Apr 17, 2023

The U.S. Securities and Exchange Commission (SEC) is moving toward DeFi oversight as it reopens a proposal from last year that would now explicitly target platforms for those crypto transactions as exchanges that need to be regulated.

Video transcript

The SEC is moving toward DFI oversight as it reopens proposed regulations. Joining us to discuss with what is a rather pointed point of view on this is Sec Commissioner Hester Pearce. Welcome Commissioner Michael. It's great to be here. Um I, I do have a pointed view but it's a bit different, I think than some of my colleagues. So I'm only speaking for myself, fully understand and, and, and indeed, this does not sound like uh you are part of the majority here. You know, you've come up with a, a bunch of criticisms here. Um you've leveled at your fellow commissioners and this one, as I said, seems particularly pointed. What in a nutshell is your main beef with this latest move? Well, what I think this document and I do urge people to take a look at the 165 page document. Um and, and look at the whole thing including the economic analysis because I think there are a lot of statements in that document that uh raise real questions about how much of this much of the activity in the crypto world um would be able to move forward without potentially being in violation of the securities laws as my colleagues are, are uh proposed to um to amend them. There certainly were also statements in that document about current activity around exchanges and including decentralized exchanges. And so I think it's, it's really important for people to take a look at it with that in mind as well. What this rule does is it expands the definition of exchanges. It's not a rule that's limited just to crypto. It's, it's a broader expansion of the definition of exchange to pull in a lot more types of platforms, communication platforms. And there's a lot of ambiguity even outside the crypto world around what it covers and what it doesn't. This latest, this latest document that came out, specifically asked a lot of questions and took a lot of positions around crypto. You, you um actually in the, on that point talking about it being a new definition of exchange, you used an interesting analogy. You went back to the 19 nineties and talked about the time when a TSS and the like were being considered as new forms of exchanges. And out of that developed, I think, you know, a fairly, again hard hitting critique of the commission itself and, and, and its perspective and how it is approaching uh the, the, the sort of the process of regulation generally here. Can you break that down for us a bit quickly? Yeah, what we did in the nineties is we came up with a new framework that was sort of an exchange light framework to address some of the new technological developments at that time. And that process was a long process. But we did, we did realize that we needed to make regulatory adjustments. What we're doing now is we're just saying we see this new technology and we're not willing to make any adjustments to accommodate it. And I think the point to be underscored is Congress gave us the authority to make adjustments, not to give up our regulatory territory. But to say when you, when you confront a new technology, you're actually allowed to make adjustments so that you meet the objectives of the securities laws without killing off the new technology. It seems that our interpretation now is if you don't look exactly like incumbent firms, then we're just gonna be fine with killing you off or driving you offshore or, you know, forcing you to turn yourself into a centralized entity, for example. And, and I should say that again, this, this attitude that we have is not limited to crypto. I think crypto has just kind of shown a big spotlight on it because so much of what people want to do in the crypto space is really uh comes directly into conflict with this approach. And you actually raised a sort of a bigger constitutional issue here because you talk about how the way the commission is handling these things is actually being something that undermines first amendment protections. Can you explain that? Yeah, I think we trifle with the first Amendment in this latest release. And again, it's difficult to know what the implications are going to be because there's a lot of ambiguity and at the meeting where we voted on this rule, I tried to ask some questions around what this would look like in practice, but a lot of these things are going to be facts and circumstances. Well, what does that mean? That means that at the end of the day, it's going to be the enforcement division that will end up making those calls. And so that there's some very broad language in there around publishing code and it doesn't give a clear pass to that as being outside of the reach of the rule. You actually did a a rather clever tweet, I thought uh we'll, we'll show it here. Uh In addition to eyeing this t-shirt, you said, um you know, which this is the shirt that's got republishing the code from a comment letter, you ask, will I need to register as an exchange before wearing it? Um Later that it's a sort of a unique way to in some respects, address the issues you were just making. Yeah, I mean, I think we really need to talk about this because if it prevents people from developing open source code and from being part of that, that is a tremendous loss for everyone. So I really just think we need to get some clarity on, on some of these basic issues. I, I view this as a very consequential moment and again, maybe others will read the document and come to a different conclusion. I hope that I hope that they do and if they do, I'm, I'm, I'm all ears if people think that I'm over reading it, um, you know, please let me know that as well but, but based on, on what's there and what I got in response to my questions around the, well, we'll kind of know it as we look at facts and circumstances. I just don't know how that gives someone ex anti any confidence when someone sits down and says, hey, I want to be a developer in this space. So obviously, you know, one group of people who are supportive of, they'd be saying is, is there many people in the crypto community there obviously enjoyed that tweet of yours. But look, there are real concerns about the way DFI functions right now. There are have been a lot of hacks Rug Pools, all sorts of concerns. Just last month, we saw the lending protocol of finance suffered an export with nearly $200 million being lost. Of course, Chana has said that at different times last year, we were running at record levels of hacks. Um What is the right way to deal with that? Right? Is this something that is this motive for the SEC to get in there and protect consumers or is there another mechanism for how we can protect people from these kinds of ongoing risks? Well, I think there are a couple of things to bear in mind. Here. One is, if we're not dealing with securities, then it's not the sec's job to fix it unless Congress expands our jurisdiction and gives that to us. Um, the true DFI though is based on open source code that everyone can see that everyone can understand the terms before engaging with it. And it really is peer to peer or peer to protocol. And so if that's the situation, if you're, if you're choosing to avail yourself of that, my argument would be that the, the technology itself is sort of a substitute for many of the regulatory protections that you would need or that we typically provide in the United States when you interact with an intermediary with a centralized. So I think it would be wise for us to set true decentralized protocols aside. And it's not to say, as you mentioned, you can get hurt if you interact with those, you can lose money if you interact with those. But um I think that's that you're, you're opting into that when you're entering into decentralized transactions. Now, unfortunately, we weren't able to get you to come to consensus this year. Uh Commissioner. Um But I will say that one of the things that we're exploring there, uh in a series of, of workshops that we're building around. So we were calling the consensus consensus report is er an exploration of how, you know, individual jurisdictions approaches to this technology intersects with the international framework and the kind of constant sort of struggle that, that uh brings up. So, on that note, like I is this, how, how does the sec even enforce these sorts of rules when much of this activity is going uh outside the United States? I think that's a very difficult question. Now, we struggle with extra territorial questions in lots of areas of our regulation because all of our markets have an international component now. But I think there's some, again, because of the broad reading that we're taking with respect to this exchange definition, it will pose some very challenging questions for because you know what we're arguing is that people can be involved in a group in, in, in running an exchange with people, they don't know in far far flung lands, people they have never interacted with. And so, you know, arguably, and it says everyone in the group is responsible for registering. So if that's the case, then I I it it's going to have extra territorial implications. All right. Well, that's all we have time for. Thank you very much Sec Commission, Hester person. And if your calendar does open up, we still have an open invitation to have you come to consensus and share some of your thoughts on this with the audience in Austin. Well, thanks Michael. I appreciate it. I'm actually going to be traveling somewhere else but I'm sorry to miss out.

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