Regulating Digital Currency • SEC Commissioner Hester Peirce

Commissioner Hester Peirce of the U.S. Securities & Exchange Commission (SEC) joins Niki Christoff in the studio to chat cryptocurrency and regulators: the players and the stakes. Affectionately known as "CryptoMom," Commissioner Peirce outlines her vision of protecting investors and consumers while fostering new crypto projects. 

“It is understandable that there's focus on regulation at the start because we've really dragged our heels and haven't provided a clear regulatory framework.”-Hester Peirce

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Transcript

Intro:

Niki: I’m Niki Christoff and welcome to Tech’ed Up. Today, we’re talking about crypto regulation with sitting SEC Commissioner Hester Peirce. She’s affectionately known among the industry as CryptoMom because of her support for innovation and experimentation, but after our conversation, I’m wondering if she’s more like crypto’s cool, fun aunt. 

Transcript: 

Niki: Welcome Commissioner Peirce, for coming on the show today, you're a sitting Securities and Exchange Commission commissioner. You're busy. You have to give us a disclaimer before we say anything.  

Hester: I do. I'm glad you reminded me.  I represent my own views [clears throat] and not necessarily those of the SEC or my fellow commissioners, and I'm delighted to be on your podcast.

Niki: Thank you. So we, today, are going to talk about a couple of things I want to cover off first, what you do for a living. What is the SEC? Why are you guys talking about cryptocurrency so much, and then a little bit about your perspective on the regulations, because you're in the news a lot lately. You have the nickname CryptoMom, which the enthusiasts have given to you.

So I'd love to hear how you're thinking about regulation, but let's start with the basics. What is the SEC and what do you do? 

Hester: So, the SEC is one of many federal financial regulators. We regulate the capital markets. So, when you think: stock markets, broker dealers, investment advisors, public company disclosures. That's what we regulate.

Niki: There are bunch of other agencies that regulate money– 

Hester: Right,  there are many federal financial regulators that regulate banking. There's the Commodity Futures Trading Commission. There are many state regulatory agencies as well, so we share the playing field. But we have a pretty big piece of that on the federal level. 

Niki: Okay. It’s an independent agency comprised of two Republicans and two Democrats at any given time with a Chair who's decided by the Senate? Or the White House. 

Hester: So, how it works is it's, it's intended to be independent, as you said. So that means it's politically balanced and the president picks the deciding person. So it's always going to be politically balanced in favor of the president's party. 

Niki: The point of the SEC is to protect investors from being defrauded, deceived, but it's not to protect people from making terrible financial decisions. Is that right? That's a leading question. [chuckles]

Hester: That's fair. We have a three part mission, which is to protect investors, to facilitate capital formation, and to protect the integrity of the markets essentially. And so you're right on the investor protection side of things. It's to help people get the disclosures they need to make their own choices, but it's not to make their choices for them. So that's how I view it. I think sometimes we tend to walk into the territory of trying to tell investors what they should do. But it's important that we stay away from doing that.

Niki: So, the, you're not in the business of saying, “Hey, dummies, this company is run by a megalomaniac. The board is, like, working on their fantasy football picks during the quarterly meetings, they have no path to profitability. [Hester: chuckles] Don't invest.” Your job is just to say, “They've done this prospectus, that is accurate, their filings are accurate. Go forth and invest at your own risk.”

Hester: [interrupts] It is the responsibility of the company to produce disclosures that represent what's going on at that company. We don't look at every disclosure that comes out. That's not our job, but, if they are lying to investors, we can bring an enforcement action against them for lying to investors. I always caution people, pay attention, look for red flags because we have an important role to play. But so does the investor in thinking about whether to invest and assessing the information.

Niki: Which is a great segue to cryptocurrency. So if you look at just the headlines and what the SEC is talking about right now, it's crypto, crypto, crypto. And it seems to me that there's a little bit of a debate going on about the role of government in protecting people from themselves or protecting people from this new technology. And I'd love to hear from you why that's so relevant at the moment and your perspective on what the SEC should be doing about it and is doing about it.

Hester: So crypto has gotten lots of attention from regulators recently, just because it's grown so quickly. And that always catches the attention of regulators. There's a lot of money. There are a lot of people trying to make money. What every regulator is trying to do is figure out:  where does this fit within my regulatory framework?

And the SEC is no different on that front. There are many instances where things being done in the crypto space may touch on our rules. Crypto assets may be securities. Or they may be, they may be sold and offerings, um,  that look a lot like a traditional securities offering. And so, at that point, we'll come in and look at it–

Niki: So I'm not sure people know what securities are.

Hester: Well, and there's a good reason for that. There's no clear definition of security. On purpose. So that, the statute that we administer has the definition of security, but it's intentionally broad because you want to capture anything where someone says, “Hey, give me your money and I'm going to produce a return for you. You can just sit back and I'll produce a return for you.” We're trying to capture all of those kinds of relationships. And so that's why we have this very open-ended definition and that's great. It helps us to catch people who say, “Oh, I'm not selling a security”, but they actually are.

Hester: But at the same time, it leads to lots of questions, especially in the crypto space, about when something might be a security and, and it's, it's actually caused quite a few problems. 

Niki: Ok, so let's talk about those problems. You're very vocal on how you think the federal government should be approaching this technology, including providing a little bit of space for experimentation and innovation. So I'd love to know how you're thinking about crypto and then also how the agency is thinking about it. 

Hester: I think about crypto as a regulator, I'm, I’m, not trying to decide what projects are going to succeed or fail. I think there's real promise in this space because I think we've been looking for a long time for a way to transfer value on the internet.  And this, crypto allows that to happen. So that's really valuable and it allows, it's a way to coordinate human activity in a way that we haven't been able to do before. There's a lot of positive potential for crypto, but I can't tell you where that's going to come from. 

But what I do think that we've done wrong is we've said, okay, we're, we have this, this framework that's been in place for almost a century. It's worked really well. And so when these people come in and ask us to help them figure out how crypto fits within that framework, we push back and we say, figure it out yourself. So I've tried to think about ways that we can create some safe harbor for them to do what they're trying to do while also accomplishing our investor protection goals. And just give them some run room. 

And then, I'd like, also, for us to, as a society, to think more broadly about whether we need to make any changes in the way we regulate because of this new technology. And that's, that's a big question. And it's one that shouldn't be decided just by the regulators–

Niki: So, so what do you mean by that? When you say,  society? So this is, this entire, we are doing a series on cryptocurrency because it's in the news, but it's also here to stay. Blockchain is here to stay. Cryptocurrency is here to stay. People are trying to figure out how to buy it. It's actually really complicated to buy it right now. And I'm curious what you mean by how society should be thinking about it?

Hester: Yeah. And I think it's become less complicated to buy. Things start out to be really geared toward the tech people and then over time user interfaces improve and that sort of thing. But I think we have to think about: here's something that's based on code, right? And that's something that's new and different for us. It allows for greater transparency.

It allows for rules that apply the same to everyone. No matter who you are, it allows you to know, ahead of time, how your transaction is going to play out because you can see that code and it, and it eliminates intermediaries. The goal is to have it be a transaction between the two of us or a transaction between me and code, as opposed to a transaction between me and an intermediary. That intermediary institution is someone I can regulate easily. I think that there's real promise in allowing people to experiment with a world in which there's a little bit less of a central government role, and there's a little bit less of a central intermediary role. 

Niki: I agree with this by the way. So, I feel like right now there are so many parts of the financial system that are exclusive. You have to, you know, to be an accredited investor. You need a certain amount of wealth. There are so many middlemen and those middlemen are making a lot of money.

Hester: And not only do they make a lot of money, but they're also middlemen who are able to discriminate against, y’know, “I like this group of users. I don't like this other group of users.” And one of the promises that, that, this technology has is that it says, “Nope, everyone comes in on the same terms”–

Niki: [interrupts] It's more democratized. 

Hester: It is!

Niki: Even though I think, I know you think it's easier to use, but, I have to be honest. I still think it's kind of hard to buy if you don't have the basics, but it is getting easier. 

Hester: I don't want to oversell these kinds of potential benefits either, but I think it is important for us to see that there is the possibility of this becoming very democratized.

Niki: It honestly seems like cryptocurrency is dominating headlines. It feels like it's the main thing everyone's working on.

Hester: I think it's getting a lot of attention because there's a lot of money at stake right now, and that always gets people's attention. And so that causes people to ask questions. And, there are a lot of narratives around crypto that I think have attracted a lot of attention. Maybe not fair narratives. And so, so, I think that's also pulling people in and, you know, to be fair, regulators are going to think when anything is growing, they're going to think about financial stability concerns, they are going to think about customer protection concerns.

And they're going to think about, you know, anti-money laundering type issues. So we're going to have to figure out a way to, to regulate it.

Niki: Yes. So, when you're talking about the unfair narratives, I think what you're talking about is the idea that criminals use this–

Hester: There's, there’s, this narrative that all of crypto is about illegal activity. Which, y’know, one could say this, that any payment medium is going to be used for legal things and illegal things And so just as cash is used for good things, it's also used for bad things. So, there's that narrative. They’re narratives around just the potential there. A lot of people just write it off as being all about speculation. But I think it's important to remember that this is early days. And I think, we will, we will see it being used as a way to, to allow people to engage with one another in ways they haven't before. Allow users to own the networks on which they do all kinds of things, not just financial things.

Niki: Right, so, it's a distribution of power. [Hester: It is] And that's, I think, why everyone's so focused on it because it's changing power structures, at the end of the day. 

Hester: Right. And I think the government needs to remember that we work for the people and, and so, things that are, that are net beneficial for, for the people should be things that we encourage and are excited about and work to build a reasonable, pragmatic regulatory framework around.

Niki: I've heard you say that you look forward to the day that when we're talking about crypto, we're talking about the entrepreneurs and the innovations and not the regulators  [Hester:Yes!] , but literally this is one of the first episodes on crypto and it's on the feds–

Hester: [interrupts] It is understandable that there's focus on regulation at the start because we've, we've, really dragged our heels and, and, haven't provided a clear regulatory framework. But this really distresses me because people who should be focused on building things are instead thinking all about regulation, all about how, how, they can comply, whether they can even build something in the United States without running afoul of the law.

And so, all that mental energy and all that time is spent on thinking about regulation. Instead of thinking about all the interesting things they can build all the problems they can solve. So, what I really have wanted us to do, is just get a framework out there, allow people to react to it. You know, put that framework in place and then allow people to go build and we'll regulate.

Niki: In addition to working for the people, you also work for Congress. So, so [excitedly] this is another dynamic that I think is so interesting as the focus on crypto in Congress, which it feels like they probably have 55 other things that should be a priority as opposed to this, if the goal is to protect people.

But it's top of mind because of exactly what you said, it's changing power structures, it's addressing intermediaries, it's changing the way people work with them. But one of the things I've noticed is, [pause] it almost feels like you're being asked to determine whether or not crypto is good or bad for people. Am I right about that characterization?

Hester: It sometimes feels like that. And that really rankles me because that's not my role as a regulator. My role is to try to get information out there to allow people to protect themselves essentially. And we do have a role in protecting people. As you said, we have a role in combating fraud.

We have a role in going after financial professionals who do bad things to their clients, right? That is, that is part of our job. But this idea that we have to make a value judgment on a particular asset class is ridiculous to me. I do think it's good that Congress is spending some time thinking about this because, you're right, I answer to Congress and they set up a statutory framework and I have to operate within that statutory framework. So if they want to change the allocation of power and say “We think that CFTC and SEC should share power on the writing rules for, for, uh, crypto or SEC should be able to write all the rules for crypto” or whatever allocation they want to do, that's their job. And so, I think it's good they're thinking about it. It is also true [chuckles], as you said, that they've got a lot of other things to think about, and this is not an easy area. I think for me, as well, things move so quickly. And so it's very difficult to stay on top of what's happening.

And we have a lot of other things to work on at the SEC [chuckles], this is just one small piece of what we do. Which is one reason I'm happy that we have a chairman who not only knows quite a bit about this, but he actually taught on this subject in his prior life. So, he comes with a big advantage that he has a technical understanding of this space.

He has an understanding of the promise and I hope that means that he'll be willing to work, to build a good, sensible, clear regulatory framework. That's, everyone can see what it is. Everyone can react and we can build it. So that it works. 

Niki: The current chair is Gary Gensler, new, relatively new, and he doesn't seem really pro-crypto. There's a lot of discomfort with some of the things he said, but you're right: he understands it. [Hester: Right, right] He understands the technology and maybe the difference, and I don't want to make assumptions about how you might think about things and how he might think about things, is protecting people from making a determination about whether or not people should be investing in this sort of directly the average person.

Hester: [interrupts] This is the nature about a regulator like mine, where we have five different voices and every one of us brings a different perspective and a different background. He's not a lawyer- the rest of us are. So he brings a different perspective from that. And so we can bring all of those views together, but I've also said it's really important that we, this be an organic rulemaking and that it not be top-down. 

And that's something that I'm really committed to trying to achieve is a bottom-up type of regulation. So that it's coming from the people who are actually involved in the industry, who are actually customers and investors in the industry. That I think is going to produce the best kind of regulation.

And so, I don't think it matters whether he's a fan of the industry or not. Though I do think he appreciates the potential of the technology.  I think it's, just, we need to have a shared commitment to building a regulatory structure.

Niki: Agreed. And so, let's talk a little bit about, you've proposed a safe harbor or some experimentation that companies can do, because this is one of the things- you mentioned before I started work at Google-

Niki: We had one person sitting in DC. The company had been public for three years. [laughs] We only had one staffer in Washington because really our focus wasn't the regulatory space, not then. And it's almost the exact opposite when you look at some of the venture capital funds who are invested in cryptocurrency. I mean, they are stacked like cordwood [laughs] with policy people, because everyone is nervous that it's going to be regulated out of existence.

It's almost like we're leading with regulation. And so, I want to give you a chance to talk about your safe harbor idea.

Hester: So what I'm trying to do is– a lot of the questions have been around: What is a security? When is a digital asset offering a securities offering? So, what I tried to say is, “Y’know, that is a really difficult question to answer.” So, why don't we offer people an alternative of not answering that question? So, you get a project that is ready to go live with its network. And it feels, right now, like it can't because when it ships those tokens out to people that could be seen as being a securities offering. 

The safe harbor is intended to say, you can set up your network, you can get it going. You've got to tell people what it is you're building. You have to tell people who you are. You have to tell people, you know, what your economic interest in it is. And you've got to keep updating that information as you go along and make progress on your plan and all that is going to be backed by our anti-fraud protections in the securities laws.

But, that gives you the time then, at the end of three years, you can, you can take a look at it and you can say, “You know what? My network is so decentralized. There's no one party anymore who has more information than anyone.” And that's really what our securities laws are about. Our securities laws are intended to say to the person who has more information than anyone else:  You tell other people what that information is so they can make good decisions. But once something is decentralized, truly decentralized, you don't need to do that anymore. 

Niki: And that's the, that's the, potential power of this technology. You said something, when you first, when we were chatting, right before we started recording about our capital markets. And I want to give you a chance to really be a champion for the capital markets, [with emphasis] because you're passionate about it [chuckles].

Hester: Yes, I am passionate! While I'm not a champion for any industry, I am a champion for our capital markets, which are a national treasure. So the capital markets are the place that people go to invest their money, to build their retirement, to pay for their kids' college.

It's also a place where entrepreneurs and companies come to get capital so that they can bring their interesting and novel, and life, world, changing technologies to life. And so we want to make sure that those markets work well, so that it's easy for someone who has a great idea to go in and get money. And it's easy for everyone in the United States to participate as an investor. 

We have, we have the best capital markets in the world. It's where everyone wants to come to raise money. It's where you know,  it's the envy of the world, right? And so, that I think has been the backbone of our economy. And so our goal, my goal, is to get more people participating. There's a lot of work to be done on getting more people participating as investors, but also to be looking to the capital markets to get money when they have something, when they have a business to build. So, that's what gets me excited. And I think it's something that everyone, no matter what their political views are, can agree: um, that, If we can empower people as investors and as entrepreneurs, it can really change our society for the better. 

Niki: I love your enthusiasm for the American capital markets! And you're absolutely right. We're the gold standard. [Hester: Yep] And you're, you’re at the agency that oversees it, which is huge. It's a huge job. And, I agree: the more people we can get involved and make it easy for them to participate. I think making things accessible, breaking down some of these set rules that exclude those who don't have a certain amount of wealth from participating, even at a small level, seems directionally correct to me. 

Hester: Yeah. And I mean, that's something that I hear more about than almost anything else. People are just really upset that we have these rules that say for certain, for certain investments, it only is available to the people with the highest income and the highest wealth. There's some exceptions to that, but that's mostly what it is. And so that's something where I think we need to work on democratizing it. Again, people need to be careful when they invest.

But there are a lot of different options for people. That's what I want to do is maximize people's options and it's a big country, people have different ways of doing all kinds of things, including investing, and we just need to make it possible for everyone to find his or her own way of investing and building, y’know, building that wealth.

Niki: I think we're in a moment in time, this is my personal opinion, where there's a real groundswell of interest in breaking down what feels like a rigged system, where it feels like if you're born with money, you have more access to invest in things and making it so that it's easier for people to buy a small piece of an ETH or or invest in a company that might have the potential to become totally huge.

Niki: And they could, not just as a speculative practice, but just to be invested in this growth. 

Hester: I think that's really important. And we saw some of that during the COVID period where everyone was sitting at home, a lot of people started thinking, well, I'm going to, uh, do some investing. And so we saw a lot of, a lot of retail interest in investing. And you know people have to be careful. Again, you can't just do something because everyone else is doing something. But I think there is something really important about having retail investors [pause] interested and excited about participating and buying company shares and talking to people about buying those shares.

We have to, we have a role to play in regulating, but it's not a bad thing that there's grassroots interest in the markets. 

Niki: Right! You can take a calculated risk, but if you're bad at math [both laugh] you might lose a lot of money.

Hester: I believe that the other side of saying people are individually free to make their own choices is to say, okay, but you're also responsible. So you have to go into this responsibly. You have to think about: When do I need this money back? Do I need this money back? You know, is this what I'm going to pay my rent with?

You've got to make your decisions thinking about, the, all the circumstances you face and you can't assume, and this applies to crypto too. You can't assume that everything will always go up because it may not, and you have to be prepared to take a loss. So that's part of the risk-balance people need to take into account.

Niki: So, I'm going to end with discussing this moniker you've been given, which is CryptoMom. And we were just talking, is it one word or two? I think it's one–

Hester: Then, it's one. [Niki: Let’s decide]  I, I- there you go! 

Niki: Okay. So, it's one word. CryptoMom, you wrote something once about your thoughts on being the CryptoMom and, you know, quote unquote motherhood of this industry. And I think it's a good place to end is, sort of, your perspective on that role. 

Hester: Yeah. Well, I think it was sort of a funny title to get. I don't actually have kids, so this is like, my substitute, I suppose, for my kids. And you never know exactly what you get when you have a child, right? [Niki: Totally] You get a surprise, but it's a happy surprise.

But I will say one thing I don't like about the title is: Government isn't there to be anyone's mother. The government is there to set ground rules, but people have to make their own decisions. And so, I want people to, to, to approach it that way. And, and to, to remember that they're responsible for their own lives, for their own decisions.

I'm excited to see people succeed. And so I think that's the part of the mother title I like, I love seeing people change the circumstances in their lives for the better. And I see the potential in people where others might sometimes only see the negatives. So I guess that's what I like about the–

Niki: [interrupts] Maybe you're more like a crypto mentor crypto fun aunt.  And I mean, I agree with you, ‘mom’ makes it feel like you're responsible for the outcomes. You're really not responsible. You're just saying “Let's create a level playing field. Let's create a framework. Let's give some room for experimentation. Let's make sure people have a helmet on before they go ride their bike.”

Hester:  So people are always pointing back to the origins of crypto and saying: “ It's all negative.”  And I'm saying: “I actually see a lot of really smart people trying to figure out problems that society has and these problems need to be solved.” And so let's cheer them on as they're solving the problems and, y’know, try to build reasonable guardrails around that. 

Niki: Great. I'm so glad you addressed it because every time I read it, I wasn't sure if you liked it or didn't like it. And it's really kind of not the point of this podcast, but it's worth talking about because it is what you're known– [laughs] It’s what you've been known as, so thank you for that. The last thing I want to ask you, your advice to the industry. When they approach Washington, do you have any tips on things they could be doing better? 

Hester: I think one thing they can do is talk about where there are, y’know, talk about it, one, in simple terms, because it is very complicated to those of us who are lawyers and a lot of regulators are lawyers. 

So that's the first piece. And the second piece, I would say is when there is something that, that, crypto is being used for that people can really get their hands around, talk to them about that. One of the problems here in the US is that everything functions relatively well in the United States. I mean, there certainly are problems. We talked about some of them, about how crypto can help democratize. But by and large things work well here.  In a lot of other places, things don't work well, and crypto has already served to improve people's lives in many places, in many parts of the world, it's made it possible to do, to transfer money from here to family, back in another country in ways that are safer and cheaper and faster.

And so, why not talk about some of these uses and explain how these things can really be transformative? That's--that would be my advice. 

Niki: And that is, I think part of the real beauty and potential of this is it gives, if they have an internet connection and they have the ability to get involved in crypto, it can be protective and also transformative for people who aren't in a system that's as highly functioning as ours. And I know people don't think our system is highly functioning, but it absolutely is [Hester: Right] compared to the rest of the world. [laughs]

Hester: [interrupts] And, and y’know even if you don't care about the billions of people who live outside the country, there are a lot of Americans living here who are trying to help their family in the country they came from. And so you should at least care about those Americans who are trying to, you know, who are scraping as much money out of their paychecks to send back to family in another country.

And so money they can save or certainty that they can have, that the money is actually going to reach the people who need it. That's something that we can at least celebrate, so-

Niki: I think that's right. A lot of people who come to this country and have relatives overseas, you might have to use Western Union, which has really expensive fees to send money. And so, thinking about those people who are living here in the US and trying to lift up their family and share what they've been able to earn here is I think one of the best use cases for this. 

Hester: Yeah. And so, I think we'll see lots of other interesting use cases, um, come down the pike. And again, as a regulator, it's not my, I don't have the best view of that future, but I think that people who come to Washington to talk to regulators should help the regulators see that view of the future. 

Niki: Yeah. Tell that positive story. [Hester: Yeah] Thank you so much for coming on today and taking the time. 

Hester: It's been great to be here. Thanks for having me.

Outro: 

Niki: Next week, we’re taking a break from our Crypto 101 series, and I’ll talk about cybercrime with Steve Bernard, who oversaw global security at Sony Pictures when the company was digitally attacked by North Korea.

Stay tuned by following Tech’ed Up wherever you get your podcasts. Video content is available on YouTube. The link is in the show notes.