SEC Commissioner Hester Peirce is taking a “liberty-loving perspective” when it comes to cryptocurrency and DeFi, contrasting with statements by the agency’s chairman on Tuesday.
For Peirce, who joined a panel hosted by The Defiant and DeFi Watch on Aug. 4, if users are voluntarily deciding to trust the code over a company then they accept the risks and government regulators shouldn’t need to clamp down on the industry.
“They’re dealing directly with one another and they’re selecting to choose to trust the code and not to trust a centralized intermediary,” said Peirce. “I tend to approach things from a pretty liberty-loving perspective, which is that if two people decide they want to enter into a transaction, and they’re doing so voluntarily, with full information, that should be fine.”
Hester’s opinions are in stark contrast to SEC chairman Gary Gensler’s remarks a day before on August 3 during the Aspen Security Forum.
“This asset class is rife with fraud, scams and abuse in certain applications. There’s a great deal of hype and spin about how crypto assets work. In many cases, investors aren’t able to get rigorous, balanced and complete information,” Gensler said. “If we don’t address these issues, I worry a lot of people will be hurt.”
He called for the regulation of stablecoins and DeFi tokens that would fall under the category of securities.
Peirce sees DeFi as an entirely different system intended to cut out intermediaries, which can’t be effectively governed by existing regulatory frameworks for traditional finance.
From this point of view, the goal would be to educate people on DeFi so they can enter the ecosystem and interact with the technology with a better understanding of the risks and rewards.
But Peirce also recognized that some of her colleagues at the SEC come from “a more regulatory perspective,” and believes the real sticking point will be whether or not DeFi is truly decentralized she said in a panel with Compound Labs CEO Robert Leshner and crypto focused US attorney Gabriel Shapiro.
“If you want to make a case that you’re something different than the CeFi or TradFi system, then you have to show that you’re doing something radically different, which from my perspective requires decentralization,” she said. “If the trust is really coming from the code, that’s something very different than if the trust is coming from one company or a group of people.”
This isn’t the first time the question of DeFi’s decentralization has come up within the context of U.S. governmental regulation.
During a U.S. senate hearing exploring crypto regulations on July 27, one of the expert witnesses, professor Angela Walch, brought up concerns over what she dubbed “pockets of power” within supposedly decentralized spaces. According to Walch, these include core software developers, responsible for creating and maintaining blockchain protocols, and miners, who can rearrange transactions in block to extract extra profits.
The biggest statement in this regard was likely made by William Hinman, former director of the division of corporation finance at the SEC, in 2018, when he said Ether is not a security in the SEC’s eyes, and that “Over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required.”
Peirce proposes a “safe harbor” period of three years for blockchain-based networks to get to this sufficiently decentralized stage.
An Uphill Battle
Regardless, Peirce recognizes that even if the SEC wants to, regulating crypto may be an uphill battle due to the slow pace of government action compared to the fast pace of crypto innovation.
“It can’t happen with a regulator sitting, looking over your shoulder, approving every step of the way,” Peirce said. “So regulators need to do a better job of figuring out how to work with innovators to deal with innovation.”
SEC chairman Gensler’s perspective mainly concerns consumer protection over crypto assets that mimic traditional assets already regulated by his agency.
“Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These products are subject to the securities laws and must work within our securities regime,” said Gensler during the forum.
Nevertheless, Gensler isn’t fully adversarial towards crypto. During the forum, he said he’s open to making space for crypto exposure in TradFi, and providing these comply with federal security laws, is open to approving Bitcoin future ETFs.
While Gensler may not be a full-throated DeFi advocate, Peirce will be advocating for regulations that don’t thwart the growth and development of legitimate cryptocurrency platforms.