I sat down with Commissioner Hester Peirce of the US Securities and Exchange Commission, who also leads the Commission's crypto task force, to discuss Reg Crypto.
And I did listen to the show that you did on Reg Crypto, and I thought that it was a very helpful discussion, and appreciate people's close read and thinking about it, and I hope that we'll get folks writing comment letters reflecting a wide variety of views. But, I think yeah, the goal was to create an environment in which people are encouraged to compete, they're encouraged to make disclosures again, so that investors can know what they're getting, and then we'll see where the market takes us.
Commissioner Peirce played a central role in getting these rules out. In this conversation, we cover what went into them. We talk about essential managerial efforts and when a project stops conducting them. We talk about whether and when the Commission will address secondary market trading. We also get into things that the Commission is thinking about next, including vaults and DePIN. If you haven't listened to the full explainer on Reg Crypto, that's episode 207, this conversation is a standalone interview, but that episode will give you the full background.
Now, this podcast is part of my mission to democratize access to legal information. My name is Jacob Robinson, I'm a securities regulatory lawyer turned podcaster, and I'm able to make these podcasts free thanks in part to the sponsors of this episode. The presenting sponsor is Altitude. Altitude is a payments platform available in over 150 countries that lets you run all your payments across as many entities as you have on one platform with stablecoins. It solves real payment headaches, and you can learn more by visiting altitude.xyz/law. That's altitude.xyz/law to learn more and book a demo. Thank you as well to the other sponsors of this episode, Cahill Gordon & Reindel, the Solana Policy Institute, and the Hyperliquid Policy Center. Their support is what makes this work possible. Here's my conversation with Commissioner Hester Peirce about Reg Crypto.
Thank you again for joining me. Welcome back to the Law of Code podcast.
Thanks, Jacob. It's great to be back. I have to start of course with my disclaimer before I forget, which is that my views are my own views as a commissioner, not necessarily those of the SEC or my fellow commissioners.
So, Reg Crypto came out. It was a very exciting time for the industry. It was a great time for podcasters in the industry like myself who got to spend a couple days digging into it. And one thing that I noticed and some commentators noticed that was more so in the Clarity Act and not as much the focus of Reg Crypto assets was the secondary market transactions. Is there a reason that that was left to something in the future that wasn't really a focal point in Reg Crypto?
Well, I think we've been pretty clear about how we're proceeding as a task force and as a commission, which is to take things step-by-step. We're not trying to do everything at once. The Clarity Act obviously is a very big undertaking. I think that's part of the reason that it's taken a while because it really does try to cover a lot and we're not trying to do everything at once in Reg Crypto. We're really just trying to attack problems as they come before us and we're doing it incrementally. So, I think that's what this reflects.
Yeah, no, and I think there's a few things that I want to touch about on that point, but just to take a step back. Your safe harbor in 2020 was on GitHub. A lot of people forked it. It was hard to believe it was six years ago now, but—
At the time, it was really built around the network reaching maturity, decentralization. We saw that as well to be a theme in the President's Working Group report around recommendations for the SEC. Now, Rule 400 and a lot of the emphasis in the March guidance as well in Reg Crypto was around promises and representations as opposed to things like network maturity and sufficient decentralization, which still are included, but it's clear the emphasis is more on the promises made and promises fulfilled, representations made, representations fulfilled. How has your thinking evolved over determining the security-like status of tokens in this regard?
Well, I think this really follows on from the interpretive release and the idea is that we want to have bright lines as bright lines as we can, but we also want to, you know, tie it to the whole notion of Howey and when people are taking your money with a promise to do something with it. And so I think this framework fits nicely in with that. You can identify your promises upfront. I mean, this is the goal, right? That people would identify clear promises upfront and then they would tick them off as they fulfill them, and that would be very clear when something is ready to move out of that investment contract context.
And you've been a big proponent of clear rules for the industry for years, you pushed the SEC on that regard. Do you think it's possible to get bright lines that satisfy the majority of the industry? A lot of the pushback here has been, well, are we just porting the difficulties in applying the investment contract test to a later stage? Now we've got this essential managerial efforts test.
Well, I think that securities law, we have to remember, is about facts and circumstances, right? As with much of law, you have to look at it in the context of facts and circumstances. But what we've tried to do here is say to people: set out your promises early on, tell people when you take their money what you're planning to do, fulfill those promises, and then you can move on. And so, I think actually it does enable people to have bright lines if they choose to do that. And I think that's the beauty of this approach.
No, and it's such an important dynamic as well, too. We've seen in the crypto industry where projects were unsure what to do. It was, do I disclose what I'm doing and then risk regulation by enforcement because there are no rules that really apply to me perfectly? So, this tries to thread that needle, and it's a really difficult needle. And I would have loved to have been in on the SEC conversations with the crypto task force and everyone on coming up with these rules, because it's a hard thing to do.
Well, and I think that you're exactly right in sort of pointing to the fact that in the past people really had this question about whether they should be upfront about what they're planning to do because that could get them into regulatory trouble. And we're trying to actually flip that and say, you know, there is a regulatory framework within which you are encouraged to explicitly identify your promises and then tick through those promises and fulfill them.
And so, I think that's really the role that law should play. It should encourage good behavior instead of encouraging—as I think the arbitrary approach that we were taking in the past really had the perverse effect of encouraging people to keep their heads down, say as little as possible, and it actually ended up rewarding projects, I think, that just took money and didn't do anything with it and made it much harder for people who are actually trying to build real things.
And so, we ended up in a world where a lot of crypto time and attention was being devoted to projects that really didn't have the utility that they I think otherwise would have if we had had a better regulatory framework. So, my hope is this framework is actually going to encourage people to build things. This is my theme, right? I want people to build things that people need and want and things that will last.
Yeah, and just on that point, you've kind of ruined my other conversations with regulators because I talk to them and I say, "What's your philosophy?" and they don't say something like that, and it really frustrates me because I think builders in the modern world we live in, there's so many amazing technologies because people build things. And your point about connecting people with ideas with people with money and the benefit that that has for the common good really stuck with me.
Okay, Commissioner Peirce, one thing that you and I have spoken about quite a bit is regulatory arbitrage over the years, right? We don't want to create a way for projects that aren't, let's say, crypto projects, but don't benefit from the network effects, the decentralization that crypto projects might not have. When we talk about an emphasis on promises and representations, how do you think about that balance between not incentivizing private companies to just launch a token to provide revenue share to potential investors versus projects that actually need this in order to operate?
Well, I think we need to be thinking about—and this is something that I mentioned in my statement, too—about how we can marry the idea of a token and sharing in the revenue of the underlying company. I think there's more work to be done in that area, so certainly welcome feedback and thoughts on that. I think that's an area that people have focused on. There can be a tension between the token holders and the equity holders. And so, how can we think about bringing those together?
But I think more generally to answer your question, the goal again is to encourage people issuing tokens to be very clear about what it is they're trying to achieve, so that people buying those tokens can figure out whether they want to buy them or not. And I always encourage people who are buying whatever it is, a token or an equity security, to be thinking about why it is they're buying that. What is their theory for buying that, and what do they expect to get from that, and to be clear-headed about that.
And I think part of what we're trying to do is facilitate rational decision-making by enabling people to get access to information they need to make those decisions wisely. That really is part of what the securities laws are well designed to do: to address those information asymmetries, to encourage communication between people selling securities and people buying them. And so, I hope that this proposal that we have out there, as we'll get comments and we'll modify it, will ultimately be part of facilitating that rational decision-making.
One thing that's particularly interesting about Reg Crypto is this idea that the investment contract falls away, and that's something that isn't net new. I mean, it might not have officially been codified or discussed in this manner. Like even the example that Chair Atkins gave about Howey and the orange groves now being golf courses and retirement communities—I mean, the orange groves no longer exist, let alone subject to an investment contract. How do you think about that dynamic when it comes to questions around what constitutes essential managerial efforts?
Well, I do encourage people to look at the discussion in the release on that, because there is some discussion on that, and certainly welcome feedback on that. But again, the goal is not to say to people you have to stop working on things, right? But it's to say, identify what you're planning to do, and once you do it and the network is—the governance of the network is democratized and there are lots of people contributing, efforts that may have been essential in the past would no longer be essential, right?
So, I think again, bright lines are difficult. Facts and circumstances do matter. They're always going to matter in the application of securities laws. But I think that this proposal does help us move forward to make it clearer what people can do and what they should be thinking about and then at what point efforts no longer constitute essential managerial efforts.
And one of the reasons people are—not hesitant, but question and need these bright lines is from an enforcement angle that we saw with prior examples where there was this really hostile regulatory posture by the SEC. How do you think about the idea that with the Form TR and the exit there, it could be weaponized versus it can also be used as a defense against regulation by enforcement because now a regulator has to at least follow what's happened prior or at least acknowledge that that has happened?
Yeah, I mean, again, my hope is that this proposal becomes a rule, again, as modified by comments that come in, and really gets us to a place where it encourages a healthy disclosure environment. And people who are opting into that environment, who are opting into a healthy disclosure environment, I would hope would not subsequently become the subject of enforcement actions.
Now, I say that and I understand what some people's reaction is. The SEC established a pretty bad reputation in this area because again, as we were talking about before, its approach sort of discouraged people from getting out there and making disclosures. It encouraged people to put their heads down and to say as little as possible. And so, I hope that by establishing a healthy framework and having people take advantage of that framework, enforcement attention in the future will be focused on the bad actors, which is what we've all wanted all along. There is a lot of bad activity in this space, and I think no one denies that.
And it is very important, not only from the perspective of the industry to have clear rules, but from the perspective of the regulator, it's important to have clear rules so that we can train our enforcement resources, which are necessarily limited, on the really bad activity out there. And so, that is the other piece of this that I'm really excited about. Clearer rules make it much easier for us to use our enforcement resources well.
I've been here now for a very long time, and I saw a lot of those enforcement actions coming through, and it was really disheartening for me to see all the time and effort being spent on our side trying to make these arguments about what random statement we could point to to pull something in through Howey. And so, I think we'd be much better off if we had this clear framework in place. So, that's what I'm hoping this will lead to: a better enforcement program in the future.
I think that point that you just made about your experience from where you sit and sat during the—we'll call it the regulation by enforcement era—colors a lot of the work that you're doing here and has helped you, I'm sure, identify where the rules can be written to avoid running into those problems that we've seen in the future.
Yeah, I mean it really has colored my approach, because I think if you see a system that punishes people who are trying to build good things that other people use, meanwhile there's all this terrible conduct happening over there that we can't go after or we're not going after, that's really, really disheartening. And so I really hope we can create a healthier environment.
Well, I think this is definitely a step towards that and a really, really important one.
Now, just to go back to that environment: we've seen projects that have existed now for years in the crypto space. Some of them sold tokens, some of them had ICOs, some of them sold to accredited investors. There's a whole bunch that has happened obviously over the past six, seven years that you know as well as anyone. Can you walk me through how you think the prior group would respond to something like this? Because on one hand there's the worry that, okay, we enter this, we're putting a target on our back for potential issues in the future, whereas if we operate as we currently are, we might be fine and not have to worry about anything, for example when it comes to something like the Form TR.
Yeah, so I think that's a good question and we have been getting some questions about that: how should existing projects be thinking about Form TR? Obviously if you have a new project that comes through taking advantage of the fundraising exemption, for example, and setting out promises, fulfilling those, and then moving to Form TR, that's one set of issuers. But you might also have people who, as you mentioned, issued in the past and now kind of wonder where they stand.
So, one thing I would point to is look at the interpretive release and see where you fit within that, right? I think that was intended to provide some more clarity around how we're thinking about classifying different types of tokens. And then the second piece is please do respond with comments to the proposal. And if there's something that we can do, you know, instead of a Form TR, do we need some sort of Form SR, a status report, that folks who haven't gone through the whole laying out promises, fulfilling them process under this regulatory framework could get some comfort on where they stand—not only for them, but also for people who hold the asset and then people who are interacting with the asset, transacting with the asset? That's something that we can consider, and so happy to hear from folks on that. We're trying to have a conversation, right? So, people should weigh in with their thoughts.
And on that point, one of the concerns that you've raised before about regulation is that the costs can be prohibitive. And with something like Regulation A+, we've seen that it hasn't quite worked as some people might have expected. There haven't been a huge influx of businesses going that route. And so, I saw there was an analysis of the costs in Reg Crypto as well, too. Could you share how those are calculated and how you think about the costs versus benefits of projects, considering sometimes we've seen exemptions work and sometimes we've seen them not?
Well, we have a Division of Economic and Risk Analysis, which has really talented economists who are thinking about how to assess these costs. And so, they're working on that, and you can go to the very lengthy discussion in the release on the economic analysis. And one of the things you will see is that we are constantly calling for folks who can submit data, give us thoughts on whether we got our estimates right. So, that's very much an area where if you have data, it will be taken very seriously by us. We're very interested in that.
I do hear people when they talk about costs. That's something that I'm always thinking about. You want to make sure that the value of the regulations you're imposing outweighs the costs that you're imposing. It's true that Reg A has not been—there's not been a lot of uptake certainly in the crypto world, not much, but in the traditional world, not much either. And part of that reason is limitations on secondary trading. But I think part of it too is that we took a look at Reg A in writing these rules and said, "How can we streamline?" And so I think that we have tried to be more principles-based here, more streamlined here, and I think that's something that should make this more workable.
The other point I would make is that you can raise up to $75 million. And if you're raising $75 million, you're going to have to get audited financials. That's expensive, no doubt. But that's also a fairly large amount of money to be raising. And so asking someone to go and undertake that expense seems reasonable. Again, we welcome feedback on that, but that's kind of the thinking behind requirements like that.
Yeah, thanks for explaining that. And I think it's important for people to hear that, and especially the point about explaining the costs that are associated from, say, the Big Law or the private practice side, the builder side too, because the economists can only go so far. They're not the ones who are billing the clients themselves.
Right. And so it is very helpful. I think we always benefit from people who have actually thought about what's it going to cost to hire the lawyers, to hire other professionals to help us get ready. And so whether it's here in this proposal or other proposals, concrete numbers are always very helpful.
And in terms of other things that will be helpful, I think the big one that people are hoping to come next will be about secondary market trading. Is there any sort of timeline that you can share on that or anything that you can say on that point about secondary markets?
