A Conversation with SEC Commissioner Hester Peirce

November 12, 2024

In this episode of the CryptoCounsel, hosts Josh and Frank sit down with SEC Commissioner Hester Peirce to unpack the complexities of cryptocurrency regulation. Together they discuss the recent challenges of SEC regulatory actions and the SEC's potential role in fostering innovation going forward. Commissioner Peirce describes her vision for a more open dialogue between regulators and crypto entrepreneurs. With insights on legal enforcement, collaboration with global regulators, and the evolving landscape of digital assets, this episode offers a deep dive into the future of crypto policy in the United States. 

Transcript

Comm. Peirce: I’m really excited because I think we’re going to see a whole new era in innovation once you have a regulatory willingness to engage with innovators.

Josh: Welcome to the CryptoCounsel at Wiley. We are the podcast that decodes the most important crypto disputes in law and regulation. I’m Josh, an international lawyer who does crypto.

Frank: And I’m Frank, a finance and technology litigator who also does crypto.

Josh: It is an honor to welcome our guest, Hester Peirce, who is a Commissioner of the U.S. Securities and Exchange Commission. The SEC has been at the center of the storm for the regulation of cryptocurrency in recent years, and this is a topic that has been right up our alley here at the CryptoCounsel Podcast. So, thank you so much for joining us Commissioner Peirce.

Comm. Peirce: It’s wonderful to be on the CryptoCounsel podcast, so thank you for having me. And I want to start, of course, with my disclaimer, which is that my views are my own views as a commissioner, not necessarily those of the Securities and Exchange Commission or my fellow commissioners.

Josh: Understood. And one thing we like to ask on the CryptoCounsel is kind of the background, the origin story about your exposure to cryptocurrency. Obviously, it’s a new technological development. Tell us about it. How did you first learn about it? And was it an area of focus before you came to the SEC?

Comm. Peirce: Colleagues where I worked before, I was working doing financial regulatory work at a sort of research center, and some colleagues of mine were working on crypto issues at that time. Bitcoin was obviously out and fairly well established, and so they told me about it. I thought it was very interesting and you know, they said there are other people developing other types of crypto assets. And so it sounded interesting to me. I mean, one of the things that really draws me to it is this notion of decentralization and peer-to-peer. Having worked in financial regulation for a long time, I saw that intermediaries can cause problems. They can have, you know, they can cause problems to financial resilience. They can also prevent people from getting access to financial products and services because they can just say no. And so this concept of having a way to transfer value peer-to-peer without a centralized intermediary was interesting to me.

Josh: That’s fascinating. One of the interesting things about the timing here is that Bitcoin, as you said, was in the market, but when you were sworn in as an SEC commissioner, that was in January 2018. Bitcoin was trading around $10,000. The FTX rise and collapse had not happened. Cryptocurrency wasn’t as much at center stage. And so I’m curious, now that you’ve been at the SEC for almost six years or over six years, you’re seen as a champion for the industry. Why have you become such an outspoken leader in this space?

Comm. Peirce: Well, I wouldn’t say that I’m a leader in the space at all. I mean, I’m just a regulator sitting on the sidelines trying to figure out how can we make the rules of this game fair so that everyone can come in and compete. If the market likes you, that’s great. If they don’t, that’s fine too. That’s not really my decision.

When I came to the SEC, one of the things that I was looking at was how does the agency handle innovation? I had been at the agency before, and not surprising, regulatory agencies tend to be fairly conservative when it comes to letting in new products and services and new entrants, dynamic entrants, into the market because you get comfortable dealing with the types of entities that you’ve known and the types of products that you’ve known. And so when you are confronted with something new it can be difficult, and, frankly, when you say yes to something and it goes wrong people come and run to you and say, well why didn’t you stop it? And so, I was hoping that we could find a way to sort of smooth the path for innovators who are trying to innovate in the financial services space.

Crypto was a really nice case study for how we deal with innovation because a lot of the people who are doing things in crypto were approaching it from outside of the traditional financial world. They hadn’t, some obviously grew up in TradFi, but a lot of people came from a technology background and they started to think how can we apply this technology in the regulated space? And so that was a lot for an agency like the SEC or any agency to handle is, how do you deal with this new set of entrepreneurs?

And so that really is what drew my interest. Again, it’s not up to me to make calls. We’re not a merit regulator. So it’s not up to me to make calls on whether a technology is good or bad. It’s really just let me see what I can do to let people come in and try and some of those experiments will succeed. Some will fail.

Josh: You mentioned earlier that one of the aspects of crypto that was interesting to you at the beginning was its decentralized nature. Was it more the newness of the technology, or is there something inherent in that decentralization of finance that was a challenge for regulators?

Comm. Peirce: Well I think there is in the sense that our whole regulatory structure is built around regulating intermediaries. And so when you bring up this possibility that you could have transactions happening without any intermediary, that’s really challenging. And there aren’t easy answers, although I think we can look to the technology for some of those answers. You get, you can get more transparency with this technology, again, you know, as I mentioned, you might have an intermediary that wants to say no to people, whereas the technology says, look, these are the terms, you like them, you can transact, you don’t like them, you don’t have to transact. But everyone knows what the terms are and everyone can come in on the same terms.

And so some of those things address the problems that regulation was really designed to address. Now that’s not to say that there aren’t unique challenges to regulating this technology, there certainly are and I think those are things we have to talk about.

Josh: When it comes to those unique challenges, quite a lot has played out in the courts and for that, maybe I’ll turn to my colleague, Frank, who’s done his share of securities litigation.

Frank: Yeah, we’ve talked a lot about Howey on the podcast and we’re actively involved just by way of full disclosure as counsel to Texas Blockchain Council and the Satoshi Action Fund in the Coinbase case against the SEC in the third circuit, challenging the absence of rulemaking in Coinbase’s mind. But, I’m curious for your views on the roles that the courts should be playing. I think you sort of have recognized that Howey has some limitations, but, you know what should the courts be doing or what could they be doing in light of those limitations?

Comm. Peirce: Yeah, well, I think, you know, far be it for me to tell the courts what to do. You know we bring in our best case and then the court can make its decision. I think, though, there’s so much focus on Howey and it’s really been a challenge because Howey cases have always been a little strange. You know, you can have these things, these assets at the center of these investment contracts that are just normal things that people use or, you know, a cask of whiskey or some sort of an animal that’s being taken care of or the orange groves that were at issue in Howey.

And so what does it mean for something like that to be at the center of a securities transaction? I think we’ve been a little imprecise about that. And part of the reason probably is that we haven’t had assets at the center of investment contracts trading on platforms, trading platforms the way we do with crypto assets. And so it does pose some interesting new questions for us. But I think we’re making a mistake if we’re only viewing this through the lens of Howey and I hope that courts will help to provide some of the legal clarity that we need in this area.

Frank: Yeah, I imagine it must be pretty funny as a technology and innovation forward Commissioner to have to deal with a 1930s era Supreme Court decision as the sort of touchstone in this whole space. I mean it sort of creates these weird conversations that you’re describing and these weird ways of thinking about it.

Comm. Peirce: Yeah, I mean, I think that’s true. I will say that the securities laws are, you know, they’re designed to be timeless. And so this definition of security is broad investment contract is one element as you know. But it really, I think if applied correctly and using the exemptive authority that Congress gave us, we can do a lot with the existing - even though they’re old - securities laws. So I just think it requires a more adept hand than we’ve been wielding so far.

Frank: So, you know, a lot of people out there in the industry and the commentators that are following the court battles have referred to this fight as regulation by enforcement, right? That’s sort of something that people have thrown around a lot. And I guess I’m interested in your views on sort of the limitations on that and also just what a good alternative might look like from the SEC’s standpoint. If they’re not going to regulate by enforcement, what could or should they do instead?

Comm. Peirce: Yeah, I mean I think some of the confusion stems from the fact that people look at the SEC and they say, oh – SEC law enforcement agency. And I say, no actually, that’s not the right way to characterize it. The SEC is a regulatory agency that has an enforcement function which is very important to what it does. But you have to start from point A, which is writing the rules. And then, point B is helping people figure out how to apply those rules in their circumstances. And then point C is enforcement against people who are not complying with those rules.

So clearly, if you have someone who’s wearing a T-shirt that says crypto entrepreneur and is stealing people’s money. Well, I mean, in enforcement cases, the right solution to that – you don’t need a rule because there’s already a rule that says don’t steal people’s money. Now whether that’s us enforcing it or someone else, but there’s already law for that. And so that you should proceed directly to enforcement. But if you’re talking about trying to figure out how does the securities laws, which are complicated, apply to a unique set of facts and circumstances, you can’t just jump to enforcement and you shouldn’t look to your enforcement division to be writing the rules because you’ve got experts in the Division of Investment Management, the Division of Corporation Finance and the Division of Trading and Markets, who are brilliant and have been thinking about these issues, many of them for decades.

And so all we need to do is say “hey, here’s a new set of really interesting challenges – go work with the public and figure out how to solve them” – and then you get a set of rules and then you can enforce those rules. Now, clearly in this area, there are some places where Congress probably needs to come in and figure out where they want the regulatory authority to lie.

But I think there are things we could have done. Tell people, here are some things to think about when you’re assessing whether or not this is a security – this thing that you’re talking about is a security. Let’s work through some of these difficult custody issues for investment advisors. We put out a special purpose broker dealer framework for broker dealers trying to handle digital asset securities as we’ve called them, and yet it was not a practical framework. So go figure out a more practical framework. We can achieve our regulatory objectives without preventing people from being commercially viable. And so there’s a lot of work that we just tried to short circuit with enforcement. And that’s not only not a good way to regulate, but it’s impossible, in the sense it’s inefficient.

You’re fighting all these different enforcement cases and we’ve got a lot of things that we need to do with our enforcement resources. There’s a lot of, in the traditional securities markets, there are a lot of things we could be using those enforcement resources for. If we tried to go and go after every project in the crypto space, we’d be at it for hundreds of years. And so that can’t be the right way to regulate.

Frank: So you mentioned Congress and obviously there has been some activity on the Hill, and now it looks like we’re going to have a new Senate, a new House, and not in terms of prediction, but just in terms of thought exercise, I mean, if we get legislation in this space, in the digital assets space, I mean, you know, what would be an effective way of legislating if that can happen?

Comm. Peirce: Well, I mean I will leave the legislating to the legislators, though I think the SEC should be actively involved in providing them technical assistance and in working with the CFTC, for example, to do some of the sort of the legwork. We could have been doing that now. We could have been holding some joint hearings to talk to people or joint round tables to talk to people. And so we could have done some of that work. But I think ultimately, we need to figure out which aspects of this we think need to have a regulatory framework. And that’s going to differ depending on who you talk to, but a lot of people do want to have some sort of regulation around someone’s doing a token or coin issuance. What’s the disclosure going to be around that? If someone is setting up a trading platform for these things, what kind of rules are going to apply? Are we going to apply the same kind of rules we apply in our equities markets?

So thinking about those kinds of things, and then also remembering that while we think about this through the lens of financial markets now, probably a lot of the innovation will not end up being financial. It’ll end up being crypto technology being applied to solve problems that are not financial problems and, you know, it’s a way of coordinating human activity and so you can imagine a lot of applications that have nothing to do with the financial services industry. As we’re writing rules or as we’re writing legislation, we, as Congress is writing legislation, that’s something that they should bear in mind.

Frank: Yeah, that definitely resonates. I think a lot of people and a lot of clients and folks that we talk to focus on the financial product aspect of the industry and less so the blockchain aspect and to hear the idea that there are maybe two lanes or two sets of rules, not separate, but just that those two use cases have to be accommodated in any legislation or regulation is, I think, refreshing and helpful because they are different and pose different issues in a lot of ways.

Josh: There was a comment from an industry association that, for example, with a recent election, it takes time to count the votes, and the question was, why isn’t this done already? It could be accomplished through the blockchain. And so, you know, people are still thinking through those different exercises.

Comm. Peirce: Yeah, and some of those applications will end up working and some not. I think, you know, there are pluses and minuses to blockchain applications in a lot of these instances. But yeah, let people experiment with those things. I was reminded, I just was cleaning out a closet and I came across my old Office of Internet Enforcement hat from the SEC and I think that’s such a good reminder. Because at the time, you could cabin off this set of activities that was securities activity using the internet. Now, of course, it’s, you know, everyone uses the internet, obviously, and securities offerings, but also in other things. So, if you had taken a set of rules and just written them with just the financial services rule in mind and applied it to the internet, I mean, that would have obviously been really problematic. So I think we just need to be careful of that same kind of thing here.

Frank: Yeah, I mean in the spirit of metaphorically cleaning out closets, Josh and I just did an AMICUS brief in the NVIDIA Supreme Court case, and we had to unpack the legislative history of the PSLRA which was written about the internet and the dot com and it tracks almost exactly to the current crypto space in terms of the things that the legislators were worried about in enacting the PSLRA in quashing innovation in the internet then and now it’s the same concerns happening again coming up in the context of cryptocurrency related disclosures. So it’s just funny that sort of the old is new.

Comm. Peirce: It’s new again.

Frank: Exactly.

Comm. Peirce: So that’s a good reminder to go back and look at some of that and see what we can learn from it.

Frank: Totally. So you mentioned the CFTC as potentially part of a process with the SEC. I’m also curious about something like the FTC, the Federal Trade Commission, which obviously has a consumer protection role. Do you, and I know obviously the SEC doesn’t often necessarily cross paths when it comes to crypto with the FTC, but do you see a role for the FTC to play in the crypto regulation world?

Comm. Peirce: Yeah, absolutely. I mean I think some of the times when you see some of these terrible fraud cases, for example, there’s a real inclination to say, well, wait, we do need to step in. We, the SEC, need to step in. I think sometimes it’s worth saying, I mean, it’s always worth asking, is this within our authority? Even if this is terrible conduct, is this within our authority? And if it’s not, is there another regulator we can hand this off to, and that might be the FTC. I mean they’ve been doing a lot of other things lately, but maybe, you know, maybe they could refocus, and I’m not going to tell them what to do, but there certainly are areas here that I think they could spend their time thinking about.

Frank: And so to bring it back just to your own home base of the SEC, I know you have the Token Safe Harbor proposal and you’re currently thinking about, so we hear, from stuff that I’ve read, a 3.0, anything to share on that at this point?

Comm. Peirce: Well, I think that what we really need to do at this point, and in developing that Safe Harbor, I did talk to lots of people, but I think to get this operational, we really have got to sit down and have a public conversation. Where it’s not done in a back room, it’s not done in an enforcement settlement action. It’s a negotiation, it’s done with a lot of people participating. And then we need to just think about what should a good disclosure regime look like? And so I really think 3.0 needs to be a community exercise basically.

But I have also talked about developing a micro-innovation sandbox which would essentially allow – and it wouldn’t be limited to crypto issues – I think we need this more generally to go back to the point I started with, the SEC does need some nudging when it comes to innovation policy generally. And so this micro-innovation sandbox would say “hey, you come in – you innovator come in, you tell us what you want to do with a notice filing, you put the conditions in there that you’re going to adhere to. You’re obviously covered by the anti-fraud rules, but then you can go. You don’t have to wait for us to give you the green light.”

Now, if you want this to be lasting, you’re going to have to put in conditions that are reasonable, because you ultimately are going to have to work with us at the SEC to develop more permanent relief for you. But I think something like that would allow people to try things in this space that right now I think they’re largely doing outside of the United States.

Josh: That’s kind of one of the concerns we’ve heard from a lot of clients is that this cloud of regulatory uncertainty means, well, what jurisdiction should we look to? Should we go to Switzerland? Should we go to another place, El Salvador where we feel that there’s a friendly regulatory environment we can trust the government to some extent?

Have you had any interaction with regulators or officials from other jurisdictions and what’s been the scope of those conversations – have you learned anything helpful from them?

Comm. Peirce: Yeah, I mean we at the SEC have a lot of conversations, whether it’s through a formal organization like IOSCO, which brings together all the securities regulators, or whether it’s through informal bilateral chats, you know, when I go travel places, I talk to people about what approaches they’re taking. And I think there is a lot to be learned from a lot of different places. The United Kingdom has a more welcoming approach, Switzerland, as you mentioned. Europe’s put together their comprehensive regulatory approach. And then, you know, there are other jurisdictions in the Middle East, Bermuda, you know, there are lots of people that are trying lots of different things. And I think we can draw pieces from what everyone is doing and we can also see what’s succeeding and what’s not.

Ultimately, we have a unique set of securities laws that we have to slot whatever reforms are into. And we also have a unique culture here in the U.S. that I really want to preserve, which is the welcoming culture for innovators. You know, I don’t want to build a place where when someone is thinking of a crypto project, they’re thinking first and foremost of getting permission from regulators. I want people to be able to think of what is the problem I’m actually trying to solve here? How does the technology help me solve that problem? And then how can I work with the regulators to make sure that I can do this in a way that’s compliant?

But I think that really is a mind shift. It shouldn’t – when you see everything being driven by what the regulations are, I think you see a lot of conduct that is not socially beneficial. People are designing things around the regulations instead of saying “hey, let’s work with the regulators to figure out how we can do this.”

And so I’m really excited because I think we’re going to see a whole new era in innovation, once you have a regulatory willingness to engage with innovators. And, you know, then if we don’t see lots of exciting ideas blossom, then there’s a bigger problem that you and your clients need to address about why isn’t this moving forward.

Josh: That is an exciting vision. We had one guest point to the fact that the Chinese government had cracked down on Bitcoin and that in a way that was one of the biggest gifts they had given to the United States because all of that innovation and activity moved. And you can see El Salvador, we’ve had a guest from El Salvador speaking to the same issue about how they are attracting a lot of capital and innovation.

But one of the things that we find amusing in the cryptocurrency space is that this innovation sometimes becomes colorful and kind of fascinating. So I think you’re on record as saying you don’t hold cryptocurrency for conflict reasons, but I have to ask, does that mean you also don’t own any Dogecoin?

Comm. Peirce: No crypto assets for me.

Josh: We’ve learned there’s a new, what’s the hippopotamus, the baby hippo?

Frank: Oh, Moodung or Moodang.

Josh: Yes, so a lot of fascinating developments here but does that affect your ability as a regulator? You know, obviously this takes a lot of different forms and some of it’s pretty amusing, but how do you understand it without owning it?

Comm. Peirce: It affects my ability and I think just being able to experiment with how to buy it, how to put it into your own wallet. You know how to move stuff, how expensive that is, right? All of these kinds of things would be very beneficial for me to be able to experiment with.

They’re good reasons for ethics rules to say, hey we don’t want you who could profit if you’re holding a big chunk of this stuff, you could profit if you develop rules that are favorable. So I get that. Obviously if this crypto becomes more integrated into more elements of our life, those rules are going to be harder to figure out how to apply properly. But no, I would love to be able to experiment a little bit and learn.

Josh: I have to say that’s not entirely surprising to me because we’ve also found incredibly entertaining, a contribution that you and Commissioner Uyeda made to the field with your script about the Shapeshift regulatory story, “As The Crypto World Turns”. And as far as we know, that’s a unique approach to commenting on these issues. How did that idea come about?

Comm. Peirce: I mean, I have been very frustrated, and I’ve stated that many times about how this has all played out because I’ve talked to a lot of people who really have just wanted to know how to proceed. And so that script that I put, that we put in that dissent is basically the script that I’ve heard play out time and again. And it just kind of wrote itself because of that. And that’s a sad commentary on where we are.

Josh: Well I have to applaud you on some good prose from your experience because the last two lines of the script – there’s one from future Shapeshift which says “I did hire a lawyer and the lawyer has even more questions,” and the SEC responds “Sorry, we cannot help any more than we already have – we don’t give legal advice,” which is a point well taken, but you’ve obviously been engaging with companies and counsel in this field. What do you find most helpful when you are engaging with those companies and counsel? How can they be helpful to policymakers like you?

Comm. Peirce: Yeah, I mean one is you’ve got to dumb things down and explain, not for my colleagues, but for me, you’ve got to dumb things down to explain what are you trying to do, explain why the technology is necessary to do what you’re trying to do. And then what exactly are the stumbling blocks that you’re facing? But I think more generally in advising people and engaging with the SEC and I’m hoping that those doors really will open up again and that people will be able to come through and have those conversations.

You’re iterating on what’s already out there. You’re building on precedent, you’re saying look, all we’re trying to do is push this one step further. This is why this is not a problem. And so be thinking about what are the pain points that you’re facing and what do you need to be able to get past those?

Now you’ve got an opportunity and so people need to be coming in with really concrete solutions. Concrete problems that need solving and then concrete solutions to those problems that are mindful of the needs of regulators like the SEC to protect investors, to foster fair, orderly, efficient markets, and so forth.

So concrete ideas, you’ve got to have some sense of what the landscape is. And don’t come in asking us to give you legal advice because we can’t. But I think there is something that we can offer, which is to say, hey, we want to work with you through these problems and we don’t want to sit in a room with you for three years just talking about these things. We actually want to see you get a chance to try what you’re trying to do in the real world.

Josh: That’s definitely an exciting vision. Frank, any other questions?

Frank: Oh, I feel like we have to ask since she’s here. We did reenact the entire script on the podcast, so do we owe you royalties? Do we owe commissioners royalties?

Comm. Peirce: We’re definitely not allowed to accept those. So you’re in good shape.

Frank: Well, we’re going to take our show on the road at some point so you can come and see a live performance maybe.

Josh: Thank you so much for these amazing insights. Do you have any final words you’d like to share Commissioner Peirce?

Comm. Peirce: No, I mean I just appreciate you having me on and my door is always open so CommissionerPeirce@sec.gov. Especially now, I think ideas of how we can move forward in productive, concrete ways are very much welcome and I hope that sometime soon coming to an SEC near you, there’ll be roundtables where we can discuss some of these issues. So, start thinking about what those discussions should really focus on.

Josh: It does really seem that there’s been a turning of the tide at least in terms of the crypto space and it’s going to be exciting to see how that plays out going forward.

Comm. Peirce: Well thanks so much for having me – appreciate it.