SEC’s 'Crypto Mom' demands innovation, says you can’t prosecute an algorithm

SEC Commissioner Hester Peirce spoke at the CFC 2021 virtual blockchain conference on Jan. 20, where she discussed the prospect of working with a new Biden-appointed chairman, and touched on her hopes of providing the cryptocurrency space with some “safe harbor”.

Known affectionately by cryptocurrency enthusiasts as “Crypto Mom”, Peirce addressed the changeover at the SEC that saw former chairman Jay Clayton depart his post in December. Incoming President Joe Biden has since nominated Gary Gensler for the role.

Peirce said Gensler’s appointment was not yet set in stone, but that the appointment of any new chairman brings an opportunity to approach things with a new set of eyes:

“There have been quite a few changes in the last year, and so I think a change in leadership is a good opportunity to take a look at those changes, including institutionalization. We’ve obviously seen the price of Bitcoin rise quite a bit; we’ve seen a lot of activity in the DeFi space, and I think all of these things will provide a nice framework against which a new chairman can take a fresh look at questions across the board in the crypto space.”

The SEC commissioner touched on the perennial “Sword of Damocles” that’s been hanging over the cryptocurrency space since its inception: Namely, regulation. But the goal of regulation should be to provide clarity, according to Peirce, adding that she hoped the new chairman would make sure the U.S was still conducive to innovation.

“We really need to embrace innovation, and figure out how we can set up a regulatory environment that’s conducive to innovation, which I think in our space means providing clarity. And so I think that’s something the new chairman will be faced with from day one,” said Peirce.

In February 2020, Peirce told an audience at the Blockress blockchain conference in Illinois that she thought the SEC’s “Safe Harbor” provisions should be applied to cryptocurrency launches. Currently, as Peirce explained at CFC 2021, new projects are under pressure to prove their non-security status from day one.

“If you can’t prove that your token is functional from day one, or that your network is decentralized, you may very well run into a situation where, under the securities laws, it’s treated as a securities offering,” said the commissioner.

But if Peirce’s proposal to apply Safe Harbor status to crypto launches gains traction at the SEC, it would grant projects an initial 3-year window during which regulatory liability would be ramped up gradually for the purpose of fostering innovation. Peirce said:

“And in that intervening 3 years, you would comply with disclosure orders which would supply those purchasers of tokens some information about you, the development team, and about the token economy. And it would also make sure that the anti-fraud provisions of our securities apply so that you couldn’t lie about those things.”

Peirce said her proposal got “a lot of great feedback”, although not every observer necessarily agreed at the time, with some characterizing Peirce as cutting a lone crypto-friendly figure in a world of blockchain skeptics.

However, with the impending arrival of a new SEC chairman just around the corner, Peirce has reason to be optimistic. She said:

“As a lot of people know in this space, Gary Gensler actually has a lot of knowledge about crypto as he’s been up at MIT working on a lot of these very issues. And so he’s aware of safe harbor, and it’s a conversation that, if he is confirmed as chairman, I will certainly have with him.”

Peirce was also asked about the recent announcement by the Financial Crimes Enforcement Network (FinCEN) that cryptocurrency owners with more than $10,000 in foreign accounts would soon have to report their holdings to the U.S Treasury Department. She questioned the practicality, and morality, of the FinCEN’s proposal, adding:

“We really do need to be careful when it comes to surveilling the transactions of individuals who are not suspected of any wrong-doing. Wholesale surveillance of their financial transactions is really concerning, because financial transactions are ultimately expressions of who you are as a person, what you do, what you’re buying, what you’re interested in.”

The very presence of decentralized finance would also obstruct any such attempts at financial surveillance by FinCEN. As Peirce rightly points out, it can be difficult to identify a legally culpable counterparty when that counterparty might not even be a human being.

“You might not have a physical address for the person, or a name for the person — because it might be an algorithm. When you have a smart contract, how do you actually identify a person or a physical address?" she asked rhetorically.