Interview with Commissioner Hester Peirce by Joyce Lai and Thania Charmani

Oops. Oh, we hear you. Okay, now you can hear me. Good. Okay, great. Sorry about that. I was having trouble unmuting, so I couldn't respond to anything. It's a delight to be with the real mamas of crypto. I'm sorry that I'm not there with you guys in person, but this is an honor for me. I do want to give my disclaimer, as you suggested, my views are my own views as a commissioner, not necessarily those of the SEC or my fellow commissioners.

Yeah. Well, I think one thing that certainly has come out is that, and it's not that this was a total surprise, but it is difficult to provide very clear guidelines about when you have a token offering. The token itself is not the security typically unless the token has characteristics that make it a security in and of itself. But trying to figure out when it makes sense to have that line, when does the investment contract actually separate out, that's obviously a very difficult question. It's been one that a lot of us have been thinking about for a long time. But I think seeing the variety of views about how to think about that has been interesting. And then hearing different people's views on whether decentralization is even something that we should be thinking about or should we be thinking about this through more questions around control rather than decentralization. Those are some issues that I think are interesting. I will say, it is also frustrating a little bit that things do take a long time, right? And I knew that this would be a frustration. I knew that it would be a frustration for me and for folks out there who are trying to actually do things. But I think the amount of interest in doing things, it really, I think when the attitude changed, when the administration's attitude changed, when the SEC's attitude changed, watching the number of people coming in who want to try something in this space has been both encouraging but also a little bit surprising.

Well, I certainly understand it. I mean, we've spent the last several years as a regulator building up a lot of bad will and now we're trying to turn that around. And I think one way to do that is to have as transparent a process as possible, which is what we're trying to do. We've been very transparent about what the issues are. You mentioned that we've had a number of roundtables where we've really tried to bring people in and have the conversation publicly. We've gotten a lot of written submissions and we've also been telling people about the meetings that we're holding and those kinds of things. So I think that transparency helps to breed more confidence and I think also the fact that the commission has already taken a number of really important steps whether that is saying we're not going to move forward with certain enforcement actions or whether that's saying we're putting out guidance on issues that people have had questions about for a long time. That so far has been staff level guidance. I'm hoping that we can move that up to rulemaking and commission level guidance in more instances and I think all of that will help to build confidence. But I think the most important message I have is the best way to protect the industry in the future is to build things now that are so important that no administration will want to get rid of them. And so in order to do that, we really have to have those conversations with people in the industry. They need to come in and talk to us because we have limited time. And so if you don't come in and talk to us and tell us what you need relief from or clarity on, then we'll probably work on some other issue. And so I would say that's a reason for people to come and talk to us. And I really, I think one unfortunate trend that I'm seeing is that there is a view now that well, we don't need to come talk to the SEC because anything goes. We can do whatever we want and there's never going to be any problem for us. And I think that is not the best way to move forward. I think it really does help us to know what people are trying to do, what they want to do, and then we can think about ways that we can provide a framework for that to happen in a way that makes sense. We're all concerned obviously about fraud in this space. And so that is something that we will continue to be vigilant for and I hope people will also help us in that mission as well of identifying bad actors when they see them and tell us about them so that we can either ourselves as a regulator or by making references to other regulators go after the bad actors in this space.

Well, first of all, I think your point is so important about how the approach that we took in the past actually made information harder to come by. And that was one of my real concerns about it. You know, even for people who are crypto skeptics, I would say to them, it makes no sense to have a regulatory regime that actually punishes people for making disclosures to investors. And so we really needed to flip that script and say, 'No, we want there to be information out there. We want you to be talking to people who are buying your tokens and telling them the information they need to make a good decision about whether to purchase those tokens.' And so I think that's something that we will continue to spend time thinking about building frameworks within which those disclosures can happen effectively and in ways that clearly have a place within the regulatory framework. So, in terms of Congress, I am very happy that Congress is taking up these issues. They're not easy issues to write legislation about. I worked in the Senate on the Senate staff years ago and I know just how difficult it is to write legislation and to do that well. So, I'm really happy they've taken up the topic both the topic of stablecoins and the topic of market structure through the Clarity Act and other similar efforts in the Senate. I think that there certainly are areas where if Congress does not step in and do something, there will not be a framework. So if you think about a trading platform that just trades crypto assets that are not securities, which I've taken the position that most of the crypto assets out there as they're structured now are not securities. So those kinds of trading platforms would not have a regulator unless Congress decides to put one in place, which is one of the things that the Clarity Act does. In other areas, we could use a little extra authority. So right now, if you're an SEC regulated trading platform, an ATS or even an exchange, you can trade non-security things on that platform. It would be helpful for us to have authority over the non-security leg of a transaction. And so that's something that Congress can give us. But in other areas, there are many things that we can do under our existing authority. Congress really was forward thinking when they were writing the securities laws in the sense that they knew things would change and so they gave us a lot of exemptive authority that we could take particular rules and say they don't apply under these conditions. And so we are working with the authority that we have now to do some of these things. I think we can write a good framework around disclosures for example under the authority that we already have when someone's making an offering, offering an investment contract of which a token is the object. We can write bespoke rules there. So there's a lot that we can do without Congress intervening. But, you know, seeing Congress working on putting together a holistic approach is helpful. And I think the work that we're doing now can inform the work they're doing and will inform the implementation once those pieces of legislation go into effect.

Yeah. So, you can imagine a trading platform, for example, an ATS, which is like an exchange light. You can imagine that someone might want to have on that trading platform tokenized securities like traditional stocks tokenized alongside stablecoins and Bitcoin and ETH, for example, right? And so if you wanted to let people do transactions where one leg was ETH and the other leg was a tokenized stock, that can happen on a platform now that we regulate, but we would only have authority over arguably over one leg of that transaction, the securities leg. And so it could be helpful for us to get the matching authority over the other leg of that transaction.

Yeah, I mean first I think it's important to recognize that this is not a new problem in the markets that we regulate. The securities markets are also international and so we have experience working with our fellow regulators through multilateral organizations like the International Organization of Securities Commissions. We also have a lot of experience working bilaterally with our counterparts internationally. And so that experience will be helpful as a base for the work that we do in the crypto space. And some of those organizations have already taken up crypto as a topic that there's been work on. The work hasn't always been in the direction that I might want it to go, but at least there is cooperation there. Another piece of it to remember is that now that the SEC, now that the US has embraced the idea of providing regulatory clarity in this space, I think a lot of other jurisdictions will look to what we do as perhaps a model for their own regimes. So, I think if we do this well, I think we can be a leader in establishing a reasonable approach to regulating in this area. The other thing that I think we will work on is, and it's a tool that we've used in other areas, but that's mutual recognition with the idea that you don't, all jurisdictions don't have to have exactly the same framework if we're all sort of striving for the same objectives. You can mutually recognize one another's regulatory regimes and that can be a way to make these things work. Another point I would make is that we, I've talked a lot about the possibility of doing some sort of an experimentation sandbox here in the US and that would allow people to try things in a small-scale commercial experiment with the idea that they could scale that up over time and that we would try to have a way for them to get into an exemptive regime that would work for them. But that's something that we can also try with other jurisdictions. We could do that as a cross-border type experiment for projects that we're trying to offer something in different jurisdictions. And that's a conversation that I've had with international folks and we'll continue to have. I have a plan to be over in the UK next month to speak with some people about these kinds of ideas. And so we'll continue to reach out to other jurisdictions to gauge their openness to something like that.

I mean, I do think it could be a reality and as you point out, this has been something that a lot of lawyers in this space have been talking about for a long time. And it was those kinds of conversations that led me to suggest quite early, quite a long time ago now. Time flies, but to suggest a safe harbor for token offerings. And the idea would be that you would still be subject to the anti-fraud rules, but that registration would be tailored so that you could, or the disclosure would be tailored so that you could make disclosures that were meaningful to people buying tokens, but you weren't trying, we weren't pretending that you were a company that was going public after having been in existence for many years, which is a model that just doesn't really fit very well in this space. So, I think something like that is still something that we're thinking about and I think it could be quite useful giving people the confidence to do a token offering in a way that makes sense and really does elevate relevant disclosures to the place that they should be and then provides a path for people as the project decentralizes or as control diffuses, however you want to think about that, provides a path for the disclosure obligations to fall away at that point. You don't have the same kind of concerns around information asymmetries anymore. So I think that's something that we are actively exploring. I mean the hurdles are that as with any commission level action, it does take some time for something like that to come into being. But you know, certainly welcome thoughts on how something like that should be crafted.

Yeah, I remember that now. That was really cool. So, another topic that lawyers have talked about forever in this space is who can be a qualified custodian. So, the definition of a qualified custodian has been a topic for a long time. Would you be able to provide an update on the SEC's current stance and any recent developments that people should track on that definition?

And another point I should make is that the SEC under Chairman Gensler had proposed to revamp the custody rule and change it into something called the safeguarding rule, which would have been much more expansive on many fronts. And we got a lot of pushback on that not only from people in the crypto world but from lots of people with lots of concerns about that. That rule is not going forward but I think others have suggested that the custody rules may in general still need updating and so that may be something that we work on with respect to crypto and/or more broadly.