SEC's Hester Peirce on DeFi: 'I think it's going to challenge the way we regulate'

Recent interviews with some members of Congress have demonstrated that decentralized finance (DeFi) has yet to make many waves on Capitol Hill.

But what about in the halls of regulatory agencies like the Securities and Exchange Commission?

SEC Commissioner Hester Peirce — who was confirmed for a second term in office in early August — told The Block in an interview this week that DeFi regulation isn't on the agency's list of top priorities for 2020. But she and other members of the agency are keeping an eye on the booming space and the looming regulatory challenges it could pose.

Peirce has long taken a unique interest relative to her fellow commissioners in the crypto ecosystem and in the broader implications of digital assets. In her speeches and regulatory proposals, she has consistently articulated a desire to protect innovation without letting it run wild and harming investors.

DeFi, she said, takes that balancing act to new heights.

What even is DeFi?

Peirce says she has taken significant steps to learn the workings of many digital asset projects, but she admitted there’s still a long way to go on DeFi education.

However, the massive growth of some DeFi projects in recent months, from Uniswap crossing $10 billion overall volume to the rise and fall of yams, could help pin down exactly what values are at the core of the DeFi movement, said Peirce.

“I think that some of the DeFi activity is going to be helpful in helping me try to put some more definition around what decentralized means,” she told The Block.

In her view, she said these projects seem to be trying to accomplish something different than many of the projects that arose during the 2017 initial coin offering (ICO) craze. Specifically, she said, it seems the DeFi revolution has a broader agenda than ICOs.

“On the ICOs people were thinking about, ‘can I build a network?’ Like in the Telegram case, as an example, the goal was to build a network and to build a currency that would work in that network effectively. And I think that DeFi is trying to do something less easy to categorize than that,” said Peirce.

It's all relative

Peirce said regulators are keeping an eye on the DeFi space and are aware of the recent growth, but in a year that’s contained so many unprecedented events, the explosion of new DeFi projects hasn’t been the biggest.

“It's big, but it's still all relative,” she said. “So if it got even bigger, then I think you'd see more regulatory attention, but that's not to say that there isn't any regulatory attention being paid.”

The total value locked in DeFi surpassed $2 billion in July and market capitalization over $7 billion, but this is still a drop in the bucket compared to traditional markets.

But besides that, Peirce said that DeFi teams and their advocates have yet to seek out formal guidance from the agency. In the past, she received more questions about the role of regulation related to decentralized exchanges (DEXs) than she is today, she said. Outside of the occasional lawyer-type on Twitter expressing interest in DeFi-specific regulation, not many industry players have approached the SEC.

But it's a game-changer

But those conversations will need to happen eventually, said Peirce, adding that she welcomes that process since DeFi will likely challenge the way the U.S. thinks about financial regulation.

Digital assets already pose unique challenges to regulators, and DeFi is another offshoot with its own specific nuances. It presents a unique challenge, she said: Who should be held accountable? When the goal is to craft peer-to-peer networks that rely on a smart contract rather than people to manage them, then by design these networks will lack a place to point the finger if something goes awry.

“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,” said Peirce.

It’s also unclear if existing regulatory proposals could hold solutions. For instance, in February Peirce proposed a regulatory safe harbor for token projects. That proposal is is currently undergoing a public comment period.

While the policy would give registered networks a time period to become truly decentralized, it’s unclear if it could seamlessly apply to DeFi governance tokens. Peirce said if the safe harbor were in place, she’d have no qualms about DeFi projects taking advantage of it so long as they complied — but it would still require a case-by-case view.