S3:E6 Rallying for Sensible Crypto Regulation with SEC Commissioner Hester Peirce
On this episode of Archebyte we are joined by SEC Commissioner Hester Peirce.
Prior to joining the SEC, Commissioner Peirce conducted research on the regulation of financial markets at the Mercatus Center at George Mason University. She was also a Senior Counsel on the U.S. Senate Committee on Banking, Housing, and Urban Affairs, where she advised Ranking Member Richard Shelby and other members of the Committee on securities issues.
Hester joins us today to give us some insight into the SEC and the regulatory world. She explains the many challenges that come along with trying to regulate the crypto industry, including lack of time and resources, a potential desire to push the industry abroad, and navigating the US’s complicated existing financial regulations. Hester also agrees that regulatory progress is failing to keep up with crypto while reinforcing the idea that the industry requires new regulations outside of existing securities laws.
We later discuss Hester’s Token Safe Harbor proposal, which lays out a potential path for new crypto projects to gradually work towards decentralization without fearing SEC enforcement. We also touch on fostering innovation, the pros and cons of decentralization, and the best ways of communicating with the SEC and Hester herself.
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2:10 Crypto regulation issues
6:18 Is the US falling behind?
9:20 No one wants frauds and scams
12:05 Hester’s Token Safe Harbor proposal
16:55 “Come in and register”
20:00 Communicating with the SEC
22:00 How 2022 changed the perception of crypto
24:20 Decentralization pros and cons
26:27 SEC proposals
28:20 What regulators and the crypto industry should know about each other
33:32 Reaching out to Hester
👋 FOLLOW US
Hester’s Token Safe Harbor Proposal - https://github.com/CommissionerPeirce...
One of the biggest themes within the crypto industry right now, and also on this current podcast season, is the topic of crypto regulation, especially in the U.S. As the crypto industry has exploded in scale, talent, and companies, lawmakers and regulators have also turned their attention to our industry.
One of the more active regulators of the crypto industry in the U.S. is the Securities and Exchange Commission, which regulates the offer and sale of all securities, including those offered and sold by both public and private companies. The SEC is probably the most well-known U.S. regulatory agency in the crypto industry, largely due to the number of enforcement actions that the SEC has performed in the last few years.
Today, we are very lucky to be joined by Commissioner Hester Peirce. She's one of the five commissioners at the SEC. Commissioner Peirce was appointed to the agency in 2018, and she's known among the industry for her clear-eyed sense and practical take on crypto regulation, whether it's in the recent exchange law definition or in her proposal for token safe harbors.
Welcome to the show, Commissioner Peirce, and thank you so much for taking the time to speak with me today.
Well, thank you, Katherine. And feel free to call me Hester, it's easier. And I'm delighted to have the chance to talk with you. I do have to give you my disclaimer, which is that my views are my own views as a commissioner are not necessarily those of the SEC or my fellow commissioners.
Understood. And for listeners, I've been trying to get Commissioner Hester on for a few seasons, so I'm really, really excited to be joined by her today. So I'm going to start off with this first question, and it's kind of a big one. The audience of this podcast mostly consists of builders and founders within the crypto industry. And among this particular group, there's been mounting frustration, especially the US based ones, that crypto regulation in the U.S. feels really untenable and impossible to comply with.
And so my big question is - why does crypto regulation in the US feel so impossible?
Well, as an initial matter, I share the frustration. I agree. I think the question is really a good one. Why should it be so impossible? I mean, there are definitely some hard questions. If we wanted to sit down and develop a crypto regulatory framework, there would be hard decisions to make and hard things to figure out. But other jurisdictions are doing the work to try to figure out solutions. Whether or not they've all reached the right solution or not, I don't know, but at least they've sat down to try to do the work.
I think there are a couple of things going on in the US. I mean, part of it certainly is that we have a complicated financial regulatory structure. A lot of crypto has started out at least as having some sort of financial application or side to it. And so as other people who seek to be regulated by the financial regulators find out, you've got federal, state, you've got banking regulators, securities regulators, futures regulators, so it is difficult to navigate that. And I think that's part of what's going on and part of why it's taken a long time.
Another piece of it is, which I think you're seeing now much more, is a willingness and maybe even an eagerness to see a lot of this activity move out of the United States. And what better way to achieve that than by not actually coming up with a clear regulatory framework for people?
Yeah, it feels like. So I started working full time in the crypto industry in 2017 and it felt like even back then there were a lot of really unanswered questions. And I know in the span of lawmaking, that's probably not a long time. But from the industry, it feels like forever, right? And it feels like we're still wrestling and grappling with the sort of same set of questions. At least that's from the builder's perspective. Would you agree with that statement?
I mean, absolutely. You know, as you mentioned, I started in 2018, January 2018, and here we are in 2023, mid 2023, and we are still grappling with the same questions. And when I came into the job, we were starting to wrestle with some of these questions. There had been the DAO action, so that had sort of started us and we were looking at Bitcoin exchange traded product applications, but really grappling with basic questions that we are, as you said, still grappling with those today.
And it just doesn't make sense. I certainly, in my time, have learned a lot about the industry, about different aspects of it. There's a lot I don't know, but I've learned a lot. And my thinking has changed because I came in thinking we have a set of securities laws that's pretty flexible - we shouldn't have to really write new regulations. And as I learned more, I think, no, that's actually not exactly right. There are unique aspects of the industry that I think do need unique regulations. We can do a lot with our processes that allow us to make exemptions and let people try things. But we do actually need to put pen to paper and try to figure out some aspects of how the industry interacts with the securities laws. And we really have done very little of that.
Yeah, I mean, you raise a couple of points that I wanted to touch on later. But going back to what you mentioned earlier about other jurisdictions, and I feel like in the past, let's say like two or three years, it really seems like non-U.S. jurisdictions and countries have really progressed a lot in developing their regulatory framework for crypto, whether it's like a licensing or anything else.
Like with the EU we had MiCA Pass, and Asia I feel like is heating up and even the Middle East they put out really informed and practical licensing regimes. Does this change the conversation at all, either within the commission or how you personally think about the state of crypto regulation here in the U.S.?
I mean, certainly I'm looking at what's being done elsewhere and thinking, you know, as I said at the beginning, they've actually done some of the hard work. We might want to look at what they're doing and see which pieces of it. We want to draw an understanding, of course, that we have a different regulatory framework here, we’re unusual in having a securities regulator and separate Commodity Futures Trading Commission. And some of the other aspects and our definitions are not all the same as they are internationally. So it's not that we can just copy and paste another jurisdiction's regime, but certainly we should be thinking of that.
I mean, I don't know whether or not my colleagues are thinking so much about us falling behind because as I said, I think there really has been a decision made by a lot of people that this is an area where any innovation is not innovation we want to have happen here in the US. And that makes me sad because as I sit in a regulator's chair, it's really difficult for me to know ten years down the road where the most meaningful innovations will come from, whether it's going to be crypto or some combination of them or something totally different. So my charge, I think, as a regulator is to keep the doors of innovation open wide in the United States.
I mean, we've always been the place people want to come from other places to build things. And that's how I want it to be. I want people to want to move here. I want the brightest people to want to build their companies and their projects here. And so in order for that to happen, I think we need to have an agnostic view.
I don't need to be a cheerleader for crypto. What I need is just to work with them and say, Look, here are the regulatory objectives we need to protect investors and consumers, but we also need to allow people to raise capital for their projects. And so how do we meet those regulatory objectives of making sure that capital formation is happening in a safe manner, but also let people achieve their objectives? And that's what we should be doing. And I think other jurisdictions have been much more willing to try that.
I had a guest on this season talking also about crypto regulations. She's a general counsel of one of the larger crypto venture capital funds here in the U.S.. And one of the things that she said to me was, What if we, as in the U.S., what if we’re wrong? What if we’re wrong about not allowing for this technology and innovation to flourish? And there could be a chance, right, that this doesn't work out.
But she said, what if we're wrong? And I think about that a lot and like you, I share your sentiments. Certainly as someone who works in the industry full time, it's frustrating, but it's also a little bit sad to feel like, you know, after this many years that we're still in the same position.
I'm looking at other jurisdictions. They've done the hard work to come up with something. And it's not fun right now to think about the state of crypto regulations.
No. And the irony is that as a regulator, my job is also harder because we don't have a clear regulatory framework. I mean, none of us want the frauds and scam. And it's much easier to identify frauds and scams if you have a good regulatory framework in place. And so we're spinning our wheels, going after companies that want to comply with rules, but don't know what the rules are.
We have done a lot of important work on the fraud side in crypto, and I think that will continue. But what I'd like to see even more of our resources be able to be devoted toward going after the people who really have no interest in building anything. They just want to rip people off. And so we're hurting the very objective that we say we're furthering by taking the approach that we are.
Now that said, look, we are where we are, all of us are frustrated, and what we need to be doing is channeling that frustration into thinking about what would a good framework look like. f we have the ability to draft one, what would it look like? Because things do move pretty slowly in DC. And so what you want to do is you want to have a framework that makes sense, that addresses the concerns that we all have, the concerns that 2022 brought to light and figure out what would that good regime look like in pretty fine detail, right?
Let's have roundtables. Let's do what we can do to figure that out and have it on the shelf and ready to go. When we get a group of regulators who are more willing to try to put something like this in place, obviously Congress is working on these issues now, which is wonderful. But I think for me, certainly knowing what people think would be useful in terms of the framework would be very helpful.
Yeah, well, I want to shine some light on and this is one of the many ways I think of which I came to follow the work that you've done in doing precisely that, you know, doing the work, learning and thinking about what makes sense. So you put out, I think in 2020, a Token Safe Harbor Proposal on GitHub, and then I think you updated it again in 2021.
It's something that I felt like was urgently needed and I realIy appreciated your understanding of what a decentralized network is and how to have a framework that that makes sense for it, which is something I definitely wish more folks in DC understood. And I'll link the Safe Harbor GitHub link in the description. But for folks who maybe haven't come across it yet, can you share a little bit more about the thinking behind the proposal and how you personally think about or how the thinking has evolved around decentralization?
Yeah, so the idea was to say, if you want to launch your token project and you want to launch it so that anyone can buy your tokens, you really do need to put certain information. I mean, this would be an optional safe harbor, but if you wanted to opt in, this would provide you a safe from a regulatory path forward.
So you put out certain information about who the people are behind the project, what the plans are for the project, what the token economics are, and update that information as you go along. You'd have the code, it would be open source, you could have the code audited as well. And so the idea is that we solve this information asymmetry problem that you have.
Often when you have someone who's launching a project and you have people buying tokens without really understanding what they're getting, so you solve that. The idea is that if this project is really seeking to build a decentralized network after some amount of time, you're not going to have a situation where some people have more information than other people.
And then that's kind of how I think about decentralization when you get to a point that a network is really being used and worked on and built by the community as opposed to a particular group of people, then at that point you could be out of the system, right? So my period was a three year period that you have to get to this decentralized point. You could do it obviously sooner than that. If you're at three years and you're still not decentralized, then maybe you're just actually a centralized project and we can figure out what registration looks like during that three year period. Your statements would be covered by the anti-fraud rules and security flaws, so you can't lie in these disclosures you make.
Now, whether or not that's the right approach, I think the point is I still think it's a possible approach. The issue that a lot of people raised with me is it's really hard to tell when something's decentralized. I get that. And so we can think about other kinds of approaches. But I think you really need to address the issue of how do you both allow someone to launch a network, sell tokens, but protect the people who are buying them, but also recognize the fact that that token can't be treated as security forever because if it is, it just doesn't work with the system. It means that everyone who touches the token has a registration obligation. And so I think we're really trying to solve the problem at the SEC in the way the SEC currently approaches it by using kind of sloppy legal reasoning to just try to argue that everything everywhere in the crypto universe is securities transaction. It just doesn't make a lot of sense.
At the same time, I think there's a valid concern around some of these initial offerings. We've seen a lot of that activity there. And so putting a framework around that makes sense. Obviously the community can do a lot on its own. You don't need a regulator to tell you that when you buy something, you ought to have a little bit of information about it. You ought to ask some questions. And if you're not getting answers, you shouldn't put your money into it. But we can build a regulatory framework, too, that would achieve that and that would address some of these concerns, because now we just get wrapped around the axle around whether something is a security or not. And if it is, it can't trade on this platform. But if it's something that might have been a security once but isn't anymore, then it won't be able to trade on certain other kinds of platforms. It all gets very confusing and I just think we need to have a much more precise frameworks so that people don't have to ask all the time, Is this a securities transaction?
Yeah. Well, the best thing about what you're proposing here is that disclosure is something that we also want. There is no universe in which anyone says, Oh yeah, the less information that someone has, the better. Not only does disclosure allow everyone to be on the same playing field, but it's not so burdensome in which you will shut down a project or shut down something that's just starting, right? It's something that I feel is very doable. It would be even quite nice actually to have some kind of standard in the industry because we really don't.
And look, nothing starts off entirely decentralized from day one, and I feel like that's a truth that we can all accept at this point. And, you know, I think that's an example, though, of whether it's a framework or proposal that clearly shows that you’ve done the work. And it's also something that the industry needs and wants. And so that's sort of, at least to me, kind of like a win-win situation.
Well, it should be. And the comments about “well come in and register,” what bothers me about those kinds of comments is that we have frameworks, but typically when a company starts, let's not talk about crypto, just a regular company, right? It starts out, you have an idea, you build a company, you don't go public on day one. So you're not coming in and registering on an S-1 on day one. You rely on exemptions and raise money slowly, and then you build. And then maybe one day when you're a large company, you decide you want to go public.
But we're sort of assuming that these companies, these projects, should be making the same kinds of disclosures as a Fortune 500 company. And it just doesn't make sense. And that's why I've been trying to focus and say, as you said, it can be a win win, actually. Where we do get the information that regulators rightly think people want, but at the same time, we don't make it such that the process means nobody can start a project here in the US.? I think we can achieve both the ability for people to do stuff here, but also the ability for people to provide information that other people need. Then the same goes to that was the Safe Harbor, but I think we can do similar things and again, it's on GitHub so that people can iterate on it, and some people have done that, but we can do similar things. Like let's sit down and think about what does the registration regime look like for a trading platform that trades crypto assets, some of which might be security, some of which might not be securities? There are some unique aspects of things that live natively onchain, right? And so we don't want to live in a world where we have to insert intermediaries where they're not needed.
But we do really want to make sure that when people turn their money over to someone else or their crypto assets over to someone else, they're protected and they know what will happen if something bad happens to that platform. We can also build a regulatory framework that makes sense around crypto lending or staking a service, right? We can do these things, but I think we just need to take each one and put a model out there, let people iterate on whatever that model is.
And it shouldn't be a conversation that we're having with just one company or one project, because then what you end up with, and this is this can be a real problem in regulation, you end up with a regulatory regime that works really well for one entity but doesn't work for anyone else. So that's why I really think having this open process is important, and that's something that the SEC is not willing to do right now, but the industry can certainly be working on that right now.
What actually are the best ways to make the industry's voice heard without having to worry? I know a lot of people who are scared, right, to talk to a regulator because they think it puts a target on their back unnecessarily. They're worried that would cause some kind of backlash. What is the best way then to actually engage or to do this kind of thinking and put it out there?
I mean, I think you can work through groups or firms if you don't feel comfortable coming in. You can always come in and talk to me. I love talking to people and actually some of the most productive conversations I've had have been when groups of people in the crypto industry who are building different things, some investors, some builders come together and we just sit down together and have a conversation. I've learned so much in those conversations, so I'm certainly always open to doing that. I often will put out on Twitter that I'm going to be traveling to a particular city. And so if people don't want to come to DC, I'm willing to come and meet you where you are. So that's with respect to me.
But I think more generally you just sit down with your colleagues, with other people building things in this space and think about, okay, if I were sitting in Hester's chair and I had a regulatory pen, what would I write? And just work it out. And look, I'm not telling anyone what to do, but I think that one way to engage productively is to imagine a different universe in which we actually did want to sit down and write productive rules. What would they look like?
Yeah, I mean, at the end of the day, the conversation has to be two ways, right? Like you can do the hard work, but at the same time, it's a two way conversation, right? Because there are just going to be knowledge gaps that we need to fill, like someone sitting from an entrepreneur seat is not fully going to understand everything that you have to think about on the regulatory seat and vice versa, right? So it is a two way conversation and it would be great to have more of it without worrying about what's the consequence if I go and talk about it now, because that's also not productive.
No, it isn't. And I will say that as bad as 2022 was, I think it did help people in the crypto world to understand, okay, I see where regulators are coming from in worrying about things. Now regulators jump to one conclusion, some but not all regulators, obviously, some regulators jump to the conclusion 2022 just means that all of crypto is fraught with problems.
Other people like me point out, No, it actually just reminds us that when you have centralized intermediaries there in the crypto world or in any world, we see similar kinds of problems that you would see anywhere else. But I think it does provide the crypto world with a window into why regulators are concerned, because there's a lot of money being entrusted to people. And so in that kind of a situation, a regulator wants to step in and say to the people who are to whom the money is entrusted, you better be honest, you better not be stealing your client's money. You better not be mixing it with your own money. If you have conflicts of interest, you better be putting in protections so that you make sure they don't influence your decision making and make sure that your customers know about those conflicts.
And then if you run into a problem and you end up bankrupt, we need to know where does the customer money lie in terms of priorities? How likely are they going to get paid back? Those are the kinds of things people need to know. So yeah, look at 2020 to see those kinds of problems. Put yourself in the chair of a regulator and say, All right, we can get together and agree that we can put in some frameworks that can address those concerns, yet still allow us to build what we're trying to build.
I'm so happy to hear you say that, because you're right, it was actually centralized business failures, but for the folks who are working on decentralized and open source networks, it's hard to be lumped into the same bucket. You know, like, obviously we don't like that. We don't want to see any more of that.u It would be great if bad actors didn't just put a bad name for the entire industry because, you know, that's obviously a little bit unfair. So I'm very happy to be on the decentralized side.
So I think the decentralized side, you have to be honest about the fact that sometimes things aren't actually decentralized and that's okay, right? We don't have to live in a world where everything is decentralized. I think there are certainly areas where I think decentralization has great promise. And so that's wonderful. But let's be honest about what's decentralized, what's not, and then let's sit down and think about what regulation looks like for decentralized things.
Now, this is an area where I think we really all need to be quite vigilant because I think the centralization through decentralization brings some really valuable things. It brings more resilience to the system. It brings more autonomy to the individual who's interacting with a decentralized protocol. It brings people access. Anyone can access the protocol on the same terms, all transparent. And so in some ways, your regulatory framework really needs to adjust for the fact that some of the work is being done by a decentralized nation.
But I will tell you that from a traditional regulator standpoint, we're used to dealing with centralized entities that we can call up and we can tell them what to do. We can tell them when they're doing something bad. We can call them in and we can find them or pick them out of the industry. That's a very different world than the decentralized world. And so regulators need to remember that peer to peer transactions typically have a different kind of regulatory framework around them than decentralized transactions or a peer to peer to peer to protocol.
So I really think this is an area where people need to be putting some thought into how do we develop a regulatory framework that really does preserve people's autonomy and ability to do things in a decentralized fashion instead of trying to force everything into a centralized model, which is going to be the tendency of a regulator.
Speaking of that, for example, with your Safe Harbor proposal, how does something like that go into effect? Is there something that we as an industry can do? Like how can we make thoughtful proposals like that happen?
Well, I mean, I think what would have to happen is, say Chair Gensler got up tomorrow morning and he said, know what, I think I want to put some productive crypto rulemaking on the agenda. You can take the Safe Harbor proposal and put it out as a proposal and then we'd get comments on that. And then it could be put into a rule in terms of what people have to do. They've got to convince my colleagues that doing something like that — and again, I'm not wedded to the safe harbor, whatever we think the right path forward is — instead of going right to a proposal, we can do something called the concept release, which is we say, Hey, here's the problem we're trying to solve here are some of the solutions that we're thinking about, what do you all think about the solutions? And then people can write in and then we can go to the proposal stage.
But I think it really is a matter of convincing the regulator that we need to do something. I mean, we're not in a good place now, as we've talked about, but I still think having as many concrete ideas on the shelf ready to go when Chair Gensler does wake up one morning and say, I want to do something different, hey, we've got some ideas for you. That's I think that's the best way forward.
Yeah. Yeah. I learned from, I think one of your past podcasts that Chair Gensler is a fan of rom-coms. Maybe we make it into that format and maybe that's digestible for him.
It might be the way to speak to his heart. I don't know.
Yeah. What is something and I think you already mentioned this but what is something that you wish more of your colleagues understood about crypto and decentralized networks and vice versa? What's something that you wish more folks in the industry really understood about a regulator's perspective?
I think, on what I wish people in the industry understood about regulators, is that we have so many issues on our plate and most of them have nothing to do with crypto. So there's a lot going on at the agency. And so it's so hard for me to keep up with developments in the industry, and I try to do that, and so I think podcasts are one very helpful way to do that. So that's one thing.
And then in terms of what I wish my colleagues understood, I wish that they would think about it just in terms of the way it could potentially empower people. And again, I'm not a crypto advocate. I'm not an advocate of any industry. But when I look and I see a technology that potentially allows us to eliminate the need to trust centralized intermediaries, I think that that could be quite empowering for people. And so I guess that's what I wish my colleagues would be a little more willing to see. And, you know, there's been a lot of scandal, undoubtedly, and I don't disagree with my colleagues that that's really off putting, but I wish that they would look through that, look at people who are trying to solve real human problems. The idea that we have a potential new method for enabling humans to interact with each other is exciting, right? And it's a powerful concept that could really affect real people's lives in a positive way. So I wish they'd focus a little bit more on that potential and just be more open minded on innovation in general.
Again, it's not just crypto where regulators have problems. Even with traditional financial institutions that come in with a new product or service they want to offer, we sometimes make it quite difficult. So I wish that our doors would be more open to innovation in general as well.
Yeah, I mean, every industry has bad actors, but not in every industry do people put up the bad actors as the only thing that the industry has, which I think is why we feel very unfairly characterized sometimes with these hearings that I tune into.
Yeah, people are just kind of silently working on building things. And I love to see people who don't spend all their time thinking about the regulatory frustrations also. So I do think we can be doing something productive on the regulatory side, even when things seem so hopeless and frustrating. But I also think it's great that people are actually nose to the grindstone trying to build things and trying to figure out where this technology makes sense and where it doesn't.
Yeah, that's actually something I say sometimes. It's not so much that being quiet and building is the answer. Actually, you want to start talking about the things that someone who doesn't know much about crypto can understand, right? Which is like, what are you actually solving? What good is your technology or your solution or your innovation? Talk about the good in a more general and approachable way.
And that's something that I personally want to see more from my industry is, you know, you're probably building for people who already use crypto, but start doing more to think about the things that everyone else can understand. And I think everyone kind of falls back into the same arguments. And I think the ideals are a great foundation. It's about choice. It's about lowering access. But I think it needs to be said more. So that's what I wish we would do more of.
Yeah. I mean, use cases, real use cases are always, I think, helpful to give people much more of a concrete idea of what this all means. It is not surprising to see an industry that starts out that's pretty internally focused in terms of building things for other people in crypto, for example. But I think if you want people on the outside to be excited, they have to see, well, this is how it's going to potentially affect your life in a positive way.
And you know, to be fair, a lot of people have gotten into crypto because they thought they could make a quick buck. So that's not going to be a compelling use case for my colleagues. And look, I come to things from the perspective of people should be able to do with their hard earned money what they want to do with it. The government shouldn't step in unless it has a really good reason for stepping in. So I'm always more willing to let people make their own decisions. I think they know more about their circumstances than I do, but that's not always the prevailing attitude in Washington.
Yeah, yeah. No, that's fair. Right? Like, I do think some of the loudest narratives within our industry are probably not the best ones. And so for builders out there listening, you know, think about the good that what you're building can do and talk about it in a way that doesn't just characterize any kind of financialization but also lowering access, lowering barriers, those are the reasons why at least I got into crypto. So I want to see more of that.
Okay, well, there's still so much more I want to talk about, but maybe I'll save that for a second appearance. How can folks, if they did want to meet up with you and talk to you about what they're building, how can they reach you?
CommissionerPeirce@sec.gov - if you just send an email there or you can always follow me on Twitter. But if you want to contact me, the best way is through that email.
Yeah. And I can attest to it because that's how I got you to show up today. Well, thank you so much, Hester, for coming on today. And we hope to have you on again sometime soon.
Well, Katherine, it's been a delight. Thanks for the conversation.