Regulatory Speech | April 3, 2024

Image: Commissioner Hester M. Peirce

Emerging Regulatory Challenges in Crypto Custody

Commissioner Hester M. Peirce delivered a speech at the SEC Speaks event in Washington D.C. on April 2, 2024 titled “At the SEC: Nothing but Crickets Remarks at SEC Speaks“.  This event is known for providing a platform for SEC officials to communicate with the public, including industry professionals, academics, lawyers, and other regulators, about current issues, regulatory agendas, and future plans within the securities market.  Commissioner Hester M. Peirce’s speech specifically addressed the complexities and implications surrounding the regulation of crypto custody, with a focal point on the issuance of Staff Accounting Bulletin (SAB) 121 by the SEC.

• SAB 121 mandates public companies safeguarding crypto assets for clients to include a liability and corresponding asset on their balance sheet. This directive, issued without comprehensive industry consultation, has raised concerns among banking regulators and the Government Accountability Office, which suggests the SEC should have sought Congressional approval under the Congressional Review Act.

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• Travis Hill, Vice Chairman of the Federal Deposit Insurance Corporation (FDIC) discussed tokenization’s ability to revolutionize banking and payments by introducing programmability, atomic settlement, and ledger immutability. However, he highlighted the lack of regulatory clarity and the FDIC’s current stance, which may stifle innovation and investment in blockchain and distributed ledger technologies.
• The SEC’s unilateral regulatory actions and the FDIC’s cautious approach to digital assets have contributed to an environment of uncertainty. This has implications for the development of new products, with entities navigating a complex regulatory landscape that may inhibit innovation and deter engagement with regulatory bodies.

This directive, enacted without broad Commission consensus or public consultation, has raised concerns among both industry participants and other regulatory bodies. Peirce criticized this approach for its lack of transparency and potential negative impact on innovation within the crypto sector.  She argued that such significant regulatory measures should undergo a more inclusive decision-making process, involving input from a wider range of stakeholders to ensure regulations are balanced, effective, and support the dynamic nature of the crypto market.

Need for More Democratic and Inclusive Decision-Making at the SEC

Select Quotes from Commissioner Peirce’s Speech

“Rules of such broad effect should be set by the full Commission, not by staff answering only to the Chairman.”

• This quote highlights a concern over the process and governance within the SEC regarding the formulation of significant policies. Commissioner Peirce is pointing out the need for more democratic and inclusive decision-making within the agency, rather than allowing crucial policies to be dictated by a limited number of individuals. This approach is vital for ensuring that regulatory policies are well-considered, balanced, and reflect a broad range of insights and concerns, which is particularly important in the rapidly evolving and complex world of crypto assets and financial technologies.

See:  Hester Peirce Reaffirms That the SEC’s Current Approach to Crypto Is ‘Not a Good Way of Regulating’

“The Commission should think about each rule proposal as an opportunity to foster a public discussion with the goal of developing the best solution to a carefully identified problem, not as the opening bid in a hard-driving negotiating strategy designed to force a cowed public to accept a slightly less onerous—though perhaps still unworkable—final rule.”

• This statement underscores the importance of regulatory transparency and public engagement. Peirce criticizes the current approach to rulemaking, which she perceives as opaque and unilateral, suggesting that the SEC should use rule proposals as a means to engage with the public and industry stakeholders in a constructive dialogue. The impact of adopting such an approach would likely lead to more effective and practical regulations that better address the real needs and concerns of the market while fostering innovation and compliance.

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“We are scaring people off from coming in and having a conversation with us.”

• Here, Commissioner Peirce voices a critical issue regarding the regulatory environment created by the SEC’s current stance and approach towards enforcement and dialogue with industry participants. The impact of this statement is profound, highlighting how an adversarial or overly cautious regulatory posture can discourage open communication between regulators and those they regulate. This breakdown in dialogue can lead to less informed regulatory decisions, hinder innovation, and potentially drive activity to less transparent or regulated environments, ultimately undermining the SEC’s mission to protect investors and maintain fair, orderly, and efficient markets.

Conclusion

The above quotes collectively highlight the need for a shift in regulatory strategy towards more inclusive, transparent, and collaborative processes. Such changes could not only enhance the effectiveness of financial regulation but also ensure that the U.S. remains a competitive and innovative leader in the global financial market, particularly in areas like cryptocurrency and fintech.  Has someone lost the plot?

The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada’s Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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• Source: https://ncfacanada.org/hester-peirce-nothing-but-crickets-at-the-sec/