I was astonished at her commentary here as I think she made excellent points that do not necessarily open the door to an unregulated expansion for cryptocurrencies but instead allow for experimentation by collaboration between regulator and market participants to ensure that the goals of both side are met: investors protection and innovation. However, she recognizes the concern of her colleagues that losses would be blamed on them for not taking action:
”We know we will be blamed when something goes wrong, and this fear leads to a default suspicion of risk-taking and a regulatory mindset that too often presumes that innovations designed to provide greater access to risk-taking are threats, both to our reputations and investor safety.”
She provides a great analogy on the risk of driving where it continues to be one of the leading causes of death around the world. However, driving is not prohibited but instead has been given “reasonable restrictions” like speed limits, barriers to entry and other laws that reduce the risk of driving. Despite these measures, things always go wrong and cannot be avoided no matter what is done. She continues to imply that risk-taking is necessary as innovation and progress could be stifled if not permitted. In what I believe is the most powerful phrase of her speech, she says:
”It puzzles me that this is so difficult for those of us who regulate the securities markets to understand this concept; after all, capital markets are all about taking risk, and queasiness around risk-taking is particularly inapt. A key purpose of financial markets is to permit investors to take risks, commensurate with their own risk appetites and circumstances, to earn returns on their investments. They commit their capital to projects with uncertain outcomes in the hope that there will be a return on their capital investment. The SEC, as regulator of the capital markets, therefore should appreciate the connection between risk and return and resist the urge to coddle the American investor.”
In continuing her analogy to driving, it would be like prohibiting the act of driving which would definitely save lives but would have a profound impact in not only the quality of life of individuals but also to the economy. Therefore, she believes that it is not the SEC’s responsibility to guarantee that investors would not lose money given the dynamics necessary in capital markets and therefore the regulation should not prohibit the creation of markets. Furthermore, she visualizes the role as:
”this threefold mission requires the Commission to ensure that investors have access to products and services that enable them to construct investment portfolios that meet their needs. Expanding investors’ options and ensuring that they have the information necessary to evaluate those options enables them to build better portfolios-portfolios that may both reduce risks and produce better returns.”
As the capital markets expand, product offerings become more diverse and the appetite of investors grow to wanting these alternatives. She states that this is normal for a market innovating and expanding and that regulators should not deter this growth, instead collaborate to bring the offerings in a framework that supports investor protection via transparency and disclosures. This is why she dissented on the vote to reject the Bitcoin ETFs. She states that the disapproval was more on the “Commission’s assessment of bitcoin rather than on the exchange’s plans for trading the exchange-traded product.” She point at the documents focus on the bitcoin markets flaws instead of the ecosystem around the proposed ETF and its trading. She believes that the SEC should not imply the ability to assess whether or not cryptocurrencies will be a success given the lack of expertise in the areas needed to make that assessment. However, the signal they are giving with the disapproval is somewhat implying these assessments. This would imply that risk-taking is not acceptable which is not the objective nor the responsibility of the SEC to determine.
Commissioner Peirce closes by stating five lessons that “might make [the SEC] more nimble in dealing with fintech innovations that are intended to create more opportunities for investors to gain exposure to our markets:”
- “…resist the temptation to treat uncertainty as a disqualifier, and we should welcome the opportunity for investors to determine the value of these innovations for themselves in our regulated markets…”
- “Either create space for innovations to occur in our regulated markets or prepare for investors to seek out such innovations in less-regulated, or unregulated, spaces, suach as foreign-registered products that lack the transparency that trading under our rules would provide.”
- “…an essential step to encouraging innovations in our markets is to provide innovators with greater clarity and certainty in their interactions with the Commission and its staff.”
- “…our investor protection role needs to incorporate a commitment to expanding investors access to our financial markets, including through innovative technologies.”
- “…we regulators have very different roles from technological innovators…”
These are incredible steps to ensure that the innovation process continues within the United States jurisdiction as it has been somewhat conflicted given the actions taken recently. In particular, the subpoenas sent earlier this year to many initial coin offering (ICOs) projects seemed to shut down that market when it came to offerings to US investors. However, many have continued to work on their projects in different jurisdictions. Even the projects that had more regulated processes of Security Tokens underwent some of this hardships. This shift in focus, if followed, could signal a new cycle of innovation for blockchain and cryptocurrencies within the United States which has its positive ramifications for the economy in general. Commissioner Peirce advocates to “to allow firms more flexibility to test new approaches.” This is more of a collaborative process to ensure that the objectives of both sides are met while creating a framework for the future of innovations in the fintech space. They recognize the complicated processes but want to help the innovators “navigate” those processes.
”The technological revolution the financial industry is experiencing now is very exciting. New asset classes like cryptocurrencies and new ways for financial companies to communicate with investors are likely to make our world look very different ten years from now than it did ten years ago. As a regulator-and one who is not adept with new technology-humility is, as I have noted, important. I do not know which technologies will succeed and fail. It is not my job to assess the relative merits of different products and services. Humility is also important as we think about how our attitudes and processes need to change to make the U.S. a comfortable home for the next generation of innovators.”
While she was the only member to dissent, the general public has really taken part of the feedback being provided to the SEC in reviewing the bitcoin ETF proposals. They have gone back to reconsider these proposals as more feedback has been provided. I think these statements by Commissioner Peirce are very relevant in their thought process as it not only has implications for bitcoin and cryptocurrency market participants, but also for many fintech innovators looking to provide products and services to the United States financial markets which are home to the most broadly diversified products and investors of the world. The risk of losing the innovation and economic impacts is too large for the government agencies to simply not want to collaborate with the potential of the coming technology. Therefore, I think that we are reaching a tipping point where the door could potentially open for clarity regarding how to expand and leverage blockchain technology sourced in the United States.
What do you think these thoughts could signal for the future of cryptocurrency regulation in the Unites States? Do you think this is going to improve the environment for blockchain innovation and development? I look forward to hearing your thoughts and feedback in the comments below.
Source:
https://www.cato.org/events/cato-summit-financial-regulation-2018
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The SEC needs to figure out an appropriate framework for these assets in order to support the innovation possible for the financial industry.
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