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Appointed by President Trump in January 2018, Hester Peirce is the newest of five SEC Commissioners. However, she is already making headlines with her dissenting opinion on the latest disapproval of the Winklevoss Bitcoin Trust on Bats BZX Exchange, Inc. (“BZX”). In a public statement released on July 26th, Peirce argues that her colleagues had incorrect judgment in rejecting the Exchange Traded Product (ETP). Peirce outlines three of her top concerns with the ruling.
1. Delays Financial Institutionalization of Bitcoin
Peirce argues an ETP would provide both retail and institutional investors a safe way to invest in bitcoin. Without a regulated product, both firms and individuals will resort to buying from start-up exchanges, like Coinbase, where they do not receive high-quality consumer protections.
“Investors who want to diversify their portfolios by adding a bitcoin component will be relegated to the spot market, which will not benefit from the increased institutional discipline that approval of this product would bring”
Peirce argues that greater participation by institutional investors in the bitcoin market would help pressure exchanges to bolster their defenses against theft, encourage greater investment in custody solutions in the bitcoin space, and make it more difficult for market manipulators to escape the notice of their fellow market participants.
2. Bitcoin’s Market Manipulation is Overstated
Peirce’s peers point to market manipulation as a reason for disapproving the ETP. But Peirce notes that the bitcoin market is not different from the forms of market manipulation of other commodities, despite those assets having SEC approved financial products. In fact, the nature of cryptocurrencies makes bitcoin less prone to the type of manipulation that have plagued other markets. Peirce notes:
“For example, trading in bitcoin is electronic, which facilitates competition and price transparency. Bitcoin’s are interchangeable; a purchaser is sure to get the same product no matter where he or she purchases it. In addition, bitcoin mining is not geographically limited (except to the extent it migrates to places with cheap electricity), so it is not subject to geopolitical threats that plague other commodity markets.”
Peirce cites prior case studies of privately generated regulation that have achieved well-functioning markets absent of government intervention. However, in this case, the Winklevoss’ Gemini Exchange is a regulated institution under the New York State Department of Financial Services, and BZX has entered into a surveillance-sharing agreement with Gemini to calculate the net asset value of the ETP at the end of each closing day. This feature makes the SEC’s criticism about lack of regulation questionable.
3. SEC Shouldn’t Play the Role as ‘Gatekeepers of Innovation’
Peirce sees the disapproval of the bitcoin ETP as a failure of the SEC to follow its mandate. Rather than make judgments about technology, the mission of the SEC is to protect investors, foster capital formation, and facilitate fair, orderly, and efficient markets. Peirce worries that the SEC’s decision indicates that the US is not a friendly business environment for innovators.
“By withholding approval of a bitcoin-based ETP because the underlying market insufficiently resembles the markets for other commodities, we set ourselves up as the gatekeepers of innovation.”
She fears entrepreneurs and technologists will take their capital and talents to other foreign markets, where they will be welcomed with more enthusiasm.
Before being appointed to the SEC, Hester Peirce was a lawyer specializing in financial market regulation. Peirce regularly contributed through books, articles, comments, and statements to the debate about banking regulations. With public comments like these, Hester Peirce is already feeling the love from the crypto community, rivaling the affection showed to former CFTC chair Christopher Giancarlo after his positive cryptocurrency statements last year. The financial industry will be sure to keep an eye out for Peirce’s next move.