The Securities and Exchange Commission (SEC) is facing new controversy, as United States Representative Warren Davidson has announced plans to introduce legislation that would remove SEC Chair Gary Gensler from his role. The move follows the SEC’s proposed rule amendments, which could bring certain brokers under additional regulatory scrutiny and redefine an “exchange.” While Gensler has said the proposed changes could benefit investors and markets, SEC Commissioner Hester Peirce has criticized the move, accusing the regulator of stifling new technology and entrepreneurship.
Peirce, who is known as “Crypto Mom” for her pro-crypto positions, has criticized the SEC’s approach to crypto regulations. She believes that the SEC has been expanding its reach to solve problems “that do not exist” and has refused to alter current regulations to allow room for new technologies and new ways of doing business. Peirce has also accused the SEC of using the “notice-and-comment rulemaking process” as a threat. In her opinion, a concept release should have been issued instead of the proposed rule amendments, given the concerns over their ambiguity and scope, and the SEC’s “limited understanding” of the space.
The SEC has faced criticism for using enforcement actions to develop the law on a case-by-case basis, rather than creating clear regulations. The regulator has launched more than a few high-profile actions against crypto companies such as Ripple, LBRY, and Coinbase over alleged violations. It has also taken aim at staking and stablecoins, prompting some critics to argue that the SEC has been stifling innovation in the crypto space.
Meanwhile, Davidson’s proposed legislation to remove Gensler from his role as SEC Chair has raised eyebrows. Gensler is widely regarded as a tough regulator who is committed to protecting investors and ensuring market stability. He has previously served as chairman of the Commodity Futures Trading Commission (CFTC) and is known for his work in implementing the Dodd-Frank Act, which was designed to reform the U.S. financial system after the 2008 financial crisis.
In conclusion, the proposed legislation to remove SEC Chair Gary Gensler from his role is the latest development in a long-running debate over crypto regulations. While Gensler has said that the proposed rule amendments could benefit investors and markets, Commissioner Hester Peirce has accused the SEC of stifling innovation and entrepreneurship. The SEC has faced criticism for using enforcement actions to develop the law on a case-by-case basis, rather than creating clear regulations. It remains to be seen whether Davidson’s proposed legislation will gain traction, but it is clear that the debate over crypto regulations is far from over.
United States Securities and Exchange Commissioner, Hester Peirce, popularly known in the digital currency ecosystem as “Crypto Mom” has issued a note of warning that a new proposal from the commission can significantly hurt the Decentralized Finance (DeFi) ecosystem.
As reported by Bloomberg, a proposal from the SEC seeks to modify the definition of “exchange” as laid down by the Securities Exchange Act of 1934. While the supposed change is not directly tagged to feature crypto or DeFi, the Crypto Mom said the expansive nature of the proposal will undoubtedly be a problem for players in the DeFi ecosystem.
“The proposal includes very expansive language, which, together with the chair’s apparent interest in regulating all things crypto, suggests that it could be used to regulate crypto platforms,” said Peirce. “The proposal could reach more types of trading mechanisms, including potentially DeFi protocols.”
Hester Peirce is a renowned advocate of innovative crypto protocols and has consistently backed the emancipation of the industry despite staunch opposition from regulators.
That she flagged the 654-page proposal from the SEC is a cause for concern, particularly going by the way SEC Chair Gary Gensler is interested in regulating everything crypto.
While there is a fairly long route for the new proposal which Gensler says will focus on “systems that offer the use of non-firm trading interest and communication protocols to bring together buyers and sellers of securities,” to make it into the Federal Register and thus binding on its targeted entities, it has to survive approval approvals from other commissioners.
While the crypto industry may count on Hester Peirce to help stump the survival of the proposal, the fact that other aspects of the financial market will be impacted makes this a dicey situation that may see other commissioners back the new rule.
In all, the DeFi ecosystem and the broader crypto industry are poised to witness more customized regulations under Gary Gensler and the warnings from Crypto Mom should be seen as a clarion call to embrace the in-bound regulation.
A New SEC proposal looking to expand the definition of a securities exchange could threaten DeFi.
The proposal aims to broaden the definition of an exchange to any system allowing buyers and sellers to communicate their securities trading interest.
If enacted, the proposal would likely make it impossible for decentralized exchanges to comply with SEC regulations.
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A new proposal from the U.S. Securities and Exchange Commission is looking to expand the organization’s definition of a securities exchange. In doing so, the SEC may be looking to lay the groundwork for regulating decentralized crypto exchanges.
SEC Proposal Threatens DeFi
The SEC’s attack on DeFi continues.
In a new proposal published Thursday, the SEC is looking to expand its definition of a securities exchange. The proposal aims to move the SEC’s definition away from systems that match securities orders using a traditional order book to any system allowing buyers and sellers to communicate their securities trading interest.
In addition to broadening the definition of a securities exchange, the proposal also asserts that the new definition will overrule previous SEC no-action letters and guidance, assuring certain kinds of systems are not securities exchanges.
Under this new definition, decentralized exchanges such as Uniswap would be subject to SEC regulations and would therefore need to register with the SEC as a securities broker. As decentralized exchanges have no way of complying with the current demands placed on securities exchanges by the SEC, the new legislation would effectively kill decentralized exchanges operating within the United States.
DeFi enthusiast Gabriel Shapiro highlighted the potential devastating effects of the proposal in a blog post, noting that “because the proposal achieves this expansion by providing new restraints on ‘communication protocols,’ I believe it may also be unconstitutional as a restraint on free speech,” taking a strong stance against the proposed changes. He also suggested that under the new definition, the SEC could class block explorers, such as Etherscan, as securities exchanges because they allow users to interact with smart contracts to communicate trading interests.
Shapiro is not the only prominent figure to come out against the SEC’s proposed legislation. In her dissenting statement on the proposal, SEC Commissioner Hester Peirce has echoed Shapiro’s concerns over labeling communication protocols as securities exchanges. Along with criticizing the broad scope of the SEC’s proposed changes, she also details that the 650-page document goes well beyond the SEC’s scope of government and fixed-income securities.
Peirce also pointed out that the Commission has only given the public 30 days to read, understand, and consider the proposal. She commented that it would be “unconscionably reckless” to limit discussion to one month for a decision that will likely affect the $22 trillion Treasury market in new and unforeseeable ways.
Over the past several months, the SEC has moved against DeFi protocols in an attempt to bring them under its purview. In September last year, the SEC was rumored to be investigating Uniswap Labs, the company behind the biggest decentralized exchange, Uniswap.
More recently, the SEC served Terraform Labs co-founder Do Kwon two subpoenas when he attended the Messari Mainnet conference held in New York last October. In Kwon’s case, The SEC appears to be concerned about Mirror Protocol, a DeFi platform that allows users to mint synthetic assets on Terra.
SEC chair Gary Gensler has frequently stated that he believes the SEC should be regulating DeFi protocols and exchanges. Gensler has asserted that many DeFi tokens likely fall under the category of securities, while also stating that DeFi will need to operate under a public policy framework in order have “any relevance five and 10 years from now.”
As regulatory scrutiny from U.S. government agencies increases, those defending the growing DeFi sector will need to pull out all the stops to ensure sweeping proposals from organizations like the SEC don’t crush crypto innovation in the U.S.
Disclosure: At the time of writing this feature, the author owned ETH, LUNA and several other cryptocurrencies.
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Caroline Crenshaw, a commissioner at the U.S. Securities and Exchange Commission (SEC) has said the “safe harbor” proposal would have exacerbated the problems seen during the initial coin offering (ICO) boom of 2017 and 2018.
Crenshaw made the remarks during the annual “SEC Speaks” event this month, and posted her speech to the SEC website on Oct. 12. The Commissioner argues that the impact on investors and markets would have been far greater if safe harbor provisions were in place at the time:
“I think the results would have been even worse for investors and the markets. ICOs and other digital asset offerings raised billions from investors, but most never delivered on their promises. Investors suffered the losses.”
“And I think it is not a coincidence that these problematic offerings pre-dated and continued through the beginning of a multi-year downturn in the value of digital assets, sometimes known as the crypto-winter,” she added.
The safe harbor proposal has been advocated by crypto-friendly SEC commissioner Hester Peirce. The proposal seeks to grant network developers a three-year grace period to build a decentralized network without fearing SEC legal action, but has yet to be embraced by most of the other commissioners.
Peirce, or “Crypto Mom”, put forward a revised version earlier this year in March. Cointelegraph reported on Oct. 5 that North Carolina House Representative Patrick McHenry also put forward a three-year safe harbor proposal in a draft bill of the “Clarity for Digital Tokens Act of 2021.”
Crenshaw argues that instead of pushing the crypto sector towards compliance, the safe harbor proposal would put investors’ capital at further risk as crypto tokens would be deemed outside of the jurisdiction of the SEC for “several years.”
“I also worry that relaxing regulatory requirements in markets prone to investor protection failures, limited investor redress options because of pseudonymity and disintermediation, and market manipulation, cannot sustain investor confidence or yield lasting broad adoption,” she said.
Related:Gensler confirms SEC won’t ban crypto… but Congress could
Instead of a safe harbor, Crenshaw called for a “bridge” in which token issuers and other crypto firms work with SEC to outline plans for regulatory compliance, or discuss specific exemptions when they are deemed “appropriate,”:
“I believe that if market participants accept proactive responsibility for compliance, we can build a bridge that promotes innovation while preserving market integrity and providing the investor protections needed for these new markets to grow.”
“If you likely fall within our jurisdiction, work with us to describe your plan to comply or explain why some exemption is appropriate,” she added.
Crenshaw’s remarks also echo the sentiments of chair Gary Gensler, who has regularly called for crypto firms to work with the SEC and register with the regulatory body.
Commissioner Hester Peirce, known colloquially as “Crypto Mom,” has slammed the U.S. Securities and Exchange Commission (SEC) for its $10 million settlement with cryptocurrency exchange, Poloniex.
The SEC announced the $10 million settlement on Aug. 9, with Poloniex being charged with facilitating trades in unregistered securities between July 2017 and November 2019.
The SEC asserted that Poloniex employees “stated internally” that they wanted to be “aggressive” in circumventing securities regulation in a bid to increase market share by listing new digital assets that may be deemed securities under the Howey Test of 1946. Poloniex elected to neither admit nor deny any wrongdoing.
On the same day, Peirce slammed the regulator’s actions in a public statement, emphasizing the opaque regulatory framework that crypto firms must navigate in the United States.
The commissioner highlighted several regulatory matters that the SEC has been criticized for failing to clarify with regards to digital asset businesses, including how to determine whether an asset is a security and what licenses and exemptions are appropriately required to operate a cryptocurrency exchange:
“Given how slow we have been in determining how regulated entities can interact with crypto, market participants may understandably be surprised to see us come onto the scene now with our enforcement guns blazing and argue that Poloniex was not registered or operating under an exemption as it should have been.”
Peirce added if Poloniex had tried to register as a securities exchange or as an alternative trading system (ATS) with the SEC, the firm “likely would have waited…and waited…and waited some more.”
Related: Crypto Mom: True decentralization is the only thing that will save DeFi projects
USD coin (USDC) Stablecoin issuer Circle acquired Poloniex for $400 million back in 2018. In October of the following year, Circle spun out Poloniex’s exchange business, selling it to a consortium of investors.
In November 2019, Cointelegraph reported that Tron (TRX)’s founder, Justin Sun, was among the investors that had acquired the exchange.
Hester Peirce, a Commissioner of the United States Securities and Exchange Commission, also known as “Crypto Mom”, has said that any attempt by the U.S. regulators to impose strict regulatory policies on the crypto industry could stifle innovation in the country.
Hester Peirce Calls for Self-Regulatory Framework
In aninterviewwithFinancial Timeson Tuesday (June 8, 2021), Peirce expressed concerns about U.S. regulators wanting to enforce strict regulatory policies for the cryptocurrency industry. According to Peirce, handling the crypto sector too strictly is risky, as it could deter investors.
This is not the first time the SEC Commissioner is speaking in favor of the cryptocurrency industry. Back in April, Peirce stated that it would be afoolish thingfor the U.S. government to ban bitcoin, adding that it was impossible. An advocate of robust crypto regulations, Pierce has always focused on friendly policies that wouldencourage innovation.
Chairman of the SEC, Gary Gensler, is also looking to bring the crypto industry under control like other markets. In May, Gensler told the members of the U.S. Congress that it was important to establish a law that would clearly state which regulatory body would supervise crypto exchanges.
Peirce, however, believes that not all regulatory policies should be done at the government level, stating that effective self-regulation could also work.
“I am concerned about trying to make it harder for people to do truly peer-to-peer transactions . . . I think regulation doesn’t all have to happen at government-level. You can have pretty effective self-regulation.”
Japan has already established a self-regulatory framework for the crypto industry. Back in April 2020, the Financial Services Agency (FCA)officially recognizedtwo self-regulatory organizations which work with the government regulators to monitor the nascent industry.
The SEC Commissioner’s statement came amid signs from the U.S. government to tighten the noose on the crypto industry. AsreportedbyBTCManagerback in May, the U.S. Treasury released a new guideline that mandates crypto exchanges and trading platforms to report transactions that exceed $10,0000 to the Internal Revenue Services (IRS).
The Senate Banking Committee, on the other hand, will meet on Wednesday to discuss a digital dollar issued by the Federal Reserve.
Hester Peirce of the United States Securities and Exchange Commission has once again urged regulators to take a step back from attempting to overregulate the crypto space.
Speaking to Financial Times, Peirce, affectionately dubbed “Crypto Mom” due to her positive stance on cryptocurrencies, argued against the need for strict regulatory policies.
According to Peirce, regulators by nature often have a knee-jerk reaction to emerging market spaces often at the expense of innovation.
The SEC commissioner warned that pursuing stricter regulatory policies eliminates the ability of market participants to carry out peer-to-peer transactions. Rather than emphasizing government regulations, Peirce advocated for industry-led regulatory activities.
Indeed, the commissioner is a longstanding supporter of crypto self-regulation. Back in March 2019, Peirce made the case for crypto self-regulatory organizations in a debate with the current SEC chairman Gary Gensler.
Peirce is not the only U.S. regulator to advocate for crypto self-regulation. As previously reported by Cointelegraph, Commodity and Futures Trading Commission Commissioner Brian Quintenz called for industry stakeholders to create a self-regulatory framework back in February 2019.
Japan remains an example of somewhat effective crypto self-regulation with the country’s cryptocurrency SRO liaising with government regulators on important legal and policy matters.
Peirce’s latest call for nuanced crypto policies comes amid indications of a significant push for stricter cryptocurrency regulations in the United States. Treasury Secretary Janet Yellen and SEC chairman Gary Gensler have both stated their intention to closely monitor the market.
On Tuesday, the Internal Revenue Service called for congressional authority to regulate cryptocurrencies. Back in May, the Treasury Department announced a new plan to ensure crypto service providers report transactions exceeding $10,000 in value.
Meanwhile, the Senate banking committee will hold a session on Wednesday to discuss issues concerning a possible Federal Reserve-issued digital currency. Reports indicate that the discussion could also extend towards the broader crypto market.
Hester Peirce, the acting commissioner for the US Securities and Exchange Commission (SEC), has long been known to be cryptocurrency-friendly. Peirce now released an amended proposal floating the idea of a safe harbor rule for cryptocurrency projects.
Peirce, also known as the ‘Crypto Mom’ for her active role in seeking to further blockchain and crypto innovation, first released the proposal in February 2020.
A huge dilemma that blockchain entrepreneurs need to consider is whether their token offering will be in violation of US securities laws. Commissioner Peirce has therefore proposed a solution that is designed to provide a clearer guideline for blockchain developers in a way that will not hinder technological innovation. For starters, she proposes a three-year “grace period” where blockchain developers will need to prove how decentralized their network is and whether the token they’re offering is a security.
In her safe harbor plan, Peirce suggests three updated changes.
First of all, in order to ensure that investors are fully protected, Peirce has suggested that token issuers provide a semi-annual update to the SEC regarding their projects to ensure full transparency about the development process. A block explorer is also required so that the public can view transactions on the blockchain.
Second of all, an exit report has been added to her safe harbor proposal to counter any regulatory uncertainty that may still be present at the end of the three-year window. Through the exit report, an outside counsel will therefore re-evaluate whether the project in question is decentralized enough. If it is not, the issued token needs to conform to securities laws and be registered under the Securities Exchange Act of 1934.
Finally, the exit report requirement provides guidance on what outside counsel’s analysis should address when explaining why the network is decentralized, Peirce wrote. This means that the counsel must determine whether the token issuer has an influence on the token’s price, and whether inside information could affect investors’ views on the token.
Peirce put an emphasis on the need for regulatory clarity in the cryptocurrency and blockchain industry. She advocated that this was the perfect time to re-evaluate how policies can be amended “to accommodate this new technology in a responsible manner,” especially as the confirmation of the new chairman of the SEC is nearing. Currently, Gary Gensler is awaiting confirmation to chair the Securities and Exchange Commission. Gensler was tapped by President Joe Biden to chair the SEC, and his confirmation to the role of Chairman will be significant for the cryptocurrency industry, as he is known for his previous background in blockchain.
Speaking at Draper Goren Holm’s Security Token Summit on March 25, SEC commissioner Hester Peirce, also known as “Crypto Mom” warned the issuers of fractionalized non-fungible tokens and NFT index baskets that they could inadvertently be distributing investment products.
While Peirce stated that “the whole concept of an NFT is supposed to be non-fungible” — meaning that “in general, it’s less likely to be a security” — she noted that “people are being very creative in the type of NFTs they are putting out there.”
Peirce urged NFT issuers to be cautious if they decide to “sell fractional interests” in NFTs or NFT baskets, stating:
“You better be careful that you’re not creating something that’s an investment product — that is a security.”
With NFTs fetching increasingly exorbitant prices, fractionalized interests in these assets enable smaller investors to still be able to gain exposure to a small share of a high-priced NFT. Earlier this month, Cointelegraph reported on two emerging teams offering novel solutions for fractionalizing non-fungible tokens.
Peirce also criticized the use of the Howey Test to assess whether crypto assets are securities, asserting it “hasn’t worked that well” for the industry.
The Howey Test is frequently used by courts to determine whether an asset is a security, with the test being derived from a landmark 1946 court case concerning real estate contracts issued by the owner of a citrus grove to fund the business’ expansion.
Peirce said that if the test was used in the 1946 case in the same way it is applied to crypto, the courts would have been seeking to determine whether the fruit trees were securities, rather the investment contracts relating to the plants.
Peirce noted she hopes to collaborate with incoming SEC chairman Gary Gensler on developing her “safe harbor plan,” which would reduce regulatory scrutiny of emerging blockchain networks.
The safe harbor plan would allow new token issuers a three-year window in which to build a robust and decentralized network and demonstrate securities laws do not apply. The plan would also require that issuers provide detailed plans regarding the network’s roadmap, token sale, and the individuals and investors behind the project.
You have three years to develop the network so that the token is actually usable or the network is decentralized — and at that point, it’s clear the securities laws don’t apply. And everything that you say will be covered by the anti-fraud laws under the securities laws.”