In a fireside chat I moderated with SEC Commissioner Hester Peirce held by the Blockchain Digital Asset Forum, in conjunction with the NYU Stern Executive MBA program, on March 26, 2019, she explained where her reputation as ‘Crypto Mom’ comes from — a desire to look at the world with fresh eyes and say, are there things we can do things better? We also discussed a Bitcoin ETF and the prospects for one after Bitwise released a report showing a health legitimate market, as well as initial coin offerings and what will happen to the hundreds of ICO issuers that had initial coin offerings that look much like the ICOs that have already had enforcement actions against them. She described the process that occurs when something like an application for a Bitcoin ETF is submitted to the SEC, whether or not there’s a lot of disagreement amongst the commissioners about how to regulate crypto, how much they work to persuade each other to come over to their side and whether Chairman Jay Clayton’s opinion overrules everyone else’s or whether majority rules. Plus, we covered dexes, stablecoins and security tokens.
View the full show notes on my Forbes page: http://www.forbes.com/sites/laurashin/2019/04/02/sec-commissioner-hester-peirce-on-why-you-shouldnt-have-to-be-rich-to-get-rich/
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Episode links:
SEC Commissioner Hester Peirce: https://twitter.com/HesterPeirce
SEC: https://www.sec.gov
Hester’s dissent to the Bitcoin ETF disapproval: https://www.sec.gov/news/public-statement/peirce-dissent-34-83723
Bitwise’s report: https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5164833-183434.pdf
SEC enforcement action against Munchee: https://www.sec.gov/litigation/admin/2017/33-10445.pdf
SEC enforcement action against Paragon: https://www.sec.gov/litigation/admin/2018/33-10574.pdf
SEC enforcement action against Airfox: https://www.sec.gov/litigation/admin/2018/33-10575.pdf
SEC enforcement action against Gladius: https://www.sec.gov/litigation/admin/2019/33-10608.pdf
Speech by William Hinman, SEC director of the Division of Corporate Finance, on ether not being a security: https://www.sec.gov/news/speech/speech-hinman-061418
Token Taxonomy Act: https://www.congress.gov/bill/115th-congress/house-bill/7356
Unchained episode with CZ: https://unchainedpodcast.com/how-binance-became-the-most-popular-crypto-exchange-in-5-months-ep-84/
SEC enforcement action against Zachary Coburn of EtherDelta: https://www.sec.gov/litigation/admin/2018/34-84553.pdf
DTC report on blockchains for securities: http://www.dtcc.com/news/2019/march/13/dtcc-outlines-guiding-principles-for-post-trade-processing-of-tokenized-securities
Thank you to Lawson Baker at TokenSoft (disclosure: a previous sponsor) for helping me think through some of the issues for this episode.
Transcript
Laura Shin:
Welcome, everyone. Thanks for coming. I’m so excited to be doing this interview, and I have to say, there was a sort of little fun detail that came up when we were prepping this, which is not only are both of us from the Cleveland area, but also Renee, who helps organize, is also from Cleveland. So it’s kind of like a Cleveland-organized event. So, welcome.
Hester Peirce:
It’s the heart of all innovation, Cleveland, Ohio, and I want to thank you to the New York Stern School for the chance to be here, and thank you, Naomi, and Renee, and Kristen for the opportunity to be here, and Laura for being willing to do this interview. I do have to start with a disclaimer, which is that everything I say is my own views and not necessarily the views of the commission or my fellow commissioners.
Laura Shin:
Great. Good to know, because I will be asking you a number of questions where I was trying to figure out, you know, where that line is between your view and the commission’s.
Hester Peirce:
Unfortunately, often, I’m here, and everyone else is there, but we’re working on it.
Laura Shin:
You’re already answering all my questions. I haven’t even asked anything. All right, so where I wanted to start, actually, with just with you, like your background. Why don’t you tell us kind of professionally what you used to do, and how you first heard about bitcoin, and how you came to be an SEC commissioner?
Hester Peirce:
So I started out my career, I majored in economics as an undergrad, and so when I went to law school, I really didn’t know what I wanted to do, but I liked the idea of securities law because it combines economics and law, and so I ended up at a firm that did a lot of securities law and at a firm where there were lots of SEC alums, and so not ever planning to go into government, I sort of was talked out of that view and talked into the SEC by some of my colleagues, and went to the SEC as a mutual fund regulator.
Then, from there, went to work for one of the commissioners at the SEC. After that, went to The Hill, another job that I never would’ve thought that I would take, but was there during the financial crisis and then in the aftermath of that, and then came over…went to the Mercatus Center, which is a center that works on financial regulation, and it was there that I encountered bitcoin for the first time, and I remember talking to some very passionate colleagues, one of whom is Jerry Brito, who’s obviously continued in this space.
Laura Shin:
The executive director of Coin Center.
Hester Peirce:
Exactly, and so he was really the one who introduced me to bitcoin, and then, you know, coming to the SEC at the time that I did when the industry was getting lots of attention, I think it naturally meant that I and my colleagues at the SEC had to spend a little more time thinking about it, and so then I started listening to Laura’s podcasts so I could learn something, and I’m still relying on her to learn a lot.
Laura Shin:
Oh, wow. Okay, no pressure here.
Hester Peirce:
The pressure’s on.
Laura Shin:
So you’re known as Crypto Mom in the industry, and I was curious to know how much of that comes from your actual interest in the space or just kind of more like a general philosophy that you have that’s, you know, sort of maybe light on regulation or maybe even libertarian?
Hester Peirce:
Yeah, I mean, I think that it comes from the fact that I really identify with some of what’s driving people in this space, which is the desire to look at the world with fresh eyes and say, are there things that we can do better? Are there new and different ways of doing things? And I’m really excited about the energy in this space, and so I think, you know, like a mom I guess, these people are doing things that I personally wouldn’t have the technological ability to do.
But I think it’s a really exciting space. You know, I am a regulator, so I have to moderate my enthusiasm, but I think that I can play a role in looking at ways that we can open the doors to make it easier for people to do what they’re trying to do compliant with our securities laws, and so when I came to the SEC, one of the things that I had hoped to work on was, in general, the agency has not been great on innovation.
So this is sort of a natural area for me to be looking at because this is an area where innovation and the SEC are meeting and not always in a harmonious way. So are there things that we can do to make that relationship between the SEC and innovation work better? And you know, I pick on the SEC because that’s where I can have an influence, but a lot of government agencies are not good on innovation.
They tend to be quite conservative because it’s safer, and so I think sometimes we have to take risks, and that might not always work out well. So I think that’s where I’m maybe a little bit more willing to say, all right, we’ll let you do this, but if you get hurt, you know, the onus is a little bit on you. You’ve chosen to take this risk, so we’re not going to protect you if you get hurt. So I’m willing to be a little bit more on that side than some other people.
Laura Shin:
And why don’t we kind of dissect one of the areas where you kind of let that stance be known, which was your dissent to the decision to disapprove the bitcoin ETF. Why don’t you talk a little bit about why it is that you chose to make that dissent, but also to make it public? I don’t even know how common…I did a little search on the SEC website. I do see there are other dissents, but I didn’t know, is this kind of like a bold statement you were making, or is it just a run-of-the-mill thing?
Hester Peirce:
Well, you know, typically, many of the decisions the SEC makes are unanimous, and so you’re not going to see a dissent. I mean, often, it’s pretty clear what we need to do in a particular instance. You know, this was one where…so the staff had been looking at this issue for a long time, and I was pretty uncomfortable with the rationale that was kind of guiding the decision.
I thought that, in looking at our statutory authority and then looking at the rationale that we had for rejecting the ETF, which was essentially to look at the underlying markets and say, oh, the underlying markets make us uncomfortable, and so we’re not going to approve a product that trades in our securities markets based on what’s going on in those underlying markets, and I think we’re limited in our ability to look through to the underlying markets.
So if we started to do that, I think there might be other areas where we would also be uncomfortable, because there are lots of markets that are not so neat. You know, they’re messy, and so allowing us to sort of go and look through is a dangerous thing, and then I thought there was a…and again, my colleagues would disagree with me on this, but I did think there was a whiff of merit regulation in this, which was essentially us saying we don’t think this product would be good for investors.
I don’t know whether that particular product or another exchange-traded product based on cryptocurrency would be good for investors, but I think that investors can make that decision better than I can. So my view is, if we get the information out there so people can make a decision, we should let things…you know, let the market try it out and see what the market thinks, and sometimes things that are really fought long and hard for by people in this space, you know, they finally get it to market, and it totally falls flat. That’s just the way it is, but that should be the market’s decision, not ours.
Laura Shin:
And one other thing I was curious about was when something like a bitcoin ETF application comes in, what is the process for vetting that? Obviously, we’re seeing that there are these comment letters and the different companies get to also weigh in, but do you guys have independent analysis where you’re kind of fact checking everything that’s being said, or how much do you take at face value? Just walk us through what happens when there’s an application like that.
Hester Peirce:
I mean, that’s a good question because process really does matter. So, typically, it’s the staff that will take the application in and consider it against the statutory framework that we have. The obligation is on the applicant for a particular product approval, and so in the case of exchange-traded products, it’ll be the exchange that comes in, which is a little bit awkward because you’ve got the sponsor of the product.
But it’s the exchange that actually comes into our Division of Trading and Markets and tries to get the product through. So you’ve got a little bit of a game of telephone as the sponsor of the product talks to the exchange, who then talks to us, and then there’s a separate process if it’s truly an exchange-traded fund. It goes through a separate division, as well, a Division of Investment Management, and so you’ve got quite a bit of opportunity for the staff to raise questions, and they do.
They’ll push back, as they should. They’ll ask lots of questions about how the product will work, and that process takes awhile, and then they’ll put a notice out. People can comment, and on some of these, we see lots of comments. Some of them, not so many, and then a decision will be made on that, and then sometimes they get kicked up to the commission, and then the commission makes the decision.
Laura Shin:
So, essentially, it starts with staff. They do their vetting, and then they might make some decision, and then what determines whether or not it goes up to the commissioner?
Hester Peirce:
So the applicant can appeal it up to the commission, or a commissioner can pull it up to the commission.
Laura Shin:
Oh, I see. Okay, and so when it does go up to the commission, how much of that is the different commissioners kind of working together, or is it sort of like the Supreme Court where they each kind of work on their own and then they make their views known, or do they try to lobby each other? Like, come to my side, or how does that work?
Hester Peirce:
Well, it depends on the issue, but I mean, we all work pretty closely together and talk to each other a fair amount, and then we have counsels in our office who are talking to each other. So, as we’re looking at issues, we’ll be talking with our counsels, and our counsels will be talking with each other, and we’ll be talking with each other at the commissioner level, as well. We can’t all get in a room together and talk about it unless we do that in public. We have the Sunshine Act. So that means that it’s…yeah, it’s not allowed for us all to just huddle in a conference room and hash it out.
Laura Shin:
Oh, interesting. So then a lot of the conversation tends to be more one on one?
Hester Peirce:
One on one, right.
Laura Shin:
Oh, I see, and so when it comes to crypto right now, do you feel like there tends to be a lot of alignment amongst the commissioners or even just within the agency overall, or is it something where, you know, there tends to be differences in opinion?
Hester Peirce:
Well, I mean, I think I’m probably not always aligned with my colleagues because, again, I would like to be a little bit…you know, I want to see a little bit of action here. So, look, I mean, there are a lot of people at the SEC who are working really hard on crypto issues, and I think we have…you know, Val Szczepanik is running our crypto efforts, and she’s been really out there talking to people, and I think she’s got a good grasp of the technology.
So she’s kind of spearheading efforts, and then there are other people in the different…she’s in the Division of Corporation Finance, and then there are people in the Division of Trading Markets, Division of Investment Management who are also working on these issues. So, you know, as with many issues, you sometimes are getting different concerns from different parts of the SEC, but I think in general, people are all pretty interested in learning and kind of moving forward to the extent possible.
Laura Shin:
And also just to continue in this line of questioning, how much weight does the chairman have? Like, if his opinion kind of differs from the rest, does that sort of overrule everybody else, or is it like if the three of you kind of have one view and then if his is the minority, then do you guys overrule him, or how does that work?
Hester Peirce:
Well, so the staff do work for the chairman, and so that’s I think an important piece to know, and so his concerns, obviously, are going to hold lots of weight. When it comes to a vote, you know, it’s just a question of how the vote shakes out. So he doesn’t get an extra vote.
Laura Shin:
Oh, I see. Okay, and going back to the bitcoin ETF, recently, there was this report that was issued by Bitwise that seemed…you know, it was very thorough. Did you look at it?
Hester Peirce:
I did see it, yeah.
Laura Shin:
I mean, I was like…
Hester Peirce:
I have to say, I didn’t read every line of the 227 pages maybe.
Laura Shin:
Yeah, I didn’t get to read every line, either, but what I read was very impressive for kind of just how sharp it was, I guess, you know, pointing out sort of the differences between what seemed like legitimate exchanges and what didn’t, but do you think that kind of thing would have any influence on whether or not a bitcoin ETF will get approved this year?
Hester Peirce:
Well, I think it’s fabulous that people are providing data, right, and that people are really engaging. The staff has laid out a number of questions in this area, and I felt like it was really nice to see someone really engaging with those questions and saying, here, we’ve got some answers to your questions, and you know, that report has been presented I think or talked about in the media in a pretty negative light as, you know, there’s all this manipulation in bitcoin.
And so we need to be terrified, but I think if you really look at the data they present, they say, look, there is this stuff going on, and we’ve identified that stuff, but there’s this other piece of the market where we see a really effective, well-functioning market, and one in which spreads are pretty tight, and so I thought that it was a really helpful contribution to the discussion.
Again, I’m not opining on any ETF or other exchange-traded product application, but I think that we do need that kind of really empirical, data-driven discussion to go on, and I think that, ultimately, anything along those lines can help answer some of the questions that my colleagues have about how the market works and about concerns that they might have about the market.
Laura Shin:
All right, well, we will see what happens later this year. So let’s now talk about ICOs, which is I think the other big topic everybody thinks of when they think of the SEC. SEC has taken these enforcement actions, almost sort of like picking off certain categories. You know, there was enforcement action against exchange and against ICOs for…or not ICOs, but it was celebrity endorsers, and then you have the ICO issuers themselves. The SEC sort of seems to be setting some sort of precedent or something, and yet you have this whole class of these other ICO issuers that pretty much did the same thing. So what does the SEC plan to do about them?
Hester Peirce:
Well, I’m not going to speak to any enforcement action, potential enforcement action, or you know…I can’t weigh in on specifics, but I will say that, in general, we took a look and said, all right, there’s some just outright fraud in this space where people are taking advantage of the fact that crypto’s really trendy, and so they’re throwing up white papers that sometimes are stolen from someone else, and you know, sometimes are completely not consistent with the underlying code, and they’re just running off with the money to a nice sunny location, and that’s the last we hear of them.
So we’re going to go after that kind of fraud, whether it’s labeled crypto or something else. So then you get to the next group where it’s someone who didn’t…you know, the promoters get together. They’re raising money for a project, and probably as this space has developed, people are much more familiar with the securities laws, but people weren’t really thinking this could be a securities offering, and that happens often, right? There are lots of things that could be securities offerings that people might not realize are, and so you can trip into our space pretty easily.
So I think we sort of sent a message first with the DAO report, which, it’s kind of like a quasi enforcement action, but it’s more just sort of setting out here’s something you all should be paying attention to, and then, after that, we went ahead and brought some specific cases, and I think that people should be on the alert and that if you’re doing a fundraising, which is a securities offering and it’s not compliant with our rules, it doesn’t either comply with the rules or fall into an exception, an exemption, then we are going to bring a case…
Because, you know, we need to…the securities laws are there, and we’ve decided as a society to have these laws and regulations in place, and so we’re going to enforce them when they’re broken. That said, if, in this space, there are things that need to change to allow this space to really flourish, then I think we need to have that conversation, too.
Laura Shin:
Well, but actually, just to go back, so amongst the many that probably are very similar to Airfox and Paragon and whatever, you know, I don’t think the SEC has the resources to go after every single one. So what will happen to those teams that really kind of did the same thing, but just nothing’s happened to them yet?
Hester Peirce:
Well, I mean, some things might happen over time, too. You know, it’s not like we’re doing sort of the Noah’s Ark approach where we’re only doing two of a particular kind of case. I think, again, if you’ve not complied with the securities laws and you realize that now, I would recommend that you come talk to the SEC, and it’s better if you go talk to them first, than having us come talk to you first.
Laura Shin:
And by that, are you talking about self-reporting?
Hester Peirce:
I am.
Laura Shin:
Which is what Gladius did? So how many teams have self-reported?
Hester Peirce:
Well, I don’t know that, and you know, the structure of the SEC is a little bit difficult to follow, even for someone who’s at the SEC, but certainly if you’re not at the SEC, it’s difficult. So the commission, we vote on the enforcement actions, but there’s a lot of work done at the staff level before I ever even know that anything is going on with a particular enforcement action. So I don’t know what’s in the pipeline and what’s going to come land on my desk next week.
Laura Shin:
Okay, and just to know, so, essentially, when a team comes and self-reports, then I guess the lower-level staff will kind of vet it to determine whether or not it was an unregistered securities offering, and then from there, will do what they did with Gladius or not or something?
Hester Peirce:
So they’ll make a recommendation or not to us, but if they think there should be an enforcement action, they’ll recommend an enforcement action, and then that’ll come to us.
Laura Shin:
There’s at least one instance of an ICO issuer where, potentially, at the time of sale, it was a security, and now it’s been deemed sufficiently decentralized enough to no longer be a security. I’m talking about Ethereum, in case you haven’t figured it out, and I know you can’t talk about specific cases, but I just want to know, you know, what would the factors be that the SEC would look at to determine when something is sufficiently decentralized to no longer be a security, even if it once was?
Hester Peirce:
Well, I think that…so we try to think of what the problem is we’re trying to solve with our securities laws, and the problem we’re trying to solve is an information asymmetry problem. You have a promoter, someone who’s behind a project who has a lot of information about that project and is trying to raise money, and so that person is going out to investors and saying give me your money, but what we need to make sure is that that person who is giving information so the investors can make good decisions about whether to give their money to the promoter.
If you get to a point where there’s no particular person or group of people who have that information monopoly, then it looks a lot less centralized. It looks a lot less like a securities offering. You know, I think part of the other thing that you have to look at is what are you selling, right? Are you selling a token that’s being used on a functional network? I think that’s also a key issue, to understand what the network is doing and what the token is for. Now, to be fair, I think we haven’t done a very good job in providing guidance in this space.
The staff is working on some guidance, and I think that’ll be helpful, but I do think that, you know, ultimately, there’s still going to be questions about, all right, so we’ve said that some of these offerings were securities offerings, but how do you get out of that, and at what point do you kind of have the blessing to go on without treating the tokens as securities? And that’s an area where I think it would be very helpful for us to lay out some markers so that people would have a sense of when they’re sort of free of the securities law framework.
Laura Shin:
And is that something you’re planning to do?
Hester Peirce:
Well, again, I mean, the staff is working on some guidance. Now, staff guidance is staff guidance. The commission can go ahead and bring enforcement actions anyway if they wanted, but staff guidance does carry a fair amount of weight. So that’s helpful, but I would like to do something a little bit more formal at the commission level to provide people a little bit more certainty. The problem in securities law generally is that it is facts and circumstances. I mean, it’s always been.
So it’s not just in the crypto space, but with everything, it’s facts and circumstances. So we tend not to be…we tend to say, all right, you know, think about the Howey test, which is the Supreme Court test, and think about how it applies in your circumstances, and if we don’t agree with you, we’ll bring an enforcement action. So it’s a little bit of a…you know, you got to apply the principles to your facts, and that can be a little bit daunting, especially for people who aren’t used to being in our world.
Laura Shin:
So, earlier, when I asked you if something is sold and would be considered a securities offering and then later become decentralized, you said one factor would be, you know, looking at whether or not the network is live, but in terms of decentralization, are there any particular other factors? Because that could apply…you know, XRP I know is another token that you’ve been asked about a ton, which, they didn’t have a sale, but obviously, a lot of people tend to view that as more centralized. So what are the factors that would go into looking at whether something’s decentralized?
Hester Peirce:
Well, I think, you know, I recommend to you Bill Hinman’s speech When Howey Met Gary, which kind of lays out some thinking on this, but I think in general, you’re looking at whether the network is…whether people are contributing to that network that are not just one core group of people, but whether it’s lots of people contributing. If there’s no formal secondary market that’s being maintained by the promoters, that’s also relevant. So if you kind of see the network just operating sort of from the grassroots up, that looks more to me like it’s not a security.
Laura Shin:
Yeah. Yeah. It’s easy to say, and yet when you get into the details, it’s like…
Hester Peirce:
I know. It’s not easy to put into practice.
Laura Shin:
What does that look like?
Hester Peirce:
Right, and I might not even come to the same conclusions as some of my colleagues might because I think, often, you know, you’re trying to look at, well, what was in the purchaser’s head when she bought a token? Was she thinking, oh, I’m going to make lots of money, or was she thinking I’m going to have a functional utility token? I mean, that’s a really strange road to go down because there are lots of products that you might buy thinking I’m going to be able to sell this for a lot of money somewhere down the line, but that doesn’t necessarily make it a security, and so I think, you know, if we’re candid about this, this is an area where we have to be careful, and if we go crazy, our jurisdiction could expand to include almost anything that people buy.
Laura Shin:
Yeah, and actually, just in our pre-interview phone call, some examples you gave where some people might buy a watch that they expect to go up in value or a car or something like that.
Hester Peirce:
Yeah, I mean, they advertise watches and say, look, this is something…you know, they show the nice picture of the father and the son, and they say you buy this watch and this is your legacy for your child. I’m thinking, well, you know, that, too. The person is saying…well, and I’ve even seen people say some of the best investments they’ve made are things like watches. So if that’s the case, then do we really want to walk down that road? I don’t want to walk down that road because I don’t need to regulate watches. We’ve got a lot to do on the securities side.
Laura Shin:
Yeah, and one other factor I wanted to ask about was, so, of course we’ve been talking about decentralization as being one of the characteristics that I guess would make a token not be deemed a security. Are there any others that you feel like the commission is sort of zooming in on as factors that would separate security tokens from utility tokens?
Hester Peirce:
No, I mean, I think those are sort of the primary things. If you’ve got an active community that’s actively involved in making decisions, and open source code, and things like that, I think that all plays into it, but I think those are kind of the basic factors. Now, again, if you all have thoughts on this, I would love…you don’t have to tell me right now, but a lot of you in this room probably have a lot more experience with actual projects, and you probably have given some thought to this. So you should come talk to me.
Laura Shin:
You mentioned the SEC, it sounds like, is working on some guidance, and then, at the same time, in Congress, I know there was introduced the Token Taxonomy Act, which kind of proposes to exclude digital tokens from the definition of a security and also relieve some tax burden having to do with central assets. So what do you think of the Token Taxonomy Act, and do you think it’s better to have that kind of clarity come through Congress or through the SEC, or can there be both, or how does that part work?
Hester Peirce:
Yeah, I mean, I think it can be…you know, Congress is kind of our overseer. So they’re looking a what we’re doing, and because, as I said, in the innovation space, the SEC is often pretty slow to act, and so sometimes it does take a nudge or stronger than a nudge from Congress to tell us we need to do something, and so the Token Taxonomy Act would be one way of getting the SEC to do something on this front. To, you know, put a safe harbor, essentially, in the statute to say if you’re within this framework, you’re not considered a security.
So, you know, one option is for Congress to spell that out very clearly, in which case we go ahead and implement it. Another is for Congress to tell us to do something. So Congress could say to us, design a safe harbor for tokens, and that would sort of force the issue. Sometimes Congress is very disappointed with what we come back with when they tell us to do something like that because we say, well, all right, we’re going to design a safe harbor.
And we’re going to put all these restrictions on it, and then, essentially, we’re back to where we started, and then Congress has to push us again. So sometimes they want to be a little bit more prescriptive and say here’s what we’re thinking of. Here’s what we want you to do, and so that’s one option, but I think it’s really exciting that people in Congress are thinking about this issue, too, and trying to grapple with the questions that I’m trying to grapple with of how our securities laws interact with this space.
Laura Shin:
Last summer, I interviewed Changpeng Zhao, who’s the CEO of Binance. Amazing episode if you guys have not listened to this. I asked him a ton of questions about regulation, and he really pushed back at me, and his company, frankly, is famous for regulatory arbitrage, and something that was kind of funny that he said to me…I mean, honestly, so much of the episode, frankly, was funny when we were talking about regulation, but I…
Hester Peirce:
Which is hard to do.
Laura Shin:
I know. Exactly. You know, but he definitely…he has strong opinions, and they really came through, but one of the things he said was that he…I mean, I don’t remember what phrasing he used, but he essentially said, like, oh, things like SEC disclosures are sort of like theater, and basically said, you know, I would rather look a the information coming through telegram groups and what are people saying, and he was kind of implying that the information that you can get online about these crypto assets is even better, and so just curious to know, because I know that you I think tend to have the view that information is kind of the main reason that regulation’s important.
Hester Peirce:
Well, I mean, I think that that point is an interesting one and one that we often forget at the SEC. So, at the SEC, we often think, well, if we don’t have a rule in place, people are just going to buy stuff, and they’re not going to even ask for any information, and that’s pretty ridiculous because, I mean, yes, there is a group of people who are willing to give their money on a hope and a dream and a little title called crypto and nothing more, but I think, especially as this space is maturing, people are saying, wait a minute, you know, I invested money in this project, and now I have nothing.
So if I’m going to invest in another project, I’m going to ask a bunch of questions, and I think that’s a very healthy attitude to cultivate in people, which is, no, don’t give your money to anyone without asking a ton of questions and being quite sure that you know who that person is, what they’re planning to spend the money on, and what you’re entitled to in return for your investment, and so I think we’ve got to remember that there is really sort of a natural inclination on the part of people to seek out information when they need it.
And I think that’s kind of what that point was going to, and so especially in a space like this where you’ve got people who are…I mean, it’s a brutal space where people are willing to rip each other to shreds, say that each other’s projects are terrible, say that, you know…someone will say this project’s a complete fraud. There’s a lot of good conversation. It’s sometimes a little bit…you know, I can’t even listen to some of it because my SEC phone doesn’t allow me to listen to some of those podcasts because the language is too bad.
But the bottom line is, you know, people are out there, and they’re talking about this stuff, and I think that’s a really healthy way to get information out there. So I don’t totally discount that point. Yes, the reason the SEC…sort of the reason for the SEC’s existence is to get disclosure, good disclosure out there to investors, and I think that’s a really important role, but I also don’t kid myself that, absent our involvement, it won’t happen at all.
Laura Shin:
So this actually raises another question for me because something else that was funny that C. Z. said to me was…you know, I was trying to go along with that line about how if you’re serving US investors, then you fall under the SEC’s jurisdiction, and C. Z. said to me, oh, well…you know, because I kept saying, like, are you worried about the fact that you might be running afoul of US securities law?
And he was saying the way you’re questioning me, it’s like you’re saying that if I don’t like hot weather, I have to live in Florida. So I’m so curious to know what your take is on the fact that, yeah, you know, he’s not based in the US. I actually don’t know how restrictive it is if you’re trying to access the Binance exchange in the US, but I do think people are going on there making accounts and buying at least a little bit. I’ve heard of just anecdotally people doing that. So what’s your opinion on that?
Hester Peirce:
Well, so I think if you look at our enforcement actions not only in this space, but in other spaces, you’ll see that people in other countries can come into contact with our securities laws without setting out to come into contact with our securities laws. So you can end up…you know, if you’re reaching out to US investors, you can come into contact with our securities laws, and you know, when I see those kinds of enforcement cases, I often say to my colleagues, all right, do we really expect someone who’s based somewhere in India, for example, to be thinking about US securities laws at all times?
And I think that’s not reasonable, but at the same time, if you are reaching out to US investors and a lot of people in other countries are reaching out to US investors intentionally, I think you’ve got to be very careful because you can easily come into contact with our laws. So, you know, you’ve got to be practical about this, but I think we also need to be practical. We have limited resources at the SEC, and we’re trying to figure out how best to use those resources.
And sometimes that will mean going to someone who’s in a different country who’s trying to reach into our markets, and sometimes that means that we would pass on a case because we’ve got more important things to do with our resources. I mean, one sad thing is that in the securities world, because there’s money there, there are always people who are there trying to rip people off. So we have so much work to do, and we have to make wise decisions about our resources.
Laura Shin:
And so for ICOs, is there any method going forward where you think people can issue tokens in an ICO and that it will be compliant?
Hester Peirce:
I do. I mean, I think that there are methods of doing offerings under our securities laws, and some folks are trying, for example, to do Reg A+ offerings, which is a particular kind of offering, and so I think we’ll see some of these offerings go through, and I think that will send a positive message to people that you actually can do this consistent with our securities laws, and here are some examples of how it was done.
Laura Shin:
And are you guys also talking with other jurisdictions? We’re seeing, you know, Switzerland has kind of carved out a little I guess area for utility tokens. Wyoming has done a similar thing. Is that something the SEC is thinking of doing, and do you talk to other jurisdictions, and if so, which ones do you find interesting?
Hester Peirce:
We do talk to other jurisdictions. I mean, we have some pretty formal working groups with other jurisdictions about all kinds of things, and so one of the issues that has obviously come onto the agenda now, the international agenda, is this area of cryptocurrencies because regulators all over the world are thinking about how crypto interacts with their rules and regs, and so we’re consulting with one another trying to learn from each other’s approaches, trying to see areas that…
You know, what’s worked in other places and not worked. It’s still early. Everyone’s sort of trying to figure this out, but you know, one area that’s interesting for me is that there is a lot of innovation going on in Asia. So are we missing out on something? Is there something that we could be doing differently so that some of that innovation would be happening here in the US instead?
Laura Shin:
And let’s talk also now about exchanges. We’re seeing that this new trend of decentralized exchanges is coming up, and you obviously already have that enforcement action against kind of a so-called decentralized exchange, but you said actually it was centralized, but in the case of actually decentralized…sort of these next generation DEXs, how would you enforce regulation where there is no one person to target? Would it be the software developer who created that?
Hester Peirce:
Well, I mean, I think this is a difficult area for us. Again, you got to look at…our rules in this area are quite precise. So, setting one of these things up, you’ve got to look at how what you’re doing interacts with those rules, and I suggest that before you start trading…and again, if it’s decentralized, this is a little bit harder, but if you’re the one sort of setting this project up, I recommend you come in and talk to folks at the SEC to make sure that you’re not tripping any regulatory wires.
But I do think that we’re going to confront a very difficult situation when you’ve got a truly decentralized exchange where there’s kind of someone’s written some code, and then that’s being used to do exchanges, and I am concerned that we could inadvertently go too far. I don’t want someone who’s writing code to have to worry, you know, that she’s going to get blamed down the road for what someone else did with her code, and I think that’s an area that I’m particularly concerned about. I don’t want to outlaw writing code.
Laura Shin:
And I know another area that’s of deep concern at the SEC is custodianship, and obviously, that wasn’t a piece I think of the decision about the ETF. So what kinds of questions does the SEC have around qualified custodianship of digital assets, and how do you think the industry can allay those concerns?
Hester Peirce:
Well, so I think it’s important just to kind of take a step back and think about custody generally. So why do we care about custody at the SEC? We want to know that assets aren’t being lost or misappropriated when an investment intermediary is holding those assets for an investor. So you want to know your assets are safe, and that looks like one thing when you’re talking about standard securities. It looks a little bit different in this space.
And so you’ve got to be able to show that the asset is there and that it belongs to you, right, and so that’s kind of the challenge because you can see on the blockchain a lot, but then you’ve got to match the private key with the public key, and you’ve got to do that in a way that shows that you’re the only one with access to that private key, and so I think that’s kind of the thing that people are working on.
The good news in this space is that because institutions are more interested in this area now than ever before, there’s a lot of effort being put in place to develop really good custody solutions, and I think there are a number of folks who are working on that, and so the SEC has put out…our Division of Investment Management put out some very specific questions. I would recommend that people who have answers to those questions write in and say what their answers are so we can get some thoughts going around that.
But I think people are writing in on it, and are thinking about it, and are talking to the staff about it. Having auditors weigh in on the discussion, because auditors ultimately have to audit these assets, having them weigh in and say, yes, we can get comfortable. There’s a way for us to do this that’s also valuable.
Laura Shin:
So I think US crypto exchanges are in a really difficult position. You know, if I were a crypto exchange, I could maybe go the super conservative route and only list bitcoin and ether, and that might not be very viable. A business model by that would mean that then I would run pretty much no regulatory risk at this point. However, from the investor’s standpoint, because there is demand for these other additional assets, you could have a lot of US investors then going to offshore exchanges where they are exposed to even more risk. So if you were a US crypto exchange, how would you proceed?
Hester Peirce:
With great care. No, I think, again, I recommend for everyone who’s involved in this space and has a question in the back of his mind about whether or not there’s an issue with the securities laws, come talk to us. Again, the sooner you come in, the better. It’s better if you come in before you start doing things, but come talk to us and work through the issues with us. You know, you should have a sense of what you’re trading on your platform and whether or not that’s a security.
I think it’s really important to do the due diligence on that, and I think that’s kind of how exchanges are approaching it, but you’re right. I mean, there’s a business problem of just staying extremely conservative, so I understand the concern, but we do have a very prescriptive set of rules around exchanges that trade securities. So you’ve got to be aware that you could trip those and that you could end up in not a good place.
And again, you know, to the extent people are concerned about the breadth of those rules, I would say we as a society have made a choice to have some pretty intense rules in our securities space, and so if you think that’s not a good idea, then we can have that conversation, but those are the rules on the books. So, you know, maybe this is the moment that makes us say, okay, maybe we should ask whether we should have a little bit more flexibility here, and that’s fine, but you do have to kind of deal with the set of rules that’s on the books. So, yeah, I caution conservatism and care.
Laura Shin:
And in a similar vein, I sometimes talk to some of the different developers, and maybe you’re not surprised, but it surprises me sometimes to hear kind of the different work-arounds they’re doing really to try to avoid any kind of enforcement action from the US, like specifically just this one regulator, and when I listen to them, I really think, oh, this does not sound good. It sounds like they’re doing a lot of work to avoid this situation, and I know you guys walk this fine line of wanting to protect investors, but not stifle innovation. So I’m curious to know, how would you grade how well the US is doing so far, and how do you think the US regulators can do better?
Hester Peirce:
Well, I think that’s a great point that you make, and it’s sort of a more subtle point, which is that a lot of resources are expended in just trying to figure out how you can be compliant with our rules, and so I hear that, and I think, wow, it’s sad to me that those resources can’t be spent in a more productive way. You know, again, we have this rulebook in place, so that’s a consequence of it, but it also makes me want to say come talk to us.
Tell us where the pain points are, and tell us, you know, what we could change so that you wouldn’t have to engage in effort that ultimately you don’t think is serving investors, and so how would I grade how we’ve done? You know, I don’t think we’ve done a tremendously great job, and it’s not because…you know, there are a lot of people at the SEC who are working extremely hard and trying to get this right.
And they are thinking about our mission, which is protecting investors, facilitating capital formation, and maintaining fair, orderly, and efficient markets, and so that’s what’s driving people, but because…to go back to a point I made earlier, we’re just not great at accommodating innovation. So I think we do need to think about ways that we can make it easier for people to get relief so they can move forward with projects in a way that they’re comfortable, they’re not going to run into an enforcement action.
So I’ve talked about different approaches to this. I think you could have an office of innovation which would sort of be a central place at the SEC where people could come in with ideas, and that office would help them to kind of navigate the many channels at the SEC. I don’t know if that’s the ideal situation, but I do…you know, I worry about the idea that people are feeling…you know, just throwing their hands up and saying we can’t even deal with the framework, the regulatory framework in the US. That’s very sad.
Laura Shin:
So, so far in our discussion, we’ve been talking a lot about these so-called utility tokens that were actually securities offerings at the time of sale or even actual securities, but let’s now talk about actual security tokens, which are digital representations of traditional securities. How should those be issued and transferred on a blockchain?
There was this recent report that DTC came out with where they talked about some of the different methods, and one was kind of using a permission to private blockchain, and then I know there are other token standards being proposed right now where it would be more like on a permission-less blockchain, and you could still have some of the traditional actors, like DTC or transfer agents, and they would sort of interact with these public blockchains. What’s your thinking around that?
Hester Peirce:
Well, I think that people are still sort of thinking through different approaches, and I’m not sure that I have the one answer. I’m not sure there is one answer, but I’m glad people are starting to think about how they can experiment, because I actually think this is an area where blockchain could be pretty valuable in transforming the way our securities markets operate. Sometimes…maybe this is a little bit of a ways off, but I think there are some problems that we see now that maybe you could address through having a blockchain-based solution, whether or not that’s going to be…
Laura Shin:
Permission-less you mean?
Hester Peirce:
Well, I think even a permissioned system could be valuable, but again, I’m glad people are thinking about permission-less and permissioned because we’ll see where things land, but I think it’s an area where…you know, again, a lot of people write this off and say that there’s nothing new that blockchain can offer here, but I think, potentially, this is an area where we’ll see innovation, and we’ll see, 10 years from now looking back, saying, oh, yeah, blockchain really kind of helped to revolutionize this space.
Laura Shin:
And another area where crypto probably could revolutionize things or is already starting to disrupt at least is when it comes to the fact that, so far, when it come to riskier investments, it’s pretty much been limited to accredited investors or the wealthy, and obviously, we saw in 2017 that regular mom and pop investors were kind of getting in on the ground floor of things, which…especially in recent years, you know, private companies have been staying private longer and kind of delaying to the IPO. So, in this context, do you feel like it still makes sense to have these accredited investor requirements, or do you have another idea on how they could be improved?
Hester Peirce:
Well, I don’t feel it makes sense to have accredited investor requirements in any context, but that’s an area where I think I’m not in the mainstream. So I will say…I mean, again, I think it’s great that people in this space, you know, they’ve come up against our accredited investor rules, and they’ve said, wait a minute, you’re telling me I have to be rich in order to get rich? That just doesn’t seem right, and so I would like people to think a little bit more broadly about that and to think, yeah, you know, are these rules even good in any space, crypto or any other space?
Is this really how we want to run our regulatory system in this country? So I think it’s great we’re asking that question, but I think from a practical, pragmatic perspective, there is interest, and totally apart from crypto in recent years, there’s been interest in saying, all right, let’s look at these accredited investor standards, and let’s broaden them out, because, you know, the reasoning behind saying you’ve got to have a lot of income or wealth before you can invest is we’re trying to protect people, right?
You’re trying to say, all right, if you’ve got a lot of money, you can probably bear the loss better, and you’re probably more sophisticated, but now we’re saying, all right, are there other ways we can judge sophistication? And maybe that’s taking a test. Maybe that’s showing that you’ve got a particular professional degree or that you’re actively employed in a particular space, and so I think that we could well see some changes in the accredited investor standard that would better accommodate more people and enable more people to participate.
Laura Shin:
Another trend in the crypto space is stablecoins, and we’re even seeing J.P. Morgan Chase saying that they’re going to have a stablecoin, and there’s multiple ways of creating one. There’s, you know, just ones where it’s dollar backed, and then there’s other ones where there’s this second or third token even involved that helps control the price. In general, what’s your take on especially these different types of stablecoins? Do you think that any of them, these categories, run afoul of securities law?
Hester Peirce:
Well, again, I think it’s really interesting to hear people talk about this space and think about this space, because it’s like monetary theory is getting a new lease on life with all these people thinking about it and really going back and sort of thinking to first principle. So I think that’s interesting. I’m not a monetary economist, so I give those people lots of credit, but you know, I think that Val Szczepanik, who, again, as I mentioned, is sort of spearheading our efforts on crypto at the SEC, made some remarks a couple weeks ago that got some attention in which she raised the issue that stablecoins, certain types of stablecoins might run afoul of the securities laws or might run into the securities laws.
So I think it’s something people need to think about. Again, it’s an area where I will be sad if our rules stand in the way of people developing a stablecoin that has investor interest that people want. So if there are things that we need to do to adjust our rules, again, come talk to us. Tell us what you’re running into, what the problematic areas are, and I think it’s helpful for us to have specific examples of where there might be problems.
Laura Shin:
All right, last question for you from me before we get to the audience questions. This is an easy one, or maybe not. I don’t know. Tell me, how do you feel about being called Crypto Mom?
Hester Peirce:
Well, you know, I’ve always wanted to be a mom, so I’ll take it in whatever form I can get it.
Laura Shin:
All right. Okay, so the audience did pre-submit questions, so I’m going to ask some of these. We’re running out of time, but the first one was a little bit salty, and I thought it was kind of interesting to get your take on this.
Hester Peirce:
All right. Salty questions.
Laura Shin:
Like, a person who had a pretty strong stance. So they have a little bit of background, which I’ll summarize. Right now, the US regulatory focus on crypto is mainly looking at its implications as a new financial asset, but this is the less interesting application. Advances in cryptography and distributed consensus systems are the underpinning for a new decentralized internet dubbed Web 3.0. Almost none of the important major projects building Web3 are based in the United States, in large part because regulators just don’t get it.
And this focus on financial assets gets in the way of innovation. Just look at what a failure the BitLicense has been. ZERO, all caps, legit projects are based in New York. Question, do you agree or disagree that US regulators have completely missed the point in a rush to be the first movers in a new regulatory regime and in the process, kneecapped the US tech industry’s opportunity to compete against Europe in building the internet of the future?
Hester Peirce:
Well, I like people who have strong opinions. So, you know, I share some of the same concerns underlying that, and I’m not speaking to any particular regulatory decision made in the US, but I think generally, people who are in the regulatory community are sort of dismissive of this space in a way that I think misses that point, which is there’s a real…
And again, I’m not a technologist, and I can’t see into the future, and I’m not an investor in this space, but I think there’s a real potential for us to change the way people interact with each other across the globe and to bring more people into our economy, which is good for all of us, right, as we draw in talent from more and more places through this area of crypto, and so we do want to make sure that we’re not stopping positive development from happening.
So, you know, often, though, in an economy like the US, we have capital markets that are very strong, and part of the reason they’re very strong is because of the regulatory framework we have, but we also have to think about are we preventing people from doing things that are beneficial to society that they would do were it not for our regulatory system? And that’s a challenge that we have to I think confront and think about. So I’m glad that people are asking questions like that.
Laura Shin:
This one also was slightly saucy and a little bit less attitude, but this person says, can you explain the disconnect between the numerous SEC enforcement actions wherein the SEC has stated that issuers need to register their tokens or other instruments as securities, and intermediaries need to register as broker dealers, and the fact that not a single registration statement or broker dealer application in the digital asset space has been approved, despite numerous applications pending, many overdue?
Hester Peirce:
I think that we would be on much stronger footing if we had gotten some of these through. Now, you know, the staff at the agency is doing its due diligence, as it does, regardless of whether crypto is involved or not. I think just as…I’ve said in other contexts, like, investors seem ready to jump anytime they see crypto and invest, but we seem to want to jump the other way when we see anything crypto related and want to just run away.
And so I think we need to be a little bit more open. At the same time, we need to make sure that all the regulatory boxes are checked, but I would love to be in a position where some of these had actually moved forward, and so, again, I urge people who are in the process to please come talk to me if you’re running into problems. It’s very important for me to hear from you directly so that I can have that…otherwise, I’m only getting one perspective.
But if you come in and tell me the problems you’re running into, it can be very helpful for me to sort of help shepherd things along, you know, at the agency and say to folks on the staff…ask them what’s going on and to understand better what’s going on, and again, I think people on the staff are working very hard, but it’s important for us at the commission level to have a sense of what’s going on there. So please come talk to me.
Laura Shin:
So this is actually a question that I had that I sort of ditched along the way, but it’s very related, so I want to ask it, which is that there are these different exchanges that are trying to become broker dealers and are applying to be approved for ATSs, for alternative trading systems, and as far as I understand, I think that was supposed to start happening in Q1. That there was supposed to be some guidance from the SEC that would enable FINRA to…but apparently, it’s not happened in the timeline that was initially set. So what’s the reason for the holdup?
Hester Peirce:
Well, again, I think the staff is working on guidance. So we’ve got staff in Corporation Finance who’s working on guidance sort of that’s related to, you know, is this a securities offering or not, and then we’ve got folks in Trading and Markets who are working on those kinds of issues related to broker dealers, ATSs, but I’m hoping that we’ll see some progress in that area, as well. I know there are a number of people who are interested in having ATSs that are able to trade crypto.
Laura Shin:
All right, and so, on a similar issue, somebody asked about potential cases of price manipulation in the cryptocurrency markets, and they were wondering what are some actions that the SEC is considering to regulate this emerging market to protect average investors?
Hester Peirce:
Well, the underlying markets are not ours to regulate. So, you know, I think the answer to that is that it’s just not in our purview. Again, you know, as with anything, I’m not giving investment advice, but I urge people to ask lots of questions and think before you commit money to anything, and so I think that’s just a valuable lesson, and don’t assume that everything everywhere is regulated, and even if it is regulated, don’t assume that you shouldn’t ask your own questions. You’ve got to ask your own questions.
Laura Shin:
All right, so last audience question is what kind of foundational principles is the SEC following to regulate crypto assets?
Hester Peirce:
What kind of foundational principles, that’s a great question. I think the foundational principles we’re applying are ones of, you know, traditional securities regulator approach, which is we take our securities laws, and we ask how they apply, which I think is the right first step, but I think the second step and the foundational principle that I would like to see applied is, all right, let’s think about are we standing in the way of mutually beneficial transactions?
And if we are, then what do we need to do to rethink the framework that we have in place to allow mutually beneficial transactions to go forward? I mean, I think, ultimately, our securities rules are just one piece of a regulatory framework that we’re trying to have in place so that society is a better place, and if it turns out that our rules are not allowing that to happen, we need to rethink them. So I’d like to have the second piece of that foundation be to really think back and say is this a good thing?
And we too often aren’t willing to ask that question, and I think a lot of times, it’s because we’re afraid that the answer is going to be, you know what? Maybe something we’re doing on the regulatory side is not ultimately furthering societal wellbeing, and there’s nothing wrong with that. Situations change. Times change, and so let’s have a frank conversation, and let’s change, or pare back, or modernize where we need to do that.
And there’s no shame in saying, hey, you know, we’ve been around as a regulator since the 1930s. A few things have changed since then. We might want to, you know, just ask a few questions about whether the framework’s working the way it should, and if it’s not, let’s change it so that everyone’s better off and everyone has more freedom to make their own decisions and to do things that allow them to participate better in society, to contribute their talents and their resources to society.
I mean, that’s ultimately what our capital markets are about. They’re about drawing out people’s talents and people’s resources so that it can contribute to our society and to the growth and development of our society. That’s what we want, because, ultimately, that means that people’s lives are better off, and that’s kind of what’s driving me and why I am so honored to be able to be part of the SEC and part of this discussion.
Laura Shin:
Well, we were so honored to have you here and hear your thoughts. They were fabulous. Thank you so much.
Hester Peirce:
Thank you.
