US SEC Commissioner Peirce: International Blockchain Innovation Comes at a "Cost To US Economy"

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David Berlind: I'm David Berlind, and this is a special edition of the Blockchain Journal podcast. On March 11th, 2024, the Boston Blockchain Association, the BBA, ran a special event at the United States Federal Reserve Bank of Boston, during which BBA chair Doug Mehne had the opportunity to interview Hester Peirce. Hester Peirce is one of the five commissioners at the United States Securities and Exchange Commission, otherwise known as the SEC. The SEC is one of several government organizations that play a role in the regulation of cryptocurrency and Blockchain in the United States. Blockchain Journal was in the room not only to observe the interview, but I made a recording of it, and I'm going to bring that recording to you in a moment.

But first, a few observations. Perhaps the hottest topic of the conversation was the idea of Bitcoin ETFs or exchange-traded funds. What's a Bitcoin ETF? Well, it makes it possible for investors to invest in Bitcoin without having to buy the cryptocurrency itself. There are 11 Bitcoin ETF funds on the market right now, and basically, you can buy into one of those funds the same way you would buy into any other fund or stock, going through a typical exchange like the New York Stock Exchange or NASDAQ. It just makes Bitcoin much more accessible as an investment to investors than having to download a cryptocurrency wallet and work with one of the existing cryptocurrency exchanges. So we're seeing a lot more activity there on the investment front. But so far. Bitcoin is the only cryptocurrency for which such ETFs exist, and there was some mumbling at the event as to whether the next one might be Ether (ETH). Ether is the protocol token of the Ethereum public blockchain.

Now, Ms. Peirce was very regretful that it took until January 10th of this year, 2024, for the SEC to approve Bitcoin ETFs. It took a long time, and it came at the end of a road that involved many lawsuits. Ms. Peirce also talked about how had she known back in 2018 what she knows today, she might have done things very differently. I really liked to hear that sort of candor coming from a United States politician. I don't know if she refers to herself as a politician, but I certainly see it that way.

Now, one of the things that she talked about is how the lack of clarity here in the US, legal clarity that is, when it comes to the regulation and law-making around cryptocurrency and blockchain, is holding back US enterprises from investing and innovating with blockchain. She talked about how that innovation is taking place in other jurisdictions where the laws and regulations are moving along, for example, in Europe or in Singapore, and she talked about how the US is falling behind, but she still thinks there's an opportunity for the US to catch up.

So I'm going to go ahead and roll tape here and let you see the interview, but first, I just want to remind you that all of our interviews, including this one, can be found on both blockchainjournal.com as well as on our YouTube channel at youtube.com/@blockchainjournal. On the version that's on our website, you can find the full-text transcript. On the version that is on YouTube, you're free to leave comments, and then, if you only want to see the audio-only or hear the audio-only versions of these, they're available on most podcast services.

Finally, after the interview took place, I had a chance to do my own interview with Ms. Peirce, and so stay tuned for that. That will also show up on blockchainjournal.com and our YouTube channel. Thanks for joining us.

Full-text transcript of Doug Mehne of the Boston Blockchain Association's Interview with Commissioner Hester Purse of the US Securities and Exchange Commission

Doug Menhe: Thank you everyone. I don't think that this institutional crowd and audience needs any introduction to SEC Commissioner Hester Peirce. I think there are very few leaders in our industry that have the pedigree, the insights and the balanced perspectives that the Commissioner brings to our institutional ecosystem. So, thank you very much for joining us today. Thank you for your your leadership and thank you for your willingness to challenge the status quo of this journey that we are all going through.

Hester Peirce: Well, Doug, thank you for that nice introduction, and thanks to you, and the Boston Blockchain Association, and Jim for your amusing story. My father has similar stories of the Boy Scouts in the back of our family van doing hijinks in the back, which also got him in trouble. But anyway, I will say that my views or my own views as a Commissioner [are] not necessarily those with the SEC or my fellow Commissioners.

I'm looking forward to the conversation and the chance to talk with some of you afterward as well.

Menhe: Thank you. Emma, and thank you to you as well for all the collaboration leading up to today. To get us started, can you share your path to the SEC twice and how you have come to the unofficial title of "Crypto Mom?"

Peirce: Sure. So I studied economics [as an] undergrad and went to law school. And the combination of those two things made securities law a natural fit. I did not intend to go work at the SEC. That was never in my game plan. But, I worked at a law firm where we did a lot of securities law, and I realized a lot of my colleagues had worked at the SEC. I realized the importance of working at the SEC to understand how it worked from the inside. And I also heard that it was a great place to work. So, I ended up there in the division of Investment Management as a staff attorney, writing mutual fund regulations.

Again, not what every little girl dreams of doing when she grows up. But I did enjoy that. Then [I] got a chance to work in a Commissioner's Office, which I also enjoyed but thought I'd never want to be an SEC Commissioner. So I left and did some other things, but then got the opportunity to come back as a Commissioner, and by that point, I was fed up enough with a policy that I thought, well, I might like to have a hand in pushing the SEC a little bit on issues like innovation.

And so, that's how I got back to the SEC as Commissioner, and really was thinking about innovation at large. But crypto was very much coming into contact with the SEC at that point. And there are a lot of people who were coming to the SEC with backgrounds that were sort of non-traditional and asking, "Why does the SEC do things a particular way?"

And I thought that was [a] really healthy kind of prodding of the SEC from a group of people who were, you know, again, not your typical SEC interlocutor. So anyway, that led me to be thinking about these issues and, of course, the Bitcoin exchange traded product. I got to the SEC in 2018. We were looking at Bitcoin exchange-traded products way back then. I didn't understand why we weren't approving them, even back then. And so I rolled my first dissent in 2018. That's how I got the name "Crypto Mom" based on that dissent. And Crypto Mom was very unhappy for five years. But finally, we got one of those – a number of those products across the finish line.

Menhe: On a personal note, do you embrace this title, or do you sometimes just cringe?

Peirce: Well, you know, I think, like any mom, you get kids that you don't really expect [or] anticipate. But, I think the real problem with a title like that is that the government's not... I'm a firm believer in the government not being anyone's parent. I believe that, you know, Americans need to think for themselves. And so that... I think the title is kind of funny. But I do push back against any notion that the SEC is in a parental role and I think a lot of the problems that we're experiencing today with the SEC stem from the fact that people are looking at the SEC to play a parental role. I say Americans are able to make their own decisions, and we should not stand in their way.

Menhe: Thank you. So, I'd like to start by giving our guests insight into the SEC. The process of decision-making in your role as a Commissioner by starting with some recent examples that the SEC has made. I've heard you previously share, which you just touched on, [that] you really can't understand the agency until you've been in it. You've recently written some very strong and independent statements about SEC decisions. I wish I had time to go through a number of them, but I'd like to focus on two.

You just touched on the Bitcoin ETF approval, and in your statement, you said what you just talked about, which was this should have happened in months, if not years. And then, on Wednesday, there was a cause for me to rewrite my questions based on the ShapeShift judgment or enforcement if you will. And I think that you and Commissioner Uyeda have stated what everyone in this room is thinking about the current regulatory environment. So, could you start by just giving us your perspectives on these two decisions?

Peirce: Yeah. With respect to the Bitcoin exchange-traded product, you know, I think the SEC, when it first encountered crypto, was scared. It's something entirely new. An asset class that it didn't really quite know what to do with. And that's understandable because there was a lot of stuff, and there is still is a lot of stuff, happening around crypto that is, you know... it just looks a lot like other frauds we've seen in the past. And so, I think that scared a lot of people at the SEC, and it made it harder to kind of view a Bitcoin exchange-traded product through the lens of how we've looked at other similar exchange-traded products in the past.

And so, when I looked at the Bitcoin ETP, I said, "Well, it doesn't really look too different from what we've done." And so, you know, you iterate on what you've done before, and it shouldn't really require a whole new thought process to get there. But it did and it ultimately took a court telling us, "Hey, you can't be arbitrary and capricious when you think about these things." And so that nudge, I think, moved us to an approval. But as you saw, it was an approval that was a 3-2 approval and Chair Gensler was the tiebreaker. Commissioner Uyeda and I supported it, but Chair Gensler was the tiebreaker. But, you know, [he] made it quite clear that he wasn't necessarily happily signing on to this.

So, I just... I think we have to be careful, again, to go back to the mom point, right? I'm not anyone's mother. And so, if we let a product like a Bitcoin exchange-traded product go live, I'm not telling you to buy it. I'm telling you, you make up your own mind. If you want it, you can buy it. If you don't want it, then don't buy it. And I think it's kind of funny that all the... So many people who are so critical of our decision to let these products go out onto the market.

But you know, they don't have to buy it. And so, to me, it seems like the way to let these things happen is to let the markets decide. If investors want a product, they'll buy it. If they don't, they'll move on to something else. So that was kind of my thinking on that. And I, you know, I think again, we should make it very clear: we are not putting our imprimatur on something simply because we have said that an exchange-traded product can be built on top of it. That's not our role.

We've had active futures markets in Bitcoin for a long time now. So, you know, we've we've been able to see how that has played out. We've seen these products trading in other countries for a long time now, so we had a lot of evidence that should have made us comfortable much earlier.

With respect to ShapeShift, for those of you who didn't follow that, there was... We brought an enforcement action against ShapeShift, which we argued was acting as a dealer and it traded, I think, around 79 assets, and some of those were deemed to be – by the SEC, were deemed to be – securities.

We didn't tell people which one[s], which assets those were, and we didn't tell them what analysis we applied to conclude that they were securities, which, you know... Sort of... It's a very complicated thing when you look at that, and you're trying to figure out, OK, well, can I glean anything from this to decide whether or not the things I'm dealing with are securities? It's really hard to tell.

But what I... What Commissioner Uyeda and I tried to do in that statement of dissent is to say, you know, "What are we doing here on a...? Are we really being productive here?" Because we have this mantra, "Come on in and register." And so, what we tried to play out in that dissent is, what does that conversation look like when you come through the doors that say, "Come on in and register?" What is that conversation like? And I think the conversation goes something like this:

"Hey, we're here to register because we think that perhaps we have to because we think some of the assets we're dealing in might be securities."

And the response from the SEC is, "OK. Well, which ones are securities?"

"Well, I don't know, because [we] don't quite understand what your rationale is for deeming one thing as security and another thing, not a security."

"Well, you can just go read the DAO report. We put that out in 2017. That should answer all your questions. And we've brought other enforcement actions since then. You can go ahead and read those, too."

"Well, yeah. I mean, I've read the DAO report, and that really doesn't help me actually develop a framework for determining what's a security and what's not."

"Well, hire a lawyer."

"Well, it turns out our lawyers don't know what it means either."

"Well, sorry. We can't help you. We can't provide you any more assistance. Go figure it out."

And I think that message is a message essentially to anyone who's trying to innovate. You know, you are taking your future in your hands here because ShapeShift started in 2014, [and] we brought an enforcement action in 2024. You know, you have to wait all those years to figure out whether you're potentially violating the law. That cannot be the right approach. That cannot be the best way for us to move forward.

[[Audience applauds.]]

So, it it seems better the rights and rules figure out, you know, some clear lines and then let people figure it out from there. So, I think it would be better for both the industry and, frankly, for us because it takes a lot of our enforcement resources to go about it the way we've gone about it. That was a long answer. Sorry.

Menhe: Thank you. I mean, I think everyone would be interested to understand what's it like to be on the inside of the SEC during these decisions and, at times, seemingly a lone voice.

Peirce: Well, it certainly is nice to have Commissioner Uyeda at the SEC because I think he he takes, you know, a very thoughtful approach to these issues. So, it has been nice to have to have him there. I mean, look, I think the purpose of having a commission is to have five different voices, five different backgrounds. So, I don't expect my colleagues to all jump on the same train that I'm on. But what has been frustrating for me, particularly about the crypto debates, is that. We really need to sit down and have some legal precision in how we're thinking about these issues. That's going to be better for everyone. And so that, for me, has been frustrating. And I guess if I could dial back time and go back to 2018, when I first became a Commissioner, I myself should have been more legally precise in how I was approaching these issues. So I can give myself a critique in that as well. Live and learn, right? But but I wish I could tell my younger self that there was a better approach to do this. And I think, you know, it's late now, but it's not too late, right? We can still change course and we can still take a more productive approach. So, I guess I would say there is certainly a level of frustration. And how I approach these issues now because I think that I think we're wasting time, but I'm still optimistic that we can turn the page to a brighter future.

Menhe: Thank you. Based on my personal experience being with a Digital Asset Trust Bank for the last five years and going through the process with a different federal regulator was pretty inconsistent and it was seemingly... There wasn't agreement from steps up through the management to the chair of the organizations, which creates really a difficult environment and a moving target for how you can do the right things to get through that process. And then secondly, I think we all would agree [that ] the current environment is that the lawmakers... I'm sorry... That the courts have become the rule-makers and rather than the lawmakers to the regulators, to industry. You said recently that regulators are not meant to be parents but rather to set the priorities. Can you share your interpretations of the current environment?

Peirce: Yeah. And I should underscore that there are a lot of staff at the SEC. It's, you know, we have almost 5,000 – 4,500 or so – people and I think a lot of people at the SEC really are interested in crafting a productive path forward. But it is difficult. You know, we are... As the Commissioners, make the policy decisions, and so they have to respond to where we are. And if they're not getting the message from the Commission that we want to see productive movement forward, it's really hard for them to work on those productive paths forward. So, I think it is important just to remember where to place the blame. I guess I would say is you've got to place it at the Commission level. And so I think again, we could change those priorities pretty quickly if we decided that we wanted to put some effort into actually working with people and coming up with frameworks that made some sense and maybe working with our fellow regulators too. So we could get some consistency.

Mehne: Yeah, thank you. We'll touch on that. I mean, how should this work, though? And if... What would you do differently with the majority position within the SEC? So, how do you take what you just said and extend that for how this might look differently in terms of the approach and process?

Peirce: Yeah. I mean, I think that's a very fair question. And so, [the] first thing I would say is, I think we're actually in a more difficult position now because Congress has said, "Hey, wait a minute." They've watched the way the SEC has handled this and they've said, "Wait a minute. Maybe we want another regulator to do some of this."

So, I think that it would be helpful for Congress to come in and allocate responsibility for crypto. I think we also have to remember that whatever we do needs to be flexible enough to accommodate the fact that crypto is not any one thing, right? It's not just Bitcoin. It's not just Bitcoin exchange-traded products. It may be tokenizing traditional securities. It... The uses of blockchain are not all financial, right? There are many things that can be done with this technology that have nothing to do with financial services. And so, whatever we do needs to be flexible.

Now, I think one thing that we could do, even before Congress speaks, is we could bring industry in, have public conversations – and I really emphasize the need for public conversation. One thing I worry about is that a lot of these enforcement settlements. I mean, you know, one bad thing is it's enforcement by... it's regulation by enforcement. But, a sub-concern is that, that means that you've got one party sitting in a back room with the SEC enforcement staff. That party is not in a position of power. No high leverage there, right? You're facing an enforcement action. So you're trying to negotiate the enforcement action. In the process of negotiating that action, you're also coming up with potentially a framework by which everyone else in the industry has to comply. And that framework may work well for you, but will it work well for everyone else?

So conversations had at public roundtables, I think, are really important where – and public comment files where people can react to what other people say – working with other regulatory agencies like the CFTC, I think you could work through, kind of, where are the issues that need to be solved? What are the problems that need to be solved here? And then, you can think through, you know... We have to think about custody. We have to think about what happens with SIPET (Initiatives, Policy, and Emerging Technologies) coverage. We have to think about drawing some clear lines. So people can figure out what a security is and what that means for all the intermediaries that touch these crypto assets. And we can use... And then, like we...

Everyone understands. It might be nice for in an Initial Point Offer (IPO) and for someone buying into that offering to get some disclosure. What should that disclosure include? What should it look like? What makes sense in terms of thinking about how long those obligations to make those disclosures run? Are we really thinking accurately about what the security is? Is it the token itself, or are we talking...? You know, if we're talking about something that was issued in a... that was offered in a securities offering as part of an investment contract, can we pull the token away from the rest of the investment contract so that in secondary sales, is it still deemed to be a security?

We need to pin some of these things down. And, I think we could do that, again, with involvement of people who are working with these things day-to-day. Investor protection advocates could also be part of that conversation. We want it to be a broad conversation. And then, I think we could... We could come up with some really good approaches. And then, using our exemptive and no-action authority to allow people to try things. And that means coming up with exemptions that are actually workable. You can't create a special-purpose broker-dealer system that doesn't allow people to have non-securities alongside crypto-asset securities because it just doesn't work. So, those kinds of things, I think, are what I would do.

Menhe: So, is there a Howey Test 2.0? And it Sounds like...

Peirce: I mean, maybe, right? I mean, I think the Howey Test... Look, the Supreme Court was interpreting part of the Securities' laws, and I don't think that there's... I think the fundamentals of that test make sense, but there have been some questions in application, and I think it would make sense for us to think about what we're trying to cover because if you interpret the Howey Test in the way we've been interpreting it for crypto, I think you end up regulating a lot of things that are not just crypto. You know, as I've said in some of my other statements, I think you end up in a place where you're regulating all kinds of physical collectibles, too. You know, you could be regulating luxury watches, you could be regulating all kinds of things. Do we really want to be in that situation? And so, maybe thinking about what parameters make sense, you know, maybe that is something that the SEC should spend some time thinking about.

Menhe: Thank you. Switching gears with the Bitcoin ETF approval, does that change the efficiency and the approval process? We're right in the middle now of a consideration for an ETH ETP. Will that be different because it's a different product and a different set of considerations? Or can it piggyback, if you will, for the your process – the most recent process – that the Bitcoin ETF went through?

Peirce: It's a little difficult for me to address that question simply because we have some of these under consideration. And, of course, facts and circumstances always matter. You've got to look at the different facts that apply to ETH versus Bitcoin and those kinds of things. But I, you know, I hope that we don't end up in a situation where we deviate from precedent, as we did when we were first looking at the Bitcoin exchange-traded products. You know, we do have precedent in other kinds of products, and I think there should be a clear line that you can follow through that. But really I can't say anything about the what, when, where, how, if on that.

Menhe: OK, I started when I did the welcome, talking about why we created this series, and we have a great representation today of 180 to 200 people that are trying to do this the right way. And they would all – I will speak for all of you – they would all commit huge amounts of time, resources, [and] team effort to collaborate with the lawmakers and the regulators to come up with the responsible framework. How does the responsible end of this industry get to collaborate, to come up with a working draft of a framework and set of rules that we can operate in so that we're not all in the ShapeShift, you know, category five years from now?

Peirce: You know now is the time, right, to work together to develop a framework. Identify the areas where what you're trying to do runs into either ambiguities or runs into a problem in the existing securities laws, right? You know, transfer agents are a little bit...

Maybe the traditional transfer agent seems a little bit redundant with blockchain, so think about those kinds of issues and then start coming up with what a good solution would look like. So, you know what our regulatory objectives are. They're very clearly stated – investor protection, fostering capital formation, and fostering the integrity, protecting the integrity of our securities markets.

So, look at it from our perspective — what we're trying to achieve with our regulation. Look at it from your perspective — what you are trying to achieve from a commercial standpoint — and see how you can marry those kinds of things.

The worst thing that could happen is we could get Chair Gary Gensler, version 2.0, who says, "You know what? I've decided that I want to take a different approach to crypto. Throw your solutions out to identify the problems for me and throw out the solutions that you've developed." And if the collective response of the industry is we can't identify particular problems and we don't have solutions, Then you've completely missed the moment. And so, get ready now for when the attitude changes – which I expect that it will at some point change. Be working on things, have concrete things that you want to achieve so that those things can then be vetted publicly and put into place.

Menhe: In 2023, we've had leading institutional, traditional institutional firms [and] leaders. We've had native digital asset companies come in be on these similar sessions and panels.

There have been some pretty consistent themes that, while innovation continues, they don't want to be public about those innovations for fear of regulatory enforcements or decisions, if you will.

And, you know, that creates a pretty difficult environment for fear of being public about what they're truly doing. They're not looking to break any rules or avoid any rules, but they're holding back until that there is further clarity.

CoinDesk last week published an article calling the registration process with the SEC as Catch-22, and their quote was, "Successful registration would lead to a dead end." You touched on the ShapeShift decision, which, you know, will have a similar effect on companies that are contemplating these innovations. And then, SAB-121 kind of killed the path of the traditional banks to support crypto assets. And you said at the Duke Conference in '23 that the inability of these traditional public custodians to participate by making custody-crypto take up precious space on bank balance sheets. I have to ask, and not point it at you, but pointed at the SEC, is this is the current intent of the SEC to prevent rather than to guide?

Peirce: Well, I wish I could say that it's to guide, but you know, I think the ambiguity serves to prevent, and I think that I worry about exactly what you raised, which is that people are scared to try things in this country, and so, a lot of the interesting things are either being done outside this country or specifically designed to block participation by American participants. And that is a cost to our economy [and] to our future growth that we can't necessarily measure.

And look, I don't need to be an advocate of any particular industry, but what I know is that the regulator should try to allow as much freedom of people to try things as possible because we don't know where the next great innovation is going to come from.

And so, we need to figure out a way to work with people to allow them... I mean, I hate even to use that terminology because I, you know, my preferred approach is permissionless innovation, right? Let people try things. But we do live in a very prescriptive regulatory regime. The SEC has laws in place that govern what we can do and what we can allow. So we have to work within that regime.

But, you know, which I was talking to someone earlier today about the idea of thinking about modeling a sandbox-type approach on what some other countries are doing to allow experimentation to happen in a way that allows reporting back to us, at the SEC, but also allows people to try things. So I think we really do need to be much more purposeful about figuring out how we can better allow innovation to move forward.

Some of the saddest meetings I have are people who come in and they say, "Hey Hester, we're trying to build something. We've been in talks with the SEC staff and with FINRA (Financial Industry Regulatory Authority), and we just don't know where we are in the process and the people who are funding us are giving us two more months. Are we going to get approved in those two months, or do we have to shut down?" And, "Do I have to shelve the dreams that I've been working on for the past three years or five years," or whatever it is, and that's heartbreaking to me because we're not in a great place for that, and it should not be like that. We have legitimate regulatory objectives, but there's a way to meet those objectives, but also to allow innovation to move forward. And that's the balance that we do not have right at this point.

Menhe: I can very much relate to what you just described. I'm getting the flag here. But, very quickly, you're you're touching on the cross-regulatory sandbox. Can you just kind of highlight for people... You've also previously mentioned a fintech – SEC fintech – path as well. Is that... are both of those things a 2024 path for firms that are here?

Peirce: No, because I don't... Well, maybe. I mean, it depends, I guess, where people at the SEC come out. I mean, we don't have anything concrete in the works. We have a FinHub (Strategic Hub for Innovation and Financial Technology) Financial Innovation Office at the SEC, but I think having something that really would work would require a more muscular office that has the ability to shepherd things through the SEC. We're having some sort of...

You know, this is always a difficult thing to think through, and I welcome your thoughts on what this would actually look like. Because one thing that bureaucrats often do is they create new offices and new titles, and they say, "OK, Now we're going to really move innovation forward by adding yet another layer for people to go through." And I think people already feel ping-ponged through different parts of the SEC, so whatever we do has to be very carefully thought out. So again, I welcome ideas on that.

But, I think we have to figure out some way to allow people to experiment and what that would look like, you know, in '24 or whenever it is. I think it depends.

One other thing I would say is that we don't have an innovation objective in our in our mission statement. And, in a way that, you know, it sounds a little corny to add an innovation objective, but when I came to the SEC and I was thinking about why is it that we're not great on innovation? You know, it really comes down to the fact that for a regulator, it really doesn't pay to green-light new things because if something goes wrong, you get blamed.

If you don't green-light something new, you can always say you know, no one knows the difference between where we would have been if we had approved this thing or let it go forward versus not. And so, you've got to somehow overcome that regulatory conservatism that is inherent in being a regulator.

Menhe: Thank you. And I would like to offer from a Boston Blockchain perspective and representing the 200 or so people here today that we do need an innovation voice. That we would like to participate in establishing those frameworks and rules in any path that would be productive and give you the tools to help do that. But we represent all of these different firms and very genuinely want to do this the right and compliant way.

Peirce: Well, I mean, again, think about concrete ideas. The other thing I would say is that in your interactions with the SEC, you should feel empowered to say what exactly is it that's blocking you from saying, "Yes, let's work through those issues." And you should, you know, you should have that dialogue and feel comfortable, if you're iterating off something that's already there, feel comfortable pushing back and saying, "OK, where are we different from where from an existing product that's out there? What do we need to address? What concerns do you have? What are the legal impediments to us moving forward?" You know, I think empowering people to have that conversation is important, too. That's how things have moved forward in the past. That's how we've, you know, done it in other areas. So that's how it should be done in crypto as well.

Menhe: Thank you. Please join me in thanking Commissioner Peirce.