DeFi Needs 'Freedom to Experiment', Says SEC's Hester Peirce

SEC Commissioner Hester Peirce is once again using her platform as one of the country’s top securities regulators to advocate for more “freedom” for the cryptocurrency industry. And this time, she has her sights on specifically on the growing decentralized finance space.

Peirce, affectionately known as “Crypto Mom” among industry observers, told law students at George Washington University in a speech on Monday that decentralized finance (that’s DeFi, for short) faces unique regulatory challenges that need to be addressed in order for it to fulfill its promise of “democratization, open access, transparency, predictability, and systemic resilience.”

“We regulators, mindful of the potential upsides and downsides, need to provide both legal clarity and the freedom to experiment so that DeFi can compete with CeFi to offer investors financial services,” she said.

DeFi, a catch-all term for non-custodial, peer-to-peer financial services, caught fire in the summer of last year. What once was a small, million-dollar market in early 2020 has ballooned to $35 billion. These products, which exist primarily on the Ethereum network, essentially offer their users bank-like services without an intermediary—and many of them can offer significantly higher returns than traditional services.

And, according to Peirce, DeFi “will provide a very good test for our ability to regulate with an eye toward protecting the interests of investors and markets, not incumbents...We tend to look at technological innovation in the markets with deep suspicion, and that mindset has to change.”

Peirce, appointed to the SEC in January 2018 and sworn in for a second term in August 2020, has become the regulator darling of the crypto industry, often going on the record discussing the need for clarity regarding the emerging digital economy. And often with a favorable view towards refining the rulebook to better accommodate innovation found in crypto markets. Monday’s talking points were no exception.

“Attempts to create a good experience using an attractive, easy-to-navigate interface run headlong into a dusty set of regulations written with paper, snail mail, and precise legalese in mind,” Peirce said.

Peirce has made a number of comments that deviate from previous SEC positions. In July 2020 Pierce said the SEC had been mistaken in pursuing legal action against the 2019 Telegram Initial Coin Offering (ICO), and in October 2020 discussed developing a renewed ‘safe harbor’ proposal to help protect crypto and DeFi startups.