SEC commissioner Hester Peirce calls for 'legal clarity and the freedom to experiment' for DeFi

SEC commissioner Hester Peirce said Monday that federal regulators need to "provide both legal clarity and the freedom to experiment so that DeFi can compete with CeFi to offer investors financial services."

Her comments came during a speech entitled "Atomic Trading" at a George Washington University Law School event focused on the digital economy and regulation. In what is perhaps a sign of the times, the published version of her remarks sported a pair of rocket-ship emojis. 

Peirce told The Block last September that decentralize finance -- known by its acronym DeFi -- will pose a challenge to federal regulators. “It's going to challenge the way we regulate. And it's going to cause us to ask questions about what we think the role of a regulator is in DeFi — and I'm not sure that I've answered that for myself yet,” she said at the time.

Tuesday's remarks seem to indicate that her position on the subject has firmed up, with Peirce commenting that DeFi "will provide a very good test for our ability to regulate with an eye toward protecting the interests of investors and markets, not incumbents."

She was quoted as saying:

"The anti-Wall Street sentiments coursing through the market events of recent weeks and the growing realization of the power that private and public centralized entities wield in our lives have inspired some to call for throwing the legacy financial system out entirely.  In its place, they would put decentralized finance (“DeFi”).  The nascent DeFi industry—a rapidly growing corner of the crypto world with significant money involved—is working on building an alternative to the legacy centralized financial system (“CeFi”) run through smart contracts rather than financial intermediaries.  DeFi facilitates lending, trading, and investing in crypto-assets.  DeFi users trust in smart contracts rather than counterparties.  Although a work in progress with all the growing pains and rough edges that implies, DeFi’s promises of democratization, open access, transparency, predictability, and systemic resilience are alluring."


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"We regulators, mindful of the potential upsides and downsides, need to provide both legal clarity and the freedom to experiment so that DeFi can compete with CeFi to offer investors financial services," she went on to say.

Later in her speech, Peirce referenced calls from Robinhood CEO Vlad Tenev before Congress for advancement toward real-time settlements in the U.S. stock market. Addressing those comments, she invoked the potential for the technology that underpins digital assets to facilitate that change.

"In last week’s Congressional hearing, the CEO of Robinhood went even further and called for real-time settlement. After all, crypto transactions settle quickly and effectively without a central counterparty. Smart contracts and distributed ledger technology could make the entire clearing and settlement process in the equity markets faster and more efficient," she said.

Ultimately, she expressed a desire for regulators to take an open-eyed approach to regulate various aspects of the digital economy, stating that the environment "does pose some new regulatory challenges, but it also gives us new tools to meet those challenges."

"We should use those tools with genuine care for the freedom of the people we regulate.  We should welcome the new technology’s potential to improve the way markets work and to make them work for more people," said Peirce.

Correction: A previous version of this report said that Peirce's comments were given on Tuesday. They were given on Monday, February 22.