SEC Commissioner and Cryptocurrency Defender Hester Peirce Talks About Regulation: Ive Been Very Frustrated in the Past

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Original author: Daniel Kuhn is the deputy editor-in-chief of Consensus magazine

Original translation: Debuy, Wu talks about blockchain

Hester Peirce, known as “Crypto Mom” for her fiery dissents, discussed how the SEC operates, why she wants to see cryptocurrencies flourish, and how her “safe harbor” proposal would allow projects to decentralize.

The SEC is not a single agency. Hester Peirce, aka Crypto Mom, is currently serving her second term as one of the five regulatory commissioners. Over the past few years, Peirce has become known as a defender of cryptocurrencies and blockchain technology — she has written numerous dissenting opinions on many of the legal actions the SEC has launched against crypto protocols and companies.

To some extent, the disagreement between Peirce and SEC Chairman Gary Gensler stems from their different philosophical and political beliefs. Peirce, a Republican and a member of the Federalist Society, believes that the government should have a limited attitude in business regulation. In contrast, Gensler, who often appears in Democratic circles, has more elusive views. Although Gensler has shown support for cryptocurrencies when he taught blockchain at MIT, Peirce has always been steadfast in supporting economic innovation.

“It’s a fundamental American principle that people have the right to make their own choices freely,” Peirce told CoinDesk. “Government exists not to protect people from their own choices, but to protect them when others harm them, not to make life decisions for them.” This view influences Peirce’s views on whether the SEC should block spot ETH exchange-traded funds (ETFs), go after U.S.-based exchanges like Coinbase and Kraken, and what role the agency should play in overseeing crypto markets.

CoinDesk caught up with Commissioner Peirce ahead of Consensus 2024, where she is scheduled to speak, to discuss the SEC’s enforcement actions, her dislike for big banks and where U.S. cryptocurrency regulation first went wrong.

Q: Hi, Mom. Lets start with a simple question. Can you describe the basic disagreement between you and SEC Chairman Gary Gensler?

A: This is not a simple question.

First, the views I represent and reflect are my own and not necessarily those of the SEC or my fellow commissioners, so I cannot speak for anyone else on the committee.

Are you talking about encryption specifically, or a range of issues?

Q: I wanted to maybe expand the discussion. What are your fundamental political or philosophical disagreements?

A: Philosophically — the way I look at it is that I dont necessarily know whats best for other people. We have mandates that we have to perform. But within those mandates, were often given discretion. If we have discretion, my preference is to say, well, let the market participants decide what they want to do. Sometimes we have to get in the middle of a trade and say, No, you cant do this or Okay, but you have to do it this specific way. But we better have a very good reason to get in the middle of that trade.

(Reference: SEC in Enforcement-Only Mode for Crypto, Commissioner Peirce Says)

It is a fundamental American principle that people have the right to make their own choices freely. Government does not exist to protect people from their own choices, to protect them when others harm them, and not to make life decisions for them.

Q: In the past, you’ve been critical of big banks but also thought the regulatory response to the great financial crisis went off the rails. I wonder if this has anything to do with your interest in crypto?

A: I think my interest comes from a couple of things. First, I think this is a good opportunity to test how we handle innovation — or maybe a bad test, because I think we failed. Crypto has brought in a lot of new players and new ideas. I think we should find a way to work with these new players and find a way for them to be able to do what they want to do in a way that complies with regulations, but also allows them to move forward.

In some ways, this ties in with how I look at the financial crisis — and a lot of people have looked at it and come to different conclusions about the causes — one of the things that was happening was bad regulatory design. A regulatory design that led everyone to make the same stupid mistakes at the same time. One way to address that is to build resilience into the system, and heterogeneity in the system is a good way to build resilience. There are some interesting concepts in crypto that allow for more decentralization of the financial system.

So, in that sense, there is a connection. But do I think the decentralized future will replace centralized intermediaries in the financial system? My prediction is no; people want to deal with a centralized intermediary. But I think there will be a role for decentralized finance. Maybe in the background. Maybe more than that. I predict that most people will access it through a centralized intermediary. I could be wrong.

Q: You don’t have to answer this, but do you hold any cryptocurrency?

A: Because I deal with these issues all the time. I don’t, and even if I could, I wouldn’t. I feel like that would be a conflict. If you deal with these issues, you basically can’t own crypto. I’m just saying the rules that apply to me.

My editor Prometheum has a question: What happened there? Is this an example of the SEC picking a winner?

Im not going to talk about any specific entity.

Q: That’s fair. Your safe harbor proposal is common sense, but in the years since you released it, I think it’s fair to say that it’s clear that perhaps three years is too short a time frame for protocol decentralization. Solana, Cardano, and even Ethereum to some extent have centralized entities guiding development — nonprofits formed alongside the network. Do you think we should be thinking about a longer timeline for decentralization? Decades?

A: Again, decentralization is not an end in itself. There are situations where it is the right thing to do. However, there are times when having a centralized entity is the right thing to do. We should all take a step back and think about what we want to achieve. Fundamentally, what we need to achieve is for people to know if they are dealing with a security, so when they do something or sell something they understand if it is a security proposition.

They need to know that in the primary and secondary markets. And then if we decide that certain crypto assets are securities, or it doesnt make sense to adjust the rules, then theres a reasonable framework that makes sense for crypto assets. Does it make sense to have some kind of disclosure regime for centralized entities? Thats really for Congress to decide. But we cant even have those discussions at the SEC right now because the conclusion is just to apply the exact same rules that apply to stocks and be done with it — I just dont think that works.

But just taking a step back and thinking about the problem we’re actually trying to solve might take some of the pressure off of the decentralization question.

Q: How closely do you or the other four commissioners work with law enforcement? What cases do you recommend?

A: Well, just to give you an idea of what the enforcement side of things is like. As is the case with rulemaking, its primarily the staff that does most of the work. Theyll consider a rule and propose it for us, and well consider it. And typically the vote happens in an open public meeting. For enforcement actions, we also get recommendations. Typically, the staff will recommend authorizing an enforcement action and resolving it at the same time. So we typically dont see the case until the very end and dont get involved in the heart of the matter. So we either authorize the department to prosecute, or we authorize you to prosecute and settle with them the same day. Most of our cases are resolved immediately that way. The vote happens in a process called seriatim, where we just vote on the documents, or we discuss it and vote in meetings, but those meetings, as you might guess, are not open to the public.

Q: So in a sense, if there is a change in presidential administration in the upcoming election, then the existing enforcement mechanisms could more or less continue, correct?

A: I think these are all good questions because the structure of the agency is a little bit odd. Oddly, its not like a lot of other agencies that have a single head. But while we have five commissioners, the chairman, Gary Gensler, does have the authority to set the rulemaking agenda, and the staff reports to him. The chairman can certainly drive the direction of where things go, but youre right that when a new chairman comes in, not all existing enforcement investigations stop. The agency is designed to continue to operate.

Q: If Trump or Tulsi were elected, would you take the job?

A: I didnt even notice that direction.

Q: No?

A: Yes, I am focused on the present and trying to move us to a better place. I have been here for six years and it is very frustrating to see that we are not on a productive path at all. To me, we have to be on a productive path sooner or later – so why not start now? What are we waiting for?

Q: This isn’t a question about the present, but I’m curious how the organization has changed since your previous stints at the SEC in the early 2000s?

A: Over the years, we have become increasingly prescriptive in our approach to rulemaking. One of the issues I raised in a speech last week is that we have become unwilling to discuss some of the difficult issues with staff and the public. That is not a positive set of changes.

Q: Is there reason to believe or hope that the process for a spot market ETH ETF won’t unfold like the spot market Bitcoin ETF?

A: I can’t talk about that because we are considering a number of applications.

Q: Do you think the 2017 DAO report was the wrong start for crypto regulation?

A: Yeah, I think so. Because I think the facts that the DAO reported were different from the facts that we see for most crypto products, right? The facts are unique. I just think that the legal analysis that we apply to thinking about tokens is not helpful to really solve the problem.

(Reference: SEC Blasts Purportedly Decentralized DAOs in $1.7M Barnbridge Settlement)

So if I could do it over again—and I wasnt there at the time of the DAO report, although I learned a lot during that time—I would change the way we approached things.

Q: Do you agree with Judge Failla’s interpretation in the XRP case that tokens are not necessarily securities, but when you sell them to accredited investors it is an investment contract?

A: Again, because thats litigation, I dont want to talk about any particular judges opinion. But as Ive said in other contexts, when you think about an investment contract, whether its a digital asset or some other type of tangible asset, the asset itself is not a security. When you offer that asset along with an investment contract, thats what makes a security a security. It becomes the object at the center of the investment contract. But you still need to think of those two things as separate. The orange grove in Howey was not, in and of itself, a security.

Q: Your objections tend to be quite artistic. Was it your idea or your co-author Mark Uyedas idea to include a script in the ShapeShift file?

A: I can’t answer that question either.

Thanks again for your time.

A: Well, I appreciate your time and I hope you have a great afternoon.

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