Meet The Watchdog Called CryptoMom (#GotBitcoin?)
SEC’s Hester Peirce—Republicans’ muse on financial regulation—has won fans for her support of the digital-currency market. Meet The Watchdog Called CryptoMom (#GotBitcoin?)
Cryptocurrency startups and traders fighting stricter regulation think they have their champion. They call her CryptoMom.
Hester Peirce, a Republican member of the Securities and Exchange Commission with libertarian leanings, has made waves with a number of contrarian positions since joining the agency last January. She has drawn attention for frequent votes against enforcement actions and calling on the SEC to moderate how it levies fines against companies and some individuals accused of wrongdoing.
But it was the vote she cast in July—the lone one in favor of allowing what would have been the first retail investment fund tied to bitcoin—that won her the maternal moniker from traders eager to see easier access to the cryptocurrency.
“A lot of the crypto guys are completely new to securities regulation, and in many cases they think how it works is terrible,” said Sara Hanks, a lawyer who leads CrowdCheck, a firm that advises crypto startups on complying with securities laws. “She’s been more willing to say, ‘Let’s not stifle innovation.’ ”
Ms. Peirce, who doesn’t have children, has embraced her new nickname and recently told a group in San Francisco that she would be a “free-range mother,” while the SEC was a “helicopter mom” trying to protect the population from investments that look too exotic or risky.
Ms. Peirce’s regulatory philosophy is well known inside the agency, where she has voted against settlements or penalties in about 10% of all cases handled in the SEC’s in-house courts, according to analysis of agency records.
A former Republican commissioner who recently left the SEC, Michael Piwowar, voted against penalties or entire cases just 3% of the time, according to the same analysis, which examined SEC votes from January 2016 to November 2018. The SEC’s Democratic members voted against enforcement settlements about 1% of the time, the figures show.
Behind closed doors, Ms. Peirce has sometimes questioned the SEC’s enforcement attorneys so aggressively that she later apologized for remarks that could be seen as denigrating their work, according to people familiar with the matter. She declined to comment on those interactions.
One such case involved a crypto company known as Airfox, the people said, a startup that raised $15 million through the sale of a digital coin that the SEC said skirted investor protection laws. Airfox in November agreed to pay a $250,000 penalty and offer money back to investors. Ms. Peirce voted against the penalty, according to SEC records.
In a more recent action, finalized on Dec. 18, Ms. Peirce voted against suspending from the accounting industry a former Panasonic Corp. executive accused of misleading auditors about a backdated contract designed to boost revenue in one quarter. She said the SEC had signed “the death warrant” for the former financial officer by barring him from his profession for at least five years, one of the people said.
In an interview, Ms. Peirce said she disagrees with fining public companies when shareholders may have already been hurt by a drop in the company’s stock price when fraud or misconduct was discovered. On the other hand, she says, she is sympathetic to a new generation of entrepreneurs who are trying to apply the technology that underpins bitcoin to other uses.
“I think it’s OK to hold their hands a little bit, to say we want you to be able to raise money if you’re not ripping anyone off,” Ms. Peirce said. “We also want you to do it in a way that complies with our rules.”
Crypto-asset developers and traders closely parse commissioners’ statements for what they might signal about future regulations. Supportive remarks can lift prices, while bearish decisions can send asset values plummeting. Bitcoin is down more than 80% from its December 2017 high, and the total market value of all cryptocurrency, currently about $111 billion, has fallen 87% from its January 2018 high of $827 billion.
Ms. Peirce, 48 years old, grew up in Cleveland Heights, Ohio, where her father was an economics professor at Case Western Reserve University. He ran unsuccessfully for governor of Ohio on the libertarian ticket in 2006.
Studying economics at Case Western “radically shaped my view of things,” she said, including her views on how regulation distorts natural incentives for businesses and entrepreneurs.
After law school at Yale University, she worked at the SEC for eight years and in 2008 joined the Senate Banking Committee as a Republican staff member. In 2012 she took a position at a libertarian think tank at George Mason University, where she co-wrote a book that criticized the Dodd-Frank law, the sweeping financial-overhaul measure that passed while she worked in the Senate.
J.W. Verret, a law professor at George Mason, said he mentioned the book when he interviewed in 2013 with Rep. Jeb Hensarling, the chairman of the House Financial Services Committee. “He said, ‘Oh, you mean this book?’ And he pulled it off a stand right next to his chair,” Mr. Verret said. “She wrote the tome for how Republicans think about the post-Dodd-Frank era.”
In 2017, the White House nominated Ms. Peirce for a seat on the SEC, a move that was anticipated given her close ties to conservative lawyers such as Paul Atkins, a former commissioner who served as a regulatory adviser to President Trump after the 2016 election.
Barbara Roper, head of investor protection for the Consumer Federation of America advocacy group, said Ms. Peirce fits the standard for a newer generation of Republican commissioners at the agency who are more confrontational and conservative than the establishment lawyers who occupied the roles two decades ago.
“For conservatives, she’s like the ideological purist for deregulation and minimal government intervention,” said Ms. Roper, who often pushes for stricter oversight of brokers and money managers. “I think she’s perfectly willing to hold a hard line as the condition for getting her vote.”
Friends say Ms. Peirce’s interest in cryptocurrency comes, in part, from her libertarian leanings.
The SEC has cracked down in the past year on deals known as initial coin offerings, a method of financing cryptocurrency ventures. The regulator says many ICOs were fraudulent, while most failed to comply with rules that require investors be given audited financial statements and detailed risk disclosures.
In enforcement cases involving crypto assets, Ms. Peirce has often questioned whether defendants understood how their token sale might be deemed a security, according to people familiar with the matter.
But it was Ms. Peirce’s criticism of the SEC’s decision to reject an exchange-traded fund proposed by Cameron and Tyler Winklevoss that won her cult-like status among crypto boosters. She disputed the SEC’s basis for rejecting the product, saying the logic, if extended to other commodities, would have prevented the sale of exchange-traded funds that track the price of gold or oil.
“There is a lot of advocacy in the crypto community for abolishing regulations or ignoring them, but what I liked about her dissent was that it came from a reasoned place,” said Andy Bromberg, co-founder of CoinList, a startup that helps crypto projects raise capital.
US SEC’s Crypto Mom: ‘I Think We Need To Be A Little Less Paternalistic’
United States Securities and Exchange Commission (SEC) Commissioner Hester Peirce recently spoke on innovation in cryptocurrencies, calling regulators excessively paternalistic.
At the Digital Asset Compliance and Market Integrity (DACOM) Summit in New York today, Sept. 26, Commissioner Peirce led a Q&A session that featured extensive discussion of the future of regulation for crypto assets.
Hosting the summit were law firm Hogan Lovells and Solidus Labs, a market surveillance tool provider.
Peirce’s benign attitude towards digital assets has earned her the moniker Crypto Mom, towards which she expressed some fondness at the beginning of her appearance at today’s summit:
“It’s been an honor to be adopted by a group of people who are really thinking in such exciting and interesting ways and trying to think about ways to change the world.”
Regarding Cryptocurrencies, She Predicted Today That:
“As technology changes, we’ll see them becoming much more the money of the internet.”
In other comments, the commissioner expressed some degree of frustration with the pace of the SEC’s regulation, saying “Frankly, sometimes the SEC needs a push from Congress.” She continued:
“If you want a government that’s more forward-thinking on innovation, that means that if something goes wrong, you can’t go running back to the government and say ‘Hey, you didn’t protect me from myself!’ […]I think we need to be a little less paternalistic.”
Hearing Earlier This Week
As Cointelegraph reported at the time, several commissioners from the SEC including Peirce testified before the House Financial Services Committee on Tuesday, Sept. 26. Peirce’s commentary at the time expressed similar suspicion towards regulatory overreach.
As the commissioner phrased it at the time, she promoted a philosophy of “regulatory humility,” the need to “always be asking if what we’re doing is right.”
Hester Peirce’s Last Effort At SEC As Wilshire Phoenix BTC ETF Is Rejected
Securities and Exchange Commissioner (SEC) Commissioner Hester Peirce has published a dissenting statement in response to the Commission’s rejection of Wilshire Phoenix’s Bitcoin Exchange Traded Fund application.
In her statement, Peirce slams the SEC for its biased treatment of Bitcoin-related products with the passion of a “Bitcoin maximalist.” Given that the commissioner’s term expires in a little over three months, at the beginning of June 5, it raises a question: Could Peirce be positioning herself for a life after the SEC?
Anti-Bitcoin Bias Among Regulators?
In her latest statement, Commissioner Pierce claims the SEC’s handling of Bitcoin-related products is inconsistent with Section 6(b)(5) of the Exchange Act which stipulates requirements for an exchange where the asset will be traded ‒ it needs “to prevent fraudulent and manipulative acts and practices [and] to protect investors and the public interest,” but doesn’t have such requirements for the asset itself:
“As I explained in the Winklevoss Dissent, this provision requires the Commission to look to the rules of the exchange seeking to list the product, not the attributes of the assets or markets underlying the product to be traded.”
SEC Will Never Approve Bitcoin-Related Products?
Peirce surmises that based on “the ever-shifting standards” that the SEC applies to the Bitcoin products, no filing will ever get approved. Furthermore, she believes that this attitude — instead of protecting retail investors — deprives investors “of the ability to access bitcoin in markets within our regulatory framework.”
In addition, the Commissioner states there was not a single “pre-Bitcoin” case where the SEC analyzed whether the volumes were “significant when compared to the underlying commodity markets.” She concludes:
“In at least one case, the Commission approved a rule change to list shares of a product referencing a futures market that, at the time of approval, had no trading whatsoever.”
Peirce’s Worst Fears Confirmed
Commissioner Peirce asserts that the concerns she had previously voiced are being borne out: that a conservative and inconsistent approach that the SEC takes toward Bitcoin-related products “impedes innovation in this country and threatens to drive entrepreneurs, and the opportunities they create, to other jurisdictions.”
According to Peirce, not only is this treatment of crypto products “impeding innovation,” but even worse it is “setting precedent that will make it more expensive to submit rule filings to bring other listed products to market, and more difficult for the Commission to approve them.”
The SEC is comprised of five commissioners, each appointed by the U.S. president for a five-year term. With Peirce leaving, the likelihood that the Commission will become more crypto-friendly in the foreseeable future is low.
Hester Peirce Says SEC Is A Partner To Crypto, As US States Chase Regulations
Some of the internet’s biggest companies — the likes of Amazon, Google and Facebook — were created from the ruins of the dot-com bubble. Likewise, the crypto ICO bubble seems to have many states rushing to put blockchain laws on the books in order to attract businesses.
Recently, the introduction of the “Digital Asset and Blockchain Technology Act” by New Jersey Assemblywoman Yvonne Lopez has raised very little attention in the mainstream media, but there are important factors to note when looking at the United States regulatory environment.
Jay Patel, the founder of venture capital firm Edge196, spoke to Cointelegraph, expressing an opinion that this announcement signals that “blockchain companies are further reaching maturity in both ideas and financial engineering.”
Following In The Footsteps
Unlike Wyoming’s comprehensive laws, which are designed to support the growth of blockchain companies to flourish while protecting consumers, the New Jersey bill follows the lead of its neighbors in New York in taking an equivocal stance on cryptocurrencies.
The jury is out on whether the Empire State’s BitLicense is helping or hindering the growth of the digital currency market. In a wide-ranging conversation with Cointelegraph, SEC Commissioner Hester Peirce noted the power that states have in regulating cryptocurrency:
“States have complicated rules as well as different roles to play in the future of cryptocurrency. Currently, states are making decisions about how to use their own authority in a way that complements the SEC framework.”
Since its inception in 2015, only a handful of companies have been granted a BitLicense in New York, despite hundreds of companies doing business around digital money.
The process is creating a bottleneck and business exodus, leading New York to consider changes and even potentially charging firms for governmental oversight. Bob Cornish, a partner in the Washington, D.C. office of the law firm Anderson Kill, told Cointelegraph:
“The proposed legislation from New Jersey is significant not for what it actually does but rather for its balancing of the need for regulation on the one hand, and the desire of the state to be able to attract businesses from New York. New Jersey certainly does not want to attract questionable industry participants, but certainly wants to appear more friendly than New York.”
New York’s recent report that the Department of Financial Services is undergoing a review of the four-year-old BitLicense has created even further confusion in the crypto marketplace. Two proposed changes affecting coin listings are currently under consideration by New York legislators, which the DFS has outlined in order to create a stronger step forward.
The first one states that approved coins will be listed on the DFS’s website and any licensee may choose to list them after notifying the department. Additionally, the DFS will propose a framework for the creation of coin-listing policies.
Existing licensees should tailor their current frameworks and submit a coin-listing to be approved by the DFS. Once greenlighted, the company may self-certify new coin listings on an ongoing basis.
Being able to list on the DFS’s site and then self-certify is a positive step for currency issuers, as it makes the process much easier and more transparent. It could also help eliminate fraudulent claims. However, the proposed framework could hamper entities like Idex that allow for decentralized transactions, with anyone being able to add any token.
Therefore, atomic swaps will need to evolve to ensure compliance with this change, should it be approved. Utilizing a rating system like the Crypto Rating Council or requiring that users utilizing atomic swaps come from Know Your Customer and Anti-Money Laundering environments only, like SmartSwap does, will help bring decentralized exchanges closer to compliance.
After exchanges and cryptocurrency technologists create projects at great expense and utilize the Crypto Rating Council, they still may run afoul from securities laws, as the SEC’s opinion may differ from that of the CRC on whether or not the token is a security.
Time To Make Amends
According to Commissioner Peirce, it is time for cryptocurrency entities to stop looking at the SEC as an enemy, but rather as a partner. Peirce states her team’s goals are “to provide useful information into the cryptocurrency space,” adding:
“If you are not sure about where your business stands, come talk to us at the SEC. The best way to approach us is through FinHub, and while we will not give legal advice, we will give you things to think about. So, give us a call and have a conversation.”
However, the issue of New York having such a low number of licensees still stands. Combined with struggles to afford oversight, what can New Jersey expect as it continues the trend toward heavy regulation of crypto companies?
Let’s break it down in terms of the New Jersey bill’s core. The bill defines digital assets as digital consumer assets, digital securities and virtual currency. Those who conduct business activities that involve the exchange of these currencies must be licensed.
Those who apply for a license must meet 15 rigorous standards, including transparency of business operations; a history of criminal convictions; no litigations pending against them; adequate insurance coverage; as well as a detailed and verifiable history of any other business actions related to digital asset transfer.
Overall, the bill appears to mirror other states in its definition of crypto, transactions and licensing requirements. In an interview with Cointelegraph, Jonathan Jaranilla, a co-founder of LedgerAtlas — a company focusing on jurisdictional assistance for cryptocurrency — noted:
“New Jersey and other jurisdictions are playing the arbitrage game similarly to what the cannabis industry has seen — this is a good thing. States should take advantage of their opportunity to move fast, be innovative, and challenge their counterparts when creating guidelines and laws, especially for crypto.”
It is clear that the Financial Crimes Enforcement Network and other federal entities will hold all companies to the same high standard. Treasury Secretary Steven Mnunchin has further confirmed this by informing all entities transacting in Bitcoin, the pending Libra stablecoin or other cryptocurrencies will need to comply with federal guidelines.
Andrew Yang, who recently ended his bid for the U.S. Democratic presidential nomination, was one of the few candidates to address the issue of the conflicting regulation of cryptocurrencies in the U.S., citing that although there is no national regulatory framework for crypto, “states have come up with a patchwork of varying regulations that make it difficult for the U.S. cryptocurrency markets to compete with those in other jurisdictions, especially in China and Europe.”
Hearings on New York’s proposed changes closed on Jan. 27. The New Jersey bill is currently before the New Jersey Assembly’s Financial Institutions and Insurance Committee, which opened its two-year session on Jan. 14. As for the federal government’s issuance of new crypto regulations, it’s anybody’s guess when that will be revealed, as markets have been roiled by the current coronavirus epidemic.
The convergence of crypto regulatory activity at the state level in New York, New Jersey, Wyoming as well as at the federal level could move the crypto market in a new direction — or remain a patchwork of regulations that will continue to hinder the growth of the U.S. crypto market. But with the SEC as a partner to the cryptocurrency community, the shared future looks very strong.
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