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(Kitco News) - Following last week's announcement that the U.S. Securities and Exchange Commission is looking to amend the definition of ‘exchange’ to include decentralized finance (DeFi) platforms that trade cryptocurrencies, the agency has received pushback from several high-profile sources, including SEC member Hester Peirce and Representative Warren Davidson.
Shortly after the announcement from SEC Chair Gensler about the proposed changes on Friday, Peirce released a response statement entitled “Rendering Innovation Kaput,” in which she criticized the agency for this latest development.
“Stagnation, centralization, expatriation, and extinction are the watchwords of this release,” she opened the letter. “Rather than embracing the promise of new technology as we have done in the past, here we propose to embrace stagnation, force centralization, urge expatriation, and welcome extinction of new technology. Accordingly, I dissent.”
Peirce went on to outline the agency’s ham-fisted approach to regulating exchanges over the past thirty years and its inability to keep up-to-date with the latest technological developments and adjust their rules accordingly. Instead, the SEC chose to deny licenses to such firms because they “were incompatible with exchange regulation of that era.”
She mentioned the Delta System, which involved a firm that issued options, a registered broker-dealer that matched counterparties, and a bank that cleared the trades. The system “could not ‘register as an exchange’ because it was not controlled, as exchange registration required at that time, by members that were also registered as brokers.”
“Faced with a choice between fostering innovation or stifling it with an inflexible and expansive interpretation of the statutory definition of ‘exchange,’ the Commission chose innovation,” she wrote. “It recognized that ‘an expansive interpretation of’ the statutory exchange definition would harm ‘innovation and competition.’”
This ultimately led to the creation of Regulation ATS, which combined “a more-expansive definition of exchange with a prudent exercise of the exemptive authority that Congress had provided two years earlier,” Peirce said. “While the origin story for Regulation ATS is a sound blueprint for how the SEC should handle emerging technologies, today’s comment reopener confirms that the Commission of that era is a relic of bygone times.”
“Today’s Commission aggressively expands its regulatory reach to solve problems that do not exist,” she wrote. “ Today’s Commission treats its basic approach to exchange regulation as something that must not – indeed cannot – be altered to allow room for new technologies or for new ways of doing business.”
Peirce noted how the SEC has told entrepreneurs trying to do new things in the crypto market to come in and register, only to dismiss the possibility of making “practical adjustments to our registration framework to help entrepreneurs resister, and instead rewards their good faith with an enforcement action.”
“The release sends a message that we are uninterested in facilitating innovation and competition in the financial markets and instead seek to protect incumbents,” she said. “Accordingly… I cannot support what the Commission is doing in this release.”
Peirce went on to explain some of the “high-level issues” she found in the 170-page report released by the SEC on Friday, including the fact that “The release’s ambiguity undermines fundamental First Amendment protections,” and said the agency should have taken a different approach from the beginning.
“I wish we had proceeded differently,” she wrote. “Given commenters’ concerns over the ambiguity and scope of the proposed rule and our still limited understanding of the area we are regulating (which the release repeatedly acknowledges), we should have gone back to square one and issued a concept release instead.”
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More than anything, Peirce stressed the importance of the U.S. adopting an open posture toward blockchain technology to encourage developers to stay on shore and not relocate to more welcoming jurisdictions.
“The Commission does seem to anticipate that its interpretation will drive decentralized protocols toward centralization, extinction, or expatriation,” she wrote. “It blithely acknowledges at one point that those involved in these systems “may instead choose to operate outside the U.S. or exit the market.”
After Coinbase’s legal chief Paul Grewal tweeted out a response to the comments from Peirce, Ohio Representative Warren Davidson responded by saying that he planned to introduce legislation to get rid of the position of Chair of the SEC.
“To correct a long series of abuses, I am introducing legislation that removes the Chairman of the Securities and Exchange Commission and replaces the role with an Executive Director that reports to the Board (where authority resides),” Davidson tweeted, adding, “Former Chairs of the SEC are ineligible.”
It is not yet clear how much support such legislation would receive, but the fact that it has been drafted shows that there is a growing chorus of voices calling for a balanced approach to regulating digital assets.
