May 31, 2024

Hester Peirce, Commissioner of the Securities and Exchange Commission, joins CoinDesk Live at Consensus 2024 to discuss the state of crypto regulation in the U.S. Plus, insights on the concerns surrounding the agency's regulation by enforcement approach and the regulator's plans for better coordination with the CFTC.

Video transcript

We're coming to you from the Coin Desk podcast studio presented by Bito, founded in 2013 with the first institutional grade Bitcoin Wallet Bit Go is the gold standard in custody staking and settlement today. Bito supports over 800 coins and processes 20% of all Bitcoin transactions by value. Check them out at bit Welcome back to Coin Desk live from Consensus 2024. I'm Jed Sasi here with my co hosts, Renato Mariati. Our next guest is the SEC commissioner Hester Pers. Welcome to the show. Thanks Jen. Great to be here. Of course, I'm gonna give you my disclaimer, which is my views are my own, not necessarily those of the SEC or my fellow commissioners. Well, it's great to meet you, IRL much like Renato and I, we've only spoken on the Zoom call, so it's great to be here in real life with you. Got to get your reaction to the conference. That theme over the last three days has really been policy and regulation here within these walls. Talk to us about the conversations you've been having. Well, I'm always sad to hear that the theme of a crypto conference is policy and regulation. I long for the day when the theme of a crypto conference is actually the technology. But, you know, I, I've had conversations similar to the ones I've had over the past several years, which is that we need to get the policy right, so that people can focus on the technology and there's a lot of work to go still on that. There's some positive shoots that we're seeing in the, in the uh regulatory landscape. But we need to see more, you know, one thing that I've heard a lot about throughout the conference is concern from, you know, attendees here about regulation via enforcement, about the aggressive tact that the SEC has taken in enforcement matters. Does it concern you as a commissioner that so many in the industry are viewing the SEC as an adversary or, or as a obstacle to progress? No, it certainly does. And I mean, I, I think I've had some similar concerns um to what you've heard that we're using enforcement as the primary way to make policy in this area. And that's just not the most effective way, it's not effective for the industry, but it's also not effective for us as a regulator with limited resources. And so I think we really need to reset. Um, we need to engage people in policy making whose job is not enforcement, who's, but whose job is actually policy making and that's a different set of people at the SEC. It seems that there is at times, um, different approach taken by the SEC and CFTC. There's been some differences of opinion about whether, for example, certain tokens are securities. Um, you know, is there a coordinating with the CFTC? And how do you see, um, potential, um, sharing of regulatory responsibility between those two agencies going forward? Yeah. I mean, crypto is not the first place where the CFTC and the SEC have had to have conversations and sometimes very difficult ones about where the jurisdictional lines lie. Um, but I was talking to someone yesterday and, and I think the person raised a really good point, which is that ultimately, it doesn't matter whether the jurisdiction was with us or with the CFTC, we both work for the American people and so we really wanna get it right. Um, I personally have been involved in conversations around jurisdiction related to security based swaps and swaps under the Dodd Frank Act. And I think we can have similar conversations here. I was on stage yesterday with, um, Commissioner Messinger from the CFTC and I think she and I approach these issues very similarly. We'd like to sit down together, have round tables, talk about some of these issues. And so we could start doing that tomorrow. There's, there's no problem to that. And would some of those conversations be hard? Absolutely. But I think it could move us forward much faster than each agency working on it. On its own commissioner. I've heard from people around the conference that you've been really open to speaking with different projects and different folks while you are here, what are you learning from people at the conference? What kinds of questions are they asking you uh about the sec and regulation to come? I think people are constantly looking for, you know, some light at the end of the tunnel and hoping that we'll get to a better place. Um But yesterday, for example, I put out uh a model for uh uh uh in innovation sandbox and I think that kind of thing would be interesting to a lot of people because it would allow them to start trying things here in the US. Um And, and it would be a streamlined approach and I think that's what people are looking for. They wanna have a way to positively engage with the SEC. Um And, and, you know, this is again the same kind of theme that I've been hearing for a long time, which is we wanna work with you and we wanna come in, but we wanna know that this is gonna be a conversation that leads us to be able to actually do something in the marketplace in a way that's consistent with the securities laws. You know, one obviously, one focus has been throughout this conference. At least that I've been hearing from market participants is about f 21 there. Hope for there to be a regulatory framework, obviously, that's up to a uh a different branch of our government, the legislative branch. But why hasn't the SEC used the authority? It does have to promulgate regulations in the meantime, so that there's more certainty for the market. I mean, I think that's such a great question because the, the, this is when Congress comes in often when, um and this is not only with respect to crypto, but sometimes the sec has authority and chooses not to use it. Um And Congress sort of nudges us and tries to encourage us to use our exempt of authority. Um I'm thinking in terms of small business capital formation, that's another area where often we don't, we don't take the steps, we need to. So Congress comes in and says, all right, well, we're gonna tell you, you have to do this and I think we're seeing the same kind of thing happen with crypto. We had the opportunity to try to, to, to set out a productive regulatory approach. Congress finally said, ok, we're gonna come in and we're gonna outline this for you and I'm always grateful for Congress's input. I mean, they're, they're my boss. And so it's really nice to hear what, where they want authority to lie. Um But I do think we could have done some of the hard work and it's unfortunate that we didn't, what was the obstacle there in your view or can you, can you tell me, and I think there's, there's a view that the existing securities laws work just fine in this space and I, I came into the sec thinking that we didn't need to make adjustments. Um, but as I learned more about the industry and about what people were trying to do, I realized there isn't actually a great fit and there's some adjustments that we need to make. And I think it's, it's a lack of willingness to sit down and have those serious conversations with seriously thinking, not only about the law and, and, and how the law has developed over time, but also about what people are actually trying to do and marrying those two things together. It's, it's actually quite a bit more complicated than I think many people are willing to acknowledge and that's why we need to do the hard work. We have the expertise that the SEC to do that work. It just hasn't been done. I asked the uh Texas State Regulator, this Renato told me earlier on the show that a lot of his clients are looking to go overseas because the lack of regulatory clarity here. Is this a conversation that you're having behind the scenes at the SEC? Is this something that's being discussed? How do we keep innovation here in the US? I mean, it's certainly something that I've talked to a lot of folks in the industry about people who are either thinking about leaving the US or I talked recently to someone who said, you know what, I don't want to leave the U SI, I will build my thing here, but I'm having to wait. Um, and that's bad too. Right. We want people to be trying to push forward their ideas in terms of whether or not it's a big concern. I'd say many people in Washington don't really care that much about it because they don't think that there's a lot of value in the technology underlying this. And so, you know, to be fair to them, they've seen a lot of fraud in the name of crypto. And so maybe it would be better if it just doesn't happen in the US if it happens outside and it's hard to sort of pull those people back and say yes, there has been a lot of bad activity, but there's also a core of something that is interesting. I'm, I'm a regulator, not a technologist, but I would like to see that play out in the United States. I would like the US to be the place that people when they think about, where do I wanna build a company or where do I wanna do my development? I want that to be in the US. Um And I think we have a lot of work to do to make that uh to make the US the most attractive place to be. Yeah, I think one of the more frustrating things for industry participants is that there's not a uh an, an avenue by which they can come forward and say here, here's what we are trying to do. Give us guidance. Are we compliant? Are we able to get a safe harbor or report ourselves and say this is the activity we're doing? How can we do this in a legal manner? And at times even attempts to do so have been rebuffed. There's been uh enforcement actions taken. Um You know, I is there any movement within the sec to try to provide more guidance to the industry or at least give a reprieve for industry participants that are trying to get some guidance uh on the front end. I mean, we haven't made a lot of progress on that front. I will say though that the, the micro sandbox that I put out yesterday, I think could be a path to getting to more um positive interaction between the industry and between the sec in a way that also allows the public to, to see what's going on. So it would be transparent um what people were doing and it would also give the sec staff time to work with these projects in a way that I think would be productive. So I hear that need and I, I think this is why I've been thinking about what could we do and this is the idea that I came up with. I welcome feedback on it. I put it out um, it's on the SEC website. People can give me feedback, rip it apart. Tell me what doesn't work. What would work? Tell us a little bit more about the sandbox that you published yesterday. So the idea is that you could, we, the SEC would, would decide which activities could qualify for the sandbox and we'd set ceilings on the number of customers in the dollar amount. Then projects could come in and it's not limited to crypto but could certainly be used by uh crypto projects. You'd come in. You'd say here's what we're gonna do. Here are the conditions we operate under those conditions could be drawn from a foreign sandbox you're participating in or they could be just conditions that you set yourself and then you put a notice out, you can start operating within 10 days. Um And then, then you're working toward permanent relief that lasts for, that's a two year uh sort of grace period there and then you're working toward more permanent no action or exempt of relief. Um And so the idea is you wouldn't want to put forth meaningless conditions because you're trying to prove to the sec that you have uh uh an approach that will be protective of investors in the markets, but also will allow you to be commercially successful. So that's the idea. It gives you, it gives you a platform to have a good solid discussion with the staff and to produce some data as you're going along about how well, whatever you're trying to do is working. Right. It sounds like it's actually trying to do what I was suggesting a moment ago. In other words, giving a pathway for people in the industry to engage with sec staff and try to develop a path forward for themselves that gives them some, some, at least some certainty in the short term that they're not going to be facing an enforcement action in the midst of doing so. Exactly. Now, one thing I have to say that is I, I admire is the fact that you're here, not only a consensus which I think is important because you're sort of showing the industry that they can meet their regulator and you're coming into an environment where there's a lot of questions and concerns, but you're actually here on coin desk TV, as well answering our questions. I really appreciate that. What is the biggest thing you've learned from talking to folks here at the conference, um, and getting, you know, in terms of a different perspective on what's going on in the ground. I mean, I've been having these conversations with people for a long time, but every time I come to a conference like this where I'm meeting with people who are, who are developing things and wanna wanna build things. It really does kind of make my heart stop a little bit and realize to be in the what, what it must be like to be in the shoes of those people who have this idea, they're just trying to do something that's technically interesting. And always in the back of their mind, is this question of, is this something that's gonna cross the cross a line at the sec, either today or five years from now or 10 years from now. And that kind of uncertainty is really detrimental to innovation. And so every time I meet with people that, you know, I get that pit in my stomach because I feel what it must be like to be in their shoes if we come back to the sandbox. Now, I know that um there have been other regulatory sandboxes proposed over the years. What needs to happen for this to be something that the industry can actually participate in the United States. What does that road map look like? So what I see is the road map is um if I could get my colleagues to agree to this, we could put this out um as a basically a proposed rule. So it would be a rule that would set this, this new sandbox up. We'd identify in that initial rule making proposal, the activities that we wanted to initially uh include. And we could ask for input on other activities to be included. And we'd also ask for input on the, on the ceilings of, of, you know, the activity limits, we'd get that feedback. Um And then we could put it into place. So this is not something that we could turn on tomorrow, but I think realistically we could have it up and running in six months. What is the biggest misconception that people in the, in this space have about the sec? Now that you've been, you've been spending all this time talking to people here. I mean, I think there are a lot of, it's, it's interesting that people in this industry know a lot more about the sec than they probably uh ever dreamed they would. But there are a lot of really unusual features of this agency. We, we're a five member commission that means that it takes a majority to uh make a change. Um I think that some of that is a little mysterious, a lot of actions are actually taken at the staff level on delegated authority. That's something that's also a little puzzling to people. Um And then I think always another big thing is that people think that the sec is sitting thinking about crypto all the time. In reality, we have so many other issues on the agenda. And so this is just 11 issue that we think about. Uh that's, that's always a little surprising to people. I think I gotta ask you about the approval of the spot Ether ETF, you can't be here and that not ask about what happened. It really felt like nothing was gonna happen. There was sudden movement at the agency, a lot of speculation going on about what was happening behind closed doors. What happened? I mean, I think that it's not that surprising of a development when you think about the, the legal history that we, the recent legal history that we had with, um, being told that our approach to the Bitcoin ETP was not consistent with the law. Um And then when you, you line up the, the Eetp alongside the Bitcoin Etp, the facts are very similar. I wouldn't want to have us have a similar legal opinion coming out of a judicial opinion coming out of the court. So from my perspective, we didn't really have a whole lot of choice just as we didn't have a whole lot of choice on the Bitcoin Etp. I know the timing people were wondering what would happen and when it would happen, but realistically, we didn't have that many options. We saw, uh Ether staking removed from some of the applications. Is that an indication into maybe how the SEC might be looking at staking in the future that I can't comment on. All right, Commissioner P. Thank you so much for joining us here. Uh We hope you enjoy the rest of the conference. Thank you both for having me take care. That was SEC Commissioner Hester Purse.

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