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If the focus of the crypto industry is still on trading crypto assets, it’s a sign that the industry hasn’t lived up to its potential, according to
Securities and Exchange Commissioner Hester Peirce often feels she's "on an island by myself" within the SEC. "I view these things differently than some of my colleagues have viewed them."
That's an understatement. While SEC Chair Gary Gensler has made very clear that he views most crypto assets as securities in need of SEC registration, and has painted the industry as a Wild West, Peirce, one of five commissioners at the U.S. banking regulator, has long been openly pro-crypto, though in her framing, "I'm more pro the ability of people to try things and experiment with things, and I think there's been a lot of interesting experimentation in the crypto space, and I expect there'll be a lot more in coming years."
Peirce spoke to Decrypt last week for the latest episode of the gm podcast. She prefaced her comments, as she always does, by saying they are her own, and do not represent the views of the SEC. Peirce was initially nominated to serve as an SEC commissioner by President Barack Obama in 2016, but the Senate did not act on her nomination until 2017. She’s currently serving a 5-year term, which is set to expire in 2025. "Because I've been at the SEC since 2018, to see no real movement—positive movement—in that time, is frustrating."
She said she first heard about Bitcoin around 2012 and has been learning about the broader crypto ecosystem ever since. But her interests are broader than that, she said, adding that her optimism around the industry has more to do with her desire to change the SEC’s approach to innovative new financial products—crypto and otherwise.
“It’s wanting to keep the doors open to innovation, wanting to make sure that the financial industry is not one that’s dominated by a few large firms that keeps everyone else out. Because there are a lot of people with great ideas and I think it’s great that people are challenging the way we’ve done things,” she said.
The FTX effect
At the time of Peirce's interview last week, former FTX CEO Sam Bankman-Fried hadn’t yet been arrested in The Bahamas and the SEC hadn’t yet charged him for allegedly defrauding equity investors in the company. Since Monday night, the Department of Justice has also levied charges, alleging he committed conspiracy, wire fraud, and money laundering, and the CFTC plans a lawsuit for commodities law violations.
Cracks in the foundation of FTX started to show in early November, when a report revealed that the crypto exchange's sister company, Alameda Research, held billions in illiquid FTT (the exchange token of FTX) on its balance sheet. A subsequent tweet from Binance CEO Changpeng Zhao referencing those "revelations" triggered massive withdrawals from FTX. After a few days, FTX had to freeze funds. The company sought a buyout first from Binance, but ultimately filed for bankruptcy on November 11.
Last week, Peirce said she’d been telling people that everything Bankman-Fried came to represent is not, in her view, the extent of the crypto’s industry’s potential.
“When I talk to people, I remind people, one: that crypto is not about centralized entities; two: that crypto is not about trading, either," Peirce said. "Although there’s been a lot of emphasis on trading in the last several years, that is not the core of what crypto is. And if it is the core, it’s probably not living up to its potential. And three: it is still early days, so we do have more to see.”
Now that Bankman-Fried has been arrested and charged by multiple entities, Peirce’s warning about regulatory frameworks born out of reactions to the FTX blowup is especially prescient. What she hopes not to see, she said, is another big legislative push that happens before thorough analysis has been done, like after the 2008 global financial crisis.
“I think we should all be on the lookout for regulatory frameworks that are developed in the context of enforcement action, because it’s a very tempting thing for regulators to do that,” she said. “And it just cuts everybody else out of the process.”
She recalled that the 2008 recession was the catalyst for a lot of new regulations. The biggest and most sweeping measure was the Dodd-Frank Wall Street Reform and Consumer Protection Act, which itself paved the way for the Consumer Financial Protection Bureau, Financial Stability Oversight Council, and the Volcker Rule to curtail speculative investments.
It’s telling that the DOJ itself has compared the FTX collapse to Lehman Brothers. While Peirce said she has been vocal in not wanting to see a big wave of reactionary regulation, she recommends that companies in the crypto industry proceed with caution.
"I urge people: The reach of the securities laws is very broad," she said. "If you have any doubt—even if you don’t have any doubt—it’s good to think about calling a lawyer.”