163 - What SEC Commissioner Hester Peirce Thinks About the SEC

and the other thing that I don't think Washington is very good at is sort of thinking about okay no one cares whether the Securities laws apply or no one outside of Washington cares what they care about is are we making the world a better place by applying regulation or are we just making things complicated and not serving anyone's interests welcome to bankless where we explore the frontier of Internet money and internet Finance this is how to get started how to get better how to front run the opportunity this is Ryan Sean Adams I'm

here with David Hoffman and we're here to help you become more bankless today we have Hester purse SEC commissioner on the episode as we're three months into 2023 which seems to be the worst regulatory environment we've ever seen in the United States and she comes on to drop some insight Hester of course is often known to dissent from her colleagues other SEC Commissioners on crypto related actions and we talk about that today a few things to look out for number one we talk about what crypto could be if we had a first principles

SEC number two we talk about the definition of a security what is a security can we Define it yet number three we hear Hester flat out say that the SEC is trying to increase its jurisdictional reach surprising number four how do we move forward with the SEC that that is a question on all of our minds and number five how can crypto take its share of the responsibility to move things forward with our Regulators David so much covered in this episode what should folks pay attention to I

think Hester really offers us an archetype of a good regulator to actually latch onto uh and so the the SEC is on a monolith there's five different Commissioners there and so while everyone kind of considers the SEC to be Gary Gensler there are other Commissioners in there who disagree with the overall direction of the SEC and Hester purse is one of them and so Hester purse offers us a perspective of what the SEC could be if it had aligned in first principles regulators and so

that's one of the first perspectives that I think uh bankless listeners will be able to walk away with I think the other big one is is that gone are the days of us being able to just like oh is the SEC really just trying to increase its scope and increase its power and authority it's like yes is like the it's not a conspiracy anymore like this is just now flat outstated and so now that that is what is just known now we have to account for that and how do we move forward when the the you know the mask has been ripped off uh so these are

I think the two big things that people can walk away with uh from this episode and just like now that they they the game is a little bit up how do we proceed how do we keep on moving yeah uh The Masks are off certainly as we get into this episode we know where people stand uh David there's so much more I want to talk to you about in the debrief uh this is just a fantastic conversation and I I want to discuss what this means of course bankless Nation the debrief is our episode that we record right after the episode that has our thoughts on this episode with the Hester purse and

you can upgrade your membership to bankless citizenship and access the debrief episode now at a brand new website bankless.com yep we got the.com go ahead and do that there is a link in the show notes where you you can get that done and access the debrief guys we're going to get right to our episode with commissioner purse but before we do we want to thank the sponsors that made this episode possible including thankless nation very excited to introduce our next guest to you Hester purse is one of five SEC Commissioners

so one of five she's been a commissioner ever since 2018. her term is ending in 2025. i definitely wish it was longer here David uh Hester is also a previous podcast guest on Bank list she consistently makes statements about the SEC how it should regulate Capital markets from a first principal's perspective which we think is definitely the way to approach this and why we've enjoyed her guidance so much Hester the last time you were on Bank list was two years ago so it was April 12 2021 my how

time flies how are you doing and welcome back well thank you Ryan and thanks David for having me I'm going to start with my little disclaimer which you all know which is that my views are my own views not necessarily those of the SEC or my fellow Commissioners it's hard to believe that it's been two years I feel like nothing has been accomplished [Laughter] um so yes I'm a little discouraged but um we we have to continue on and try to get some things done so um you know obviously we've had some bad

bad events happen since in those two years also some very bad events I think they've been learning experiences for everyone involved for Regulators as well as for people in the industry um but we also I think have had some bad events on the part of regulators and I'm hoping that that's what we can work on changing absolutely so are we we're actually optimistic about the future they say that the best way out is through and we're certainly going through it now um Hester we want to cover a number of things today including kind of first

principles of the SEC just refresh folks on that what's going well what could be improved making the case to crypto natives of what's good about the SEC what should we appreciate from this regulatory body and also we'd love some of your feedback on how we in crypto can engage better how our industry can improve as well you ready for all that I am before we get in just a quick touch base uh the U.S banking system has had some events here recently uh just curious because it's top of Mind current

event of course does any of that touch the SEC or how how is kind of the um what you Shepherd and have oversight over affected by some of this I mean certainly the financial system in the United States is is very connected and so what happens in the banking system can have ramifications for the markets that we regulate um and and sometimes the entities that our banking entities have have Affiliated entities that we regulate so

there there certainly can be connections and and sometimes banks are public companies and we regulate disclosures of public companies so again there's another potential touch point but I mean certainly we're watching closely what's going on and um it's you know it's it's never it's never good to see those kinds of things happening um and and so we watch to make sure that it doesn't have reverberations on the on the entities that we're regulating directly so Hester for people that have not

watched our first episode uh with you which was a great Learning lesson for me about just like the first principles reason about why we have the SEC I'm wondering if we could just return to that conversation start there because I I believe you listened to our my uh own little rabbit hole investigation of Securities why we have Securities laws in the first place uh and if from the crypto perspective it's very easy to say oh SEC bad like Regulators bad uh so I'm hoping you could pitch to The bankless Nation about like why we need an entity

like the SEC what the SEC does and then after that we're going to rotate into the conversation of what the SEC can do for crypto uh in the if we can all allow this like a future world to to come about in the way that we hope it does so but we'll we'll start there like make the case for why we need Securities laws and why we need an organization like the SEC yeah so Securities laws are there to address something called information asymmetries that's that's one of the key purposes which is if you're if you're

trying to raise money to build a company and you have all the information yourself right you know what you're trying to build you know you know what your background is but someone buying shares of that company doesn't necessarily know all that and so the SEC comes in and says all right we're gonna help level the playing field we're going to make sure that the person raising money is providing sufficient information to the person who is providing the money and so that can be a very important role it doesn't have to be played by

government but I think that the SEC has played that role well over the years and then we regulate various entities in the markets we regulate broker dealers investment advisors stock exchanges so again those infrastructures are so important to the economy to the functioning of the economy and so having someone having a regulator looking at what they're doing can be very beneficial for the smooth functioning of those

entities so um commissioner purse is is part of you can call me Hester thank you Hester is is part of the role here here to like remove information asymmetries or provide transparency to those information asymmetry so when an information asymmetry is identified where some Insider group has knowledge that the General market doesn't maybe in particular the retail Market how does the SEC work to bridge that gap or make that more transparent or what actions do

you take yeah so if if it's a public company the company has to make filings that everyone can see and those filings talk about whether it's making money or losing money talk about what their their risks are the nature of their business how much their executives are getting compensated so there's all kinds of information that we require companies to produce and so that does eliminate um the the this disparity between what the Insiders have and then what investors

have now that doesn't mean that we eliminate all information disparities I mean different people have different information and they make decisions about whether to buy or sell based on that information it's only when they're insiders that we want to make sure that they're they're operating on a Level Playing Field but if you sit down at night and you do a lot of research on a company and you have a lot of information and I don't have that information you're under no obligation to provide it to me if you're not if you're not somehow affiliated with the company that's that's kind of generally

I mean I'm I'm I'm simplifying it a bit but that's kind of how how we think about things there was this big just aha moment big unlock moment for me when I was really approaching understanding the SEC and securities laws from the concept of centralization and decentralization um decent in a decentralized system or a decentralized asset like a commodity or assets that are commodity like there tends to not be information asymmetries because there's no centralization there so there's this innate relationship

that's that the SEC has with centralization it is a check on what is the principal agent problem that naturally comes along with centralized entities and capital markets in capital formation and so understanding that like in a decentralized world the SEC doesn't really care so much about the decentralized world because there's no information asymmetry there in a centralized world when someone knows something that the public does not that's when management of this principal agent problem becomes appropriate and so Hester I'm wondering if we can start to

apply some of this under David I think you put that really eloquently I like that a lot I think that's a good a good frame to think about things in so go ahead appreciate it yeah and I'd like to start to apply some of this kind of uh perspective towards the crypto markets because I think there is a big is ought Gap in what crypto is today versus what it could be in the future uh as it relates to good Securities regulation and good SEC regulation so Esther I'm wondering if we could just Daydream for

a moment comment about a future state of crypto that has good healthy SEC regulation in a in a fantastic relationship with the SEC what can we do in this future state of crypto that I hope eventually arises like what could that become sounds so nice when you put it that way David we're hoping we'll get there uh well I mean I think first of all centralized entities I mean you can come to different conclusions about whether you think centralized entities in crypto need to have a federal regulator a lot

of people I think especially after the events of last year are very comfortable and enthusiastic about that idea and so if we're going to do that then the SEC is a potential candidate to be the the regulator of trading platforms of issuers of tokens potentially um you know I think we have to think about that but if you're if you're really talking about a state where crypto has reached its potential and there's a lot

of decentralized activity I think we better be careful now to make sure that we're not just layering on the traditional regulatory system on top of decentralization because as you pointed out the the decentralized model really solves a lot of the problems that you would be trying to solve with regulation everything is open source so everyone can see what the terms are that they're engaging on no one has access to more

information than anyone else and and no one is able to shut anyone else's access off right this is every everything is accessible to everyone and so whatever we do I think we we need to carve out the decentralized aspects uh and really yeah it a different regulatory approach needs to be taken I would argue a a much different one where a lot of that doesn't need the regulator

sitting on top and watching what's going on my Layman's view here Hester is that anything with this uh information asymmetry right that that it you know has this market failure uh mode where some Insider knows more than than retail and causes a market inefficiency and causes some unfairness in the market anything kind of like that or in that sphere from a first principle's perspective sort of um a security but I feel like we don't necessarily in crypto have Clarity we have a new set of assets

here that are digital assets on which of these assets might be Securities and which might not be and I I do feel like this is still the case um you know two years later since we first had this conversation I don't feel like we're any closer to actually getting that clarity I mean so um nfts uh are these Collectibles or is this something that should be regulated by the security does it depend on the type of nft and and what it drives um various tokens like are these

Securities are they not does it does it totally depend um are we any closer to being able to Define what a security is I know often quoted back to to crypto as well there's the Howie test which is some Court precedent we understand that but it doesn't answer all of the questions here particularly as we address this new asset class so do you feel like um you are the SEC has a good definition on what a security is that it can present to crypto or is this an area of work

I mean it's certain we're certainly not any further along than we were and look the definition of security is Broad you mentioned the Howie test that ties to investment contracts which is one piece of what a secure one one element of the definition of security is this broad investment contract category and that's where a lot of the discussion has been around crypto offerings because what the SEC has said is look if you have someone selling a token along with a lot of promises that they're planning

to build a network and increase the value of the token because the network is going to be great then that the SEC has argued could fall within the category of an investment contract and therefore there needed to be some sort of registration with us or some sort of exemption from registration the problem is that this is this is really a a difficult application because if that invest token was sold as part of an investment contract does the token

itself have to register as a security or and be treated as a security all along so one question is what is a security and the second question is well if it's a security doesn't even make sense to regulate it the way we regulate other kinds of Securities and so we we need to be thinking about making adjustments now I've taken a bit of a different approach than some of my colleagues where I really do think you need to think about that token on its own as a separate thing even if a token was sold as part

of a Securities offering I don't think that transforms the token into a security and and I I think we haven't done the hard work here at the SEC and some lawyers have been suggesting maybe that we we think about things a little bit more rigorously here because it is leaving the crypto world in the state of uncertainty about how to even move forward um we haven't even gotten to nfts and there are lots of other types of things that we we really need to sit down and think okay at what point do the

Securities laws apply and if they do apply what adjustments do we need to make to make sure that people can continue using these things without it you know the the legal the legal structure being placed on top of some of these activities could actually squelch them entirely and that doesn't make sense so let's figure out how to deal with that yeah I'd love to actually explore that a little bit more because there's this self-terminating nature of if you what happens if you applied existing

Securities Frameworks towards crypto assets crypto Network assets like our crypto networks um like and these protocols that are built on top of other Protocols are all designed to be Community owned and and totally decentralized yet there's this this chicken and egg problem that all of these tokens eventually start in some Inception point they start in this very centralized way but they are designed to be as decentralized and diffuse in community bottom-up owned as possible yet applying Securities laws framework

actually prevents them from achieving that state so there's this like weird self-terminating relationship where like okay yeah they kind of start off in the centralized way but if you apply Securities laws as they exist today they actually we never get to the point of them being in their maximally manifested state which is not as a security so because you are defining as a security you actually Rob these opportunities these tokens of these opportunities to actually achieve the state that it would be if it was actually decentralized and I think that's perhaps what you were

alluding to with more rigorous thought uh by the SEC Commissioners and chair I'm wondering if there if there is this understanding or acknowledgment of this like Catch-22 of we want our things to not be Securities and the the best the worst thing that you can do is to actually create Securities regulations about these things that are designed to be decentralized do you understand the conundrum that I'm trying to express yeah I do but I think what what's going on at the SEC though is I mean there's there's Fair a lot of capacity to do to

do good rigorous legal analysis but the issue is that we are taking positions that maximize our jurisdictional reach right if if it if if most tokens are securities it means that most platforms where tokens trade are going to be entities that we regulate if most tokens are securities it means that any broker dealer that it deals with any firm that deals with uh these tokens could end up being

classified as a broker dealer so it it's a way I think of of maximizing the reach of the Securities laws and if we this is why this is why I really think Congress needs to come into this conversation and say all right look we agree when there's a token offering the initial token offering it would be great to have some disclosure let's have the SEC write up a disclosure framework or we agree you know we think that these platforms need to have some sort of regulator

um okay maybe that's the SEC maybe that's cftc some combination of the two and so that would then sort of free us up to do a to do a better legal analysis but right now this is a lot of this seems to me at least to be about planting jurisdictional Flags by just taking these very expansive approaches to where our Securities laws apply and the other thing that I don't think Washington is very good at is

sort of thinking about like okay no one cares whether the Securities laws apply or no one outside of Washington cares what they care about is are we are we making the world a better place by applying regulation or are we just making things complicated and not serving anyone's interests and so the the ability to take a step back and think about those kinds of things is sometimes hard for a regulator with a with with you know A History A long

history and and you know a real intense desire to protect people right this this is a very there's a lot of good motives here people want to protect people it's sometimes hard to take a step back and say wait a minute by protecting people you're actually preventing people from getting access to products and services they want and you're actually not even getting them the kind of information they would want I mean let's talk about what is SEC registration look like well the reason that we don't really know is because it's really hard to get through a

process that's just not designed for your asset class or for your type of entity and so this isn't a good outcome but you know for a regulator we're like well you know we're looking at our regulatory checklist and if you don't exactly tick every box on there then you know we're protecting investors by telling you to leave Esther this is why we appreciate talking to you because there's just such Clarity and willingness to kind of engage on these uh on on these issues that the community and that's really the relationship I think a lot of people in

crypto are are looking for uh from from their regulators and and you're right we don't have Clarity on some of these things but to the point of maximizing jurisdiction I wonder if um the argument has made internally whether the SEC actually wants this jurisdiction or not I know uh you know bankless we we put out things that are you know we think are funny sometimes but uh we went through a thread recently of things that we're not sure if their Securities or not Chuck E cheese coin versus like uh you know an erc20 is it a security what's the one-to-one mapping we've got

baseball collectible cards that aren't Securities somehow um how about a digital collectible how about that um you know sword of uh fire that just dropped and your video game is that a security and I start thinking about all of the opportunities for like digital assets and we start thinking from the crypto vantage point of the explosion of digital assets which is just going to absolutely balloon right the way websites did in the early internet you know you started off with 20 websites and then before you know it you have a million and before that you have a billion and it keeps going from there

does the SEC actually want jurisdiction over this because it seems like a complete mess to go through the process of trying to regulate a you know a sword in a video game if that's kind of the direction we're going in I'm being a little hyperbolic but does this make sense not really I and that's the SEC well look Washington Regulators typically want to expand their jurisdiction but I I think your your point is a good one which is that if we apply the analysis we've been applying with respect to crypto we would be

regulating a lot of things that we're not regulating now and so is the answer to say well yeah we want to regulate that stuff too or is the answer to say wait a minute we need to like rationalize what we're what we're asking for here what the SEC should be regulating is is is capital raising um that's our mandate right to to regulate activities around Capital raising and where it's something else that really doesn't belong with us and I think if we don't get it right now what we

will end up with when more of the world is digital more of the world is digital assets more more things are happening in that world then we will end up with the SEC regulating everything now I will tell you that outside of crypto also the SEC is taking extremely aggressive jurisdictional stands and we are trying to regulate a whole host of entities that are not Congress hasn't told us to regulate but we're looking around for as

many pieces of the economy to regulate as possible so I I you know nowadays I would say yeah our goal is to regulate as much as possible and I I speak not that is not my goal but I but I think as an institution that's that seems to be our goal I think we're going to need some more Commissioners then if that's the case better look at number six and seven if we're to go in this direction well so so Hester I think the crypto community that pays attention to these kind of things have come to that conclusion that gone are the is the opportunity to interface

directly with the SEC and come in and shake hands and here are the days of that's a trap and uh we all everyone kind of understands that the SEC is interested in expanding a jurisdictional reach and kind of putting his original first principles mandate secondary to that uh which is um a sad State of Affairs but understanding that this is kind of the Paradigm the the Paradigm that we were stepping into what advice do you have for our industry when we when the whole industry does kind of

understand that like the SEC is not really here to advocate for our Capital markets or our assets like what what advice do you have for us and how do we proceed on this I mean the SEC is never there to advocate for any particular asset class so so don't set your sights too high but I also think that we're in a bad place right we all acknowledge that it's kind of a dysfunctional relationship the SEC is is you know lashing out by bringing lots of enforcement actions and again there's a place for enforcement actions right I

think we all know there's a lot of Fraud and and we've seen a lot of that come out and there is definitely a place for us to to bring enforcement actions but then you know the industry is is like well looking at the situation and saying well it doesn't benefit us to talk to the SEC I still think we have to have those conversations I'm trying to push from inside for us to have more productive conversations with the industry um but I think that needs to come also from from people in the industry or

people who use crypto and and want a better regulatory framework around it um you know maybe you don't want to come in on your own uh but you can come in as groups uh in in groups of like-minded folks and come to us with use cases show us what you're actually trying to do with with the technology because I think that's a really powerful reminder that this isn't just regulating away some useless activity it's regulating a way

things that actually could transform people's lives um I think that's what a lot of people in crypto believe and so you got to make that case with concrete use cases and we we need to keep having these conversations because what if if people who are trying legitimately to build things within crypto just say you know what we're just not even gonna go and talk to The Regulators in DC then what is DC left with we're left with stories of really bad things happening in crypto

and enforcement action after enforcement action where you know the conclusion then becomes well this is just a lawless group of people they're not interested in complying and so why should we waste time with doing anything other than bringing enforcement out something worse will fill the void is what you're saying I fear that's the case and and you know look I I am discouraged I mean you know you're telling me it's been two years since we talked I am discouraged by that I'm discouraged that we haven't made more progress but I'm also optimistic that we can make

progress and I think it is really important for people to remember that even if The Regulators themselves don't remember this Regulators work for the people it doesn't it's not the other way around um and so it you know ultimately even though we're a little bit removed from direct political accountability there is accountability to the people and so that you know that's something that we can continue to work on Pastor Riva noticed a number of descents uh the statements

that you've had out of uh uh the SEC website and the most recent one came on March 10th uh five days ago alongside of commissioner Mark uh yuida uh pardon me for you wait up for butchering the last name uh and the last sentence of this statement is uh we descent so that you're not alone of course you're not the only sole dissenter as the of the five commissioners of the SEC so there's at least more than one of you and I'm wondering like to what degree are you

actually able to sway the direction of the SEC with these descents there's multiple people dissenting to what degree are is that actually effective and how how much control do you feel like you have over the the ship of the SEC well I think it's an important question and I think a lot of people looking at the SEC have no idea how it operates right it's a weird entity with five people running it but chair Gensler sets the agenda and the staff report to him so obviously he has more more control

um but the the the five of us um do you know we're all involved in the decision making whether it's about rules or enforcement actions and it is a majority rules thing so the two of us dissenting that was on a a Bitcoin exchange traded product I know bitcoin's not your your primary interest but but I think the the point that we were dissenting on there was that the SEC is applying different standards when it comes to Bitcoin exchange traded products than it does with respect to