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A US Securities and Exchange Commission (SEC) commissioner has given a speech calling for a hands-off approach to market regulation in the wake of GameStop volatility while sounding the alarm over calls for more decentralised finance.
Hester Peirce spoke at George Washington University Law School in the nation’s capital on Monday, as part of the university’s Regulating the Digital Economy Conference.
One of four current SEC commissioners, Peirce was appointed by former-president Donald Trump in January 2018.
The speech — which paraphrased Marshall McLuhan, emphasised the importance of civil liberties and aligned access to markets with the American Dream — was light on policy but did offer some insight into the minds of market overseers currently mulling how to react to the recent retail surge and short squeeze.
As the SEC is currently investigating the “momentous market events” of January, the commissioner would not be drawn on the “significant regulatory changes or enforcement actions” that may occur as a result of the GameStop saga, but said it was time the agency “stepp[ed] up our game as a regulator of the digital economy”.
The commissioner noted that despite the changing times, the regulator’s role has remained largely the same; policing fraud, protecting investors, upholding the rules. “The medium may change, but the message is the same,” Peirce mused.
But, while new digital tools have made it easier to uncover bad actors and provide unparalleled insight into trading activity, Peirce said those same tools — massive datasets, enhanced computing power and sophisticated software — make it easier to “trample over individual rights”.
The commissioner’s reluctance to come down hard on retail investor involvement after the GameStop short squeeze rattled Wall Street will come as a relief to many in government and the public alike. During the US House Committee on Financial Services’ hearing on GameStop and “predatory” short selling last week — the first of three — many House representatives singled out short selling, retail investing platforms and hedge funds.
Committee chair Maxine Waters’ indicated that the third hearing will focus on the regulatory response. No date is set for the hearing.
A House memorandum made clear the committee wants to dust off a half-forgotten section of 2010’s Dodd-Frank Act which would oblige firms to disclose their short selling data.
Peirce also addressed the anti-Wall Street sentiment “coursing through” the GameStop saga, noting that many still feel antipathy towards the sector after the bailouts of 2008’s financial crisis.
“Some participants seem to have viewed these price rallies and attendant short and gamma squeezes as a way to serve Wall Street a poisonous meal of its own making,” Peirce quipped.
But she warned against moving to decentralised finance (DeFi), a “rapidly growing corner of the crypto world with significant money involved”, in response to the anti-Wall Street sentiment.
Despite DeFi’s “alluring” promises of democratisation, open access, transparency, predictability and systemic resilience, Peirce highlighted a report published by the Federal Reserve Bank of St. Louis, a regional reserve bank, which detailed the pitfalls of DeFi including security vulnerabilities, scaling problems, and faux decentralisation.
Rather than “throwing the legacy financial system out entirely” and ushering in a new DeFI world, Peirce concluded, the agency should focus on enhancing transparency, modernising the post-trade settlement process and ensuring “that the markets are working for everyone”.
