SEC Czar Hester Peirce on the U.S. Crypto Awakening

I think our baseline in this country needs to be permissionless innovation, right? You shouldn't have to ask permission to identify a problem and go solve it. Crypto itself, I think one of the things that makes it interesting is it's a way to transfer value across the internet the way you used to only be able to transfer data. And so that's a very powerful concept. The best way you can protect investors is to make sure there's a dynamic marketplace in which new people with better ideas about how to do things can come in and move the old products and services.

Well, thanks for having me on Tech Surge. It's an honor to be here. I of course I have to 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 think about crypto policy not really any differently than I think about other types of innovation policy. When new things come into our markets, we need to take a sensible approach to regulating them. And that means understanding that we probably don't understand what the technology is going to develop into. So, we're trying to provide a flexible enough regime that the market can kind of figure out what it wants to do with the technology, but we're also trying to provide enough clarity so that people feel comfortable stepping into that space and innovating in that space. And really if we do that then the market kind of takes care of the rest.

The SEC has three objectives: investor protection, facilitating capital formation, and fostering fair, orderly, and efficient markets. So, we're always thinking about those three objectives as we look at anything. Investor protection obviously is central, but I don't think it's in conflict with those other two objectives. You're really trying to figure out a way to get investors the information they need to make decisions for themselves, but not withholding from them opportunities to participate in markets by stepping in in a paternalistic way. So that's really what we're trying to achieve is the balanced approach to investor protection that recognizes opportunity is important but also recognizes that people should be able to get the information they need to be able to reliably invest.

National security is not the SEC's mandate. So there are other agencies that deal with that. We're taking our guide from Congress. If Congress tells us that we need to pay attention to something, we certainly do. And we work with other agencies that have that mandate to make sure that we're not doing anything that's inconsistent with what they're trying to do. In terms of competitiveness, we do have competition is one of the things that we are supposed to think about. Efficiency, competition, we're supposed to think about those kinds of things. But in my view, the way to develop competition is to have clear rules so that when people go into a market, they know what the playing field they're operating in looks like. And then if someone engages in a transaction and there's fraud, they know that there's someone there to police that fraud. That's really the best thing we can do for competition. Keep barriers to entry low so that new dynamic competitors can come in, not try to micromanage competition. Now, I think the financial industry and the markets that we regulate in particular, we've not always done a good job there because sometimes we have built up regulatory barriers to entry that have meant that incumbents don't get challenged by people from outside because it's just too hard to get in.

And so, this is a good moment. Crypto offers us a good moment to kind of reflect on that and make sure that we're not putting up barriers to entry that are keeping would be competitors out. It's not to say that our markets aren't dynamic. They are. But I think if you could have even lower barriers to entry, that would be more dynamic.

What we should be trying to do is set out objectives and say if you can meet this objective, we don't care how you do it. We just want you to meet this regulatory objective. And something that we've done in the past has been more taking a prescriptive approach to say we want you to do it this way and that sort of cuts down on the imagination of the people in the industry because if they just have to do what the SEC says, they're not thinking of creative ways to get to the same place more efficiently.

Yeah, I mean, crypto is a broad term that has been used to mean a lot of things. You have the sort of commodities like Bitcoin that fit within a particular category. Then you have digital tools. You have things that people are treating as currencies. You have assets that are real world assets. They could be securities and you take them and you tokenize them. It can mean a lot of different things. Crypto can also refer to the technology underlying it, the blockchains underlying it. So you do have to be a little more specific when you're talking about it. We often just lump everything into one category and that really isn't the right way to think about it.

I mean, we have a lot more to achieve and I think the goal is not to say we're done with crypto policy because things will change too and so we'll have to keep working on crypto policy. But I think we are in a better place than we were a year ago. We've made more progress at getting toward regulatory clarity. There's work being done on the hill on the Clarity Act, which is the market structure legislation for crypto. Getting that in place will be helpful in providing a durable framework, but the SEC and CFTC and the banking regulators are all taking our own pieces and we're working on that. We have the Genius Act in place which covers stable coins. So, I think we're making progress, but there's still a lot ahead to be done.

We have a lot of work to do, but one thing we did do is we put out an interpretation to say here's how we're thinking about crypto assets and whether or not they fit within the securities laws. And I think that was a helpful piece of guidance for people to sort of think about this. There's been a lot of conversation around the Howey test. The Howey test deals with something we have a broad definition of securities in the US. One of the categories is investment contract. It means you give someone money with the expectation of profits based on the efforts of that other person. So you just have to provide the money then you sit back they do something and create value for you. This is the area that has caused a lot of people consternation. When is something that is actually not itself a security packaged with promises that turn it into a security and when that thing moves it's a securities transaction. And so we tried to provide some guidance around that in this interpretive document. I think that was helpful. But there's still a lot of questions around how do you do capital raising involving crypto assets. There are questions around what are tokenized securities? Are they the same thing as the underlying security or is it something separate? How do you tokenize something and does that affect what it is? So, we're working on also providing clarity there. We've put out some guidance on how to think about tokenized securities, but we have a lot more work to do there.

I mean, I think there are a lot of things that have changed, but one is that if you're trying to do something in the United States, we want you to come in and talk with us. We want to figure out a way for you to do something that's commercially viable, but also aligns with our regulatory objectives. So, that is a conversation that we want to have with the people actually trying to do the things. And before what it was is there wasn't any help in thinking through how the regulations applied in this area. The only help you got was by looking at enforcement actions.

It's changed. And it's not to say there's no possibility of enforcement. If you do bad things, if we have the authority, we're going to come after you. If we don't have the authority, we're going to try to find someone who does have the authority. So, it's not a permission to do anything phase, but it's saying if you are trying to do something valuable, if you're trying to solve a problem, you're trying to make a product or service that people want, we want to help you figure out how to do that in a way that's consistent with our law.

Yeah, I mean I want the US to be the place where everyone wants to come and build stuff whether it's in crypto or something else. I want this to be a place that people say you know what we can find capital there, we can find clear rules there, we can find sensible law enforcement there. And so we at the SEC have a role to play in that. Crypto itself, I think one of the things that makes it interesting is it's a way to transfer value across the internet the way you used to only be able to transfer data. And so that's a very powerful concept. It can be used for a lot of things. I think it's also we're seeing more and more people all across the world use the US dollar in the form of stable coins. That's also interesting for us. But I mean really my job is not to decide whether or not people prefer one technology or the other. It's to say if you want to build something, we want this to be the environment in which you want to build it.

Well, I mean, I think our baseline in this country needs to be permissionless innovation, right? You shouldn't have to ask permission to identify a problem and go solve it. We do need guardrails in the sense of there are basic rules that people comply with. I think one of the reasons our capital markets have been successful in the US is because when you go and pick up a disclosure document you can rely on that disclosure document because there's a backstop of people are held to an anti-fraud regime. And people know that if they give their money to a broker to buy stocks they're going to get that stock or there's going to be a government enforcement backstop there. So, we have those basic rules, but then within that we really should be striving to be in a place where people can just innovate and solve problems as they see them. I think we have to be very careful in the United States now because we're a prosperous place and people are very excited about how they're doing well. And so they start being a little less comfortable taking risk and security starts to be the thing that they get most animated about and most want to have. And I think in order to have a vibrant dynamic society and a vibrant dynamic economy, you need to have people who are willing to take risks. And so, I was talking to someone the other day on a plane and he had started a business. And it was just really interesting to talk to him because he had been in a field for a while, it was healthcare. He had been in that field for a while and he identified a problem and he said, you know what? I can solve that problem. I have a solution. And he just goes off and creates a company to solve that problem. I want our markets to be a place where someone like that who has a good idea and the experience and expertise to solve a problem can go and get the funding to do it. And I want to make sure that if that problem that someone has identified is in the financial markets that person can be an innovator in the financial markets. I don't want all the innovation to just be happening in the tech world and not to be happening in our world.

Well, I mean, it ties into the core of the SEC's agenda, which is, as I mentioned, one prong is capital formation. Having our markets be the place where people can come and get money and build things. That's the best way to give the US a strategic advantage at least as far as we the SEC control.

Well, I mean I stay in my lane that Congress set me in and what Congress said to me was not directly to me, but I take this as a directive to me, Hester, is to say, Hester, work on creating capital markets that are very good at funneling capital to the highest and best use. And that is what I see as my mission. And I think by doing that, getting out of the way where we need to get out of the way and setting the guardrails where we need to set them, we are doing the best thing that we can do for domestic industry, which is to say, let this be an environment in which it's not the people you know, it's the ideas you have that get you funded. I mean obviously connections always play into it, but I don't want this to be a place where it's government connections that matter or it's who your father was that matters. I want this to be a place where someone says that person is really talented and I want to find out a way to invest in that person's projects.

Absolutely. Well there was an election. And I mean part of what happened was there was a decision that we are not going to do what we did before which was clearly not working which was as we talked about before trying to use enforcement as this hammer that arbitrarily falls on people. That is not a good way to solve these problems. And so the new administration came in and the goal was to say, let's figure out how we can answer some of these regulatory questions that people have been asking us now for a very long time. Let's get the answers out there. That will not only be helpful to people trying to build stuff in this place, but it will be helpful to the regulators because it's really hard to know who the actual bad actors are when you're just painting everyone with the same brush and you're saying anyone building in this space is bad.

Well, I mean, part of it is if you have rules in place and you got people who are choosing not to abide by the rules, sometimes that's a good indicator that those people are bad actors. If you are able obviously to identify people who are just running away with other people's money, that's a pretty good indicator that someone's a bad actor. So, there are those kinds of things that we can focus on. But I mean, that's what we do as a regulator, right? We're looking through, we're seeing someone has promised investors X and is actually doing Y with the money. Well, that's a pretty bad sign. Or someone promises to take care of its client's money and they lose it. Well, that's a problem. Now, it could be carelessness, but it also could be someone who's set out to do something bad.

Yeah, I mean what we did is we came in and we said first thing we need to do is we need to listen to people so we did a lot of listening to people that was through roundtables, also through written submissions. And also you have a crypto task force. We've got the task force which has been running this and we've been meeting with lots and lots of people. And we also said let's start by telling people early on where some things that are in the crypto sphere are not the SEC's issues. They just don't fit within our issue area. So that everybody can know that, people who are buying those assets can know they're not getting SEC protection. That's really important. So, we've done some of that and now we, as I mentioned, we came out with an interpretation that laid out a taxonomy. That's helpful. We're working with people who are trying to tokenize securities. That's helpful. And so, little by little, we're working on a rule that will allow people to do capital raising with crypto assets. That will provide some needed clarity. So, it's just tackling each one of these issues on its own. And it's a long laborious process, but I mean, that's where the difference is from what was being done several years ago.

Yeah, we're trying to build durable things, and part of that is what Congress is working on. We're working on rulemakings. Those will be durable. The way I see that we've been successful so far is that we have gotten a lot of really wonderful input from people who are trying to build things, and we've seen a lot of hard work on their part in engaging with us. And to me, that suggests success, because before, the notion of coming in and talking to the SEC was something people didn't want to do.

I tend to think they're actually really complementary because the best way you can protect investors is to make sure there's a dynamic marketplace in which new people with better ideas about how to do things can come in and move the old products and services aside and bring in their new products and services. We do always have to think about where are the risks. Are we creating new opportunities for people to do bad things? We need to be thinking about that. There are a lot of things that are done in the name of crypto that involve very centralized entities that look anonymously, right? Sometimes anonymously, sometimes not anonymously. But we want to make sure that the rules aren't different just because you put a crypto label on the door of your business, right? And figuring out how you provide appropriate exemptive relief to say you don't have to comply with this rule, but also not saying you get a pass just because you're crypto, because obviously that's not what we want to do.

Well, one thing is that when you don't have intermediaries, you do take care of some of those risks that regulation has typically protected against.

Well, partly. But I guess when you can do something that is a truly disintermediated transaction, you don't have to worry about the centralized intermediary who's either careless or has ill intention, right, to run away with your money. You might have to worry about other things, right? But in a world of intermediaries, when you enter into a transaction, you don't know exactly what the rules of the road are. If you're entering into a decentralized finance transaction, you know, because you can see the code and you know what's going to happen. And actually, the terms are the same for you as they would be for anyone else. So, you don't have to worry about sort of discrimination type things that you might have worried about.

I mean, it's glass half full or glass half empty, right? So when I see that, I say, yeah, our rules that we've written have been all around trying to make sure that centralized intermediaries are dealing in an appropriate way with their customers. When you go into a peer-to-peer world, you don't have to worry about those centralized intermediaries anymore. You might have a different set of worries, such as there's no one to go to if something goes wrong. There's no way to reverse a transaction once it's done. Those are real concerns, but they're very different concerns. So then the question is, can we create a world in which people who want to engage in peer-to-peer transactions, or people who feel more comfortable with a centralized intermediary can use that centralized intermediary who may then be looking to those decentralized protocols to provide a better product or service to that customer. So on the back end it's using those decentralized protocols, but it's providing a much more traditional intermediary relationship to someone. We should be able to live in a world in which people can choose what they want. If disintermediation is more important to them, that's what they can choose. If the ability to go to someone when something goes wrong is more important, they can choose to work with an intermediary.