Got 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 we really do need to switch the framing to say that it is natural, as you said, we should expect people to want to protect their privacy. When I just look across the landscape of assets, I come to a very different conclusion than some others at the SEC in the past have come to. Tokenization is one of those areas that since the administration changed and since the attitude toward crypto and blockchain changed, people have come to us and they've said, 'We really think tokenization has potential here.'
Good morning, ladies and gentlemen. We are back at The Rollup and today we've got Commissioner Peirce of the SEC joining us today amidst the innovation exemption happening in the digital assets world. We're going to be getting into all of this as well as what is going on with Project Crypto and the crypto task force at the SEC. Commissioner Peirce, thank you so much for joining.
Thanks, Robbie. It's great to be with you. I of course have to give you my disclaimer, which is that my views are my own views as a commissioner, not necessarily those at the SEC or my fellow commissioners.
I can tell you've practiced that once or twice. So thank you for sharing that. It feels like it's been a whirlwind. Things are happening day in and day out. We're not going to be talking about prices. There's so much happening underneath the surface that I want to get into. Because you have such a unique perspective as commissioner of the SEC, maybe you can just talk us through what has been the recent weeks and months. What are you most excited about? We hear about tokenized equities, tokenized deposits, SpaceX — we're recording this during the SpaceX IPO. There's tons happening both onchain and offchain. Give us a little bit of insight into what have been the recent happenings at the SEC.
Well, we've been busy and I think one of the most exciting projects we're working on is thinking about how we can make it more likely that more companies will go public earlier in their lives. That's a project with many different pieces to it. Just yesterday, we proposed a rule that would eliminate Rule 611, which is the trade-through rule in equity markets. That is a 20-year-old rule that I think was really ripe for reconsideration. So I'm excited about that. There's obviously a lot going on on the crypto side. I'm excited to see clarity move forward and I think that will give us a lot of work to do. I won't be here to do it, so maybe that's why I'm excited about it. But I think it will be quite helpful for the industry to have this legislative framework within which we and the CFTC are writing rules.
Yep. And I think that is a great place to start with the recent 611 proposal. I was reading a thread about this and it turns out that Chairman Atkins, this has kind of been 20 years in the making. In 2005, Chairman Atkins and Commissioner Cynthia Glassman issued a 44-page written dissent on this vote that put 611 into place. So why don't we start here? There are ways in which this is protecting the national best bid and offer as it pertains to trading. Some of these are fundamentally impossible with some of the AMM technical structures that are available with exchanges on chain. It feels like this piece of regulation is a bit antiquated. But before we draw that conclusion, could you describe to us what Rule 611 is? And then we can get into whether it makes sense in the digital onchain age.
Yeah. The rule came from the concern that there were different marketplaces that were not being united and so you might not be getting the price that you could get if you were trading at some other venue. The idea is that in order for a trade to go through, it has to either be at the national best bid or offer, or you have to improve on it. Otherwise that trade can't go through. It's called the trade-through rule because it doesn't allow you to trade through a better price. My view is that markets don't need a rule to bind them together. That's what arbitrageurs do. That's what markets are all about. If you see a good deal in one place and it's a worse deal in another, market participants will figure out a way to even that out. That was my concern at the time the rule was initially adopted. Even if you thought it was necessary then, that was a time where the New York Stock Exchange, for example, wasn't using the most modern technology. Since then, everyone has upgraded to extremely modern technology. There are a lot of interconnections between markets now. They're all hooked together. Even people who might have thought it was a good idea then are questioning whether it still is. We just put it out for proposal so we'll be getting good comments and I'm excited about that. We've seen some things happen like the fragmentation of the marketplace, lots of different exchanges and complex order types, and some of that we believe to be tied to the fact that this rule exists. So yes, I think it could be helpful as we move toward tokenization not to have this kind of rule in place, but that isn't really what was driving the proposal.
Got it. I read some commentary about how the current structure of some onchain exchanges aren't necessarily prepared to support national best bid and offer, but as you're saying, you make the case that even in off-chain exchanges — the NYSE, NASDAQ — they're innovating and using upgraded technology, and even in that case the markets support a more sophisticated approach that doesn't regulate national best bid and offer. That helps these markets find their fair market price and create an efficient market. As we think through market structure upgrades, people are looking at the tokenized equities market structure and thinking this could fundamentally reshape how these things are traded. There's several things happening at the SEC. It feels like tokenization is inevitable at this point. There's some market structure changes coming and tokenized equities and the innovation exemption is one of these. At a high level, what is the tokenization exemption? What is it not? Let's get into the nuts and bolts because this was a point of pretty extreme contention. Maybe you could dispel some of the misconceptions around the tokenization exemption.
The innovation exemption. First, the innovation exemption has not yet been released. I know there have been people writing news stories, but it's not actually out there yet. That's one myth that should be dispelled. The second is some people have talked about it as if it's going to be used to support the trading of synthetic securities. The staff put out a taxonomy with three categories, and one of those is synthetic securities where you're getting exposure to a security but you don't actually hold the security. Those were not ever something that we were thinking about including in the innovation exemption. Now someone could come and register those kinds of securities in the United States if they wanted to, but that wasn't what I had been thinking about. So what the idea is is to allow tokens to trade onchain basically. It's onchain finance. It's not decentralized finance. It's onchain finance. There's still permissioning involved. What we're trying to do is allow people to do controlled experiments using onchain finance to help the market think through whether tokenization makes sense. See what it looks like to try to do this not fully at scale, but at least to be able to try it in the real world, but also allow us as the regulator an opportunity to see how this works and to think about where the proper points of regulation are. There are going to be some differences with the way the traditional financial world works and we want to make sure that we're applying regulation at the right points. I think people should look at it as an opportunity for everyone to really explore trading of tokenized securities. We don't see a lot of tokenized securities yet and I expect that we will. There are advantages to being able to have things trading on chain. There are advantages to being able to put a smart contract with an asset. It's very powerful and could be helpful to meeting regulatory requirements. Having securities on chain could be helpful for people who want to use them as collateral. There are a lot of potential reasons it could be useful, but until we allow people to do some experimentation with trading I don't see that people are going to move to tokenization. This really I view as a step toward allowing folks to imagine what the future will look like.
You make a great point that in the early stages of this, it looks like onchain finance, but not necessarily decentralized finance. There are some DeFi purists that may take issue with that, but ultimately I'm very optimistic that this is a stepping stone into a more innovative environment where we're using the best technology. You bring up great use cases of smart contracts — using these things for collateral, using them for compliance or regulatory purposes — but not necessarily a decentralized environment, still a permissioned environment. I would tend to agree with you that there is a value proposition there. Maybe there's another value proposition of extending this further into a decentralized environment, but that's when we start breaching into further unknowns. I think it's a very pragmatic approach to take this one step at a time. First tokenize these assets, move them onchain before moving them into a more decentralized environment.
I certainly hear the people who are purists, as you put it. I've been watching this technology for a long time and I think it's really interesting that people are figuring out ways that they can do a lot of things without having an intermediary where you had to have one before. But we're operating in a very regulatory world and so we have to think about that. I agree with you that we need to see what it looks like to have things on chain and then we'll see what the appetite of folks is to take some of those securities and put them into decentralized environments. But that's really not where we are right now. It just isn't.
Yeah. And it makes me particularly excited because it reminds me how early this all is and how we are still at the precipice of this tokenization journey. So we've got the through lines — tokenization, onchain finance — as well as the two elephants in the room: the innovation exemption and Rule 611. I want to use those as the through lines for the rest of our conversation. You've had a number of tremendous contributions in the SEC. Your term is on the horizon. I want to get a sense of what your priorities are for the remainder of the year. These two pieces, innovation exemption and 611, are tremendous and certainly move us further in the right direction. But what are your main priorities when it comes to the crypto task force and ultimately delivering greater regulatory clarity for digital assets?
One thing that I think will affect where the commission goes is whether clarity passes, because as I said, clarity does give us quite a few rule writing obligations. That's something we're watching and trying to prepare for. That's one piece. The next thing is the innovation exemption. That is one thing I'd like to see get done. Another thing I have talked about for a long time is the ability to use tokens in fundraising and raising capital. We have been doing some work on that. That's also a priority. And then we are dealing with the nuts and bolts issues around transfer agents, interaction between transfer agents and blockchain, custody of crypto assets on both the investment advisor side and broker dealer side, clearing agencies. The staff greenlighted the DTCC to do some experimentation here with a new action letter. We're thinking longer term about definitions of things like brokers. The staff put out a statement around user interfaces as a temporary measure while they think about how broker dealer regulation interacts with this area. Vaults are another issue that deserves attention. I'm urging people to come in and talk to us because there are potential areas where activities could implicate the securities laws. Now I should say that my term ended last June. I can stay until the end of the year unless someone else gets put into this spot, but I will be leaving before that time. My time here is short and I am very enthusiastic that the commission will continue to do good work in this area. It's not just the SEC, it's the CFTC. We're doing a lot of joint work with them, coordinating around where products sit, where they should be regulated, what it looks like for an entity to trade products that may fit within both the SEC's and CFTC's jurisdiction. Thinking about those kinds of issues will also be a big focus.
Certainly. And this is part of the foundation that you lay for the following commissioners. The definitions and taxonomy you talk about leave not only a legacy but also clear rules of the road. We talked about the Clarity Act and how this is going to be a lasting piece. There's also the innovation exemption. In addition to the rules we've talked about today, I'm curious — are there criteria or processes that you've seen companies take now that you think are the right way things should be done? What can these entities take into account that will serve as building blocks going forward? For instance, the DTCC got a no action letter. Is there any general criteria or processes you would recommend as we move forward that you anticipate will become sustainable in the regulation?
The biggest thing I would recommend is think about what you're trying to do, what you need to do to make that commercially viable, and then what kind of regulatory relief you need. This is a very complicated legal area and people really need to be thinking about, do I need to come in and register this product? Do I need to ask for no action relief? Might I be pulled into the definition of broker, dealer, investment advisor, investment company? Don't panic if that's the case. Come in and talk to us and we can think about what makes sense. Are there any requirements that don't make sense because we have information on the blockchain that maybe replicates information that would otherwise be generated through a regulatory requirement? Best practices are, I hate to tell people that they have to go talk to lawyers, but go talk to a good lawyer who specializes in this area. The crypto task force, but more generally the staff at the SEC, is very eager to engage and I think we can make some good progress. It's only by people being willing to come in and say, 'Hey, this is what I'm trying to do, we need some relief here,' that we can move things forward.
Yeah. And this is a relatively recent phenomenon. I'm sure you can remember the SEC wasn't always as open-minded to some of the innovations happening in the digital asset industry. For a long time a lot of the industry was pushed offshore. The idea was, hey, if you go talk to the SEC, they're going to serve you an enforcement letter. That's no longer the case, but I think that is somewhat still a precedent in the industry's mind. That has changed and you've been a pioneer and a leader as it pertains to that change.
I'm very grateful for people who are coming in and talking to us. The frustration that I still have and that others have is that things don't move fast. When you're dealing with a complicated regulatory regime with a lot of people taking different approaches, things can move very slowly. I talk to companies that say, 'We're trying to do this, but we need to go to market soon. We can't just wait and wait and wait.' I feel that pressure and I would love to be able to move things along faster. There is a bit of an apology here that things do take a long time.
Well, no need to apologize. You've been such a lightning bolt as it pertains to the regulatory state of our industry, at least relative to some of the previous regulatory complexes and representatives in the SEC. My question is how do we maintain this pace because the SEC is very open-minded and willing to collaborate with industry partners and establish best practices. Some of these definitions are starting to become formed in the taxonomy and you've accelerated the pace of regulatory change. As you transition, how do we ensure that we don't go backwards and we continue to accelerate the pace of the regulatory regime?
I think as long as Chairman Atkins is here, the pace will continue. He's very committed to getting clear rules in place and he's someone who spent a lot of time thinking about what good financial regulation looks like. He has a real appreciation for the need for people to be able to do things that are commercially viable but also a high commitment to achieving the goals of the commission — protecting investors, facilitating capital formation, and fostering market integrity. That piece will be fine as long as he's here. I would also say, and this is the message I give everywhere, build things that people want and need and then it will be more likely to stay around because people will speak up if a regulator tries to take them away.
That makes complete sense. We're seeing those products come to market in real time. Another thing we're very excited about is this innovation exemption. We've talked about the Clarity Act and how we understand the typical process — it passes the house, passes the senate, goes to the president's desk, he signs it, and it becomes law. When it comes to the proposed innovation exemption, how does this progress? Who are the stakeholders that have to sign off on this before it becomes established and concrete in the regulation?
