An SEC Dissenter Says the Regulator Must Ease Off Crypto

Something needs to be done about crypto. In 2022, billions of dollars were lost to crypto bankruptcies and hundreds of millions more to hacks. The mess has spilled over into traditional finance, with the collapse of the two biggest crypto-friendly banks: Silvergate and Signature. And all the while, new scam tokens flood the market.

In the US, regulators are arguing over not just what needs to be done, but who gets to do it, with the Securities and Exchange Commission (SEC) and Commodities and Futures Trading Commission (CFTC) sparring over who has jurisdiction over crypto. Under chair Gary Gensler, the SEC in particular has gone after the sector with new intensity since the implosion of crypto exchange FTX in November, launching or threatening enforcement actions against big-name crypto businesses, from Gemini and Genesis to Kraken and Coinbase.

But the SEC’s aggressive approach doesn’t sit well with one of its most senior figures. Hester Peirce, one of the SEC’s five commissioners, has formally disavowed the agency’s tactics on multiple occasions. She says the SEC’s actions have been driven by what she calls “jurisdictional maximalization”—launching cases in order to grow its mandate—but haven’t actually helped the crypto sector become more compliant.

“One way to plant a flag is to bring enforcement action. It says: This is our space,” Peirce says. But in pursuing territorial gains instead of creating guidance to help crypto firms color within the lines, she claims, the SEC has lost its way. “We haven’t done our job as a regulator. We have not provided a road to compliance.”

Peirce has made multiple public dissents—most recently against a proposed amendment to the definition of an exchange that would expand the range of crypto activities overseen by the SEC—which she says are designed to foster public discussion about appropriate checks and balances for crypto and to heal the “dysfunctional” relationship between the industry and the regulator.

She describes the SEC’s current tack as a combination of “regulation by enforcement” (a term crypto’s proponents have also latched onto) and “regulation by ambiguity,” whereby businesses are left in the dark as to their compliance obligations until a lawsuit lands in their in tray. Peirce believes the dynamic has eroded any vestige of mutual trust between the crypto industry and the SEC.

A common frustration among crypto firms, articulated recently by Coinbase and Binance, is that efforts to discuss with regulators the aspects of crypto that do not tuck neatly into existing frameworks have borne few fruit. Paul Grewal, chief legal officer at Coinbase, describes the company’s 30-plus meetings with the SEC as “one-sided monologues.”

Peirce is sympathetic. One reason for the dysfunction, she says, is that discussions are too frequently held behind closed doors on an ad-hoc basis, leading to inconsistencies in understanding between different crypto firms about the way to bring services into compliance.

“If you sit in back rooms negotiating with individual industry players, as opposed to having a public conservation about the right approach to regulating the space, it leads to all kinds of problems. The big conversations need to be had in a public forum, so that you don’t end up with a set of rules that works for one entity, but not for everyone else,” she says. “I’m sick of seeing it being done in these one-off situations, where the power dynamics are all wrong.”

The SEC, Peirce suggests, is profiting from a lack of direction from the US Congress over the proper classification of crypto assets. Absent clear legislation, the SEC is free to bring enforcement actions on the basis of a belief that most crypto assets are securities, and in doing so pull crypto into its orbit.

Without specifying quite how securities laws apply to crypto, Gensler has repeatedly stated that almost all cryptocurrencies are securities, subject to SEC supervision. He has also called on crypto businesses to register with the agency—a process that would impose reporting requirements but limit the chances of after-the-fact legal action by bringing operations into compliance from the beginning.

But crypto firms like Coinbase claim there is no practical route to registration, because the existing process makes no accommodation for crypto’s specific attributes. The decentralized nature of the underlying technology, they say, and the kinds of crypto activities it supports (like staking), demand a bespoke system. Yesterday, Coinbase filed a motion with a federal court, seeking to force the SEC into responding to a petition for new crypto guidelines it submitted last July.

Peirce, meanwhile, says questions around the classification of crypto deserve greater attention than the SEC has afforded them. “We’ve been sort of broad brushing. I think we have to be more precise, because every case is unique,” says Peirce. “[Businesses and consumers] have to be able to know whether they’re dealing with a security or not, because when they don’t know, they can’t move forward—it paralyzes them.”

Gensler faced questioning to the same effect at a House Financial Services Committee hearing on April 18, at which he was the sole witness. A chorus of criticism was led by committee chair Patrick McHenry, Republican representative from North Carolina, who asked Gensler to account for his agency’s enforcement strategy and lack of crypto-specific guidelines. “There is a lack of clarity,” said McHenry. “Do you think that provides safety and soundness for the product? Do you think it provides consumer protection? Do you think it serves the value of innovation? I think ‘no’ should be a simple answer for you.”

Warren Davidson, another Republican on the committee, claimed the SEC has imposed a “de facto ban on crypto” and went as far as to table a bill under which the SEC would undergo a restructuring and Gensler would step down from his role as chair.

Gensler maintained that crypto markets are compatible with existing SEC guidelines, that most crypto tokens are securities, and that the crypto market is therefore “rife with non-compliance.” His office declined to comment further on the record.

But not everyone at the agency is pulling in the same direction. Peirce says the effort to bring new territory under SEC control threatens to undermine its central objective: “to serve the American people.” She worries that to “grab jurisdiction” only to insist crypto businesses must either squeeze themselves into existing moulds or leave the US “defeats the point.” “It’s supposed to be the government working for the people,” she says, “but sometimes you get the sense that government is working in a way that is not consistent with what people want.”

The SEC’s quest for jurisdictional maximalization, says Peirce, risks jeopardizing the US’s status as a center of technology innovation in finance by pushing companies offshore.

Tired of what they interpret as a hostile regulatory regime, crypto businesses are starting to filter out of the US. On March 31, crypto exchange Bittrex (since sued by the SEC) announced it would wind down its US operations. On April 20, Coinbase, which is listed on Nasdaq, announced it had obtained a license to set up shop in Bermuda. Its CEO Brian Armstrong told Bloomberg that “anything is on the table,” including relocation.

“It makes me sad, because it’s about the capability of a regulator to deal with a new technology and asset class,” Peirce says. “We’re showing ourselves to be incapable of making any accommodation for experimentation.”

The five-commissioner structure at the SEC is intended to bring together divergent perspectives—something Peirce celebrates. But in her dissents, she is trying to persuade her agency peers that, on the crypto issue, the SEC has it clearly wrong.

So far, she’s had little joy. “I can’t give you the fly-on-the-wall perspective,” Peirce says. “[But] I have not been successful in convincing my colleagues that we are going down such a bad road.”