Since being appointed in 2018 by former president Donald Trump, SEC Commissioner Hester Peirce has been affectionately known as “Crypto Mom” throughout the industry. Long seen as a champion for bitcoin and crypto adoption, she is best known for sharply-worded dissents to rejected bitcoin exchange-traded fund applications that often argue for bitcoin to be treated the same way as any other type of investable asset. The implication being that her fellow commissioners have unjustifiably held the digital currency to a different and more stringent set of standards to the point where they could be weighing in on whether or not a given financial product is a worthwhile investment.
In our discussion, Peirce makes clear that the delay in approving a bitcoin ETF is not without consequence, as crypto-hungry investors are forced into other, perhaps less reputable avenues, to gain exposure to the new asset class. Additionally, the crypto agenda for the commission will only get more arduous and complex as they wrestle with new questions and challenges such as decentralized finance (DeFi) governance tokens.
Forbes: Is there a general theme or two that you would say ties together some of the regulatory enforcement actions that the SEC has taken and completed regarding crypto?
Peirce: I should say at the outset that everything I say represents my own views and not necessarily those of the chairman or my fellow commissioners. I think that’s really important in this area because I have taken a different approach from my colleagues on a lot of these issues.That said, there are some areas where we are united, such as when we find straight out fraud in the crypto space, which is no different than what we see in any other area. It’s just wearing a new coat. The second theme has been to say to crypto folks that if you’re setting out to do a capital raise, you’ve got to do it in compliance with the rules of the SEC. The third piece is that it’s not always easy to tell whether what we’re dealing with is actually a capital raise or not. And so that’s where I would like us to provide more clarity. This is the area where I’ve disagreed, I guess, with my colleagues.
Forbes: I’m sure you’re well aware of the excitement in the crypto industry about former CFTC Commissioner Gary Gensler being nominated for SEC chair (as of this writing the Senate Banking Committee has approved sending his nomination to the Senate floor for confirmation). What are your expectations for him and potentially for the commission, as it pertains to bitcoin and crypto in general?
Peirce: I think it’s really wonderful to have someone coming in who knows the industry quite well and has spent time interacting with people who are actually building stuff. He’s going to have a very busy agenda—much of which will have nothing to do with crypto. So it is important to manage expectations a bit. But I do think that he is someone who is sympathetic to the call for regulatory clarity. For more information on Gary Gensler’s background please see our primer on the Biden Administration in the November 2020 issue.
Forbes: There are new bitcoin ETF applications in front of the Commission. There’s a lot of excitement about it, especially with the rally: bitcoin and the broader crypto market have been performing exceptionally well over the last six months or so. Has this impacted the likelihood of an ETF potentially being approved or has this frothiness caused the commission to potentially be a bit more cautious?
Peirce: We look at each application on its facts and circumstances, and that will drive where the decisions go. However, people are looking at these past rejections to try to figure out what it is they need to answer. My view has been that we’re overdue on approving one of these things. I also think we’ve dug ourselves into a bit of a difficult hole by setting standards for approval that are difficult to figure out how to satisfy. So I really don’t know where we’re going to go. I think that a new chairman with a fresh perspective can be helpful in rethinking the approach to approving exchange-traded products. What the price of bitcoin is doing is really not the business of the SEC. That’s not what we look at when we’re looking at other underlying markets. But I think the bigger driver is that there are a lot of avenues now or other ways to access bitcoin and ether. And I guess the question will be at what point do we start to say: “Wait a minute, retail investors are accessing this stuff in other ways. Would it be better for us just to allow them to access it through these more standard exchange-traded products that are more familiar?” We just saw Canada approve one or more ETFs. I think those kinds of things can have a real effect. But again, the standard we’ve applied is different from what we’ve applied to other types of products, so it’s hard for me to predict.
Forbes: A bunch of publicly traded crypto and blockchain-related stocks have taken off. MicroStrategy has returned about 600% to investors over the last nine months. There are several mining stocks, including Riot and Marathon, which have gained more than 1,000% over the last six months, and a lot of people are investing in these stocks because they’re easily accessible. The stocks have almost become de facto ETFs. Do you think this is healthy? Can this level of activity have an impact on any ETF being approved?
Peirce: The fact that retail investors are looking for other ways—at companies that have some kind of connection with crypto to get access to it—I think that’s another arrow in my quiver for saying: “Look, why don’t we open up an avenue that is, again, more standard for getting access through our securities markets?” And that would be an exchange-traded product. We have strong and time-tested rules on what public companies need to disclose about what they’re doing. I would look to our corporate disclosure rules and the review process that we have for making sure that investors are getting the information they need to make good decisions about whether to invest in a particular public company.
Forbes: I want to talk a little bit about Coinbase. I’m just going to assume you can’t discuss whether or not you think its direct listing will be approved. But I’m more interested in your thoughts on what that might mean for the perception of the crypto industry as a whole if it does get approved? And if you think that could potentially be another arrow in your quiver for an ETF?
Peirce: That’s correct, I can’t talk about any particular company’s IPO. The fact that there’s a lot of economic activity going on in the crypto space means that you’re going to see more touchpoints with our markets through public companies becoming involved somehow with crypto: through investment advisors and broker-dealers wanting to interact with crypto on behalf of their clients, hedge funds, others wanting to be involved. I think all that leads to a push for stricter standards in the industry, which then invites in more institutions. So it becomes a bit of a cycle: as institutions come in, they ask for higher standards, and once those higher standards are put in place, more institutions come in. That kind of cycle is helpful in demonstrating that there are a lot of protections in place in the market that might then make the staff and my colleagues more comfortable with an exchange-traded product.
Forbes: Decentralized finance (DeFi) has been the hot trend in crypto over the last six months and a lot of people are moving into space. Bitwise just launched a DeFi trust, where it is taking private placement subscriptions for certain composite indexes of some of the biggest DeFi governance tokens out there. What are some of the things you would look for to determine whether or not they may or may not be securities?
Peirce: One of my concerns has been that we are looking at tokens as if they’re securities when the question should be: Is the entire sale a securities sale, because these are investment contracts? Are the tokens being sold as part of an investment contract? When you start to look at the tokens themselves and try to figure out whether they’re securities, it does get kind of confusing. In particular, it’s so hard in the DeFi landscape because there’s such variety. This is why I encourage individual projects to come in and talk to the SEC because it really does require a look at the very particular facts and circumstances.
Now, if you truly achieve decentralization, then I question whether it makes sense to apply the securities laws. Because the securities disclosure laws are designed for a situation where I’m running a company, I want you to buy shares of my company, and I have all the information. You need that information in order to figure out whether you want to buy. It’s the information asymmetry problem. If you really have a decentralized project, then there is no one who has a monopoly on information. At that point, who would even be providing the information? So that’s something we have to think about.
Now, if you’re talking about a decentralized exchange. Again, it becomes very complicated. What are we regulating if it really is just a smart contract running? This is an interesting theoretical question. But in terms of individual projects and whether things are going to be categorized as securities, I think there’s a real need for us to provide more clarity around that.
Forbes: Obviously, the GameStop hearings are a big deal in crypto and the broader financial sector. Can you provide an individual perspective on what transpired? Or if you can’t speak to that, I’d love to know what you’d like to potentially come out of all this with respect to more transparent and efficient capital markets.
Peirce: We’re doing a deep dive into what happened, so it’s premature for me to say that there are a couple of positive themes that have come out of this. One is that there is room for retail investors to participate in our markets to contribute information to the mix of information in the market. Obviously, they need to do that with great care. They need to understand they can lose money when they invest. But it shouldn’t be a market that is just for institutions and not for individual retail investors to play a role. Another important theme, I think, is that we do want more of the population to invest, whether it’s directly or through mutual funds and ETFs. So we do want to make sure that the capital markets work in a way that includes as many people as possible.
Now certainly, we’re looking at a number of things coming out of these events: make sure that there is clear transparency around things like broker-dealers, relationship with their customers, securities lending. One thing that should be underscored is that the markets worked quite well, from a mechanical plumbing perspective under extremely high volumes and volatility, and that’s a good thing. There are definitely lessons to learn from all this. But also we shouldn’t just assume that things have to change for the sake of changing; we really have to do the work to figure out if things need to change.
Forbes: Thank you.