Commissioner Hester Peirce (SEC) Interview With Students: BlockchAIn Bootcamp & Workforce Expo:

Well, thanks Yash for that question and before I jump in, let me give you my disclaimer, which is that my views are my own views as a commissioner at the SEC and not necessarily those of the SEC or my fellow commissioners. I think it's like anything else, you need to have a clear idea of what you're trying to build for, what's the point of what you're doing, because I think that will help to guide you and figuring out what you all want to do together, figuring out who wants to be part of that community and then figuring out what it makes sense for you all to spend your time on. So that's a pretty basic thing. But I think sometimes in the world of crypto and blockchain as well as other things that are new and interesting, sometimes people get caught up with the enthusiasm but don't think about the nuts and bolts practical nature of what they're trying to do.

Well, that's a difficult question. I've been working in and around financial regulation for almost my entire career and I've seen a lot of things during that time, including the financial crisis of 2007 to 2009 and then the aftermath of that crisis. And I think those kinds of experiences really do shape you as a regulator. They shape the way that I look at markets. And so I would say probably that time period was the most influential and just thinking about what brought us to that point. What can we do to prevent those kinds of problems in the future? And I think one of the areas that really stands out is that a lot of large financial institutions didn't even understand what their exposures were and certainly people on the outside didn't understand what their exposures were. And so that's something that anything that technology can help us solve, getting a better sense of what people actually owe and what they own can be quite helpful and should help prevent similar problems in the future.

Yeah. Well, it's great to get involved in policy early in your career, whether it's about digital assets or something else. So, a couple things. We at the SEC have tried to have a very open process because we do want to encourage all kinds of people to weigh in. And so, we have a written input section where you can write us a letter if you have thoughts about how we should approach crypto policy. You can take a look at letters that other people have written. We've had a series of public roundtables which you can watch and again if you have reactions we welcome your reactions. And you can take a look at the rulemakings that will be coming out from the SEC and typically when we do a rulemaking there'll be a comment file that you can write in a comment letter. Doesn't have to be a formal letter. You can take a look at it. If you have thoughts on it, you can send us an email and tell us what you think we should be doing differently and how you think it might affect your project. So there are a lot of ways to get involved.

Yeah. Well, what inspired me was that I was in the right place at the right time. I guess when I came to the SEC as a commissioner, I had been here before in my career as a staff attorney. Then I was gone for a while and I came back as a commissioner and I knew that I would be focused on how innovation intersects with the securities laws. Because I knew from being here before that we didn't always handle innovation very well. It's very easy for regulators, as other people do, to get comfortable with the way things are and to not be that enthusiastic about change because it sometimes it's hard to figure out how to approach change as a regulator. And so one of the things that was happening when I started here as a commissioner in 2018 was that Bitcoin exchange-traded product applications were coming in and I was of the view that we should approach those the same way we had approached other types of commodity-based exchange traded products. What happened instead is that we I think applied a different standard. And so I started objecting to that early on. I wrote a dissent early on in 2018 and then continued to focus as I thought the agency was approaching crypto in ways that weren't ideal. So I continued to write about those things and I tried to talk to as many people as I could in the crypto world to understand what they were trying to build and to understand what their challenges were as they tried to understand our regulatory system.

I think for a long time it was a reluctance to get involved in something that there was certainly a perception that the government was not favorable toward. Banks are very dependent on the goodwill of regulators and banks and other financial institutions. The SEC doesn't regulate banking, but it does regulate financial institutions. And I've noticed that with the entities that we regulate, as soon as the commission's attitude toward digital assets, crypto, blockchain became more positive, we started to get a lot of interest from people in the financial industry in trying to experiment with these technologies. And so I think it's a similar thing. The Genius Act was passed last summer and that deals with stablecoins and as soon as that passed there was great interest in experimenting with and thinking about how stablecoins might be used. And so I think as the industry sees regulators building regulatory frameworks and getting comfortable with thinking about how to regulate these things, you'll see the financial system responding. You'll see financial institutions responding by experimenting.

I'm sorry, can you repeat that question?

Well, I think the best thing that the US can do to control its debt is to think about, as with any other entity, you have to think about what's coming in and what's going out. And so it is true that as people around the world use digital dollars, use stablecoins and other types of dollar-based instruments, it increases the demand for potentially for US Treasury securities and things like that. So that can be helpful. But again, I think that it's just a piece of the puzzle and the bigger piece is really thinking about trying to bolster economic growth in this country and also trying to think about spending at the government level.

Well, the first thing I would say is that it's probably up to you student leaders to figure that out. I mean you are at the age where you will be making a lot of the decisions about how to use the technology and you'll be thinking about problems and potential uses of the technology to solve those problems. And it really does come down to that. You know people are experimenting now and thinking about where the technology can be useful. And I think some of that is still up in the air as we watch different experiments play out. I will say that there's a lot of interest as I mentioned once the regulatory climate changed and the government was more favorable toward experiments, a lot of people have come in and said you know we think it could be valuable to put stocks or to put bonds or to put loans on chain and there are various uses for that or you know we talked about stablecoins a little bit to think about uses of stablecoins. There are other people who think there are a lot of potential non-financial uses for blockchains. And so I think that we really need to watch how these experiments play out. And as a regulator, I'm not really well positioned to say I can imagine exactly what the future will look like. None of us can, of course, but I think the market will have to decide where these technologies help solve problems and where they're most useful. So, it's all up to you.

I think that the tradeoffs are, you know, really whether people want to, it's up to people what they want to use to hold and transfer value. And so I think people are thinking about that all the time. They'll look at something and they'll say, is this a form of value transfer that a lot of other people will accept? Can I go to my store down the street and pay in this particular type of currency or not? They'll think about how predictable is this? Is the value of this currency going to go up and down or is it going to stay fairly constant over time? How much confidence do I have in this asset? Do I have to think about things like quantum risk or other types of risks? And then I think too people will think about portability. One of the reasons that crypto assets and Bitcoin for example has taken hold in some parts of the world is that people think that it's a safer place to have money to hold value than their local currency. And they might also know that they'll have to flee from persecution and it's easy to take Bitcoin with you when you flee. So, there are a lot of considerations that go into these kinds of questions. It also matters what does your government think of people transferring value in Bitcoin. If the government is favorable toward it, then it's more likely people will use it. If it's not, they won't. But these kinds of questions really are very personal. They depend on where you are living. They depend on what you value in terms of whether you value having the ability to transfer money over the internet the same way that you transfer data over the internet or whether you're someone who likes to spend cash and do everything using cash. So it really is a very personal issue.

I know that the two things will interact. A lot of people are very excited about the intersection between AI agents and crypto because AI agents would be able to make micro payments for example and so crypto could be the currency that AI agents use to do those things to make those payments. You can also look at it from a more negative side and ask will AI detect problems in smart contracts that no one knew was there. Now, that can be good in the sense of as you're getting ready to launch something, you can run it through AI and really check to make sure that it's strong and secure. But if there's a smart contract out there already and someone using AI wants to break it, there's a possibility that they'll be able to hack it using AI. So like any other technology, AI can be used for good and it can be used for bad.

Yeah, it's a great question. There are a lot of pieces that need updating and need updating not only to accommodate blockchain but to accommodate other kinds of technologies. We are working on a lot of different areas. Custody, which means when a financial institution holds assets for you, what are the rules around that? Those can be a little bit difficult to apply in this world of crypto assets. Another area is how do we think about trading of crypto assets? Are there different because obviously we have a system that's not based on crypto assets. So when people are exchanging crypto assets, particularly of concern to me crypto assets that are securities, are there places where we need to adjust the rules to accommodate those transactions? People are taking things like money market funds which are used often when people want to have money handy but they want to earn a return on it. They'll put it in a money market fund. So people are taking those and tokenizing them. There are questions about then how can you use those tokenized money market funds? They're new things that you can do with them because they're tokenized. Same with other types of things in stocks and mutual funds and exchange traded funds. There are a lot of questions around how do you raise money using crypto assets. So we're working on rules there. There are questions about the roles of different types of financial intermediaries may change because of crypto. And so, do we need to update our rules for brokers, for dealers, for transfer agents, for clearing agencies? And so there really is an unending number of questions that have to be asked. How do you treat stablecoins when an entity that we regulate is holding those or helping its clients use stablecoins? So there'll be lots of questions when you all graduate from law school if that's what you're going to go on to do or you're out there in the working world. You'll be able to help us answer some of these questions because I'm sure they won't be answered by that time. I'm sure it'll take us years to get through these.