Bankless - 163 - What SEC Commissioner Hester Peirce Thinks About the SEC

Episode Date: March 20, 2023

Hester Peirce is one of five SEC Commissioners. She's been a Commissioner since 2018, with her term ending in 2025. Peirce, a previous podcast guest of Bankless, consistently makes first principles statements and is known to often dissent for her colleagues on crypto-related actions…we talk about that in today’s episode. These are a couple of many reasons why we enjoy her and her guidance so much.  ------ ✨ DEBRIEF | Unpacking the episode:  https://shows.banklesshq.com/p/debrief-hester-peirce    ------ ✨ COLLECTIBLES | Collect this episode:  https://collectibles.bankless.com/mint  ------ We’re three months into 2023 in one of the worst regulatory environments we’ve seen for crypto in the United States. In today’s episode, SEC Commissioner, Hester Peirce shares some insight on what crypto could be like if we had a first principles SEC, what a security is and how we can define it, and how can crypto take its share of the responsibility to move this industry forward.  Commissioner Peirce was on the show two years ago…Apr 12, 2021. Today’s second appearance is one you do not want to miss.  ------ 🚀 JOIN BANKLESS PREMIUM:  https://www.bankless.com/join  ------ BANKLESS SPONSOR TOOLS:  ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://bankless.cc/kraken  🦄UNISWAP | ON-CHAIN MARKETPLACE https://bankless.cc/uniswap  👻 PHANTOM | #1 SOLANA WALLET https://bankless.cc/phantom-waitlist  🦊METAMASK LEARN | HELPFUL WEB3 RESOURCE https://bankless.cc/MetaMask  ------ Topics Covered 0:00 Intro 8:25 Thoughts on Bank Crisis 9:30 Why We Need the SEC  11:40 Information Asymmetries 13:20 Healthy Crypto/SEC Relationship 17:15 SEC Security Definition  20:52 Security Catch-22  25:40 Expanding Jurisdiction  28:35 SEC Advocation  35:03 Dissent SEC Sway 39:36 Kraken Staking  43:36 Guidance vs. Enforcement  46:15 Stablecoin Status  47:43 What Crypto Could Be Doing Better? 51:12 Decentralization  53:49 Self-Regulation  55:24 Duke Speech  57:59 Closing  ------ Resources: Hester Peirce https://twitter.com/HesterPeirce  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures 

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 security's laws apply. 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 Perce, 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. So 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 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 on to.

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 and first principles regulators. And so that's one of the first perspectives that I think bankless listeners will be able to walk away with. I think the other big one 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? Yes. It's not a conspiracy theory. It's not a conspiracy anymore. Like this is just now flat out stated. And so now that that is

what is just known, now we have to account for that. And how do we move forward when, you know, the mask has been ripped off? So these are, I think, the two big things that people can walk away from this episode. And just like, now that the game is a little bit up, how do we proceed? How do we keep on moving? Yeah, the masks are off, certainly, as we get into this episode. We know where people stand. David, there's so much more I want to talk to you about in the debrief. This is just a fantastic conversation. And 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 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 dot com. Go ahead and do that. There is a link in the show notes where you can get that done and access the debrief. Guys, we're going to get right to our episode with Commissioner Perce. But before we do, we want to thank the sponsors that made this. episode possible, including Cracken, our number one recommended crypto exchange for 2023.

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that you might have. At Bankless, we have huge things planned for 2023, including a new website with login with your Ethereum address capabilities, and we're super excited to ship what we are calling Bankless 2.0 Soon TM. So if you want extra help exploring the frontier, subscribe to Bankless Premium. It's under 50 cents a day and provides a wealth of knowledge and support on your journey West. I'll see you in the Discord. The Phantom Wallet is coming to Ethereum. The number one wallet on Solana is bringing its millions of users and beloved Ux to Ethereum and Polygon. If you haven't used Phantom before, you've been missing out. Phantom was one of the first wallets to pioneer Solana staking inside the wallet and will be offering

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Phantom has already saved over 20,000 users from getting scammed or hacked. So get on the Phantom waitlist and be one of the first to access the multi-chain beta. There's a link in the show notes, or you can go to phantom. dot app slash waitlist to get access in late February. Bankless Nation, very excited to introduce our next guest to you. Hester Purse is one of five SEC commissioners. of five. She's been a commissioner ever since 2018 with her term ending in 2025. I definitely wish it was longer here, David. Hester is also a previous podcast guest on bankless. She

consistently makes statements about the SEC, how it should regulate capital markets from a first principles 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 bankless was two years ago. So it was April 12th, 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 in that time. So, yes, I'm a little discouraged, but we have to continue on and try to get some things done.

And so obviously we've had some 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. 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.

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, the U.S. banking system has had some events here recently. Just curious, because it's top of mind, current event, of course. Does any of that touch the SEC or what you Shepard

and have oversight over affected by some of this? I mean, certainly the financial system in the United States is very connected, and so what happens in the banking system can have ramifications for the markets that we regulate, and sometimes the entities that are banking entities have affiliated entities that we regulate. So there certainly can be connections, 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, you know, it's never good to see those kinds of things happening. And so we watch to make sure that it doesn't have reverberations on the entities that we're regulating directly. So Hesser, for people that have not watched our first episode 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 believe you listen to my own little rabbit hole investigation of securities,

why we have securities laws in the first place. And from the crypto perspective, it's very easy to say, oh, SEC bad. Like regulators, bad. 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 if we can all allow this like a future world to come about in the way that we hope it does. But 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 one of the key purposes, which is 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 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 going to 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 Commissioner Persis is... And you can call me Hester, please. Thank you, Hester. So is part of the role 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 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 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 the 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 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 somehow affiliated with the company. That's kind of simplifying it a bit, but that's kind of 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. 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 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 and 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. David, I think you put that really eloquently. I like that a lot. I think that's a good frame to think about things in. So go ahead. Appreciate it. Yeah.

I'd like to start to apply some of it. of this kind of 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 as it relates to good securities regulation and good SEC regulation. So, Hester, I'm wondering if we could just daydream for a moment about a future state of crypto that has good, healthy SEC regulation 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? It sounds so nice when you put it that way, David, by the way. We're hoping we'll get there. 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 regulator of trading platforms, of issuers of tokens potentially. I think we have to think about that. But 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 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 no one is able to shut anyone else's access off, right? Everything is accessible to everyone. And so whatever we do, I think we need to carve out the decentralized aspects. A different regulatory approach needs to be taken. I would argue 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 information asymmetry, right, has this market failure mode where some insider knows more 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 principles perspective, it's sort of 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 do feel like this is still the case 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 NFTs, are these collectibles, or is this something that should be

regulated by the security? Does it depend on the type of NFT and what it drives? Various tokens. Like, are these securities? Are they not? Does it totally depend? Are we any closer to being able to define what a security is? I know, often quoted back to crypto is, 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 you or the SEC has a good definition on what a security is that it can present to crypto? Or is this an area of work? 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 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 really a difficult application because if that token was sold as part of an investment contract, does the token itself have to register as a security 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, does it even make sense to regulate it the way we regulate other kinds of securities? So 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 I think we haven't done the hard work here at the SEC. And some lawyers have been suggesting maybe that 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. we haven't even gotten to NFTs and there are lots of other types of things that we really need to sit down and think, okay, 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 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-termination. nature of what happens if you apply existing securities frameworks towards crypto network assets. Like our crypto networks, like these protocols that are built on top of other protocols are all designed to be community owned and totally decentralized. Yet there's 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 and community bottom up owned as possible, yet applying securities laws framework actually prevents them from achieving that state. So there's this 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 never get to the point of them being in their maximally manifested state, which is not as a security. So because you are defining it as a security, you actually rob 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 by the SEC commissioners and chair. I'm wondering if there is this understanding or acknowledgement of this like catch-22 of we want our things to not be securities. And 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 here? Yeah, no, I do. But I think what's going on at the SEC, though, is, I mean, there's a lot of capacity to do good rigorous legal analysis. But the issue is that we are taking positions that maximize our jurisdictional reach, right? 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 deals with, any firm that deals with, these tokens could end up being classified as a broker dealer. So it's a way, I think, of maximizing the reach of the securities laws.

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. We think that these platforms need to have some sort of regulator. Okay, maybe that's the SEC, maybe that's the CFTC,

some combination of the two. And so that would then sort of free us up to do a better legal analysis. But right now, 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 making the world a better place by a regulation, or are we just making things complicated and not serving anyone's interests?

And so the ability to take a step back and think about those kinds of things is sometimes hard for a regulator with a long history and a real intense desire to protect people, right? This is a very, 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 does SEC registration look like. Well, the reason that we don't really know is because it's really hard to get through a process is just not designed for your asset class or for your type of entity. And so this isn't a good outcome. But 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. Hester, this is why we appreciate talking to you because there's just such clarity and willingness to kind of engage on these issues at the community. And that's really the relationship I think a lot of people in crypto are looking for from their regulators. And you're right, we don't have clarity on some of these things. But to the point of maximizing jurisdiction, I wonder if the argument has made internally whether the SEC actually wants this jurisdiction or not. You know, bankless we put out things. We think are funny sometimes. We went through a thread recently

of things that we're not sure if their securities are not. Chucky Cheesecoin versus like, you know, an ERC 20. Is it a security? What's the one-to-one mapping? We've got baseball collectible cards that aren't securities somehow. How about a digital collectible? How about that, you know, sword of fire that just dropped in 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 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? Well, look, Washington regulators typically want to expand their jurisdiction, but I think 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 rationalize what we're asking for here. What the SEC should be regulating is capital raising. That's our mandate, right, 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 assets, 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, you know, nowadays I would say, yeah, our goal is to regulate as much as possible. And that is not my goal. But I think as an institution, 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 for it to go in this direction. Well, so Hester, I think the crypto community that pays attention to these kind of things have come to that conclusion that gone is the opportunity to interface directly with the SEC. come in and shake hands, and here are the days of, that's a trap. And everyone kind of understands that the SEC is interested in expanding its jurisdictional reach and kind of putting its original

first principles mandate secondary to that, which is a sad state of affairs. But understanding that this is kind of the paradigm that we're stepping into, what advice do you have for our industry 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 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 don't set your sites too high. But I also think we're in a bad place, right? We all acknowledge that. It's kind of a dysfunctional relationship. The SEC 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 we've seen a lot of that come out, and there is definitely a place for us to bring enforcement actions. But then, you know, the industry is like 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, but I think that needs to come also from people in the industry or people who use crypto and want a better regulatory framework around it. You know, maybe you don't want to come in on your own, but you can come in as groups in groups of like-minded folks. And come to us with use cases. Show us what you're actually trying to do 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 away things that actually could transform people's lives. I think that's what a lot of people in crypto believe. And so you've got to make that case with concrete use cases. And we need to keep having these conversations because if people who are trying legitimately to build things within crypto just say, you know what, we're just not even going to 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 action. Something worse will fill the void is what you're saying. I fear that's the case. And look, I am discouraged. I mean, 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's not the other way around. ultimately, even though we're a little bit removed from direct political accountability, there is accountability to the people. And so that's something that we can continue to work on. Uniswap is the largest on-chain marketplace for self-custody digital assets. Uniswap is, of course, a decentralized exchange.

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Go to learn.menomask.io and add Metamask Learn to your guides to get onboarded into the world of Web3. Hester, we've noticed a number of dissent statements that you've had out of the SEC website, and the most recent one came on March 10th five days ago alongside of Commissioner Mark Uita. pardon me for perhaps Britchering. UADA. UADA, for Britchering the last name. The last sentence of this statement is, we dissent. So you're not alone, of course.

You're not the only sole dissenter 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 dissents? There's multiple people dissenting. To what degree is that actually effective? And how much control do you feel like you have over a decision? 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 control. But the five of us, 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 Bitcoin exchange traded product. I know Bitcoin's not your primary interest, but I think 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 other exchange traded products. That's a similar concern that I have more broadly across crypto, which is we're just making up a

new regulatory framework and applying it to crypto. So the fact that one of my colleagues came alongside me and said, yeah, you know, I look at that and I see a distinction between the way crypto is being treated and non-crypto things are being treated. I think that's a really good development. And I have, my other colleagues have open minds too. And I think Commissioner Crenshaw has expressed a real interest in meeting with people from the crypto community, for example. I'm sure Commissioner Lazaga does, he's the newest commissioner. I'm sure that he does as well. And so people can change their minds. We can't give up on people. And then if they're three, then we've got a different ball game here. So I really think, yeah, dissenting on its own maybe doesn't move the ball,

but I think it helps us to think about what the issues are and maybe what some potential solutions are. And so I think it's important to have that conversation and have it publicly, which is why I put out so many public dissents. Well, we definitely appreciate reading them. Anytime Gary Gensler, chair gunsler comes up on the Friday weekly roll-up that Ryan and I record. We're always jokingly, and the section is like, but Gary, come on the podcast so we can talk. I'm wondering, Hester, do you think Gary will listen to this podcast? He's a busy man with a lot of rules to write, so I'm not sure how many podcasts he listens to. Maybe if you style it as a rom-com, he really likes rom-coms, so maybe that's going to be. What? He's always talking about him. So work on that.

That's going into place. I don't think the podcast has ever gone, David. No, we have not gone down. particular part of the world. You never know. There's always new frontiers so open. Hester, you're basically saying, hey, crypto industry, don't give up on regulators. You're saying to kind of regulators say, you know, we've got to engage with the community. And I just want to echo the problem that we have, I think, between the SEC and regulators

and crypto is a problem of mutual trust. And the best way you restore that trust, I'm a podcast maximalist maybe, but is conversations like these. It's engagement. And so I just want to say, we appreciate you engaging with the crypto community in this way and having a conversation. And we may not see eye to eye in everything. And that's totally okay. But I think that the other SEC commissioners will see a set of shared values that we have in crypto that are also expressed through regulators like the SEC. So that was one dissent that David brought up, which is the Bitcoin ETF dissent. There's also the crack and staking dissent.

as well. And what was the core of your dissent in the cracking staking initiative? For bankless listeners, who probably know, Cracken disband their staking product. What was that? Man, time flies. A month ago, something like this, David. Probably even more. Sorry, we've had a banking crisis between now and then. Yeah, February 9th was the date of your dissent. So just over a month ago, and then you kind of wrote a dissent on the back of that. Can you tell us about that descent? What was your purpose in that and what were you driving towards? What was the core of your argument? Sure. Well, the Cracken staking service was basically shut down in the United States by that enforcement action. And the first question I asked is like, okay, if we think that this was a securities offering, which, you know, depending on the facts and circumstances, one of these staking as a service services could be categorized as a securities offering, then let's think.

think about what it would look like for Cracken to come in or another provider of a staking service to come in and register with us. So, you know, they come in and they say, okay, this is what we're trying to do. We'd like to register it with you, the SEC. If the SEC were actually to say, all right, we recognize that this is a bit different than anything we've looked at before. So let's figure out what kind of disclosures with someone who was a customer of wanting to use one of these services. What would they want? What information would they want? okay, we can figure that out. We can sit down and figure that out. But I think it's more likely that the response that someone coming in would have gotten is a very long drawn out process with probably nothing to show for it at the end. You know, we just want to jam everything into the frameworks that we're used to. But why? I mean, in other circumstances, with asset-backed securities, for example, we've said, you know what, these are a little bit of a different kind of asset. So let's design a regime that makes sense.

for them. We could do the same thing for a number of things, whether it's crypto lending or crypto-staking or stable coins if those were given to us by Congress to regulate, whatever it might be, right? We could come up with a regulatory framework that made sense. And so I guess I was frustrated by the fact that our answer is just to say, all right, great, we've kicked this service out of the United States, so now we can count it as a victory for investors. Well, I mean, not necessarily, because some people understanding the risks and the potential rewards might decide they want access to crypto as staking to staking as a service offerings, right? And that's really not my decision to make and say, no, you can't have access to that. So I just didn't count it as a win for investors. Plus,

then it was being used that one settlement as a definitive statement around crypto staking, which every product or service has to be looked on. on its own facts and circumstances. And so you can't use one settlement. And again, when people settle with the SEC, there can be a lot of reasons to settle with the SEC. You know, like they can't afford to litigate or they don't want to go through the trouble of litigate or whatever. And so you don't have an erring of the issues before a neutral arbiter. So you can't take a settlement and say, well, that's law now and it's determinative. One of the patterns I think in some of these dissents is this idea of guidance versus enforcement. What you're just illustrating there, it seems like an

enforcement approach was taken rather than guidance. Is that kind of a common theme across many of these dissents? Yeah, it is. Why not do it this way? Why not identify discrete issues? Take those discrete issues, put out a position paper, hey, world, this is what we at the SEC think when we look at NFTs. We think these are markers that might indicate that an NFT is. a security fits within our realm. Put it out there in kind of a draft form, invite people in for a public roundtable where you've got people actually sitting talking to each other and doing it in public so this is not developed in some back room. And then after hearing that conversation, then we could go to a proposed rulemaking or maybe, you know, we have other tools like exemptive

orders or a guidance document, an interpretive guidance document. But it would be informed by a discussion with the community that knows the technology, that knows the ins and outs of this, that can react. But instead, we come out with these developments through enforcement actions, which then we expect everyone to adhere to, and no one had the chance to have a conversation about it. It's not even the most efficient way to do things. I mean, if we wanted to go one by one and bring enforcement actions against everything that we think as a security, some people have said pretty much everything as a security, we would be doing this for hundreds of years. And why would we be ahead in that situation. Why wouldn't you want to just establish rules? People could see the

rules. And then if they don't abide by them, then you can bring enforcement actions. It's just a very inefficient and very nonproductive way of moving forward. And we have other options, which we've used in other circumstances. Hester, what you just described of people coming together to kind of talk about what the guidance should be, it just sounds like from the crypto community and from regulatory. It just sounds so functional. Yeah, and why not do it? Tomorrow, we could come out and we could say, you know what, we've rethought where we are and where we're trying to go. Right. And we're going to just do something new. Let's try something new. I would love that. Like, plus one to that. How do we make that happen? I guess you've got a common sense approach

these things. I'm wondering about stable coins. So there's been some, you know, action with BUSD, and you don't have to comment on any specifics with this. But like, what is the status of stable coins? You brought it up earlier that maybe some legislation needs to be put forward. But like in a common sense regulatory mode, how could you see that being dealt with in the United States? Well, again, we could do something similar. As I said, we could say here, because again, not every stable coin is identical to every other stable coin. And so we could say here are some things that we think maybe pull it within our regime. But because stable coins is an area where Congress has at least expressed a pretty direct,

pretty, they were actively negotiating legislation for stablecoins in the last Congress. I think it really at this point makes sense for us to wait for Congress to tell us what we should do in that space. Now, with everything going on over the past week, whether Congress is going to turn its attention to crypto or not or focus more on banking, we'll see. But I still think stable coins is an area where Congress could write some, you know, it's a pretty discreet area. So they could figure out what they want the regulatory framework to be. So my preference would be for us at this point just to wait to hear from Congress on that. Hester, I'm curious kind of your feedback to the crypto industry as well. We want to do our part in engaging with regulators. Of course, it does not

help that crypto in 2022 had a lot of bad actors that made headlines and done a disservice to what we're trying to actually build here and do here. I know that doesn't help our cause, certainly. I'm wondering if you could give us a critique or a take. What could people in crypto be doing better at this point in time? What are your frustrations with the industry when you look at it? Well, look, I mean, some of the lessons from traditional finance are certainly applicable in crypto, and people need to internalize those. You need to be thinking about who your counterparties are. You need to be asking whether something seems too good to be true. You need to be looking at leverage can put people in a worse position. You need to be asking whether statements that you're

getting from centralized counterparties are actually backed up by reality or not. And you need to be demanding transparency from entities, centralized entities, right? And then identifying bad actors and telling the regulators about those bad actors, there's a lot that the industry can do on its own to protect itself, right? You don't need to come crying to the government always for help. And that's Sort of one of my general themes is it's generally better to try to figure out solutions other than regulatory solutions. Even when things are really bad, sometimes a privately designed solution can be more effective. And then the other pieces, as I said earlier, telling the government about use cases is important. Thinking about what the questions are that need to be answered by the regulator,

concrete questions, and then offering up concrete solutions to how could you achieve the regulatory objective? in a way that would still allow the industry to move forward as it should. And then I guess one pitch I'll make is that in the process of this, don't lose sight of those first principles, because this is a moment for us to be defending some of those first principles. It is a moment for us to say, no, we don't want the government watching everything that everyone does. We don't want the government to be involved in everything that happens on chain, right? And that's okay, right? Because, again, there are other protections that are available through the technology. And so let's have this moment to say,

are some of the approaches that we've taken so far in regulating the economy and the financial system, do they work or do they need to be rethought? So don't, to get a short-term gain, don't give up those first principles, because they really are important. And I think the decisions that we make now will have profound implications down the road. And so we can't lose sight of that, even if, you know, sometimes it's tempting to say, okay, we just want a short-term success on the regulatory front. You have to be thinking down the road of, are we really going to be in a better place with this kind of regulatory framework in effect? Hester, I think one of those first principles that the industry, the community that crypto-natives need to hold on to is this principle of decentralization. And I feel like sometimes we have not been diligent enough in piercing through when things are called decentralized.

There's this decentralized theater about certain projects, about certain things going on. And I think one thing that could help, you tell me, though, is that the cryptoimmune system becomes better at identifying what is actually decentralized and what is centralized and learning about that. I do think even though through these mistakes, though, this is how the market realizes there are centralization attacks. So when we had BlockFi and Celsius and Voyager and all. all of these failures, I think a lot of people realized the market got more intelligent on where

the centralized attack vectors actually are and the weaknesses and failures are. And that is how a market levels up. But that, I feel like, is something that we could improve on moving forward. And we definitely want to do our part on that. Yeah, I think that's a really important point. Because if you have stuff that's calling itself decentralized and it's actually centralized, you're playing right into the regulators' hands who are saying, this is all just a centralized. industry and we're going to regulate it all just the way we regulate other centralized industries. So be honest because sometimes does take some time to move from a centralized point to a decentralized point, but you have to be honest because people can get very badly hurt if they think something is

decentralized and they're actually three guys sitting there with the keys to a treasury that's growing and growing and growing and then they run off with it. So I think we have to be honest, both as regulators, but also you in the industry have to be honest about that. And what I do worry about is I worry that the regulators really want everything to be centralized. And so we're going to be sort of playing that up and pushing centralization. So I think people need to be pushing in the opposite direction of decentralization to show that we truly are dealing with something different here. Now, there are, again, I think a lot of people would argue that when you have a centralized entity,

it doesn't get a pass just because it calls itself crypto. So, you know, then we have to deal with the risks that arise from centralized entities. I really think that's what I would like the Bankless Nation to be left with after the end of this podcast is that there's this inherent resistance towards regulators in the crypto world. We just don't want regulators, you know, get out of our industry. But then really the question that comes out of that is like when you have that sort of just spinal reflex against regulators, then you also create an environment for, the reasons to be regulated in the first place to arise, right? And so without us self-regulating and being

equipped to understand why we have securities laws and things like the SEC in the first place, without understanding that, then we will just fall victim to the same trap that will invite the regulators in the first place. I agree, David. Yeah, I mean, it doesn't have to be a black and white picture, right? I mean, I have my own views. I'm a pretty free market, let people make their own decisions, let them make mistakes and learn from those mistakes kind of person, whereas some of my colleagues, for example, and a lot of the American people would rather have a much more active and interventionist regulatory system. And that's okay, but we need to have those conversations honestly and then figure out, you know, what's the right middle ground there that allows people to realize their own dreams

and make their own choices for themselves and their families, but also prevents or protects against some of these really bad things that we've seen. Hester, we actually invited you back onto the podcast after both Ryan and I read your remarks at the Digital Asset Conference at Duke. This was in January 20th of this year, and so I just want to read a small excerpt from towards the end of those statements

where you said, last year was so brutal for crypto that some people wanted to regulate it to the dustbin of failed experiments. Rather than swiping left on crypto, however, we should remember that new technologies sometimes take a long time to find their footing.

what kind of country would we have if regulators prohibited people from experimenting with technologies that other people think are stupid or meaningless or even ones that could cause harm? Our country is built on a presumption that people are best able to choose for themselves. People know their own preferences, limitations, risk tolerances, and circumstances better than the government does. Sure, sometimes people make very bad decisions on behalf of themselves or their families, but handing over the keys to government does not ensure that decisions will be good. And I think that'll be how I leave this with the call of the action for the bankless nation is that we will have good relationships with the SEC if we also regulate ourselves better than the SEC can. So the responsibility is actually on us as well to do the SEC's job and then we will have the best foundation possible to actually interface with the SEC.

That's my takeaway from these statements that you gave at the Duke speech. And I'm wondering if you had a moment to reflect on them, Hester, what would you say? Yeah, no, I mean, I think that that's a great point. Like, take the responsibility yourself and show that you are being proactive about getting rid of the bad activity within your own space. And I think that makes a good selling point to say, you know, regulators, we really don't need you to make every decision for us because we're making some good decisions on our own. But, you know, I think we as regulators also need to be introspective and think about where we can add value and where we can't. So I hope we'll do that on our side as well. And the other thing I would say is I love talking to people. So people in the industry, I always learn from those conversations. And so talk to my colleagues, but I often, when I travel, let people know where I'm going to be. I really do welcome the chance to hear from you directly. So just putting a plug in for that as well.

You need to keep us informed. I'm constantly needing to learn. And so I appreciate people who are willing to take the time with me. Well, Hester, thank you for taking the time. I think we established the framework for how we could, move forward. I'm just envisioning people in the industry. Maybe all the shadowy supercoters get together with all of the evil regulating bureaucrats. And we actually have a conversation face to face. Wouldn't that be amazing? Wouldn't that be great? Why not? Why not? And I absolutely, going to

2023, I think that's possible. We appreciate all that you are doing at the SEC to make that possible. And we'll continue to kind of fight the fight on our side. And the last thing I want to say is, please stay. We appreciate you. I know there's lots of places you could go, it's so important to have regulators in government that are willing to engage in this way. And I worry a little bit about that power vacuum. Of course, I know this is not an appointment for life. No, but Ryan, that's the key point. I think that's a key point, which is that we need to have institutions that are strong institutions, that it won't matter who's sitting in my seat or who's sitting in the next seat. And that means institutions have to respect the rule of law, due process,

and the need for people to be able to live free lives. And so it won't matter whether I'm sitting here or someone else is sitting here. That should be totally irrelevant. And so the world I'm trying to get to is where we have these. And I think that's true of these institutions. I mean, we've got great people who want to come in and serve. And so we won't matter if I'm here or not. The key is to just get those institutions working for the people.

And I think that's where we're all aiming for that. That is the key. Incredibly neutral SEC, incredibly neutral crypto. Commissioner Perse, thank you so much for joining us today. We certainly appreciate you. Thanks to both of you. It's always fun to talk to you. Have a good afternoon. Bankless Nation, a couple action items for you. Some dissents will include links to the show notes to some of the speeches that we referenced, also the Duke speech. Got to end with this, written to Claimers. None of this has been regulatory advice. Of course, Hester said that at the beginning. Neither has it been crypto or financial advice. You could definitely lose what you put in. But we are

headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.