SEC Faces Stiff Test in Regulating DeFi, Says Hester Peirce

Hester Peirce, the regulator affectionately known as “Crypto Mom,” was last month sworn in for a second term as a commissioner on the US Securities and Exchange Commission. In an interview with Decrypt, she talked about what she foresees for her next five years at the agency.

“[Decentralized finance] is going to cause [the SEC] to sit down and ask some fundamental questions about regulations,” she said.

To be sure, decentralized finance is this summer’s hot topic amongst the cryptocurrency set, but it’s a tricky one for the SEC to deal with. It comprises non-custodial lending protocols, synthetic stocks and exchanges, and a lot of food references. 

On the one hand, some lawyers are convinced that it involves the distribution of securities—exactly the remit of the SEC. But DeFi seeks to avoid this: The leading protocols have aggressively moved to decentralize.

But what’s the SEC supposed to do—file a lawsuit against a community composed of thousands of anonymous users? 

It is here that Peirce gets to the heart of the issue. “The goal of DeFi, as I understand it, is to eliminate intermediaries and to allow people to engage with one another directly,” Peirce said. “And typically, the way regulators have regulated the financial system is to regulate intermediaries.”

So, what’s Crypto Mom’s advice?

Despite her moniker—a crypto fan even once sent her a card for Mother’s Day—Peirce said, “Part of my own M.O. as a regulator is that I don't think regulators should be...maternalistic.” 

Peirce prefers a hands-off role regarding regulation. When it comes to crypto specifically, she said, “Regulators have not done a great job.”

Indeed, Peirce has butted heads with her own agency over cryptocurrencies several times, most recently over the SEC’s court case against Telegram for its $1.7 billion ICO, which caused the messenger app to abandon its blockchain project. “Who did we protect by bringing this action?” said Peirce in a speech at a virtual conference in July.

Therefore, for her second term, Peirce wants to tweak existing regulations to make it both easier for Americans to access regulated cryptocurrency markets and more attractive for crypto companies to fundraise within reasonable frameworks. 

“My main priority, with respect to anything, and not just crypto, is to allow people in the market to engage in transactions that are mutually beneficial,” she said. All the while, of course, ensuring that nobody is being defrauded.

One of Peirce’s main plans for the crypto industry is to revise a policy draft for a “safe harbor” that would give cryptocurrency companies three years to devolve power to their communities before the SEC would take action against them for distributing what might otherwise have been labeled unregistered securities. 

Yet, while many in the crypto-sphere hope that Peirce will be the industry’s salvation, she is less sure of her ability to enact change. “Bureaucracy is difficult,” she said. “It’s really hard to get anything done.” And she’s not confident that her initial safe harbor proposal will ever set sail, given the stance of her fellow commissioners.

Perhaps after implementing changes recommended to her by those who read her first draft, she might have a better chance. Peirce will have to be nimble—with the safe harbor proposal and with DeFi—because crypto is “about as nimble as it gets.”