Hello listeners and welcome to another episode of Beyond the Code. Today I'm joined by SEC Commissioner Hester Peirce, affectionately called Crypto Mom within the crypto verse. Commissioner Peirce is one of five Commissioners who sits on the SEC and she's been a voice of reason in an SEC that's been increasingly hostile towards the crypto community and towards innovation generally over the past few years. She was personally appointed by President Trump during his previous term and I'm extremely proud and excited to have her with us on today's episode. Welcome to Beyond the Code, the podcast where industry experts and brilliant legal minds discuss the impact of new emerging technologies. I'm your host YSY Hammer, a lawyer and tech enthusiast. Join us as we explore the legal, regulatory, and ethical issues surrounding AI, blockchain, and more. Get ready to go beyond the code and stay ahead of the game.
Commissioner Peirce, thank you so much for joining me. I really, really appreciate this. I will just start by stating that I'm pretty well versed in US securities laws related issues, but I'm by no means a securities lawyer, so please excuse my ignorance in some fields. I am however a huge fan of yours and have been for years. And for actually getting into the podcast, I just want to say thank you for joining me and thank you for being a voice of reason these past few years for the crypto industry and for innovation generally.
Well, thanks Y for those kind words. It's great to be with you. I want to give you my disclaimer of course, which is that my views are my own views as a commissioner, not necessarily those of the SEC or my fellow commissioners. And second disclaimer, I'm a little bit under the weather, so I apologize for that.
Well, we excuse you for being under the weather and I'm glad that your views are your own. I've heard you speak much and often over the years and I love how refreshing and clear your approach always is. So thank you again for joining me. I guess we'll start off by asking what to me has been kind of something that I've always thought about. Again, you were an SEC staffer and you've been a commissioner for quite some time. I think you've probably spent a large portion of your career in the SEC and you must have like a pride towards the commission and towards the organization at large. You're also over much of that time been a dissenting voice and the commission has been seen as kind of like a big bad wolf, at least in the crypto space but on other fronts as well. And I wonder as to how you resonate with that dissonance as on one hand like being part of an organization that you believe in and want very much to see succeed and fulfill its mission, and on the other hand the commission being seen as this kind of stumbling block towards innovation and not necessarily meeting what its initial goals are supposed to be.
Yeah, I mean it's a really good question because it kind of highlights the mixed feelings that I've felt now for the past seven years. I was at the commission before as you mentioned. I've had a long history with the commission. I started there as a junior lawyer, spent eight years there, and then left and came back as a commissioner in 2018. And part of the reason that I wanted to come back as a commissioner, not something that I had thought about doing before, but when I was presented with the opportunity of doing it, I thought, you know, this is a chance for me to really affect the agency in a way that I think is so important for it to be able to continue to contribute to the health and safety and soundness of the capital markets in the United States over the long term. And that is really to think about how the agency approaches innovation and think about how it approaches its role as a regulator in balancing its objectives. Our objectives are protecting investors of course, facilitating capital formation, and fostering fair, orderly, and efficient markets. And so too often we have taken the position that although we're not a merit regulator, Congress didn't tell us to be a merit regulator, we've taken a position that has in effect turned us into a merit regulator. And that manifests itself in different ways, but one of the ways is really having a difficulty accepting new developments and new competitors. And that really came to a head with respect to crypto because you got this whole set of potential new entrants in the financial services industry who were coming from outside of financial services and so were really viewing things through a new lens. And so how do you deal with all that change coming from people you're not used to dealing with? And so I think that's really where I have felt that tension because I want us to be able to be more nimble and I want us to be more open to letting new competitors come in. Again, not saying to them we're going to roll out the red carpet for you, but we're going to let you compete on the same terms as everyone else and then we're going to let the market figure out whether they want you or not. And so that's the role that I think I can play, is to push the agency to be a little bit more willing to engage with new technologies, new competitors. And we've got a lot of great talent at the agency, a lot of great legal minds and economists and accountants. And so really what it requires is having the commission, right? I said at the outset that I only speak for myself. There's a commission of five commissioners and so the message coming from the five of us needs to be we want you to engage with these new technologies and new competitors. And that's something that I feel like in my role I can at least bring that voice to say, hey, we're not going about this the right way. And maybe we can get a culture change now that we have a new administration coming in. Maybe we can get a culture change coming from the top again because the staff has to do whatever the commission says.
So the staff isn't really free to do its own thing. So the staff I understand has to follow whatever the commission says, but what's the dynamic between, and again excuse my ignorance, between the five commissioners and the chair?
Yeah, that's a good question. The SEC is an unusual agency in that it does have a five-person head essentially. And so it's politically balanced, you can't have more than three from the president's party. The chairman has more authority than the other commissioners, so he sets the budget, the staff report to him, and he sets the agenda. So obviously that's a lot, right? And so the chair is going to set the direction of the commission. And so when you have a chairman who has really strong wrong views on something like crypto, that is going to have an outsized effect. And so if I had been able to convince two of my colleagues to go along with me on some of these things, we could have made progress, but you'd still end up with the difficulty that the agenda is still being set by someone who isn't necessarily on the same page.
I understand. Do you think that the failure to provide guidelines or the hesitation to be at the forefront of these innovative developments of technology comes from a fear or a lack of understanding of what they actually are and what they mean, or something more than that?
You know, I can't speak for other people, but what I can say is that there's a natural regulatory tendency to say no. Why should we let something new happen? Because if something goes wrong, people are going to come blame us, and if something goes right, people are not going to come and thank us. And so there's this really understandable conservatism to say, we know we've dealt with this set of large financial firms for a long time, we're very familiar with them, we have dealt with this set of rules and products for a long time. So when someone comes in and says, hey, we want you to change stuff, we're going to say, ah, you know, let's just slow walk this a little bit. And it's not only in crypto that this comes up. We've seen this in the past, for example, we tend to be very focused on larger public companies when we're thinking about rules. And so smaller companies that are trying to raise capital have often had difficulty because it's disproportionately more expensive for them to raise capital. And so there are adjustments Congress gave us the power to adjust the rules to even out the burden a little bit, make it less disproportionately expensive for these small companies, make it feasible for them to raise capital. And it's something that we've not been great about over time. And so Congress has had to come in through something like the JOBS Act and say, SEC, use the power that we gave you, and we're going to be much more directive here because you haven't done it on your own and we're going to tell you what we want you to do. But you could have done this on your own. And so I think that we're seeing a similar thing happening with crypto, which is really, there's not really an upside to working with these people. And then add on top of that the fact that, as we all know, as anyone who's followed crypto knows, there's a lot of bad activity in the name of crypto. Some of it is just outright frauds that are just wearing a crypto label because that's the trendy thing to do. But some of it is people who are really crypto people who are doing things that are not great. So my counter to that is, hey, you know what, it'd be easier for people to distinguish the good actors from the bad actors if you actually made the rules clear so that the people who wanted to comply could go ahead and comply.
And then I believe that's the mission statement of the SEC, right? The whole idea is to protect us consumers. But by not providing guidelines, all these crypto companies, some of them are scams, have to find other ways to get to us consumers without registering with the SEC, be it going offshore or using VPNs or whatever it is. And in the end of the day, the US consumer is exposed to these scams and even if they're not scams, they're just not having the appropriate regulatory controls that you would have had if you would have gone through some kind of registration process and oversight.
So, and I think that's the part of the analysis that really has been missing from us, right? Which is that yeah, these entities are going to go do their thing overseas and they're going to reach US investors or US customers, whether or not they're investors is a question, but they're going to reach US customers. And then something's going to go wrong and those US customers are going to come to us at the SEC and say, hey, why didn't you protect me from this company? And we're going to say, and legitimately so, well, the company was outside our jurisdiction. But the whole point is that these companies want to set up and do business here. And so why not let them do that, tell them how to do that, then we'll have a more direct ability to prevent things from going wrong in the first place and then go in afterwards if things do go wrong.
Right. Okay, thank you. That was very helpful. So I know that Chair Gensler is stepping down and Paul Atkins is coming back to the SEC and there's kind of going to be a shuffle both within the commission and within the new administration with a crypto czar coming in from somebody who's a big, you know, whose entire livelihood is based off of this space and especially excited about these new developments in North America in particular. I think that, you know, great things are coming. What do you think? What's the state of the SEC right now and what could we anticipate in the coming months?
I mean, the SEC is still, for another week, is as it has been. Same SEC.
Well, I guess what happens to like existing enforcement actions that may have been seen as like frivolous when Commissioner or Chair Atkins comes in? Could he just like put a halt to things that he doesn't necessarily agree with? Like, is there a complete shuffle of the agenda? How does that work?
Yeah, well, again, I mean the agenda is his to set. So Chairman Atkins comes in, he decides what to do. But I should, there are a couple of I guess cautionary notes. One is Chairman Atkins is going to have a lot of things on his plate and crypto will be one of those things, but it will not be the only thing by any means. The second point is that enforcement actions that are already authorized by the commission, so when we bring an enforcement action, what happens is the staff comes to us with a recommendation and often that recommendation will be to sue someone and to settle at the same time. The case is then pretty much done. But what can happen obviously is that we can sue and someone doesn't settle. And so when we authorize the staff to go ahead and sue, that lawsuit starts. And we have a bunch of those lawsuits in the crypto space that are ongoing. And so if the commission authorized it, it's not so easy to just, you know, they're there. So I think those will be questions that we'll have to think about as a commission. And there will be activity, my prediction is there will be activity on the side of which is what I've called for, which is let's do some proactive, productive things here. Let's talk to people about how can we allow projects to move forward that are clearly not within our space and just carve those out of our space altogether. Whether Congress wants to set up some other regulatory regime or whether some other regulatory regime already covers those things, that's another question. And then there's the space of things that are within our remit but where some kind of exemptive relief is necessary. And so we'll be able to work on some of those kinds of things as well. And we'll be able to do that with the input of the public because I think it's so important to do this in a way that involves lots of transparency.
Exactly. Very different than how things have been done.
And so I think those processes are going to be moving on and then we can try to figure out how that interacts with other things that the commission is doing. You know, these things take time and I think people, that's the other cautionary note, people need to know that things take time to change. So some of the decisions, it's not going to be overnight.
It's not going to be overnight.
It's not overnight. And some of the decisions that are made under this commission now can make life very hard for the next commission.
Well, I was going to say I'm optimistic, but now that seems like an unfortunate way to end things.
No, and I don't mean to not be optimistic because I think this is a moment where we can all, now we've all been complaining, I've been complaining, a lot of people in the crypto world have been complaining and rightfully so. Now's the time for us to say, okay, now what do we want? Like what do we want this to look like? What do we want this regulatory regime to look like? What makes sense? I've put out some ideas in the past, other people have put out some ideas. Which of these ideas is best? Are there other ideas? I want to have some roundtables where we bring together different people in the same forum to really bounce ideas back and forth. We're not going to get this perfect, but the benefit that we have is that some other jurisdictions have been much faster. What has worked from those jurisdictions and what hasn't? We have a different statutory framework so we may not be able to port over things from other jurisdictions entirely, but are there elements of those things that we can take and put into place here? So yeah, I don't want you not to be optimistic, but I want you to channel that optimism into constructive ideas. And not you specifically, I'm not putting it all on you, but your listeners, right? I want them to think about what does this actually look like if it's going to be successful and then send me those ideas.
So I mentioned before how I guess in a sense I was disappointed with the SEC's failure to provide guidance in the sense that it way-sided us consumers. But I would take it even a step further. As somebody who lives now abroad, I live in Israel, and the regulators here very much look to the US as like a beacon of light and they've been sitting on the fence for quite some time and still have not come forth with clear regulations, at least in the Securities Authority. And in that sense, the US and the SEC in particular has done a disservice to residents abroad as well whose regulators are kind of still waiting for the SEC to come out and say, okay, this is how we're going to do it, and then everybody else will just say, okay, well, do it like the SEC did. So I guess what I want to ask you is like how does the SEC, or does it even work with securities organizations abroad? Is there any kind of coordination or formal education process that it goes through? That's on the education and rulemaking side. And on the enforcement side, does the SEC try and enforce regulations on companies or projects that are based overseas? And what limits, if any, does the SEC set on its reach in enforcement cases outside of the US?
Yeah, both good questions. And I think it is really important for, I've heard this from other people as well, like, hey, we want to know what the SEC is going to do in this area. While we may not copy exactly, it'll be informative to us. And I think we have really dropped the ball here where we could have set a better example and try to adopt some principles-based regulations that would work well here and would be easy to mesh with other international regulations. We do spend quite a bit of effort working with foreign securities regulators, both in coordinating on enforcement, for example, and talking about problems that we face in common and how we're addressing those problems. And then in educating and telling them what's worked here in the US. We work often with companies that are just developing securities markets and working with them to sort of understand what a good regulatory framework looks like within which a healthy securities market can thrive. And then in terms of our extraterritorial reach, we often read our extraterritorial reach quite broadly, sometimes in my view too broadly. I mean, we have limited resources and so we have to think about where do we want to spend them. And when most of the activity has been outside the United States, to me it's not that interesting. I think if you, I shouldn't say not that interesting, but it's just not the highest priority demand on our resources. Sure, if you as a US citizen decide to avail yourself of a market in a different country, more power to you. That's on you. But like, you're opting out of the securities law system in the United States. And so when something goes wrong, don't come running to me is my view. We have other things to do with those resources. But that's not always how my colleagues interpret things. Sometimes the commission is much more willing to reach in order to be able to pull something into our jurisdiction.
Okay. So I've heard you say one other point that I want to make in connection with international cooperation.
Sure. So I did put out a suggestion that we try to develop some sort of cross-border experimental regime, like a sandbox regime. And it doesn't have to be cross-border, but it was designed so that it could be plug and play. If you get approval in your home country, for example, to do something, then you could come and take that same experiment and run it here in the US on a small scale, limited scale, but using the controls abroad. Well, you'd have the same, yeah, it would be permissive to allow you to do that on different conditions than you do in the US on a limited scale. And then you'd work toward sort of no-action relief in the US at the same time you're working toward some sort of permanent relief in your home jurisdiction. That's just an idea, but I think that kind of thing could be really helpful in this area where there's a lot of international work going on.
Okay, I'd like to see that be something that maybe comes to fruition in the coming months or years. So definitely develop that idea.
I've heard you say that you can't engage with crypto tools and products directly due to possible conflict of interests, but you've definitely been exposed to crypto tokens and products over the years on a very deep level. If you got a green light tomorrow to go and buy crypto, what are the three, not so much, no, I'm not saying which, the three blockchain products that you would be most intrigued or excited to interact with from a curiosity perspective? I mean, I think it's really hard for me. By the way, I think it's a very important point. Again, it's something that I've heard you mention more than once because I often tell clients or even more so naysayers over a family or holiday meal or whatever who are telling me how crypto is a scam, I'll tell them until you interact with these products directly and until you send Bitcoin from one wallet to another, you can't understand it. You just can't understand it. So I could definitely resonate with what you're saying. So from a learning perspective, something like where you really want to feel that you want to close that gap, what would be the thing that would be most intriguing to you?
