SEC Commissioner Hester Peirce chats with Laura Shin on Crypto Regulation | LA Blockchain Summit

Hi everyone. It wasn't for this fireside chat with SEC. Commissioner has her purse AKA crypto on, and thank you for giving us some of your time this week and congratulations on having your second term as SEC commissioner confirmed, an August, thanks Laura. And it's such a pleasure to be able to be here with you. Today. I have to start with my standard disclaimer, which is that my views represent my own views and not necessarily those of the SEC or my fellow commissioners. He began making your mark and your second term almost immediately with the Unicorn settlements in September. At that time

the SEC settled and action against took an issue or unicorn. And you how much did the scent? Can you explain why you disagreed with his settlement? I felt that it was a rather heavy-handed settlement for a case, where there were allegations that there was a registration violation. There were no allegations of Fraud. And so given that it seems rather extreme to take the action that that we did which which basically was depriving The Firm of all its liquid assets. And so that we would not be my preferred approach to dealing with with a

registration violent violation. And I think that the message that we send with a case, like that is one that is basically, if you want to do Innovation, go somewhere else to do it, cuz we really don't want you to try things here. As you noted unicorn did not commit fraud but as part of the settlement, it had to permanently disable its tokens. And also pay a 6.1 million dollar fine. And you deem that to her because it put them out of business, which he believed would have been the proper penalty. Well, I think we should look when there's a registration violation. And again, I mean,

I'm just saying, for sake of argument, let's say there's a registration violation there. I had my own views on that issue as well. But if there's a registration violation, it's typical to allow people the right to know basically get their money back and that's that's fine. But you essentially take the further step and say we're going to, we're going to just take all your assets. The way we're going to penalize you by taking all your assets away, it just seems like a very strained remedy to me for or something where we're just saying there was there was a problem, maybe

people would want unicorn tokens to keep running, maybe the the people who purchase that would still want them to keep running and we're basically telling them no. Sorry that's not going to happen because we have this other Envision in mind, which is to get rid of the token. And then you also just said that you had your own sauce also on the registration issue. What were those thoughts? Well, I think these are really complicated questions. The reason that I think we need a safe harbor. I think it is not always easy to tell whether something is a security or not, but it in this instance,

I think there was a case to be made that this was not being sold as a security and it were well as part of an investment contract which is how these tokens tend to get pulled in to the Securities analysis. And I I just came to a different point on that but again I will acknowledge that is a gray area and it can be difficult to figure out where Things fall. In February, you also propose to Safe Harbor for token issue areas, which would give teams a three-year grace period in which to decentralize their networks. And as a part of that, you would require the disclosure of certain

information such as details about the projects or that the code be open stores. The development plan on among other things. What is the current status on this token? Safe Harbor. Proposal will I haven't yet? Convince my colleagues to do something like that. I'm still hopeful that I will be able to what I'm trying to do. Now is work on version 2.0 and think about ways that we can incorporate some of the feedback that I've gotten and you know one one piece of feedback is people want stronger protections for token. Purchasers who are there. Are there ways that we can look at

some of what's Happening? Now in the way perhaps people are doing launches of different tokens that might help me. Think about what we could build into the safe, harbor to make it. To offer more protection to token, purchasers. And it would be an example of a protection that you might include on the disclosure side. And this would be so similar to what the EU is talking about in its proposal, which is you could say, you can't you can't Market this and I'm not an expert in EU regulation, but you can't get this with the idea that the token

is going to rise in value. So that would be one option. Another option would be To try to take advantage of the technology and build in things that would actually prevent the development team from selling their tokens for a particular period of time. So so maybe you could do something along those lines. So those are some of the things I'm thinking about. But still there's been a lot going on at the SEC and then the world in general. So there's been a lot of other issues that have been taking my time. And meanwhile, you know, the crypto industry is kind of moving on too. So so I do hope that

we can move forward with the safe-harbor. I still think there's room for it to do some good, but but they're also a lot of other developments happening. And it, when you said earlier, you have not yet convinced the fellow Commissioners or the chairman have you discussed it with him and if so, what were their views on it? One thing that I never want to do is is is purport to represent my, my fellow Commissioners use. I'll just say that, you know, I think I still need to do version 2.0 in order to help when folks over. And so, that's that's what I'm

hoping to do. And then, what would be the process after that? Like what is it take to get this kind of thing adopted? So, what it would take, I think it would probably be done through some kind of a rulemaking. And that would mean that we would go out with the proposal, which would then get comment. And then we go out with a final version based on the comments that we received. Going back to unicorn if you're safe, harbor proposal had been in effect. Would you have found that the Unicorn offering complied with a safe harbor? What's so I think that what you need to do the Unicorn would have

needed to say, hey, we're taking advantage of the Safe Harbor. But assuming they had done that, I think it is the kind of thing that could fit very nicely within the safe harbor. I know and that's because they had done some of the disclosures and what like, what about that particular token, whatever they would need to make the disclosures required by the Safe Harbor but I think that that's that's sort of along the lines of what they had in mind, right. They get some Venture money at the beginning and they they do a lot of the work and then then they do the

launch after that. So I think you can those are the types of instances in which I think the Safe Harbor can be particularly useful when there's been some work done. On the front end, it's been financed by venture capital or other accredited investors. And then at some point the company is ready to launch it out into the wider world and Users of the token. And and it's at that point that you would say hey we're taking advantage of the Safe Harbor. There's been a new trend in the Deep by space where a lot of these tokens are actually being launched, kind of more in the

community and their two non VC coins as at the VC coins. And you know, it strikes me that you're safe. Harbor proposal maybe is tailored more toward the projects that do you start with VC backing. So then it does that mean that the community type tokens like these Fairlawn coins would kind of not be allowed to go that direction or that simply they wouldn't fall under the purview of this Safe, Harbor proposal. I think that they could certainly that wasn't what I had in mind when I when I developed the Safe Harbor. And I think

it's interesting to see that that's where we're a lot of these two broken launches heaven have moved and I think that's in many ways. It's a it's a really interesting and positive development to see. No, trying to get the tokens out into the hands of people were going to use them right away, right? That's kind of a vision for a lot of these projects and I think that's that's consistent with the idea of decentralization, right? Which then takes it. Outside of the framework potentially. Takes it up the Securities framework, so I don't know. I'd be interested in getting

people's feedback on whether I need to tweak the Safe Harbor because I think as a Securities regulator, I probably ought to give the the the the warning or the admonition that you know, no matter what kind of want you to do. You really need to think about whether If you put on those glasses of of a Securities regulator, especially one looking in hindsight, is that going to look like a Securities offering them in and and so people need to be careful no matter how they're doing it. And that's why I would certainly be open to tweaking the safe harbor to accommodate those kinds of their

launch event, whatever kind of token distribution event. You want to use, I think we need to be thinking about is there to this really be regulated as a Securities offering or should it be regulated and some other way and it said incorrectly, I, I had been assuming that currently the fairlawns coins, don't bump up against Securities Law. But I just wanted to check is at true. Well, again, I think people need to need to think carefully about whether that is the case because even if you do something like an airdrop, the that doesn't

necessarily mean that you're out of the out of the Securities Law framework, right? So even if you're not selling it, but you're basically giving the token out, you could still end up sitting with in the Securities classification. So people do need to be careful. And again I think this is all the more reason why the SEC needs to be. Out there providing guidance because people are trying to figure out ways to get the tokens out so that people can use the tokens and we're not, we're not really stepping up and providing the guidance that I

think people need to feel comfortable and trying these different methods to when you mentioned are jobs famously, the SEC has indicated that those could be considered Securities offerings. And you know, if you mention, that's just where the tokens are giving away for free to certain group of her in your Safe Harbor proposal, you actually seem to take issue with the fact that the SEC has indicated that those could be Securities offering. So what is your view on how the SEC should consider ear drops? Well, I'm going to give the typical lawyer

response that everything is facts and circumstances based. But, you know, I think if you are giving something out, it looks very different than if you're selling something. But again, I caution people that I'm one person on the commission's. There other people on the commission, who might look at the same facts and circumstances differently than I do and so, so I just caution people to be quite careful in this in this area. You know, I I, I think it's really interesting that people are coming up with different ways to distribute tokens that I I, I do think that that

should factor into our analysis when we're looking to see whether it's Securities offering or not. And it sort of feels like, we're almost dancing around one particular story. In particular that a lot of people have been talking about, which is the launch of uni, which is the coin for the decentralized exchange uniswap after the airdrop of that coin, a lot of Krypton lawyers were saying that you need was almost certainly a security and I wondered if you agreed with that. And if so this kind of ghosts actually the kind of like teen vc-backed project versus one that is you know

what community launch one? Whether you thought that its competitors Sushi which kind of is more of a community coin or started. That way is also a security or if it's not simply because he she swapped you know, was not created by an entity located in a specific jurisdiction. Well, I'm not going to speak about any particular instance. Again these things all have to be looked at on their facts and circumstances and so I I can't say anything specific about it other than again, urge people to think carefully about the intersection with the Securities laws, even when they're

doing things, they might think we're well outside of the Securities laws and employees, you know, come talk to us as you're thinking about how to do things. I know that that I make this, we often come talk to me, but come talk to our Fan Hub, our folks, on the staff who work on these issues all the time and they can help you think through some of the RAM and ramifications without giving you legal advice, but they can help you think about what kind of questions to ask. So that's what I would have supposed to do. So after you're safe harbor proposal was published. There

were some public responses including from a group of attorneys, one of whom is a former SEC staff is that Kris Allen and as a group of attorneys has quetzal their offense. I compliance from and they said that actually they sell that. Maybe what could be done instead? It's just we existing Securities Law such as regulation a in which took an issue is can raise up to 50 million dollars through the sale of what would initially be considered Securities and I wondered what you thought of that idea. I think that's an option to, and I'm certainly open to that option. I've always

said that my Safe Harbor is not intended, to be the end-all and be-all or the only solution. If there are other solutions that will work better. I'd rather spend my time working on those but I do worry, if we focus only on a reggae type solution, we might end up with tokens that are stuck in a Securities Law framework after a point in which it doesn't really make sense for them to be in that framework. And again, that's a project-by-project determination and it seems to be working for some projects which is fantastic. But I I just

worried that that's not the right model for for every token offering. And so certainly willing to be shown that I'm wrong on that. But I think it's it's it's not because they're so many requirements around what it means to be a security and how you can move those Tokens around, if they are deemed to be Securities. That's where I continue to worry that a reggae solution, might not be the only solution we need. And so did she go back to defy? I wanted to ask a broader question then the question I asked about uni which is that in general a lot of these DIY projects are using what they

call a governance token to decide on the direction of the project and he wondered if you thought defy governance tokens for securities. well again at facts and circumstances, but I think when when you start to put security like Surah benefit like equity-like characteristics. Then again, that's going to be something that you have to think about. I I say that with with a little hesitation only because I think it's really interesting what's happening in the defy stays the night. You know I've heard you talk about this Laura

and so I know you feel the same way but there's some real potential for for some pretty major and revolutionary change coming out of the B5 face. This idea that you can have the users of something be the ones who also govern it in a really direct. There's, there's no attenuation there, right? It's a very direct way and so that, that will challenge the regulatory structure in a number of ways and some of those are on the security side. But I think also on the corporate governance side, some of which much of which is within state law curfew, we're going to have

to ask a lot of really difficult questions about what that means for for how how we regulate things. And I didn't sit here in a recent interview, you said that defy itself plays a regulatory role and it I love the way you phrase. It was so interesting to me and I just wanted to hear you explain. What do you mean when you say that? I think, when you have the people who are actually using something deciding, It's future, then the changes that that that happen or are decided by the community together. And that's a sort of regulatory

function is not a government regulatory function, but its regulatory function by the people who are actually using it. To someone can launch one of these projects and say, I have this great vision for what's going to happen with this project, but if you really want it and you put it into the hands of your, your community, it could end up doing and being something very different than what you all to mately you what you what, you initially imagined it to be a Ultimate Way, be very different. So you have to have a little bit of willingness to be hands-off and and see what happens. And

that's probably a little bit scary for some, for some developers to do that but I think it's kind of a an interesting thing to watch. And it can have some really I think, positive ramifications for regulator Behavior. Now I'm talking about Congress. It was a recent bill called the Securities Clarity Act that was introduced and that bill would create a new definition for tokens that are between a commodity and a security and part of it would be to amend the Securities Act of 1993 and 1940 1942 say that the term

security does not include an investment contract asset. I wondered what you thought of this bill What's up? I think it's really, first of all, it's good. That Congress can can get involved when their questions, where two agencies hear the see if you see any SEC potentially have some traditional claim but she is a bit slow to act on things. Is that Congress comes in and says okay well if you're not going to deal with this, we're going to tell you how to deal with it. And that can be that can be a really important push

for us actually to make some progress on our own. But I do appreciate the fact that there are people in Congress who really care about this face, and it's a bipartisan interest, which I think is fantastic. That there's there's real interest in trying to figure out the appropriate regulatory framework. And at some point they're probably will need to be Congressional involvement. Simply because in the US there, so many different Regulators involved both on those Federal side and the state. Side. So I think it's kind of been a vegetable that is some point Congress, is is going to weigh in

one way or the other on this. If it does get passed in Congress, then with the SEC, be able to weigh in and anyway, to amended or revise it or would it simply be handed down to you and you would enforce it? It depends often with Congress, will do is Bill Wright abroad, and not bill that gives the agency, the relevant agency, the ability to cut fill in the details at other times, it will be much more specific and, you know, they're at along the way people

from from Congress, will come to the SEC sometimes, and ask for a technical advice on What will this mean if we write it this way and so the experts at the SEC are able to provide technical advice on it, but it just really depends, you know, when it depends on the mood to it. Sometimes if we saw it, for example, it with the jobs act that I think there was a frustration in Congress. This was probably before you were following this face before, but there was a real frustration in Congress about the SEC. Not taking Capital formation at

small companies for small issue or seriously enough. And so Congress came in with the jobs act which which told us what we had to do, basically. For years. Now, the community has been hankering for a Bitcoin ETF and multiple attempts to create one have been rejected by the SEC this morning, the UK's Financial conduct Authority, ban, the sale of cryptocurrency derivatives and exchange-traded notes for retail users. Think of that decision and does this also influence the chances of a Bitcoin ETF being approved in the US, Well, I mean, I don't even comment on what

other Regulators in the US or necessarily doing so. So, all I can supply sometimes say, I think there has been some positive work. Actually, by other Regulators in the US and in the crypto space. So I'm happy about that. But, you know, figuring out what what products should be available to retail, investors is probably a country specifically saying what I will say is that in the US we have a tradition of of believing that people should be free to make decisions for themselves and then responsible for the consequences and I don't know why that wouldn't apply in an area like a Bitcoin

exchange traded products, where you see lots of interest from people in in getting exposure to bitcoin. This is one way that would would be easy for people to get exposure again, the facts and circumstances matter, so how the product is designed matters and that's something that the SEC looks at and so One of these will be judged on its own merits when we, when, when people come in and apply. But as I said in the past, I think we've taken up an approach. That is a merit regulation for the corrosion is saying, we don't think that we don't think that investors can make

wise decisions for themselves. So we're just going to cut the product, offering them all together and this stuff, make any sense to me. In the news recently, there were also some really big enforcement actions against the crypto, derivatives exchange bitmex, including criminal charges against its owners and older. This is outside your domain. I wondered what effect you thought this action would have on the industry in general it particularly maybe around kyca ml or on future ETF applications. Well, I think there's the the message

has been coming to the industry, fairly loud and clear on the AML kyc front, and I'm sure it will continue. Is it a difficult? It's a difficult area. Frankly, for for very traditional, Financial firms as well. And I think that lots of lots of firms run into trouble there, but I, but I think that it's definitely sending a message to, to the crypto world. And then in terms of when they're, when they're are us, Users of a product or service that there's going to be enforcement of us laws. And so that I think is, is what we're probably

seeing here. So, we'll see what happens. As you said, those were our agency was not involved in that, so I don't know the details other than what I've read in the paper same as you. Stablecoins have become a Mainstay in the crypto ecosystem with volumes up this year over last. Valerie stepanek the fcc's cryptos. R has said that certain types of Steve McQueen's could raise issues under Securities laws, which types of stablecoins. Do you believe beer more in that direction? I think sometimes when you see a stable coin that's built on a basket of underlying

things, underlying assets, It could, it could implicate certain of our rules. And so as with anything else, if you're developing some kind of stablecoin you out, I'll come talk to us but I think there's been some positive developments and mean we saw with the OCC did couple weeks ago and and we came out with with guidance or statement in response to that say, hey, we want you to come, talk to us to see whether there are any Securities implications. I think some people took that statement as as sort

of a negative one, but I would I would say is I think it was really saying, we don't think every stablecoin implicated Securities laws, but you ought a common check with us to make sure that it doesn't. So I think there is a path forward there. Recently, chairman Clayton and Shay, Clayton, said that all Securities May one day be tokenized, do you agree? And if so, what do you think needs to happen before that can become a reality? I think that is likely. I mean, a we seen the the transition from paper certificates were most Securities are not are not evidence by paper certificates

anymore. And so I think it's a natural progression to to think that there will be tokenization. And blockchain is a really useful way to keep track of where Securities are, who who owns some. So I think that we could see that there probably is worth that we need to do on the transfer agent will making side and then I think their technological changes that will have to happen or something like that to happen. I think you got it everyone in the industry through has to get on board so it can take a longer time for something like that to to happen, but Sometimes, you

know, sometimes it takes it, it takes an event like we had to paperwork crisis in the late 1960s, which caused broker-dealer, a lot of broker-dealers, actually to shut down. And sometimes it takes something like that. And I feel like with covid as bad as it is one thing that it's made, us recognizes that the more we can do to rely on technology that the better were set up for when something really terrible happens because he can it's easier to do you don't all have to be in the same place, right? And so I think blockchain really lends itself well to that Euro that were

in now All right. Well, we will see where this technology continues to develop. Thank you so much for joining us for this fireside chat. Thanks, Laura.