Web3 Breakdowns Ep 25 - Commissioner Hester Peirce - A Regulator’s View of Crypto
Primer: How do regulators view crypto? In this episode of Web3 Breakdowns, host Eric Golden invites Hester “Crypto Mom” Peirce to share how the SEC functions, her Safe Harbor proposal, and her thoughts on NFTs, DAOs, and stablecoins.
The Moniker Of Crypto Mom
Came about when she wrote a dissent in 2018 on a denial of a bitcoin exchange product
Used the analogy of the regulator as a lifeguard:
A lot of people think that regulators are parents who are sitting in the sandbox with their child as their child builds a sandcastle
Instead, a regulator is kind of like a lifeguard watching over the beach and looking out to see if anyone’s in trouble and needs help
Think it’s funny
Important for people to remember that the government is not your parent
How Does She Strike The Balance Between Letting Innovation Flourish Or Clamping Down On It?
It’s always better to keep the financial markets open
In past financial crises, people wanted regulators to freeze the markets. However, this is not the best way to return to normalcy
Have to balance between both ends of the spectrum
What Is The Balance At The SEC Right Now?
💡 The SEC’s mission has 3 parts: (1) protect the investor, (2) oversee capital formation, and (3) protecting the integrity of the marketplace. Eric enquired about how balanced are their priorities right now.
Important to think of that tripartite mission as a unified whole
Investor protection is not just about protecting investors from losing their money. It is also about making sure that investors have opportunities to participate in the markets and to do so in a way that is comfortable to them
Sometimes, they prioritize investor protection with a very narrow concept of what investor protection is. This is to prevent investment decisions that regulators think are not wise for people to make
Right now, they are in the uncomfortable position of telling investors that crypto is too dangerous for them
Difficult to identify fraudsters from good actors
The SEC has not made it easy for themselves by not engaging with good actors to develop a regulatory framework that makes sense
How Does The SEC Commission Work?
The SEC is an independent regulatory agency. It is set up differently from other agencies
They are a commission of 5 people
It’s politically balanced
There are 4500 staff spread across the US
A lot of the work is done at the staff level. The staff reports directly to the chairman and the chairman sets the agenda
Crypto is only a small part of what they do
How Much Dialogue Is There When Commissioners Meet Together To Debate?
Some of those meetings are public
There’s something called the Sunshine Act — a law stating that if you are having a discussion among the commissioners that needs to be done in public
There are exceptions to the above — closed meeting to discuss enforcement issues
Have been public about the fact that she have not been able to convince her colleagues to take a proactive approach to crypto
How Do The Staff Learn About Crypto If They Have Never Interacted With It?
Think that it’s a problem
Her regret is that she can’t own crypto and interact with it herself
What she is able to do is:
Talk to people in the industry
Talk to retail who have crypto assets
Listen to a lot of podcasts
People at the agency is trying to figure out how they can experiment
Regulators tend to be pretty conservative people
“As I said, in a recent speech, we have to maintain a bit of that wonder, thinking about technological innovation and what it can bring and how it can change lives.”
- Hester Peirce
Could Blockchain Be Used To Revolutionize EDGAR Or How We Look At Financials Of Companies?
This could help them address some of the problems that have dogged them for years:
Company balance sheets
Extent of concentration of the financial industry in a few large institutions
Safe Harbor Proposal
Easier to track bad actors with digital assets than with cash
Blockchain could also be used in a bad way by governments and regulators
Protecting the privacy of individuals is important
Have to ask the question whether is it appropriate for regulators to watch everything that’s going on
What she was trying to achieve with Safe Harbor is to allow token distribution events to happen
Projects have to provide information on their team, plans, tokenomics, etc. They have the obligation to update disclosures periodically
After 3 years, you can get a sense of how decentralized the network is
If it’s sufficiently decentralized, it doesn’t matter who the original project team is as the network is up running and functioning
The Safe Harbor Proposal is currently in limbo. It’s publicly available for comment on Github
Have not gotten traction as her colleagues said that they have great securities laws that have been in place for years
Crypto And The Howey Test
When the US Congress wrote the securities laws, they defined it broadly
The Howey Test is the interpretation of one prong of the securities definition: the investment contract
Over time, the Howey Test has been applied to cover lots of things that would not be traditionally considered as securities
Her view is that they need to work to accommodate this new technology
Moving From A Security To A Non-Security With The 3 Year Safe Harbor
When a token is sold as part of a securities offering, the token itself is not the security
The token plus the promises that go with it are the security
At some point, the promises around the token are not important anymore
People have wrestled with how to approach this
Is There A Risk To The SEC Of Losing A Case?
When they bring an enforcement action, they announce the enforcement action and settlement on the same day
Quite difficult and expensive to litigate against the SEC
They try to stay within the bounds that Congress gave them
They do not use enforcement actions to make laws/provide clarity
Notice On The Alternative Trading Systems (ATS)
The bulk of the proposal is about fixed income
Introduced a new communications protocol system in that proposal. That term is broad and could encompass lots of things
Put it out for a lot of people to comment on
She and her colleagues are still reading through the comments and will take them into account moving forward
Does Every Spot Bitcoin Market Need To Be Regulated Before We Get An ETF?
Does not understand the rationale that they’ve used to deny past applicants
Thinks that they should have approved one 4 years ago
Any final agency action can be appealed and considered by a court
How NFTs Might Potentially Be Regulated
People need to think about SEC regulation when they engage in this space
All of these things could potentially raise regulatory issues:
NFT fractionalization
Revenue flowing to NFT holders
NFT used as collateral for loans
NFTs associated with governance rights
Thoughts On DAOs
DAOs are an interesting way to organize human activity
Some States (e.g. Wyoming) are trying to grapple with it
Thinks that a lot of the grappling will be done at the State level because states are sources of corporate law
People are going to look for someone that they can hold accountable if something goes wrong. Figuring out how that works is an interesting legal issue
How Much Is The Chairperson’s Agenda/Control Impacted By Society?
Have to talk to the chair about his agenda
Thoughts On Stablecoins
There are different stablecoins, so it’s difficult to paint them all with the same brush
Some of them may have securities implications
Market pressure is driving clarity in this area
Hope that whatever regulatory model that Congress settles on, it would recognize the value and the role that stablecoins play
Thoughts On Self-Regulating Organizations
Congress has a role to play in deciding who gets to be the regulator in this space
Setting up a separate regulator to deal with crypto is difficult as it’s intertwined with many things that traditional financial institutions do
The technology allows for self-regulation
Can also imagine self-regulatory organizations arising as they are able to build rules that are technologically sound
What Is She Excited To See Get Achieved At The SEC Till The End Of Her Term?
Would like to see the agency to have proactive conversations around regulation — guidance, regulatory framework, etc.
Does not have any particular date in mind
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