U.S. SEC commissioner Hester Peirce has come to the attention of the crypto community once again, commenting on some of the problems with regulating decentralized finance on a recent BIC panel. The Bank for International Settlements hosted its inaugural Innovation Summit that took place from the 22-25 March. The theme of this year’s summit was “How can central banks innovate in the digital age?”.
Affectionately given the moniker ‘Crypto Mum’ by the crypto and blockchain community, Peirce has long been an advocate of innovation in the markets. She gained her nickname in 2018 when she dissented in the SEC’s decision to reject Cameron and Tyler Winklevoss’s application for a bitcoin-related ETF. She argued that the rejection sends a “strong signal that innovation is unwelcome in our markets”.
In the recent innovation summit Peirce commented on decentralised finance, and the challenge this poses to regulators. DeFi enables users to access financial services without the need for an intermediary but governed by smart contracts. Peirce described what areas would fall under the scrutiny of the SEC, as well as noting that many elements of DeFi are outside of the SEC’s regulatory capacities as DeFi is more about banking than securities.
The issue of decentralization was brought up by Peirce, who described the difficulty in regulating it when there is no central counterparty.
“Often, people aren’t really thinking about regulation until there’s actually a problem. And then when there is a problem, they really want there to be a regulator to go to. And they really want there to be a way to reverse the bad thing that happened.“In the case of DeFi there could be neither. And that could be really problematic for people. And they’ll only find out about it, or they’ll only really focus their thinking on that point when something does happen.”.
Peirce commented on her Safe Harbor proposal that she first brought up last year. The initial proposal came about as a response to the difficulty many entrepreneurs and businesses in the crypto space face with the lack of regulatory clarity. Peirce commented at the time:
“When we see people struggling to find a way both to comply with the law and accomplish their laudable objectives, we need to ask ourselves whether the law should change to enable them to pursue their efforts in confidence that they are doing so legally.”
The Safe Harbor proposal would provide projects with a three year grace window to build their networks without being classes as securities. Peirce stated in the panel discussion that she has plans to update the Safe Harbor proposal, and hoped to share it with SEC Chairman Gary Gensler.
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