Peirce urges SEC to limit blockchain oversight to control, custody

At the IC3 Blockchain Camp in Princeton, N.J., on June 3, SEC Commissioner Hester M. Peirce argued securities rules should focus on actors who control assets, hold custody or exercise investment discretion rather than on neutral blockchains, validators or open-source software.

Peirce observed:

We see the crypto world teaming with brokers, dealers, exchanges, clearinghouses, transfer agents, investment advisers, and investment companies. In some cases, the blockchain is used to perform functions similar to those performed by these intermediaries, but it is not clear that our rules should apply to the blockchain itself, given that blockchains are used to do many things other than transact in securities.

She drew a line between infrastructure and market activity and said the SEC’s rulebook is built around intermediaries such as brokers, dealers, exchanges and custodians. Regulators should assess who controls assets, who exercises discretion and who performs functions traditionally handled by securities intermediaries.

Under that approach, centralized firms that hold customer funds or exercise decision-making power would fall under existing securities rules, while validators, node operators and software developers could avoid those rules when they do not exercise control or discretion.

Peirce urged builders to address risks before regulators intervene, recommending stronger audits, improved key management, security safeguards to prevent hacks and clearer disclosures about decentralization trade-offs so users know when central points of control exist. She added: “Crypto offers us the opportunity to think carefully about when, why, and how the securities laws should apply.”

Her remarks form part of ongoing discussions between regulators, developers and industry participants about how to classify decentralized finance platforms, node operators and user interfaces and about when traditional securities rules should apply.

Erlier, Hester Peirce called crypto privacy tools lawful parts of financial infrastructure and urged developers to work with the SEC Crypto Task Force on KYC and AML.