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Securities and Exchange Commissioner Hester Peirce expects an SEC proposal to expand the definition of an exchange as a backdoor way to regulate cryptocurrency exchanges, but does not anticipate the commission will formally introduce direct crypto regulation this year.
“The expansive definition that's being proposed for exchanges will cover a lot of potential platforms that haven't thought necessarily that they would be covered and that's in the traditional security space, as well as in the crypto space,” Peirce told Yahoo Finance in an exclusive interview.
Peirce – a Republican appointee dubbed “Crypto Mom” for her enthusiastic advocacy of the sector – believes the Commission is moving too quickly with a comment period of 30 days, which she said is too short to properly consider expanding the regulatory net for trading platforms.
Last week, Peirce dissented against an SEC proposal that seeks to amend regulating trading systems, including expanding the definition of what constitutes an exchange. While aimed at targeting deficiencies in the Treasury market Peirce sent a warning to all trading platforms.
“Even if you have nothing to do with government securities or even fixed-income, or with traditional securities, read this release,” she said at the time. “It covers a lot of ground, and you should not assume that it has nothing to do with you, because it probably does.”
Debate over exchanges heats up
Meanwhile, SEC Chairman Gary Gensler has urged cryptocurrency exchanges to voluntarily register with the Commission independent of the latest proposal.
“Regardless of what happens with this proposal, I think he's trying to pull those crypto platforms into our orbit,” said Peirce. “That proposal, if it's adopted, will make that a lot easier.”
While the SEC is pursuing a potential method to regulate crypto trading platforms, the agency hasn’t put out formal rules or guidance on regulating crypto exchanges while Gensler told Yahoo Finance last month that he hopes this is will be the year that the SEC will put out rules to regulate exchanges.
“We don't have a rulebook in place that works for crypto exchanges as they currently operate. So absent some kind of adjustments or exemptions, it's going to be very difficult for these entities to register with us,” said Peirce.
The commissioner says she has yet to see any formal, direct proposals for regulating crypto exchanges or crypto in general on the SEC’s agenda this year.
“If you look at the agenda that chair Gensler has put out, I don't see anywhere on that agenda, a rule directed toward crypto exchanges and registration of those exchanges other than the one that we just proposed, but that's not specifically tailored to addressing these questions about what does it actually look like for one of these entities to be registered? So I think that's there's a disconnect there.”
Peirce says she sees the SEC regulating through enforcement this year rather than creating new rules or adjusting existing rules to accommodate digital assets.
“We should be working on creating that kind of a framework that works,” says Peirce. But I just don't see it on the horizon based on what's in the regulatory agenda. And that leads me to fear that a lot of this work is going to be done through enforcement.”
According to Peirce, the SEC needs to offer the digital asset industry a clear framework on how they will regulate crypto. She suggested applying the so-called Howey test – a rule that for years has been used to determine whether an asset is a security – to digital assets to see if it makes sense, but that may be somewhat of a challenge.
“It gets a little more difficult because the token works in a different way than some of these other assets do; and the information that you might want about that token is a little bit different than you might want about other kinds of assets,” Peirce told Yahoo Finance.
The official believes the SEC could craft a sort of safe harbor for digital assets that would offer disclosures for investors, such as transparency of the code, who’s behind the cryptocurrency, how many tokens will be minted and how they are being sold. The SEC would then make sure that the disclosures and information are backed up by anti-fraud rules under securities laws.
Stablecoins, Spot ETFs and NFTs on the radar
The Biden administration last fall tasked Congress with coming up with a framework for regulating stablecoins – cryptocurrencies tied to fiat currencies like the U.S. dollar.
The administration recommended that only banks be allowed to issue stablecoins while directing regulatory agencies to use their existing authorities to regulate stablecoins as best they can right now.
Some have debated whether stablecoins should be overseen like money market funds. Yet Peirce contended that would depend on what the stablecoin looked like, given that not all coins are designed the same, and would have to be evaluated on a coin-by-coin basis.
“I can imagine that we might look at some of them and say they have securities-like features or money market-like features, but is it really one?” she asked. “It's a facts and circumstances analysis.”
Also on the SEC’s agenda is Bitcoin (BTC-USD)-based exchange traded funds (ETFs). While the SEC has approved Bitcoin futures ETFs, the Commission has repeatedly turned down attempts to greenlight funds that physically hold bitcoin – a so-called “spot ETF.”
Peirce doesn’t think the SEC will approve spot ETFs until Bitcoin markets are regulated like stocks. The agency’s resistance is rooted in perceived problems with crypto markets that lack the same oversight as equities.
“We're applying a crypto specific framework here and denying these products,” said Peirce. “My suspicion is that it's going to take seeing the Bitcoin markets regulated, just the way our equity markets are regulated before one of these things gets approved.”
With the market for non-fungible tokens (NFTs) exploding to more than $40 billion, Commissioner Peirce says she would like for the SEC to take a look at the space and offer those involved guidance about where there might be potential intersections with securities laws.
“Whether it's people who are fractionalized in NFTs and selling pieces of them or other types of financialization of NFTs, it's something that we should be thinking about again and again,” Peirce told Yahoo Finance.
That means “not leading with enforcement, but leading with a regulatory hand to help people navigate this very difficult territory,” she added.