Between now and 2025, staunch crypto advocate Hester Peirce will sit as one of five Commissioners representing the world’s most powerful financial regulator: the SEC.

A second term for Peirce is tremendously good news for the crypto industry at large.

Peirce picked up the affectionate nickname ‘Crypto Mom’ back in the bull run days of 2017, after her now-infamous public dissent decrying the regulator’s denial to push forward with what would have been the world’s first Bitcoin ETF. 

Feeding the ETF

It’s a frustrating process which many of the largest mutual fund managers in the world have failed at in the intervening years. 

Consider Van Eck, which has about $50bn in assets under management. It goes where the money is, and where the desire is. It’s about as free market as it gets. 

If Van Eck can capitalise on the soaring price of precious metals to list a junior gold miners ETF, back the boom in e-sports to list a video gaming ETF comprising the likes of Activision Blizzard and chipmaker Nvidia , and see the way the wind is blowing with renewable energy to offer an ESG ETF, then why not a Bitcoin ETF? It’s a popular asset class. People want exposure to Bitcoin in their portfolio. So what’s the problem?

Retail investors, too, love buying ETFs. In fact the amount of capital flooding into these passive investment funds is at an all time high, and rated to hit $50trn by 2030, so says Bank of America research. 

It’s a solid passive investment strategy that cuts risk through diversification, and leaves all the hard work of rebalancing portfolios to professional money managers. 

If she had her way, Peirce would allow Van Eck, or Wiltshire Phoenix or any other of the institutional money managers to list a Bitcoin ETF.

Her arguments are likely to become more powerful over time — as the crypto market matures, and discussions continue in the Senate, at the IRS and at every level of the American legislature.

Given another five years to press this claim, there will be multiple opportunities to convince her SEC Commissioner colleagues.  

Certainly she is a civil servant who commands respect from both sides of the political aisle, being first appointed in 2017 under President Obama, then reconfirmed for a prestigious second term under the current Republican President.

Back to the beginning

A little background on Peirce would probably be helpful here. 

As a lawyer and economics researcher with a previous position as staff member on the powerful US Senate Banking Committee, Peirce really came to prominence with her position on the Dodd-Frank Act. 

This series of federal regulations in the wake of the 2008 Great Financial Crisis sought to restrict the freedoms of those industries considered to be at fault for the liquidity crunch that spiralled out of control in the latter part of the last decade.

Its critics, which include our ‘Crypto Mom’, said that the regulatory burdens the Act imposes were too onerous and make the United States less competitive than foreign regimes. 

In a 360,000-word takedown of the Act, jointly written with Mercatus Centre researcher James Broughel, Peirce wrote that not only is Dodd-Frank “a typical piece of crisis legislation [which includes] many provisions crafted in haste”, it fails on a fundamental level to address the subprime real-estate mortgage lending which precipitated the crisis. 

A more serious flaw lies in the fact that Dodd-Frank “gives rise to a whole new set of problems that could lay the groundwork for a future financial crisis.”

It is in these kinds of arguments that Peirce is at her most convincing. 

Safe harbour

Of course, the point of a regulator is to protect investors against obvious scams, liars, frauds and snake-oil salesmen who prey on the unwary or incautious. 

And the SEC has bared its teeth to a greater or lesser degree in prosecuting clearly illegal actions in the cryptocurrency sector. The runaway ICO fundraising boom of 2017 to 2018 has provided much ongoing fodder for the regulator, with many falling under the description of an ‘unregistered security’, the fundamental basis for protective action. 

Setting multi-million-dollar large fines here is right and proper, and a deterrent in the same way as it would be for those who try to defraud investors in classic binary options or forex scams. 

But we can certainly see Peirce’s safe harbour proposal coming into being between now and 2025.  

As CoinDesk notes, this would give crypto startups “a three-year grace period from their first token sale to acheive a level of decentralization sufficient to pass through the agency’s securities evaluations, including the Howey Test, the famous US Supreme Court assessment.” 

Heavy hitters like Coinbase and Gemini are starting to move behind the scenes to support this kind of regulatory action. This is most clear in the creation of the Crypto Rating Council which seeks to head the SEC off at the pass in determining the legal status of various prominent cryptocurrencies. 

Accredited

There are libertarian, small government, free market principles that seems to inform everything Peirce says, does and believes. 

Take the recent bombshell move by the SEC to open up the ‘accredited investor’ rule. This basically mandates that only wealthy investors can put forward capital into joint venture projects that have higher risk of failure, like hedge funds, or early-stage seed or venture capital funding, or buying a slice of otherwise highly illiquid investment products.

Before the rule change, in the US, an accredited investor had to have a $200,000 annual income for the last two years, “with the expectation of earning the same or higher income in the current year”. 

Notionally, this kind of ringfencing of investment opportunities seeks to defend lower-income investors against very high-risk products.  

In practice, it is anti-meritocratic and shuts the public out of investments that they would have otherwise been able to make. So in August 2020, it came as quite the shock that the SEC would take such a modernising step to redefine an ‘accredited investor’ to be based on knowledge rather than simply wealth.

Peirce welcomed the move, but as usual said it did not go far enough. 

“Why should I, as a regulator, decide what other Americans do with their money?” she asked. 

In an August 26 tweet she wrote: “Americans shouldn’t have to ask the SEC for permission to invest, but today’s accredited investor rule at least offers people a path to ask permission based on their education, rather than simply telling them ‘no, unless you’re rich’.”

It is this kind of personal philosophy that binds Peirce to the cryptocurrency industry. 

Power not absolute

As one of five cross-party Commissioners, including Chairman Jay Clayton, whose term ends in 2021, Peirce does not have absolute power. Far from it. 

Like a Supreme Court judge she is one of a bench of leaders who must convince her peers that her view is right and just. Not all are as enlightened as Peirce and she is often outvoted. 

“As you will hear today, I do not always convince my colleagues to sign on to my view,” she said in a speech to Blockchain Association Singapore on 21 July 2020. 

The SEC can — and does — overreach when it comes to regulatory actions, Peirce laments. 

Nowhere is this more clear than in the costly lawsuit against the Russian encrypted messaging app Telegram. 

The SEC’s action forced CEO Pavel Durov to return $1.2bn to 171 mostly overseas investors and wearily close his highly-anticipated TON blockchain project.

Peirce asks her audience: “Who did we protect by bringing this action?” 

“The initial purchasers, who were accredited investors?  The members of the public, many of whom are outside the United States, who would have bought the Grams and used them to buy and sell goods and services on the TON Blockchain?  Did they really look to U.S. securities laws for protection? [Did we protect] would-be innovators, who will now take additional steps to avoid the United States?”

The lack of a clear regulatory structure for the US cryptocurrency industry is something that clearly rankles Peirce. In a 2019 op-ed for respected political site The Hill, one line in particular stands out.

“We spotted a problem and let it fester without a definitive reaction from the Commission for five plus years.”

One could apply this exact principle to crypto regulations in the US. Still piecemeal, still inadequate and still failing investors. 

Her seniority and power will only rise over time.  

We’re all waiting for the levee to break. When that happens, the flood of crypto support will be overwhelming.