Hester Peirce, one of the five commissioners of the US Securities and Exchange Commission, has recently emphasized the positive potential of allowing the cryptocurrency market to self-regulate. Peirce made these remarks at the MIT Bitcoin Expo 2019, which was held on March 9th, within the context of a public talk with Gary Gensler, the former chairman of the Commodity Futures Trading Commission (CFTC).
Peirce’s remarks represented a response to Gensler’s proposal that a more detailed and unified federal level regulatory framework for cryptocurrencies would be indispensable. According to Gensler, this would cover not only trading platforms and exchanges that offer the trading of security tokens and other forms of complex cryptocurrency investment instruments, but also entities and brokerages that list commodities such as bitcoin. Pierce responded to Gensler’s proposal by saying:
“It is important to highlight the fact that people often regulate each other throughout their interactions with one another, and this represents the core concept behind Bitcoin, that it would be an ecosystem that has the capability of regulating itself. As problems emerge, individuals within that ecosystem would start thinking about solutions that can mitigate these problems. Alternatively, a government model can be established to address these problems, yet I don’t think that would be the only successful model”.
Gensler argued in favor of the extension of regulations on a national level to cover a broader range of cryptocurrency trading activities that focus on improving investor protection, coordinating efforts to prevent money laundering, and addressing the current discrepancies of regulatory and enforcement frameworks across different states.
Throughout a short debate that ensued with Gensler over mitigating this jurisdictional regulatory fragmentation, Peirce highlighted the “status quo” throughout which states are obliged to enforce laws of money transmission as per the Bank Secrecy Act yet may otherwise regulate various aspects of cryptocurrency markets with considerably various degrees of latitude. She thus reported:
“This represents the regulatory model we decided to choose. Again, I think that these markets have the potential to regulate themselves, only if we allowed them to do so”.
Peirce continued expressing support for minimizing regulatory manipulation whenever possible. Nevertheless, she stressed that security token offerings (STOs) should be launched according to SEC’s registration requirements and praised the major efforts of many cryptocurrency trading platforms to register with the SEC as crypto exchanges or alternative trading platforms in order to be able to compliantly offer the trading of security tokens.
Peirce’s support for crypto earned her the “Crypto Mom” moniker:
Pierce boasts a positive reputation among crypto supporters, which earned her the “Crypto Mom” moniker in response to her personal disagreement with SEC’s decision to reject the Winklevoss Bitcoin ETF, which was proposed last year to give US investors permissible access to bitcoin. Peirce believes that investing must be associated with some risks. No matter how protective regulations can be, something will always go wrong – businesses fail, market downturns take place, fraudsters cheat, nature strikes, etc. However, the losses associated with the prohibition of risk taking can also be enormous. Even though they cannot be accurately quantified, these losses have the potential to threaten investors’ welfare. She expressed these remarks in her speech that proceeded the Cato Institute’s FinTech Unbound Conference, stating that it was rather puzzling to her that it is sometimes difficult for regulators of security markets to understand the innate risks associated with investing, as capital markets are all about risk taking, and expressing queasiness towards taking risks is extremely inapt. She emphasized that financial markets are all about permitting investors to take market risks and quench their appetite for risk taking in order to be able to earn gains on their investments. They invest their capital in businesses with uncertain outcomes, hoping that they can generate profits on their invested capital.
Peirce believes that SEC’s decisions that aim at protecting the US investor may highlight a desire to minimize certain forms of risk taking investments that can undermine the reputation of the SEC in the likelihood of investor losses. However, Peirce believes that this form of investor overprotection is not needed, especially since Congress does not require the SEC to guarantee that the US investor would never suffer losses on their invested capital.
Regulations of security tokens under the SEC laws:
The US was the first country to initiate legitimization of cryptographic tokens in 2018. Thanks to the SEC, we can now delineate the difference between utility and security tokens. Today, a company can legitimately launch an STO via filing SEC’s Form D in order to raise capital alternatively to the traditional IPO fundraising funds. A company does not have to file a Form D prior to launching an STO, since security token offerings are exempt from the full requirements of SEC registration. The SEC registration permits the issuing entity to publicly advertise the STO event so long as:
– All participants in the token sale are accredited investors
– The issuing entity thoroughly verifies participants’ accredited investor status
In the end, it is worth mentioning that even though the SEC is entitled to protect investors, their regulations are sometimes confusing to advocates of the cryptocurrency economy. One of the most prominent pitfalls is that despite the recent SEC regulations of security tokens, each US state still has its very own securities act, which is referred to as the “blue sky law”, which regulates the offering and sales of securities. As such, a unanimous set of regulations at the national level is mandatory to avoid discrepancies between different state laws.
by: Tamer Sameeh