SEC Commissioner Hester

SEC Commissioner Hester “CryptoMom” Peirce Mentions Bitcoin 50+ Times in New Statement Recommending the SEC Embrace Innovation around Cryptocurrencies

SEC Commissioner Hester Peirce dissented from her colleagues this summer when the SEC denied multiple bitcoin ETF proposals. Last week, Peirce gave a speech clarifying her stance on crypto, bitcoin ETFs, and the SEC’s attitude towards innovation.

“Regulators need to hop out of their helicopters and onto the free range,” wrote Peirce in a tweet. The tweet linked to a transcript of Peirce’s statements at a recent fintech conference in San Francisco.

The speech broadly discussed the SEC’s regulatory duties, including how the commission approaches new technologies. Peirce used bitcoin and cryptocurrency as a specific example. Over the course of her speech, Peirce mentioned bitcoin 37 times and cryptocurrency 21 times. Crypto regulations were a key focus of the discussion.

Peirce’s speech was titled, “Motherhood and Humble Pie”. She was speaking before the Cato Institute’s FinTech Unbound Conference in San Francisco. The speech took place on September 12, 2018, although it was just published online today.

Here are some of the highlights of the speech, including the parts that pertain specifically to cryptocurrency, bitcoin ETFs, and blockchain:

  • Peirce began with the usual SEC disclaimer, claiming that the views expressed in the speech are her own and do not necessarily represent the views of the SEC. When Peirce talks about bitcoin and cryptocurrencies, she’s speaking about her own opinion – she’s not discussing the official stance of the SEC.
  • Hester Peirce mentions in the speech that she has been informally dubbed “CryptoMom” after famously dissenting from her colleagues earlier this year. Although Peirce does not have children of her own, she has “always wanted to be a mother, so acquiring this new title was quite an honor.”
  • Peirce envisions her parenting style as like a free-range mother and not a helicopter mom. “If I were a mother, I suspect that I would be a free-range mother rather than a helicopter mom.” Today’s parents are ultra-careful about protecting their kids from risks, and this attitude naturally leads to helicopter parenting.
  • Peirce connects that attitude to the SEC. The SEC, like a cautious parent, wants to protect investors from risk.
  • There’s a good reason the SEC is cautious about approving a new, risky asset. When something goes wrong with that asset, the SEC is blamed. “… the downside risk for the regulator is real: When investor risk-taking leads to investor losses, regulators inevitably face criticism for allowing investors to take risks that, in hindsight, appear to have offered nothing but downside.”
  • Peirce sees this approach as fundamentally flawed, saying, “The problem with such an approach, of course, is that something will go wrong. Something always goes wrong. Companies fail. Fraudsters cheat. Nature strikes. Market downturns happen.”
  • On the other hand, the losses caused by denying risky products is also real, according to Peirce: “But the losses of prohibiting risk-taking are also real. Even when we cannot readily measure them (or even because we often cannot measure them), these losses are potentially very threatening to investor welfare.” In other words, investors can lose money by buying a risky, manipulated asset, and those losses are always obvious, but investors also lose money when the SEC prevents them from investing in a particular asset.
  • This is where Peirce has trouble agreeing with her colleagues: The SEC will deny products because they’re seen as risky, but investment markets are all about taking risks. Says Peirce, “It puzzles me that it is so difficult for those of us who regulate the securities markets to understand this concept; after all, capital markets are all about taking risk, and queasiness around risk-taking is particularly inapt. A key purpose of financial markets is to permit investors to take risks, commensurate with their own risk appetites and circumstances, to earn returns on their investments.”

“Cryptocurrency May Be One Such Asset Class” That Will Become Mainstream Over Time

Peirce began her speech by connecting helicopter parenting to the SEC and investor welfare. The SEC wants to protect investors like helicopter parents want to protect children – even when it might not be in the best long-term interests of the people they’re trying to protect.

That’s when Peirce begins talking about cryptocurrencies and bitcoin. As mentioned above, Peirce mentions bitcoin or cryptocurrencies over 55 times in the speech, and crypto was a clear focus of her speech at the recent fintech conference.

Some of the highlights from the crypto portion of Peirce’s speech include:

  • Peirce talks about how there is clear enthusiasm for investors about cryptocurrency products and bitcoin, although the SEC has not yet shared the enthusiasm of investors: “It is clear that there is strong interest among some investors for this type of product, and innovators in the industry have made several attempts to respond to this interest. So far, however, the SEC has not shared these investors’ enthusiasm.[11] To date, the SEC has stopped all such retail products from getting to market. To shift my metaphor a bit, the SEC helicopters in with good intentions, but often without sufficient concern for the way its regulatory blades roil the markets, frustrate innovation, and potentially expose investors to greater risks.”
  • Peirce has a problem with the way the SEC has denied previous bitcoin ETFs. Peirce mentions the ETF proposed by the Winklevoss twins and their Gemini exchange. The SEC denied that ETF earlier this summer. This was where Hester Peirce famously dissented from her colleagues. Peirce explained the reason for her dissent in her speech: “I dissented from the disapproval because it seemed to turn on the Commission’s assessment of bitcoin rather than on the exchange’s plans for trading the exchange-traded product. The Commission’s order included an assurance that the “disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment.” The order, however, seemed to do almost that. It focused on the alleged flaws with bitcoin markets, rather than on whether the exchange proposing to trade shares of the trust had taken steps to ensure the orderly trading of those shares.”
  • “Private markets can and do regulate themselves,” says Peirce. “The crypto community includes lots of people who are very willing to speak up, criticize one another, and bring to light technological, corporate governance, and other perceived weaknesses in cryptocurrencies.” With that in mind, Peirce questions why the SEC believes it has authority to require the assets underlying securities be regulated as if they were securities.

The SEC Has Backed Themselves Into a Corner with Bitcoin ETF Denials

Peirce makes another interesting point in her speech. She believes the SEC has given poor reasons to deny previous bitcoin ETFs.

Those reasons haven’t just been poor: they’ve also forced the SEC into a corner. The SEC has denied previous bitcoin ETFs because they feel markets are too manipulated, too illiquid, and too problematic in other ways to support a regulated exchange-traded product.

Now, if the SEC ever does approve a bitcoin ETF, investors will assume that the SEC no longer feels that way about bitcoin markets. They’ll take it as a sign that the SEC approves bitcoin as an investment:

“…our approach creates the very real risk that investors might conclude—reasonably, but incorrectly—that any exchange-traded product approval means that we have done due diligence on the underlying asset and the markets in which it trades and that the exchange-traded product or the underlying asset carries our imprimatur.”

The SEC Needs to Encourage Innovation by Providing Greater Clarity and Certainty

Hester Peirce has made it clear before that she believes the SEC has a tremendous power to encourage innovation. As fintech companies flee the United States for more regulatory-friendly countries around the world, the country is losing some of the crypto and blockchain world’s biggest talent.

This is discouraging innovation, putting the United States at risk of falling behind its competition. Investors and companies have little reason to build in the United States when the SEC cannot decide anything meaningful about bitcoin regulations:

“…an essential step to encouraging innovations in our markets is to provide innovators with greater clarity and certainty in their interactions with the Commission and its staff. Innovators are often reluctant to ask for regulatory permission for fear of getting an adverse response. Even worse, perhaps, is getting no response at all or an unclear response. Certainty and predictability are important aspects of a pro-innovation environment.”

Conclusion

Hester Peirce’s full speech during the September 12, 2018 FinTech Unbound Conference in San Francisco is worth a read here. The SEC Commissioner clearly believes her colleagues can do a better job of encouraging innovation while still protecting investors. The SEC needs to decide whether it wants to be a helicopter parent or a free-range parent – and it’s clear to see which side SEC Commissioner Hester “CryptoMom” Pierce is on.

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