? The SEC focused on "the wrong thing" in denying a recently proposed bitcoin exchange-traded fund, according to Commissioner Hester Peirce.
? Peirce believes U.S. regulatory bodies need to provide guidance on cryptocurrency or risk losing the innovation race to other countries.
? Volatility in cryptocurrency markets is not the SEC's concern: "It's not my mandate to regulate the bitcoin market."
On Jan. 11, the Securities and Exchange Commission swore in Hester Peirce and Robert Jackson Jr. as its two newest commissioners. Peirce, a Republican, previously worked as a senior research fellow at George Mason University's Mercatus Center and has served as a staff attorney at the SEC. Since taking the role at Wall Street's top regulator, she has targeted a rule designed to ensure that stocks trade with the best quoted price and has spoken out in favor a national regulatory fintech sandbox.
She has also become the commissioner most open to allowing new cryptocurrency products. In July, Peirce dissented from the commission's majority opinion to again strike down a proposal from Tyler and Cameron Winklevoss to list a bitcoin exchange-traded fund.
Commissioners Peirce and Jackson spoke separately with S&P Global Market Intelligence to talk about that decision and the broader cryptocurrency marketplace. Part two of both conversations will be released Aug. 13. The following is an edited version of the first part of Peirce's conversation.
S&P Global Market Intelligence: There has been a lot of volatility in bitcoin and other cryptocurrencies. How concerned are you about market manipulation?
Commissioner Hester Peirce: It's not my mandate to regulate the bitcoin market. It's my mandate to regulate securities.
SEC Commissioner Hester Peirce
To the extent that we have a security that's based on bitcoin as an underlying [market], the exchange that's trading that security may pay attention to what's going on in the underlying market, but I don't believe that it's my job to police manipulation in bitcoin or in gold or in any other commodity underlying a security.
There's a pretty active community of people who trade bitcoin who are watching what others in that space do. There is some self-monitoring going on, which is a fact that wasn't focused on in the commission's order that it put out [against the Winklevoss proposal].
Why did you dissent from the majority opinion to decline the Winklevoss' proposed bitcoin ETF?
First, I think the approach that the majority took in applying our statutory framework was focused on the wrong thing. It was focused on the underlying asset, which in this case was bitcoin, as opposed to on the rules of the exchange that was actually submitting the application. I would've focused on whether the rules of the exchange were appropriate rather than looking through to bitcoin.
The second concern I have is that some of the issues that were identified in the underlying market would be ameliorated if we had more institutionalization. We should be open to the idea of exchange-traded products because it will address some concerns the commission identified in the order.
Third, we as an agency, and this is typical of other government agencies as well, have not been particularly open to innovation. The signal that we were sending with this particular disapproval was a signal that we are not willing to work with people who have innovative ideas and might interact in some way with the securities laws. We need to be open to working with those folks, and I'm concerned that we're telling people we're not interested in working with them.
How does an exchange-traded product address the commission's concerns in the bitcoin market?
If you have an exchange-traded product, such as the one that was the subject of [the Winklevoss] application, you by definition invite in institutional investors to play essentially an arbitrage role in the bitcoin market. You would have folks who are acting as authorized participants putting together the bitcoin that would go into the trust. Those folks can get the bitcoin from anywhere in the world and put it in the trust.
Those are institutions that have a real interest in making sure that the market for bitcoin works better. One of the concerns that was identified in the order was that there were problems in the underlying bitcoin market. Bringing in institutional participants can help to address that concern.
Are you worried that the slow pace of regulation could put the U.S. behind other countries' innovation efforts?
I am worried about that. We need to make sure that our markets are viewed as the best place to innovate. Part of that is making sure our regulatory framework functions well.
On one hand, we have done a good job at telling people that we will not tolerate fraud in this space. I think that's very important. But the other part of it is to say to entrepreneurs who have legitimate business ideas, "Come in and talk to us. We want to work with you. We want to understand if you need us to rethink how our old securities laws apply to these new issues."
There may not need to be a lot of adjustments, but we might need to provide guidance, and we should be open to doing that. We need to be willing to take the step of providing guidance or, in this case, [approving] a product that meets our regulatory requirements.
Some have talked about a cryptocurrency self-regulatory organization. Do you think that's the right move?
I would need to see the details on what that would actually look like. But in order to consider what role a crypto SRO would play, you need to understand who's running it and what its mandate is. I don't know precisely what the mandate of crypto SRO would be.
More generally, without talking about the specifics of any proposal, it's good for industries to police themselves. It's good for people to identify bad actors in their space and to let us know about those bad actors. To the extent that there's a function like that being contemplated, I think that's a great idea.