Commissioner Hester M. Peirce is the most active voice within the US Securities and Exchange Commission (SEC) in favor of the cryptocurrency market, known for advocating clear and sensible regulation that will allow the evolution of the US crypto industry.
On Oct. 8, she spoke at the Texas Blockchain Summit in defense of the industry, challenged SEC President Gary Gensler's view that the market is an 'Old West', and shared the paths to regulating cryptocurrencies and Decentralized finance ( DeFi ) should follow in the future. Read below the full speech of Commissioner Hester M. Peirce:
Thanks to the Texas Blockchain Summit for the chance to be here today. I have to start with my disclaimer that the views are mine and not those of the Securities and Exchange Commission (SEC) or my fellow Commissioners.
I'm interested, however, in what my colleagues have to say, which is why President Gensler's habit of calling the cryptocurrency universe “Old West” caught my eye. He's not alone in referring to the crypto ecosystem as the Wild West, a place we imagine to have been lawless—a society where the gunslinger with the best reflexes and the worst morals wins at the expense of all.
Merriam-Webster defines the "Wild West" as "the western US in its border period characterized by harshness and lawlessness". Bringing government into this kind of environment to establish some order seems rather obvious. Today, however, I will offer a different view of the Old West and, with that image in mind, suggest a way forward in regulating cryptocurrencies.
The West of the past called for people who were irritated by the sober and rancid societies of the East and sought to launch themselves in the construction of a new future in a more promising place. The western frontier was a place for the adventurers, the rough on the edges, the idealists, the free thinkers and the restless.
I'm from Ohio, which was once what the West meant to people coming from the east coast states. Reflecting that story, the part of Ohio I come from is called the “ Western Reserve ” . My alma mater , not a military academy as some think, still bears the region's name — Case Western Reserve University.
Connecticut people colonized the region in the first decades of the 19th century. These settlers left Connecticut, relatively well-populated and well-organized, and moved west with big dreams, to a part of the country that was incredibly beautiful and abundant, but also fraught with danger, disappointment, and hardship.
Life in the West was difficult at first, as described in 'Western Reserve: The History of New Connecticut in Ohio': “Conditions were dire for the first quarter of a century, and probably no improvement would come without a system of transportation and supplies. money".
These things did happen, and "[the] boundless enterprise and energy that drove Moses Cleaveland and his men to explore the desert and sustained the first settlers through the difficult years in their forest clearings never lagged or faltered." That spirit and energy became the basis for a thriving industrial, educational and cultural center in Ohio.
I recently read a fascinating book by David McCullough, The Pioneers, which discusses the post-Revolutionary War settlement of another part of Ohio—Marietta—this time by people from Massachusetts.
It tells the story of the difficult journey west and the successes, disasters, dangers and failures that shaped what eventually became a thriving community. For these immigrants, the West offered hope and promise in contrast to the East, as McCullough explains:
“An unprecedented financial panic has gripped the new nation since the end of the Revolutionary War. Government resources and credit have run out. The money, in the form of a currency issued by the government, was almost worthless… Commerce was paralyzed… Farmers were being arrested for debt… As it was, the severe economic depression that followed the war would last even longer than the war. But now, in the West, there were lands such as could never have been imagined — vast lands, rich lands… The West was an opportunity. The west was the future”.
The settlers who moved to the West came not only with high expectations, but also with a wide range of talents and professions. They cultivated other skills out of necessity after they arrived. The society was harsher than what they had left, but it was still governed by the social norms they carried with them, the law, and the mutual concern intensified by difficult conditions in the early years.
Even though they imitated the old eastern society in many ways, these new frontier societies were created by their inhabitants. McCullough describes, for example, the work of Marietta's leading citizens to ensure Ohio was a free state and to develop educational institutions and make them accessible to the general population.
Of course, not everything was good in the West. The Ohio name itself—Iroquois for “Great River”—and the Native American names for many other places in Ohio serve as a reminder of the inhabitants who were forced to leave when immigrants from the east arrived.
Ohio was the frontier in the early 19th century, but by the end of the century people were still looking west, farther west, for opportunity. John Soule wrote in the Indiana Express in 1851: "Go west, young man."
Horace Greeley picked up that phrase fifteen years later when he wrote : “Washington is not a place to live. Rents are high, food is bad, dust is disgusting, and morale is deplorable. Go west, young man, go west and grow up with the country.”
Texas may come to mind more readily than my native Ohio when we think of the Old West. Here too, however, the Wild West was marked by more order than the movies would have us believe. Andrew Morriss, who, after a stint at Case Western Reserve University, moved west and ended up in Texas, researched the Old West and identified several forms of effective private regulation that were effective precisely because they faced competition.
He explained, for example, that Texas cattlemen, whose farms were delineated by clear lines of property, were able to "create order on their farms." A ranch's code "forbade cowboys from playing, carrying six shooters, keeping private horses, running [the ranch's] horses, drinking, and stealing cattle from other ranches."
As detailed in an article titled “The Not-So-Wild, Wild West,” the Western order was not limited to cowboy gambling bans made by stately ranchers, but also included a number of private organizations dedicated to maintaining order:
“In the absence of formal government, it appears that the western frontier was not as wild as legend would have us believe. The market has provided protection and arbitration agencies that have functioned very effectively, either as a complete replacement for formal government or as a supplement to that government."
These accounts do not paint a picture of perfect order, but they suggest that social order does not always come from the public sector. Morriss explained that borders foster private order: “The border is a difficult place. Conditions are difficult, social capital is dispersed and many of the institutions we take for granted are absent or scarce”.
Morriss then praised the famous economist and political philosopher Friedrich Hayek, noting that “Hayekian legal institutions flourished on the frontier and were lost as civilization advanced. This suggests that current boundaries are likely to foster Hayek's legal institutions.”
History has not allowed us to see how these private arrangements would evolve to meet new challenges over time, for, as Morriss still notes, "once there was wealth in the West, the arrival of government was inevitable." Perhaps, then, the boundary of cryptocurrencies is also inevitable.
Let's turn our attention there now. The crypto frontier, like the Old West, looks pretty wild at first glance: home to many coders, speculators and a few street vendors, this New West also has its internal struggles, friendships forged through shared difficulties and successes, colorful personalities, passions, dreams, difficulties, spectacular failures and remarkable victories.
But, as in the West of the past, there is order and discipline in all this mess. Because cryptocurrency is built into code, the code itself serves as a ruler of conduct. But cryptocurrency is also built on people, and these people hold each other accountable not only through unbridled public discourse, but also through the use or otherwise of a protocol.
Protocol users, competitors, bug bounty hunters, and sophisticated skeptics monitor protocols for clues of centralization, vulnerable admin keys that can be compromised, slowness, high costs, weak security, and so on. A system outage, rug pull, insider trading incident, or exposed code failure gives rise to an inevitable firestorm.
Decentralized communities collectively discover how to deal with unforeseen problems. These cooperative and competitive discipline mechanisms have helped to clear the cryptocurrency frontier, although there is still more work to be done. The persistence of both self-regulation and community calls for clarity by government regulators suggests that lawlessness is not the predominant culture on the cryptocurrency frontier.
On the other hand, ironically, our methods of shooting the old and supposedly sober regulatory world of government in the East are causing people to question our commitment to the rule of law.
Let me explain by raising a number of questions about our regulatory approach to date. I will conclude by suggesting that it is not too late for government regulators to establish clear rules that respect the unique attributes and challenges of life on the cryptocurrency frontier.
I. Is there legal clarity regarding digital assets?
A key area of conflict between the SEC and the public is the legal clarity that exists around digital assets. The safe haven I proposed for token distribution events recognizes that there is uncertainty about when digital asset offerings imply securities laws, but the prevailing attitude at the SEC is that there is clarity, so why bother with a safe haven?
The idea that there is clarity about when cryptoactives are bonds should come as a surprise to lawyers who advise cryptocurrency projects that have struggled with this problem for years.
Take, for example, the public feedback we've received regarding the Commission's statement on the custody of digital asset securities by brokerages, which distinguishes between “digital asset securities” and “non-security digital assets”, the latter of which we will not allow them to be held by brokers for special purposes.
In response, many comments called for clarity on what constitutes a “digital asset security” and stated that it would be unfair to expect a broker to conduct the analysis given the lack of clarity. Furthermore, if clarity means that essentially all tokens must be considered securities, then why establish a commission position on specific purpose brokerages?
II. Are we enforcing the rules by agreements or agreeing to ambiguity?
The SEC points to the Supreme Court precedent and our own growing list of enforcement actions and says the case is closed — most digital assets are bonds. Even if we accepted application as an adequate way to provide clarity, it wouldn't work.
Final securities determinations have only occurred in the few cases where a court (and not the Commission) has settled the matter. Even in these cases, the determination that a token was initially offered as a bond says nothing about the token itself being a bond, either at the time of the initial sale or in secondary transactions.
Most of our inspection actions related to cryptocurrencies, however, were not lawsuits; instead, they ended up in settlements, which are not good vehicles for careful legal analysis.
When a party resolves an SEC enforcement action, it is usually trying to close the case so it can move forward. There are no incentives to force the SEC, as a condition of the agreement, to present a clear legal analysis.
In cases where a platform is involved, the SEC usually only claims that some of the digital assets were bonds, without specifying what they are or why. Commissioner Elad Roisman and I raised this issue together in the agreement with Coinschedule.
This approach is perhaps understandable, as the parties to the agreement may not include the parties with the greatest interest in the title/non-title status of this token. However, if the SEC cannot easily articulate an unassailable legal theory to explain why certain assets are securities, is the line as clear as the SEC claims it to be?
The ambiguity ultimately serves us well because it effectively forces any actor with any connection to digital assets into our regulatory jurisdiction.
III. Are we fighting for investors or for jurisdiction?
As stablecoins grow in popularity, they are attracting more and more interest from a range of regulators vying for regulatory positions.
Should stablecoin issuers be registered as banks? Should stablecoins be guaranteed by deposit insurance? Should stablecoins be designated as systemically important by the Financial Stability Oversight Board? Are stablecoins money market funds? Should the Consumer Financial Protection Agency intervene to protect consumers?
Given the impressive growth of stablecoins, regulators are understandably asking whether they fit into an existing regulatory framework and what their implications for consumer protection and long-term financial stability are. As they conduct this investigation, however, I hope they will do so with an appreciation for the following:
- Many people consider stablecoins to be a convenient payment tool that facilitates the movement and exchange of cryptocurrencies, so any regulatory measure that restricts the use of stablecoins must be justified by a benefit that outweighs the lost convenience.
- Regulators must be wary of broad generalizations, as stablecoins are not uniform in operation, backing, underlying reserves, or transparency.
- Excessively broad application of the law to cover stablecoins inadvertently can impact other products and services.
- Attempts to discard stablecoins based on 19th century experience with private banknotes are based on a misunderstanding on both sides.
- While it's good to try to understand stablecoins, the fear of stablecoin is unwarranted. As Federal Reserve Vice President Randal Quarles explained :
“We don't need to fear stablecoins. The Federal Reserve has traditionally supported responsible private sector innovation. Consistent with that tradition, I believe we must take into account the potential benefits of stablecoins, including the possibility that a stablecoin of one US dollar could support the dollar's role in the global economy.”
IV. Are we protecting investors or denying them opportunities?
Embedded in the negative Old West analogy for the cryptocurrency frontier is concern that unwilling and reluctant investors are being harmed by participating in the crypto market.
For those who do not see the opportunity to participate in these markets as valuable, the lack of regulatory clarity in the United States may actually be a way to protect investors from harm: if ambiguity prevents them from participating, so much the better!
From that perspective, that some projects and platforms, for example, exclude Americans due to regulatory uncertainty is actually a good thing. It is only the projects that fail to keep Americans out that face coercive action .
The pervasive geo-blocking of Americans should worry US regulators, even as it eases their regulatory burden. Consider well-publicized recent examples of airdrops that excluded Americans. An airdrop is essentially a free distribution of tokens to, for example, members of a network.
These tokens are a way to reward network participants. Why do we want US participants to be excluded from receiving the reward due to them? Check out Twitter after one of these airdrops — the SEC isn't being thankful.
Whether by slow product approval or outright disapproval of products using creatively applied standards, regulators can make certain products unavailable to investors. The Commission's approach to investment vehicles bundled in cryptocurrencies illustrates the problem .
The product offerings currently available — including OTC products and mutual funds with limited exposure to cryptocurrency futures, ETFs with exposure to the crypto industry, and public companies that keep cryptocurrencies on their balance sheets — are less direct, less convenient, and more expensive for investors than products traded on cryptocurrency exchanges offered in other countries.
From the perspective of a regulator who doesn't like the product much, nothing is lost. The investor, however, loses the opportunity to participate in something that is worth something to him, even if he chooses not to buy the product in question; just having the option to do that is valuable. As CS Lewis observed, "Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive… That same kindness wounds with an intolerable insult."
V. Are we going to pretend everything is centralized so we can regulate?
President Gensler correctly pointed out that labeling something as decentralized does not mean that it is. We saw this phenomenon at play in a recent enforcement action to a DeFi project, which accused a company and two senior executives who made an illegal offer and perhaps it has occurred to a lesser extent in a case several years ago against the creator of a decentralized trading platform that had some centralized features.
But what happens when we're dealing with a protocol that facilitates peer-to-peer or person-to-code transactions without a centralized intermediary? Is there anyone who can be held accountable consistently with the rule of law and our constitutional principles? Can we hold the developer of an open source protocol accountable for how others use it or what layers are on top of it?
Perhaps we shouldn't even answer these questions. After all, if people use an automated market maker to trade cryptocurrencies, haven't they done so with the notion that it's the code that determines how this trade will take place and that no one is ready to reverse a trade that went wrong? Truly decentralized platforms do not fit well with a regulated approach designed for centralized finance.
As one commentator noted , “So every time they say 'the platform must do this' 'the platform must do that' — [what] does that mean!? Implicitly, the only way to understand these comments is to interpret the securities market records as being about what kind of software can be written — it won't do.”
It turns out that a lot of people want to deal with intermediaries centered in crypto space. We can regulate these entities if they engage in securities activities (assuming, of course, that we enable them to actually do business within our regulatory framework), but the DeFi protocols that people choose to interact with must be seen by a different lens.
Treating DeFi differently would, in the words of attorney Collins Belton, "[the] SEC is probably the best motivator to make something truly decentralized." And that wouldn't be a bad thing for cryptocurrencies, which, after all, pride themselves on decentralization.
SAW. Are we catching the bad actors or creating an unsolved problem?
Good actors want to know what digital assets are bonds so they can figure out how to comply with securities laws, but we did little during my nearly four years on the Commission to explain what that would be like. I blame myself and my colleagues in the Commission.
We simply didn't allow the team the freedom to consider the difficult questions about how cryptocurrency might operate within the bond structure. The way forward is not to drag entities into the Commission through coercive actions and apply them by brute force to a regulatory regime that is not really suitable for them.
Instead, we must adopt a methodical approach that provides answers to the key questions that market participants need answers to.
In a dissent in an inspection action against the cryptocurrency trading platform Poloniex, I exposed a paradox: considering digital assets as bonds means that the platforms that trade them and the entities that intermediate them need to register with us, but cannot operate as a entity registered under our existing rules, so they could not register.
In this dissent, I asked for answers to a series of questions, which I think are worth repeating here because they give a sense of the complexity that arises when at least one digital asset trading on a platform is considered a security:
- Can the platform hold the client's assets, a typical feature of centralized cryptocurrency trading platforms? If so, how, given our concerns about custody of digital asset bonds?
- If not, could enough brokers navigate the registration process to create a liquid market?
- Would the conditions imposed on their registration allow them to function as market makers or to facilitate trading on behalf of retail investors?
- Can the platform trade non-bond assets along with bonds? If not, how can the platform, using two entities — a broker-dealer for digital asset securities and a non-broker affiliate for non-securities — offer a continuous or at least useful trading platform for traders. customers, who are likely to, for example, trade digital assets and digital asset securities and pay for transactions in digital asset securities using non-bond digital assets?
- How can a trading platform and its clients determine whether a specific digital asset is a security?
- If a token was sold in a securities offering as part of an investment contract, how long should secondary transactions on that token be considered as securities transactions by platforms that trade the tokens?
- What is the mechanics of recording tokens sold as part of an investment contract as a class of “equity” under the foreign exchange law?
And there are others I didn't mention in that dissent. For example: How can a brokerage or trading platform work with digital asset securities alongside non-bond digital assets and non-digital securities? How does Securities Investor Protection Act coverage work when a broker trades in digital assets?
What is the appropriate role, if any, of a transfer agent with respect to digital asset securities? Who can hold digital assets under securities laws? Should the Financial Accounting Standards Board address cryptocurrency accounting issues? How does a platform that finds itself trading securities, due to the new clarity of definition about digital asset securities (assuming that clarity comes in at some point), finds itself in compliance with digital asset securities trading?
If we intend to require the registration of entities in the crypto space, we have to give our team permission to do the hard work of figuring out how the rules will be applied, given the unique aspects of the business, and seeking broad public input through a transparent process. regulatory (not enforcement) in doing so.
These questions are intended to encourage a deeper commitment among governments to find sensible regulatory solutions. The stakes are high because the government is entering cryptocurrency with the promise that it can do a better job than existing informal disciplinary mechanisms.
We have regulatory expertise that we can bring here, but we have to do it carefully. As government agencies consider how to regulate, they must take the lead of Congress, work collaboratively with one another, and actively consult with the public who will be subject to and protected by the rules.
I can approach this entire effort with a less rigorous hand than some of my fellow regulators, but the real question is not what I or any other regulator want, but what you — the intended beneficiaries of this regulation — want. I'm looking forward to seeing what you'll accomplish on the cryptocurrency frontier once we've set some clear and sensible regulatory parameters.
To paraphrase the standard closing words of a popular cryptocurrency podcast , which follows an appropriate warning about space risk, “[You] are going West. That's the border. It's not for everyone…”. Thank you for allowing me to join your journey to the West.
Translation: Saori Honorato
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