Should the government ever have the power to tell you that you can't hold your own money, protect your financial privacy, or build software without permission? Today, I'm talking with SEC Commissioner Hester Peirce as she prepares to leave the agency after years of pushing for a radically different approach to crypto regulation. We get into the collapse of the Clarity Act.
I did expect that it would pass. I was surprised with the outcome. A lot of work has gone into the Clarity Act. It's a big piece of legislation with a lot of moving pieces.
Tokenized stocks. I do think a lot of issuers will be very excited to see their securities traded in tokenized fashion. We want the United States to be a place where people can try this.
New fundraising rules, privacy, self-custody, developer protections, and why she believes America still has an opportunity to become the best place in the world to build. This is one of Hester's final conversations as an SEC commissioner, and it gets to the heart of what crypto regulation should actually protect. Let's go.
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Thank you so much for joining again, Commissioner Peirce. So, it's been a wild time in the United States government, especially with regards to crypto. Perhaps we should start at the Clarity Act, which was debated, discussed for over a year, and sort of seemingly died with a bit of a whimper last week. So, did you expect that the Clarity Act would pass? Were you surprised by the result? Was it in line with what you were thinking?
Well, Scott, thanks for having me. It's great to be back and I should start with my disclaimer which is that my views are my own views as a commissioner, not necessarily those of the SEC or my fellow commissioners. I did expect that it would pass. So I was surprised with the outcome. A lot of work has gone into the Clarity Act. It's a big piece of legislation with a lot of moving pieces and yeah, just many people had put a lot of thought into it. I think it would be helpful to have a market structure bill for crypto. I think it would be helpful across the board. It would be helpful for regulators, but we can do a lot even without having that in place. And so that is where we're turning our attention.
You said that you expected that it would pass. Why do you think that it didn't? Can you point to any
Oh, I mean, I'm just a regulator and as I say, there are a lot of moving pieces and a lot of people with different parts of the bill they were interested in. So, I don't know what the political cause of it not having passed was, but you know what I can say is that we worked with folks in Congress on it and so I was sitting as an observer watching how hard folks were working on it and so I don't know whether it will move forward at a later date. So that's something to watch as well.
So, in the time leading up to the closure vote, it seemed that both the CFTC and the SEC signaled that they were willing to move forward with or without the Clarity Act and were making plans to do so and it did not take very long for that to happen. Right? So, obviously we had the innovation exemption proposed by the SEC this week. The CFTC has filed already. We don't know what the language is, but obviously intents to do rulemaking as well. So it seems like everybody was well hedged that they were prepared for either outcome.
Well, I mean we have been using our authority to do things related to crypto now for over a year and a half, nearly two years. And so we're just continuing along doing that using the authorities that Congress already gave us. And I think that's what we should be doing under the authority that we have is using it to try to answer some of the questions that frankly have been hanging in the air for many many years now.
So perhaps we can get to which questions you can answer and then later maybe we can talk about the ones that you can't that you would need the Clarity Act or something similar for. So we can start at the innovation exemption which seems like a narrow and reasonable path for certain tokenized stocks to trade in the United States. I've seen a lot of sort of interpretation that I think is wrong that it's much broader than it is. It seems like it's the first iteration of what's likely to come. Is that a fair assessment?
Well, I think what it is is a desire to bring tokenized stock trading onchain and to allow people to experiment with doing that using automated market makers to do that. It is onchain trading. It's not DeFi. And so you know it's through permissioned people making permissioned access to AMMs available to folks. And what we are trying to get to is a better understanding of what tokenized trading will look like. Tokenized trading of NMS securities will look like.
And then our goal, it's time limited. It's a five-year time-limited order. And so the goal is then to get information that we need to better understand what these different models will look like and therefore how they will fit within our regulatory structure where the points of regulation should be. And so I hope that people will take us up on the invitation that we're giving them with the order to experiment in this area and also will take us up on helping us think through what a permanent regulatory framework should look like. As the chairman said in his statement, this is really a bridge to the permanent regulatory framework.
Five years is a lifetime in crypto. We like it's like dog years probably 35 years for anything else. The speed at which this is moving I would imagine that we're going to find out very quickly how well that's working, how much adoption there is and it probably won't take that full five years.
Yeah, I mean it is a long time in crypto. The thing that makes me a bit sad is that so I'm at the end of my tenure as a commissioner and even at the beginning. Well, I mean, there's time it's time for that to end, but I would have liked things to be further along because even at the beginning of my tenure, people were starting to think about these kinds of things. And it really shouldn't have taken us this long to get to the point where we were letting people experiment with onchain trading, but this is where we are. And so yeah, I do hope that we see some uptake and see some activity.
It's interesting that from your perspective, you think it's taken a long time because I think a lot of people maybe who haven't been around for a long time are seeing it start and move exceptionally fast. They don't know how long it took to get to the starting line.
It took a very long time to get to the starting line. And really just seeing the change when the administration and the regulatory agencies said, you know what, we're going to take a different approach here. We're not going to try to use regulation to shut down activity that is being carried out by people who really want to do good things. We're going to shut down the bad activity but allow the good activity to go forward. There was such interest in saying, hey, how can we use this technology to make the traditional markets work better? And there are different views on that. And I think that's part of what we want to see is where is the technology useful, how are people thinking about it and not trying to dictate that from the place of the regulator, but trying to say we want to accommodate your attempts, you the market as you attempt to experiment with it, see whether the technology makes sense and how it makes sense to apply it.
Well, you alluded to the fact you were hoping that some people would test this or would come in and try, but everybody's trying. Coinbase is seemingly has an announcement every single day and tokenized stocks, Kraken, OKX, Robin Hood, everyone. But everybody's taken a different approach and there's been push back to some of them already. Robin Hood most notably obviously had the CEO Vlad in a bit of a spat with the CEO of AMC. And I noticed in the innovation exemption, it very explicitly says that there's effectively a 30-day period at which the company itself can I don't know what the correct terminology is, but they can reject the tokenized stock being created by a third party. So they actually do have the power effectively to decide whether that's going to happen or not, which seemingly was at the core of their argument.
Part of what we're trying to do is encourage people to try trading and tokenized securities here in the US. And so a lot of the activity has been outside the US. We want the United States to be a place where people can try this. And in terms of including an issuer consent condition, I do think a lot of issuers will be very excited to see their securities traded in tokenized fashion. I've talked to a lot of issuers and there is obviously questions, but there's also excitement about what this could mean. And so we did want to give issuers the option to say, I'm not ready for this. This is not what I want. But I think it will be interesting to see again the uptake on that side as well and the interest on that side.
I think they're going to be exceptionally interested and I'd be surprised if AMC isn't also exceptionally interested because you effectively addressed every concern that they had. Right. They have the ability to veto so to speak, but also you've guaranteed to my understanding that these will represent actual shares fully backed same dividends and voting rights. They will effectively be the same as owning a share which was another one of the kind concerns that was being debated there.
Yeah, that is a condition of the order is that the securities do have to carry the same rights.
And I also noticed that there was explicit language about permissionless blockchains, which I found extremely compelling and interesting because this will happen very publicly, very transparently, and likely on the blockchains that we're already passionate about and using.
Yeah. I mean I think permissionless blockchains offer a level of transparency as you say and people can understand how they operate and so that's really helpful in terms of from the regulatory perspective. If people want to experiment with permissioned blockchains then we're happy to talk with them as well. I think as we've stated more generally, we're trying to do things in an iterative manner. And so if you see that we've done something and you think we should do it slightly differently or you think that an accommodation is necessary to do what you're trying to do, then come talk to us and we'll think about whether that's possible and whether additional conditions are necessary to make that possible or you know whether I just think that's the message is it's an open door. This particular order is about permissionless chains but certainly happy to talk to folks.
The reason that I smirked is because I remember the language come in and talk to us very different a few years ago and when I hear you say and I know you actually believe it. It's very different because you obviously I'll go ahead and say you suffered through the Gensler era SEC and he said come in and talk to us and that usually meant you were going to present something and get sued. So it's a little different now.
We're really trying to get to the place where we can achieve our regulatory objectives which Congress gave us. And so we have to achieve those protecting investors and fostering market integrity as well as capital formation. But we can do that in a way that recognizes there are aspects of this technology that address some of the risks that our existing regulations had to deal with. But there are also aspects of the technology that are new and may require a different regulatory solution than we've seen before. So I think that's really the way to be tech-neutral is to acknowledge that new technologies present a different set of risks that a regulator has to deal with.
So, circling back to what regulation can or cannot address, I've already seen, you know, some pundits saying that it's likely there will be litigation because of Loper Bright and perhaps regulatory agencies don't have the power that they would have in the past and that rulemaking could be challenged. So, are there any concerns that the innovation exemption itself could see litigation or challenges from the courts?
Well, I mean, I can't speak to that. Well, but what I can say is that we really are trying to and the whole way that we've approached crypto has been to say we want to so it's back to the come talk to us line, but it's not only if you want to build something in this space, if you have concerns in this space, we want to hear what they are. We want to talk to people. And we really do want to get to a long-term regulatory framework that is efficient, that's effective, and that enables innovation not only by new entrants but by incumbents. And so I hope that we can all work together toward that productive end. And there's just a lot of creative energy there. A lot of really excellent ideas that are flowing not only from new entrants but also from incumbent firms who are looking at the landscape and looking at the technology and saying how can we use this to do things better than we've done before. And so we're excited to work with everyone. We're excited to hear from critics as well. That's the beauty of American government is you don't always have to say that you like what we're doing. It can be valuable to hear people saying we don't like what you're doing.
I've been very surprised at some of the institutions that have been quick to seemingly start adopting the technology. The DTCC blew my mind when obviously they got the no action letter from the SEC and a day later we're talking about tokenizing everything and having it on a blockchain within a year or two years. Right? I mean
And they've been thinking about it for a long time really you know.
So they I think that's evident. So it's really kind of different approaches that different institutions would take for them. That's obviously plumbing, right? I mean it's just a superior infrastructure. It's really faster, cheaper, and better updating an old computer OS to a new one. Very different than a company that's trying to, you know, launch tokenized stocks or make a profit from it. It's really just making their system better. Is that I mean is that sort of an accurate way to view how a lot of these people will be approaching it?
I think a lot of people are looking at it as you know tell me if this is actually going to help us to do things better to improve the plumbing, improve the back end. And I think that's a good way of framing it because the question is really it's not to say blockchain is the solution to everything but it's to say let's think about whether there are areas where applying this new technology would make sense and let's experiment with it there. And so that's why we don't expect that every experiment that happens will radically change the world, but it might make things more efficient in a back office. It might eliminate problems like fails to deliver that we've seen in the past. So I'm excited to see what the consequences will be of really opening the doors to experimentation.
How much risk is there with inevitably future regime change to rulemaking now? Not even specific to this rulemaking, but for people to understand how far rulemaking can go and how easy it is to reverse. We all very much enjoyed watching you reverse very quickly some of the policies of the last administration.
Well, elections obviously do have consequences. So, I think that's certainly something we all recognize. But as I say all the time, the best way to futureproof something is to build things that people want and need and actually use. And then you have a lot of people who will argue for keeping rules on the books that enable those things to continue working.
Does that mean that the onus is really on the industry to make sure that it's too big to fail or that we've, you know, the technology has spread so far and wide that it's really unstoppable? Basically, take the rules now, run with them, and then it's unstoppable anyways.
Yeah, I think that's a good way of putting it. I don't know that I would use the term too big to fail in the sense that it's not any particular market participant that's too big to fail, but it's the idea that people are actually this is actually improving the way things work. And so why would anyone want to take that away?
Yeah, I think it's going to be a very exciting couple of years here at the very least I would imagine. So you're leaving what led to the decision to go back to the private side and to finally step down as an SEC commissioner? It seems like very green pastures right now.
