ETF in July of this year. At the time, she commented:

“I think that one of the reasons is that in the past, with other applications for commodities – you might think of metals – [the SEC] also looked at the underlying markets. I would argue that this also was not the right approach at looking at those. Of course, that was well before my time here. But, in addition, I think that there is concern around new technologies, and I think some of that is reflected in the disapproval order.”

She added that she felt that the SEC in general treats innovation with caution, feeling that the body maintains it is safer to simply “put the brakes on” than to approve ETF applications. The commissioner suggests that the SEC needed to figure out a way of being less cautious and letting “innovation go forward” rather than being concerned about criticism if projects fail.

The ETF debate is a topical one at present, particularly with Bitcoin struggling to find any stability in the market, and along with the adoption of cryptocurrencies by institutional investors, the approval of ETFs is now being seen as the industry’s saving grace.

 

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Congress Requests SEC Clarify Crypto Security Laws to Support Innovation

The United States Congress has sent a letter to the Securities and Exchange Commission (SEC) requesting that the agency clarify crypto security guidelines, to support innovation and to lessen the increasingly tense mood in the crypto space caused by widespread crackdowns led by the SEC.

Congress says they believe crypto is important for many sectors of the United States economy, and that the SEC’s view that all cryptos are securities, besides Bitcoin and Ethereum, is leading to an exodus of crypto and blockchain companies and talent from the United States. Congress is concerned that the United States will fall behind in the crypto and financial technology sectors due to the SEC’s behavior, explicitly stating that the SEC is inhibiting innovation by using law enforcement instead of making the rules better and easier to understand. Congress explicitly demands the SEC clarify guidelines by making them more articulate and improving them.

Currently, the SEC’s definition of a security cryptocurrency is any crypto which is purchased by investors from a centralized organization with the expectations of profits from their investments. Congress believes this classification is too broad since it basically includes all cryptos besides perhaps Bitcoin and Ethereum as security within that definition. Congress is asking the SEC to expand on its definition of crypto securities and to reference the Securities Act and Howey Test in its response. Furthermore, Congress wants the SEC to create easy to understand educational materials, like FAQs and examples, so crypto users aren’t confused.

Congress wants the SEC to create new guidelines to clarify how a crypto can transition from a security to a non-security due to decentralization, which is what happened with Ethereum. There are probably several cryptos launched with initial coin offerings (ICOs) that are sufficiently decentralized to not be considered securities that would still be called securities by the SEC due to the broad definition that is currently in place.

In the letter, Congress gives a shout out to SEC Commissioner Hester Peirce, who has stood up for crypto rights, unlike other SEC commissioners. Some people in the crypto space have labeled her ‘crypto mom’ for her nurturing attitude towards crypto.

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SEC Commissioner Says Bitcoin ETF Rejection Hurts Investors, Stifles Innovation

There has been a large amount of enthusiasm in recent months across the crypto space that the United States Securities and Exchange Commission (SEC) would approve a Bitcoin exchange traded fund (ETF), which would effectively put Bitcoin on the stock market, and make it easy for institutional investors to buy Bitcoin on all the major stock trading platforms.

However, these hopes were shot down when the SEC rejected the Winklevoss Bitcoin Trust ETF in a 92-page document detailing how the underlying Bitcoin market was not mature or safe enough to approve any Bitcoin ETF. This is combined with the revelation that the VanEck SolidX Bitcoin ETF, which is similar to the Winklevoss Bitcoin Trust, can have its decision delayed until 2019. One of the SEC commissioners who voted on the ETF, Hester Peirce, has issued a dissenting opinion that the SEC made the wrong choice, overstepped its bounds, and didn’t do its job.

SEC commissioner Peirce says, “The Commission’s action today deprives investors of this choice. I reject the role of gatekeeper of innovation—a role very different from (and, indeed, inconsistent with) our mission of protecting investors, fostering capital formation, and facilitating fair, orderly, and efficient markets. Accordingly, I dissent.”

Additionally, Peirce argues that approving a Bitcoin ETF would have created a channel for transparent and regulated investment into Bitcoin, which would protect investors. Not approving the ETF would ultimately keep investments outside of properly regulated channels and harm Bitcoin investors. This is quite the opposite of SEC’s mission to protect investors.

The SEC rejected the Winklevoss Bitcoin Trust based on the dynamics of the underlying Bitcoin market, not on the merits of the ETF itself. Peirce says that the ETF would have been able to follow all of the SEC rules and regulations to ensure lack of market manipulation and that it wasn’t appropriate for the SEC to reject the ETF based on the underlying market.

Winklevoss Bitcoin Trust had a surveillance agreement in place with the Gemini exchange, which Peirce thinks is sufficient because the ETF’s price would have been based on Gemini’s Bitcoin spot price. The SEC demanded surveillance agreements with larger Bitcoin exchanges outside of the United States, which is impractical and not necessary. According to Peirce, the SEC analyzed the Bitcoin market with methods used to analyze other commodity markets that are fundamentally much different, which is inappropriate.

The SEC left the door open for the approval of a