Lau: Well, it was a busy holiday! The SEC dropped a bombshell right before Christmas: a lawsuit against Ripple. After eight years of XRP operating in the market, comes this lawsuit. Can you help us understand the thinking here? What is the message that the SEC is sending with this lawsuit against Ripple?
Peirce: So, let me start by saying that the views that I represent are my own views and not necessarily those of the commission or my fellow commissioners. On an issue like this, where we’re in active litigation, I really can’t speak to the specifics. So, I’ve gotten a lot of questions about how I feel about the lawsuit. But, those questions are better saved for later. I will say more generally — that we will continue our efforts in this space.
And so I think, by now, people realize that we’re active in this space. And so, people should continue to watch; both on the enforcement side, but we also took some steps, some important steps, right at the end of the year — on the regulatory clarity side by providing some clarity for brokers that want to engage in digital asset securities. And so, I hope that people will pay attention to that and give us some feedback on that. One of the things we did in connection with that was to ask for comments. And so I hope that people will respond to our request there, and then continue to ask for clarity in other places where they need clarity.
Lau: Yeah, that clarity is a little muddied right now, and I absolutely understand that we can’t talk specificities, but it’s remarked that we see misalignment from different U.S. agencies on how cryptocurrencies are regarded. For example, XRP was determined to [be a] currency by the DOJ and FinCen in 2015. So, disregarding the specificity of that example — for the intent of this question — why is there a current misalignment between U.S. agencies?
Peirce: One thing people should bear in mind is that each agency has to look at its rulebook and align the things that it sees with its rulebook. And so, for us at the SEC, the question that we get asked most often is, “Is this particular digital asset a security or not?” And in determining whether it is or isn’t, we — and lawyers in the field and people in the industry — need to look at the SEC’s specific rules. And we have a specific definition of security, which is actually quite broad. And that has caused some people consternation and difficulty in trying to figure out exactly what the parameters of a security might be in our space.
And, I think that’s not only a problem with respect to digital assets, it’s actually a broader problem because we have this very open-ended category called an ‘investment contract,’ and that’s intended to capture anything that looks like a security and acts like a security but might not be called a stock or a bond. So you’ve got this very broad ‘investment contract’ category, but it can be difficult to figure out whether something fits within that category. And that’s where most of the problems arise. So something might be characterized as one thing by another agency, yet still be a security under our rules, and that can be frustrating for people.
Lau: It certainly is causing a lot of strife and concern, that’s for sure. How is the U.S. moving towards filling the gap? We are noting the Digital Commodity Exchange Act that is proposed, that would create a national regulatory framework for, at least the CFTC, to regulate digital commodity exchanges. Does that clarify and simplify things for all agencies?
Peirce: Well, I think that Congress can play a role in providing clarity — whether it gives the SEC jurisdiction or the CFTC jurisdiction, or some other agency jurisdiction that can be helpful. I will note that we have made some progress this year. Last year, I should say in 2020, in the sense that the OCC (Office of the Comptroller of the Currency) has taken some steps to provide clarity, both in 2020 and just now in 2021. And we’ve also seen clarity coming out of places like Wyoming, so on the state level. I’m hopeful that we will — the SEC will take some more steps to provide greater clarity. But I think it has to be a combination of legislative, potentially, and then each agency working individually to address specific questions in its domain and then having some cross-agency work — which is happening. But I think we could do more cross-agency coordination.
Lau: Yeah, there’s certainly a chill right now. Are other cryptocurrencies that raised, and are active over the past couple of years — should they be worried?
Peirce: Well, again, I think that in each instance, we’re looking at it on a facts and circumstances basis. And I don’t want to speak to any particular cryptocurrency, whether it’s in litigation with us or not in litigation with us. But I think everyone has to look at the facts and circumstances. And that’s why I have called for more clarity, because I actually think it can be difficult to determine whether something fits within the security bucket or not. And I think we could do more to provide some guideposts for what that would be.
Or, as I’ve called for: a safe harbor, which recognizes, yes, there is a little bit of uncertainty, but if we can get these digital assets to a point in their life where it becomes much clearer which side of the line they sit on, I think everyone would be better off. So, I’m hopeful that, maybe that’s something that we could actually get done in 2021.
Lau: That deeper understanding is exactly why the industry has given you this moniker of ‘Crypto Mom.’ You proposed that three-year safe harbor period for crypto token sales, really kind of creating a sandbox, if you will, that allows innovation and the sales to exist without fear of direct regulatory action. Where’s the appetite on this, do you think, from your fellow commissioners? Can we see this enacted in 2021?
Peirce: Well, I think a lot is going to depend on who the chairman is under President Biden. And so that will, I think, help determine the direction that the commission goes on a lot of issues, but cryptocurrency being one of them. And so, it remains to be seen.
That said, I do think that there’s interest, generally among institutional investors, to see more clarity in the space. And so, as the industry matures and gets more people involved, I suspect we’ll feel a little bit more pressure from the outside too.
Lau: Yeah, and I know that there has been such blowback and certainly a lot of people trying to understand your perspective on Ripple. And I absolutely know that you must adhere to the guidance of SEC rules and that you can’t necessarily talk about it. But I do note that in one of your tweets, you noted -— and you pointed to the fact that this needs to be a majority decision by the commissioners, though the votes cannot be revealed until the resolution, which could be a few years from now. My question to you, Hester is: was this a unanimous vote?
Peirce: I can’t answer questions about what the vote was. As I mentioned, not only can I not say how I voted, I can’t say how others voted or how the commission [voted]. I mean, obviously the commission as a whole, is evident how it voted because a suit can’t get authorized unless the majority [of the commission] authorizes it. But, I know that that can be frustrating for people to wait to see what the vote is. But, I think that it’s important for the agency to be able to litigate the action.
Lau: Hester, you note that, you just said that you expect the litigation to continue for Ripple. The comments that you made — do you want to clarify that?
Peirce: Yeah, so when the majority of the commission authorizes the lawsuit, the lawsuit will proceed. And so, people at the commission, commissioners and others generally don’t speak about cases once they’re in litigation, we let the litigation play out. And then we can have a conversation about the litigation, if that’s appropriate, after the fact.
Lau: So, I’m hearing, to be clear, this is not — this may or may not be your personal view — but it is the fact that litigation will continue because the authority of the SEC, the regulatory body that you are a part of, has to continue.
Peirce: Yeah, I think one thing that sometimes can be a bit difficult for people from outside the agency to understand in it, because every agency is different and ours is one that’s run by this commission, which is made up of five people, and I’m one of those five people. And so, when we adopt a rule or when we authorize an enforcement action, we’re all sitting there together and we all vote for it. And so if there [are] five people on the commission and three of the five vote for something, it will move forward. In enforcement actions, it’s often a unanimous vote, but it’s sometimes not. And so, once that vote has been taken, the litigation moves forward. And often, you’ll see that the litigation ends in a settlement. Sometimes it goes through and the litigation actually plays out in court. You saw that in, for example, the Kik case and the Telegram case are a couple of examples of that. Unikrn was an example where a settlement was reached. So you have different ways for things to play out. And then once something is final, either final through a settlement or final through a court action, you can actually go to the SEC’s website and you can see how the different commissioners voted.
Lau: We’ll be keeping an eye. Thank you, Hester, for that clarity.
Well, let’s talk a bit more broadly then. In 2020, we really saw, especially in the last part of the year, this increase, as you said, of institutional dollars flooding into this space. We’re certainly seeing that as the underpinning of the current price of bitcoin and volatility. How have you been regarding this rise of interest — and how has that been regarded by the rest of your commissioners of the space?
Peirce: Well, again, I can only speak for myself. And I think the agency doesn’t take a position in terms of a price or enthusiasm in the space. The only thing that I would say is that people are looking for asset classes, new asset classes that perform differently than traditional asset classes. And so, I think it’s helpful to help focus our minds that more people are saying, ‘Hey, this is an asset class I’d like to take a look at. I’d like to be able to get some exposure in a way that’s more akin to how I get exposure to other asset classes. I’d like to get exposure through my traditional intermediaries.’
Obviously, there’s a big set of people in the crypto community who [don’t] want to access crypto through an intermediary. That’s the whole point of decentralization. And so, there are a lot of people who have no interest in that. But, some of the more traditional investors are going to need to access. If they’re going to be able to access at all, they’re going to need to access through these traditional avenues.
And so, you’ve seen in 2020, some people come out, some companies come out and say, ‘Hey, we’re putting some of our treasury funds in crypto.’ Or you’ve seen well-known investors come out and say, ‘Hey, this is an asset class I’m looking at.’ And so, that will necessarily put more attention on crypto at the SEC. Now, that said, crypto is still a relatively small asset class and the SEC has a lot of different things to work on. And so, it’s always going to compete with other issues for attention.
Lau: Absolutely. It is growing attention nonetheless. And you talk often of clarity. Certainly, that can be muddied by regulatory action, not only from the SEC, but other U.S., [European], and other regulatory agencies around the world. What’s your goal when it comes to clarity in 2021, from your position as commissioner?
Peirce: I mean, my goal is just that we would make some concrete steps toward providing clarity, and that doesn’t need to be the safe harbor that I proposed. But, it needs to be something to be able to tell people — one, this is what you need to look at to determine whether or not something fits within the security bucket, or two, this is what you need to think about when you’re trying to go from being a security to a non-security. Because there’s this notion that, maybe something starts out being sold as a security, but then, down the road, it turns into something else. So can we provide some markers about what it means for a network to be decentralized? I think that could be quite valuable to people.
And then, there really is a need for clarity in terms of: how to broker dealers, and investment advisors, and ATSs (alternative trading systems), which are sort of exchanges, ‘exchange-like’ in the United States. How are they allowed to interact with digital assets, whether they’re securities or not securities? So, I think there’s a lot of room for us to provide clarity. I think we’re getting a lot of good questions.
We’ve seen, as I mentioned, Wyoming has been quite forward-thinking in the approach that they’ve taken to crypto. And so, there are some areas where their laws intersect with their actions, intersect with what the SEC does — so we can provide clarity there. We can provide clarity with respect to DeFi, which is something that we haven’t talked about yet, but I think has had quite a year in 2020. And so, I think it’s important for us to provide some help there for people trying to understand, ‘How does DeFi interact with the securities laws?’
Lau: I want to absolutely jump on that. It is exactly top of mind for so many. We saw at the beginning of 2020, you know, the value of the activity was, I think — half a billion, five hundred million. And at the end of the year, it has absolutely — exponentially exploded to the billions.
How do you regard this space? When you talk about DeFi clarity, it really feels on one hand, great technology, and then on the other hand, really a lot of hype, a lot of ‘Wild West’ kind of behavior. How are you as commissioner, in your view, regarding DeFi?
Peirce: Well, I think it’s hard to provide a clear answer to that, because, again, DeFi encompasses a lot of different things. And some of them are probably well outside of the reach of the securities laws. So when I’m thinking about clarity, I’m thinking, ‘Let’s help people figure out when the securities laws might apply, so that we’re not faced with a situation a few years from now when we’re providing clarity through enforcement,’ which I think is never a good way to provide clarity. Enforcement actions can indeed provide clarity, but it’s not the right way to do it from my perspective. We want to provide people clear guidelines ahead of time and then they can figure out whether — how they can do something so that it is legal.
But on the DeFi side, I think it moves so fast, it can be difficult to keep up with. But we would do well to try to spend some time with people in that space and thinking about where clarity might be helpful. And thinking about where we can spot something and say, ‘Yes, we know that’s a security issue, so let’s let people know that it is.’ But again, a lot of people are very creative and building really interesting things.
And I think the concept of decentralized finance is a really fascinating one. It is one that’s going to be challenging to us because most of the way we regulate is through intermediaries — and when you really build something that’s decentralized, there’s no intermediary. And so, that’s great for some things like that. It’s great for resilience of a system. But it’s much harder for us when we’re trying to go in and regulate to figure out how to do that. And so that’ll be a new challenge.
Lau: The industry is going to be listening intently here and they’re probably wondering, ‘Well, what about all the crypto tokens that people are working on right now?’ How do they get that they go to market, and for those who want to abide by the regulatory lanes that have been set, how do they do this within the rules of the law so they don’t get in trouble?
Peirce: Well, I think that’s a big concern of mine. Now, you have seen some projects that have used some of our existing exemptions, or used Regulation A, which is one form of doing an offering that’s not subject to all the rules that you might have in an IPO, for example. But, there are then questions about how you transform from being a security to being a token that’s used widely.
So there, if people look at it and they say, ‘Well, we know that we could do an organic launch.’ Where it’s like a Bitcoin-like launch, but that’s not always very easy to figure out how to do that. And so, I think it is really quite challenging right now for projects, and I think people are thinking about different ways to do that in a way that’s compliant. But there are no easy answers because we haven’t provided that clarity on how to do it.
Lau: As a regulator, as a commissioner of the SEC, this is the gold standard. But as you take a look outside of the U.S., and observe other regulatory peers, how would you rate and compare the U.S. against regulatory guidelines that are being set around the world?
Peirce: Well, you know, again, I think the SEC hasn’t done a fantastic job in getting out in front and setting clear lines for crypto and other countries have been much faster to do that. I think one advantage for the United States is that it’s a place where a lot of people want to do their development work — and they certainly want to interact with Americans and they want Americans to be part of their network. But, as the lack of regulatory clarity persists, some people say, ‘You know what, it isn’t worth that much,’ and especially if they think of it in a few years, ‘I might face an enforcement action.’ I think the Telegram enforcement action was really quite telling for some, because even though a lot of the activity was outside the United States, its interaction with the United States ended up ultimately bringing that project to an end. And so, I don’t think that we’ve done a great job so far.
Now, as I said, some other regulators are quite forward thinking in the United States. And so it’s not one story. And I don’t think that it’s all a negative story at the SEC either. I’m hard on my own agency because I want us to do better. But we have people at the agency who care a lot about the space. We just made the head of our office that deals with crypto officially a self-standing office and has a more prominent role at the commission and a more direct reporting line to the chairman. And I think that is a positive move. And so, there’s a lot of collaboration between our staff at the SEC and other staff and other agencies working on these same issues. So it’s not all a negative story, but I think that the rate of activity on our part has been rather frustratingly slow, and that has real concrete effects on businesses that are trying to get into this space.
But they need that regulatory flag: ‘Yes, go ahead.’ They need to get that permission slip to move forward. And until they get it, they can’t do anything. And that means that some businesses can’t hang on long enough to get that permission slip. So we could certainly do a better job. And I hope that we will in 2021.
Lau: You know, Covid has kept everybody in place. But that doesn’t mean that these projects are geographically tied to any one place. And so you make a great point — that as the regulatory landscape seems to be, slightly divisive because it’s not aligned. And so for the more innovative regulators outside of the U.S., it could be attracting that kind of talent. That’s the concern. That’s the concern for the growth of [the] U.S. and this space.
Peirce: Well, it certainly is. And I’m someone who loves to see the best and brightest minds wanting to come to the United States — wanting to work in the U.S. And build things in the U.S., whether it’s in crypto or in other things. And so, I think we send a message when we don’t handle something new, a new innovation while we send a broader message.
And I’m not happy about sending a message that’s not welcoming to innovators and innovation. But again, I’m optimistic that 2021 will be a time for us to kind of recalibrate. And so, we have a lot of really great people in the agency and outside the agency trying to help us think through how to approach these issues. And so, it’s a fresh start, a new year. And I’m hopeful that it will bring more clarity.
Lau: Well, that move, that trend line is underlined by a number of things that are happening at the SEC. [The] Strategic Hub for Innovation and Financial Technology (FinHub), recently labeled to formal office status. So that, to your point, we’ve got a new acting chairman of the SEC, Elad Roisman. We also have a new administration that’s going to be coming in — the Biden administration. How do you think this all shapes progress this coming year?
Peirce: Well, Chairman Roisman is fantastic. I’ve had the pleasure of working with him at the SEC for some time now. And he’s fantastic. He doesn’t have a lot of time to make a lot of headway on crypto, because soon, the Biden administration and a new chairman, presumably, will be coming in, but he’ll stay on at the agency and he has a real passion for innovation as well. So, I think that’s really promising. And then we’ll see what comes. But, I can assure you that I’ll be talking to the new chairman about this space. And I think it’s a wonderful opportunity for us to work together as a commission to provide clarity which we really need to do through regulation.
Lau: Well, as we wrap up this very candid conversation, Commissioner Peirce, I’m going to ask you to join our Forkast Forecast. This is our look at 2021. But, in retrospect, what do you think the top developments were in 2020, as we know that this is a foundation for what we’re going to be seeing this year? In your view, what were the top developments in 2020 that you paid attention to?
Peirce: Well, I think increased institutional interest in the space. I think developments in Wyoming were quite meaningful in the past year. And then I would say the DeFi summer was certainly a big part of 2020. And then, moving forward into 2021, I think we’ll continue to see institutional interest. It will be interesting to see — both what happens with bitcoin, the interest in bitcoin — and then also we’re seeing a lot of developments around ether. So that should be fun to watch as well. And then, I’m hopeful that we’ll see some changes at the SEC in terms of predictions on what will happen. I’ll just say, generally, that I think that we will make some strides. But again, that’s probably informed by my optimism. But I hope that we’ll make some progress there.
Lau: Well, there’s no doubt — leading that progress will be you, as you share your views from the industry and share your knowledge and education. There’s no doubt the interest is increasing and the focus is absolutely on the guidance that you and your commissioners will provide.
Last thoughts, on how you want to, where do you want to leave us with? As you head back to the office, what can the community expect? What can the industry expect?
Peirce: Well, I think the industry can expect the need for me to hear from them, the need for them to interact with regulators. At the same time, I don’t want them to spend all their time thinking about regulation. So, I’m going to leave with the note that you should continue to think about how the technology can be used in developing your projects. And remembering that what it is that makes this technology and the community that’s developing it a really interesting and exciting one to be a part of.
Lau: Well, thank you so much, Commissioner Hester Peirce, for joining us on this first of the year and really an exclusive interview that you shared with us — for the first time on your views — to kick-off 2021. We absolutely appreciate it. And there’s no doubt that we’ll talk again.
Peirce: It’s been a pleasure. Thank you, Angie.
Lau: And thank you, everyone, for watching this latest episode of Word on the Block. I’m Angie Lau, Editor-in-Chief of Forkast.News. Until the next time.