SEC commissioner opposes bailout of cryptocurrency companies – Crisis highlights innovators, says

By Steven Ehrlich

US Securities and Exchange Commission (SEC) commissioner Hester Peirce is among those who believe the recent cryptocurrency crash could put the industry on a more sustainable footing.

“When the situation is a little more difficult in the market, you find out who is really creating something that may or may not last long,” Peirce said in an exclusive interview with Forbes last Friday.

And that’s not the only benefit he believes could come from the fall in the cryptocurrency market.

The recent sell-off can also be a valuable opportunity for market participants, but also for the regulator, to see how the market works during times of intense stress. “It is useful for us to see the connection points. It is time to learn not only the market participants, but also the regulator, so that we have a better sense of how the market works,” he added.

Although it is a painful process and Peirce has made it clear that it does not downplay the suffering of anyone suffering from this fall, its assessment is correct.

After all, it has been four years since the industry last experienced such a collapse, long before several of the Commission’s key executives took office. As for Peirce, he was appointed commissioner to the US Securities and Exchange Commission in January 2018, at a time when the market for the initial public offering of coins was about to collapse. However, even then institutional investors had not turned to the cryptocurrency universe, derivatives markets were in their infancy, decentralized financing (DeFi) had not yet been established, and virtually no one had heard of NFTs until then.

Does this mean that the regulator is going to remain inactive, watching remotely what is happening in the market? Of course not.

Peirce noted that for the SEC the downturns are more instructive than the uptrends. “Scammers will find ways to take advantage of any market situation, to take advantage of other people. So I’m sure their tactics change and sometimes they chase people who are in the nadir; we may be more likely to learn lessons from such times.” .

The SEC also monitors any activities in the field of cryptocurrencies that fall under its jurisdiction, while continuing to train its staff to detect warning signs.

Peirce, for example, points out that investors or depositors should be wary of anyone who promises consistently double-digit returns. Without mentioning any company or service provider in particular, although leading cryptocurrency lending companies such as Celsius, BlockFi and Babel Finance have come under strong pressure in recent weeks, Peirce noted: “In the case of attractive returns, one has to wonder what “If there is no answer, then he has to think carefully about whether he really wants to make such an investment.”

In any case, Peirce has made it clear that it does not support any rescue efforts by any cryptocurrency entity. Although it noted that the SEC has not been designated by Congress as a regulator of systemic risks, Peirce said it would not favor the use of rescue programs to rescue cryptocurrencies anyway. Especially companies that deliberately ignored the basic principles of risk management, gave in to over-leverage and moved on a tightrope.

“The cryptocurrency market does not have a rescue mechanism. And this is considered one of the strong points of the market. I do not want to get involved and say that we will try to find a way to rescue you, if we do not have the authority to do so. But “Even if we had it, I would not want to use it, we really have to let this situation develop,” he added.

Difficult equation

However, this reasonably raises the question of how industry – and possibly regulators – can prevent history from repeating itself once this “winter” cryptocurrency’s blizzard subsides, whenever that happens. Things will not be easy.

A good barometer of the magnitude of the challenge is the painstaking effort by Congress to enact cryptocurrency-focused rules. Several attempts have been made to answer fundamental questions about the industry, such as whether a “token” should be considered a commodity, a security or something else. Even Peirce itself drafted the Safe Harbor proposal, which provides some regulatory “relief” to early token projects so that they can be “decentralized” and not classified as securities.

All of the above are important because these designations determine the jurisdiction of the regulatory authority. If a token is considered a security, then it is subject to the jurisdiction of the SEC. Commodities do not fall within its scope, although it is interesting to note that a “sister” authority has been set up, the Commodity and Futures Contracts Committee (CFTC), which currently oversees derivatives markets and digital commodity contracts.

The next positive change concerns a provision in the proposed Responsible Financial Innovation Act, a bipartisan initiative led by Senators Cynthia Lummis (Republicans) and Kirsten Gilibrand (Democrats), which aims to provide additional regulation to each branch. the classification of tokens up to the regulations for stablecoins and the minimum (de minimis) exceptions for small cryptocurrency transactions, so that a user does not have to pay capital gains tax for a cryptocurrency used to buy coffee.

The ultimate goal is to settle the vague jurisdictional issues between the Securities and Exchange Commission and the US Commodity and Futures Commission, with industry observers believing that the proposed legislation will turn the tide in CFTC favor.

For its part, Peirce is moderately optimistic about the bill, but is generally in favor of expanding the debate on cryptocurrencies in the Capitol. She does not seem to care if it falls within the jurisdiction of the SEC, nor does she resent the fact that her “Safe Harbor” proposal has not been implemented. He just wants to have a clear guide for anyone who will follow. “I do not claim laurels for the Safe Harbor bill. I do not care if we act differently, all I want is a clear legal framework.”

Of course, in words it is easier than in practice. After all, there is no perfect law and technology approach comes with many challenges, such as ensuring that it adapts to changing conditions and market developments. After all, almost five years ago almost no one expected stablecoins and NFTs to monopolize public debate at some point, as is the case now. Therefore, the regulatory framework should be based on functionality and not on technology.

Peirce leans towards the first view, however it still believes that there is room for exceptions. “I was somewhat critical of technology-specific rules. And to some extent my proposal, Safe Harbor, falls into that category, as it contains a technology-specific approach. My answer to that is that our Congress empowered, under the original securities legislation, to adapt and use exceptional applications to provide the conditions and assistance required for a particular technology. to last… at the same time, I think sometimes we have to recognize the unique features of this technology ”.