Yahoo Finance Presents: SEC Commissioner Hester Peirce

Yahoo Finance senior reporter Jennifer Schonberger is joined by SEC Commissioner Hester Peirce to discuss regulation around cryptocurrency exchanges, digital assets, as well as NFTs and stablecoins.

Video Transcript

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JENNIFER SCHONBERGER: This is Yahoo Finance Presents. I'm Jennifer Schonberger. Securities and exchange commissioner Hester Peirce last week dissented against an SEC proposal that would seek to amend regulating trading platforms, including expanding the definition of what constitutes an exchange.

While the proposal is aimed at deficiencies in the Treasury market, fault lines that were shown during March 2020 with the onset of the pandemic, Peirce sent a warning to all trading platforms saying, quote, "even if you have nothing to do with government securities or even fixed income or with traditional securities, read this release. It covers a lot of ground. And you should not assume that it has nothing to do with you because it probably does." Here to talk about why she dissented and regulating cryptocurrencies is Commissioner Peirce.

HESTER PEIRCE: Jennifer, it's great to be here. I have to tell you that my views represent my own views and not necessarily those of the SEC or my fellow commissioners.

JENNIFER SCHONBERGER: Thanks, commissioner. I'd like to start off the conversation with why you dissented and that warning that you sent to trading platforms. Do you see that as a backdoor way to begin regulating cryptocurrency exchanges in decentralized finance?

HESTER PEIRCE: Well, I certainly think that the expansive definition that's being proposed for exchange will cover a lot of potential platforms that haven't thought necessarily that they would be covered. And that's in the traditional security space as well as in the crypto space. So I want people to think about it. And the reason that I dissented is that we're not giving people enough time to think about it. And so I'm not going to be able to get the feedback that I need to make a decision about whether or not this proposal is a good one or not.

So that's kind of the crux of the reason that I disagreed with it. Now, I will say that Chair Gensler has said even under our existing rules that he thinks a lot of crypto platforms should be coming in and registering with us. So regardless of what happens with this proposal, I think he's trying to pull those crypto platforms into our ambit. The proposal, if it's adopted, will make that a lot easier.

JENNIFER SCHONBERGER: Do you believe that this proposal could be adopted? And if so, how long between the time with which it's adopted to when compliance would be required for these crypto exchanges?

HESTER PEIRCE: Well, it's hard to tell now. I mean, we will look at comments, I hope, as they come in, even though we did give such a short amount of time. And so that should inform the rulemaking process and the decision about whether to move forward with adoption as proposed or whether to modify it in some way. If it does go into effect, it's difficult to know what the implementation period will be. Again, that's something that will get feedback from people on what they think a reasonable period would be and then go from there. So things in Washington take a long time, generally. But Chair Gensler here at the SEC is keeping us working quite hard. And he tends to move pretty fast. So it's all relative, I guess. But for DC, he moves fast.

JENNIFER SCHONBERGER: You mentioned that Chair Gensler is urging cryptocurrency exchanges to register with the SEC, though it hasn't been mandated. You guys haven't put out formal rules or guidance on that. And speaking with Chair Gensler last month during a press conference, he told me that he hopes this is the year that the SEC will put out rules to regulate exchanges. Do you see that happening? Are you directly working on rules behind the scenes for cryptocurrency exchanges or for decentralized finance?

HESTER PEIRCE: Well, Jennifer, your question is exactly right in the sense that we don't have a rule book in place that works for crypto exchanges as they currently operate. And so absent some kind of adjustments or exemptions, it's going to be very difficult for these entities to register with us. If you look at the agenda that Chair Gensler has put out, I don't see anywhere on that agenda a rule directed toward crypto exchanges and registration of those exchanges other than the one that we just proposed. But that's not specifically tailored to addressing these questions about what does it actually look like for one of these entities to be registered. So I think there's a disconnect there.

JENNIFER SCHONBERGER: So then Commissioner Peirce, are there any regulations or rules that the crypto community can expect this year from the SEC, whether it's exchange registration or otherwise? Or should we expect a ramp up in enforcement activity?

HESTER PEIRCE: I think that that's the discouraging piece of it, that we're leading a lot of these charges through enforcement instead of taking the approach of using our rulebook, our existing rulebook, and our existing statutory authority which tells us that we can make adjustments to the rules to accommodate new things and different things. So we should be working on creating that kind of a framework that works.

But I just don't see it on the horizon based on what's in the regulatory agenda. And that leads me to fear that a lot of this work is going to be done through enforcement, which is not the right way to go about writing rules. You want to do it in a transparent way that involves all of the affected people, whether it's the people running the platforms or the people trading on the platforms. You want everyone to be able to have a say in how those rules look.

JENNIFER SCHONBERGER: The digital assets industry doesn't have a clear framework from the SEC, as you mentioned, for what really constitutes a security versus a commodity. How do we solve that?

HESTER PEIRCE: I think, again, we sit down and we think about what it is we're trying to achieve. And we're trying to make sure that people who are buying these digital assets, these crypto assets, know what it is they're buying and get the information they need to make a good decision. And so that looks a little bit different for a crypto asset than it might for a regular security.

And so what we should do is sit down and figure out what information do people need. Is the SEC the right agency to get them that information? If so, let's draft a rule and say, here's the information you should provide when you sell one of these things. But so far, we haven't done anything other than slap labels of security on various digital assets. Sometimes, we don't even tell people digital assets we think are securities. And so people are left guessing.

JENNIFER SCHONBERGER: To your point, should the Howey test, something that's been used for years to determine whether assets are securities, be preserved and applied to digital assets, while understanding that they are different but perhaps the rules that apply to regular securities should also apply to digital assets?

HESTER PEIRCE: Yeah. I mean, it's the securities laws are intended to be flexible and to accommodate changes as they come along. And the Howey test has worked to cover a lot of things that people are doing that look a lot like securities offerings but maybe aren't labeled securities offerings. And so it serves a function. I mean, there's a reason that the Supreme Court adopted the Howey test.

But I think it does make sense to look at the rules and say, hey, are they achieving for crypto what we want them to achieve? And I think that's where it gets a little more difficult because the token, it works in a different way than some of these other assets do. And the information that you might want about that token is a little bit different than you might want about other kinds of assets. So it's a complicated question. But I think we're not solving it by bringing one-off enforcement actions in cases where there's no fraud.

JENNIFER SCHONBERGER: So what disclosures need to accompany digital assets, who they report to, and what those regulatory obligations should be?

HESTER PEIRCE: Well, I think some of the things that people want to know. I mean, they want to see the code. And they want to be able to test the code and make sure that it's actually working as it's intended. They want to know who's behind it. Who's behind this new project? Who's selling me this token? How many tokens are they going to keep for themselves? When are they going to sell them? How are they going to sell them? What are their plans for developing the network? And are they actually carrying through those plans when they tell us they're going to do that?

Those are the kinds of things people want to understand. What's your plan to getting toward a decentralized status? Those are the things people want to know. And I think we could craft some kind of an exemption. I've suggested crafting a safe harbor that would get some of that information to people and make sure that that information is backed up by our anti-fraud rules under the securities laws.

JENNIFER SCHONBERGER: I know you have voiced opposition to creating a new regulatory agency that would oversee crypto. But what are your thoughts or ideas on perhaps a self-regulatory organization that can maybe serve as a conduit that would be overseen by perhaps the SEC and the CFTC to oversee digital assets?

HESTER PEIRCE: Adding another regulator in Washington does tend to complicate the landscape. But I can understand why some people might prefer a self regulator in this space because it allows for more flexibility and the industry knowledge is infused throughout the self-regulatory organization. There's a benefit to that. I will say that sometimes adding in that self-regulatory layer can add some complexities.

And we see that in crypto already because our self regulator FINRA plays a role with respect to some of these broker dealers that are trying to get into crypto. And so FINRA has to communicate with the SEC. And then FINRA has to also communicate with the entity trying to apply. And so there can be some complication in that kind of arrangement. But it is one option. And I'm sure it's something that Congress will think about as a potential option.

JENNIFER SCHONBERGER: Commissioner, you mentioned that you don't really see anything on the docket in the way of new rules or regulations from the SEC this year. But I do want to ask you about stablecoins because the Biden administration, while tasking Congress to come up with the brand new framework to regulate stablecoins, has also asked regulators to look at using their current authorities to regulate them. Would the SEC consider looking at regulating stablecoins akin to money market funds or perhaps mandating some sort of disclosure and liquidity requirements?

HESTER PEIRCE: I think it depends on what the stablecoin looks like. They aren't all designed the same way. And so I can imagine that we might look at some of them and say, they have securities-like features or money market-like features. It's a facts and circumstances analysis. And it's something that has to be done through a one by one process. I think, again, we need to be looking at what the objectives we're trying to achieve are. And shoving something into an existing regulatory regime may not be the best way to achieve those objectives.

JENNIFER SCHONBERGER: Commissioner Peirce, what's it going to take for the SEC to approve a physical Bitcoin, a spot futures Bitcoin ETF?

HESTER PEIRCE: Well, so we painted ourselves into a difficult corner because we keep coming back and denying these spot Bitcoin applications. And we do it based on the fact that we think that there's a problem with the underlying markets, the problem being that they're not regulated the same way that our equity markets are regulated. And that's true for many things underlying exchange traded products that trade in our markets.

So we're applying a crypto-specific framework here in denying these products. So my suspicion is that it's going to take seeing the Bitcoin market's regulated just the way our equity markets are regulated before one of these things gets approved. But we'll see. I've expressed dismay now for four years that we're applying this crypto-specific standard.

JENNIFER SCHONBERGER: And Commissioner, NFTs have absolutely exploded. They are now worth more than $40 billion as a market. Do you see the SEC looking to regulate NFTs or NFT trading?

HESTER PEIRCE: As with many other things in the crypto space, there are places where they might intersect with the securities laws. And so I would like us to take a look at them and to offer people who are involved with NFTs some sort of guidance about where they might think about potential interactions with the securities laws, whether it's people who are fractionalizing NFTs and selling pieces of them or other types of financialization of NFTs, it's something that we should be thinking about. And, again, not leading with enforcement, but leading with a regulatory hand to help people navigate this very difficult territory.

JENNIFER SCHONBERGER: Commissioner Peirce, thank you so much for your insight. So appreciate it. Hope to speak with you again at some point in the future.

HESTER PEIRCE: Thank you, Jennifer.