Bankless - 60 - The SEC and DeFi | Hester Peirce

Starting point is 00:00:01 into bankless. We'll re-explore the frontier of internet money and internet finance. This is how to get started, how to get better, and 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. David, what an episode. First time we've had an SEC commissioner on bankless. And not only was she a guest, she's also a listener of the show. Yeah, absolutely fantastic. Pretty cool that the great words. of bankless are making their way all the way into the office of the SEC. Hester Purse, more endearingly known as Crypto Mom, has been one of, I think, crypto's biggest allies in the space, and she's careful about that word because she doesn't advocate for any specific industry.

Starting point is 00:00:59 But why we call her Crypto Mom in the Crypto World is because she understands the value and what can come out of crypto. And she wants to make sure that the power, the dormant power that is in crypto is able to manifest in ways that are good instead of being bad. And it's very rare to have someone who is in a governmental regulatory body that also understands the power that can be and is looking to help facilitate that. So Hester Pierce is a fantastic ally of this space, really happy to have a very deep and thorough conversation with her about a whole range of subjects, such as tokens, defy, quote-unquote, self-driving banks, and, you know, regulatory clarity and what she's optimistic about into the future. Yeah, and I want folks to really appreciate what this takes is because

Starting point is 00:01:45 as an SEC commissioner, right, like the crypto markets, that's just like a fraction of your brain space. I mean, you're not spending all of your time thinking about crypto. Hester's not like us. We spend all of our time thinking about crypto, right? So the fact that she can talk about defy, the way she does, understands what DAWS are, understands kind of the nature of NFTs and of protocols and the removal of intermediaries and can speak in an educated way about this space is super impressive. And honestly, it makes me bullish, makes me excited, makes me optimistic. And something that you repeat so often, David, is the most bullish thing for crypto is to be

Starting point is 00:02:23 understood. And that means understood by everyone. We want financial people to understand it. And Wall Street, we want Silicon Valley people to understand it. We want everyday citizens to understand it. We want regulators to understand it. And in particular, those that align with the value system of crypto. which is open access to a permissionless financial system, they'll just gravitate to it,

Starting point is 00:02:43 and they'll fight our fight for us in the places where we don't occupy and we don't exist. And so I just think that was a very refreshing conversation with regulators, someone that you might think is sort of like the cop trying to tell you what you can't do. But she really gets it. She really understands it. And she has a very nuanced perspective on DFI. So just a fantastic episode. The SEC is only one of many regulating bodies that is relevant to crypto. And so this conversation does not represent all regulating bodies. But if it did, I would be extremely optimistic about the future of crypto and D5 regulation, which is inherently an almost impossible task to like perfectly regulate what is something that, you know, DFI moves at a speed that no one can comprehend, not even Ryan and I. And that's a question that we ask, Hester. Like how do you even try and regulate something that,

Starting point is 00:03:36 moves 10 times faster than any human can keep up with. And her answers there, I thought were pretty compelling because she said it's not about regulating the technology, it's about regulating the principles. And how else are you going to regulate something that, you know, has infinite possibilities with regards to what could be done on Ethereum? And Hester understands that. And the fact that she understands that, I think is really important to what can be done here with crypto to make sure that we actually produce the ecosystem that we know crypto can be, it is not yet. And I think Hester would want us to clarify that the views she expressed were her own personal opinions. They were not views of the SEC writ large. But this, of course, goes back to

Starting point is 00:04:17 something we often say, which the layer zero is people. That's true for crypto networks. It's also true for regulatory bodies. There are individual people making the decisions and advocating for positions in our places in government as well. So with that as an introduction, we want to get right to the interview with Hester Purse. But before we do, let's take a minute to tell you about the sponsors that made this episode possible. This is proud to be supported by Uniswap. Uniswap is a new paradigm in asset exchange infrastructure. Instead of a cumbersome order book system where trades are matched with other humans, uniswap is an autonomous piece of software on Ethereum, which is what Ryan and I call a money robot. No human counterparties or centralized intermediaries, just autonomous

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Starting point is 00:06:44 your trade to give you access to better liquidity. You don't even have to think about it. Try it out, download Metamask for desktop or mobile now at Metamask.io and start swapping. Bankless Nation, we are super excited about the conversation that is about to be had. We have Commissioner Hester Purse. She is one of five commissioners on the SEC. For those not in the U.S., that is the Securities and Exchange Commission in the U.S. It's one of the most important regulatory bodies affecting this space.

Starting point is 00:07:17 The SEC's stated mission, this is important because we'll get to this, is threefold, protect investors. Number one, number two, maintain fair, orderly, and efficient market. And number three, facilitate capital formation. Sounds like that mission has lots of intersection with crypto, which is what we're going to talk about with Commissioner Perce today. Commissioner Perce, welcome to bankless. Thanks for joining us. Brian and David, it is great to be here.

Starting point is 00:07:44 I love listening to your show whenever I'm feeling discouraged. I listen to your show because you're so optimistic about the future. So it's a nice way to bring my mood up. I do have to start out by saying that my views are my own views, not necessarily those of the SEC or my fellow commissioners. I think everyone in this space knows that, but I still have to say it. Well, thanks for saying that. We appreciate it. And we're glad that you are a listener.

Starting point is 00:08:12 I mean, we're honored to hear that. And certainly, we are avid readers of your speeches because those speeches make us equally optimistic about what regulators are doing in crypto, in addition to all of the things you say about crypto, so it's an honor to have you. Commissioner Perce, I want to start with this question, because this is kind of a fun one, but the crypto industry has given you the moniker, Crypto Mom. And I think that's because you understand this space at a level that others don't. But what's the history of that moniker? I haven't really like, why does the industry refer to you under that moniker? Well, I want to start out by saying, I do love your show and I listen to it, but sometimes I feel like it's a bit of a foreign language. So I don't want to oversell my knowledge of the space. I'm learning. I'm still learning and I'm definitely open to learning. And you guys are helping me on that journey. But in terms of the moniker, it came after I wrote a dissent on a Bitcoin ETP. And after that, someone came up with the title. And it's kind of.

Starting point is 00:09:19 stuck since then. What was that dissent? I'm just curious about the history around that. Well, when I got to the SEC, I got there in January of 2018. And so that was just about the time people were thinking about doing a Bitcoin exchange traded products. There had been some efforts before I arrived. But then after I arrived, there was a denial of one. And I wrote a dissent saying, hey, you know, I think Bitcoin's ready for an exchange traded product. You're applying different standards. Then you apply to different kinds of products. So what's the story here? Why don't we move forward? And, you know, that was three years ago. And look where we are today. Yeah. Same place. Hester, I think the the crypto mom name came out of, it's kind of a, it's very

Starting point is 00:10:06 endearing term. And it's something I think out of the crypto space, we are really lacking in good representation in our governing bodies, in people that represent what crypto can bring to the world. And, you know, crypto often has, you know, a very tainted brand. There's just generally negative connotations. And it takes someone who can come in with an open mind and see what, what me and Ryan see and be optimistic about the future of crypto. And so before we get this conversation started, just thank you for being that. representative person that our industry truly needs to help facilitate what can be good crypto innovation. Well, I mean, that's nice of you to say. I will say that, you know, I don't advocate for any

Starting point is 00:10:55 particular technology or any particular industry, but what I do think is important and something that we've kind of lost as a nation is to remember that the government is there to serve the people. It isn't the other way around. And so, you know, there are people who are trying to do things and build new things and try new things and some of those experiments are going to fail. I mean, we know that when innovation is happening, a lot of failure has to happen along the way. But this notion that you have to get permission before you can try things, I think is really detrimental to our society. I think that's really what David was referring to, Commissioner Purs, when he mentioned that. Not so much an advocate representing an industry, but an advocate

Starting point is 00:11:38 representing some values that we in crypto hold dear. And I want to ask you about this, because we very much think the values of crypto, open, permissionless, you know, basically self-sovereign for the people sort of financial system aligns very well with American values. Some of the bankless community recently referred me to this article from someone that was written in 1999, a gentleman by the name of Ira Magizener, and apparently he was an advisor to the Clinton administration. The article was called Creating a Framework for Global

Starting point is 00:12:16 Electronic Commerce. And he kind of goes through how they navigated the regulatory waters and sort of the government waters when it came to the internet. Because when the internet arose, there were all of these questions, like what about encryption, what about privacy?

Starting point is 00:12:33 You know, what happens if we get this communication technology to the people? And he talked about the internet as a force for progress, how it aligned and identified with American values, open education, open internet, freedom of speech, democratization, power to the people. I'm curious how you see crypto. Does crypto, does open permissionless blockchains, is that in alignment with the values embedded in the U.S. Constitution? Yeah, I mean, I think it's certainly in line with what we are as a country and the fundamentals of what this country are, which is that we want people to be able

Starting point is 00:13:11 to engage with one another in mutually beneficial transactions that are voluntary. And really, the government should be stepping in only when there's an issue of someone harming someone else. And I think the whole crypto peer-to-peer model is one in which you've got people voluntarily engaging with one another in ways that they find to be beneficial to, you know, each party finds beneficial. And why should we stand in the way of that as a government? I think we should try to encourage that kind of thing because it's better for society when you have people cooperating with one another. So I'm curious, maybe this comes from a recent speech where you articulated this well that you made in February. It's called atomic trading. And I'll note it had

Starting point is 00:14:01 rocket emojis in the title of the speech, at least as it was published in the SAC, so maybe some crypto culture leaking out here. But you made this comment. You said technology does not change our regulatory objectives of protecting investors, facilitating capital formation and fostering market integrity. But for technology to have its maximum benefit, we will need to change our attitude. Specifically, we tend to look at technological innovation in the markets with deep suspicion, and that mindset has to change. I felt like in the speech you were making kind of this dual argument that, hey, like first, our mandate at the SEC as regulators hasn't really changed.

Starting point is 00:14:42 You know, people are still, as we call it on bankless, the base layer of this entire system and people really haven't changed across the centuries. But at the same time, regulators, government specifically has to look at technological innovation with an open mindset rather than suspicion. Can you get into that and why you made those comments? Well, I think one of the issues with regulators is that we, you know, we're people too, right? And that was part of the theme of the speech. We have our own concerns about if something goes wrong.

Starting point is 00:15:15 People are going to come back and they're going to say, hey, why did you let this happen? You know, you could have shut this down before it became a problem. And so we have to fight against that natural reserve on our part, that national, natural conservatism and say, look, we're willing to take a risk as regulators to allow people to, and I hate to use the term allow people, but to not stand in the way of people trying new things, because those new things could be good for society. And so we have to constantly push against that. And of course, we have our mandate.

Starting point is 00:15:52 So we're always going to be thinking about protecting investors. we're always going to be thinking about the integrity of the markets. But if you don't open the doors and allow for technology to come in, people are going to lose out. And we're seeing that. So in our sector, we're very much about getting disclosure to investors. That's a very important part of our mission. But we're very much rooted in this paper-based approach.

Starting point is 00:16:19 And so if you compare what things are like in non-financial sectors versus financial sectors, They tend to be much more backwards, much more old school in the financial sector than in other sectors. And people come to the financial sector and they already don't really want to spend a lot of time thinking about finance. I mean, it's boring, it's intimidating. And then you tell them, and we want you just to look at this thick layer of documents and read through them. And people say, no, I'd rather be doing my online shopping on my phone. And so if we can try to marry those and allow financial firms to use technology to communicate with investors, I think that's a good thing. Now, you all are saying, well, we want to just jettison the old financial system altogether and go for this new model over here.

Starting point is 00:17:09 And my point to that is, you know, hey, why not let people try those things too? Peer-to-peer systems are very good for other reasons. And so we should, as regulators, we should kind of like the fact that people are trying people. to appear because it has certain qualities of resilience that a centralized financial system doesn't have. But again, we tend to, you know, be very slow to allow that to embrace that. Commissioner Purs, I want to get your opinion on what the potential that lies dormant in the crypto world has to offer the world. And I think going back to why this crypto industry has bestowed the title of crypto mom to you is we think that you see that potential in there.

Starting point is 00:17:50 And with that potential that crypto has to offer, what do we have at stake with good regulation versus bad regulation? Like, what do we have to lose if bad regulation happens? And what do we have to gain if we can create good regulation? Well, on the bad regulation front, I think we're seeing a little bit of this now because a lot of things in crypto move so quickly, regulators move so slowly. Other regulators and other places tend to be moving faster. Many of them are moving faster than we are in the U.S.

Starting point is 00:18:19 And so what happens is you have people trying to avoid the U.S. altogether, not only not building stuff here, but they're trying to avoid even dealing with U.S. persons. And that's a very dangerous thing because then we'll miss out on a lot of that growth. I think good regulation is difficult to do because the technology is changing quickly. What we've learned from the past is that it's really bad to bake old technology or any particular technology into the regulations. So I would say on a sort of on a general point, you want to have regulation be as technology neutral as possible to allow for experimentation. That said, I think in the crypto space, we may need to do some specific crypto specific regulation to allow the freedom for some of these things to work. And it's a big job because I think, you know, I've suggested we need to do something to allow token distribution. events to happen, but I think there's stuff we need to do on the custody side. And then there's, if you want to look further down the road, if you want to have a regulatory structure that envisions Dow's, I think you have to think about that as well. But in general, I would say that the hope that I see and the good things I see coming out of crypto is this ability to bring

Starting point is 00:19:45 more people into the financial system to allow them to come in on their own terms. you know, doing a way, and again, I don't think we're going to do away with the centralized financial system. I don't think we're going to do away with financial institutions. You you guys might disagree with me on that. But I think having this other option of really self-serve, you know, just do it, do it yourself, do it with peers, do it on an anonymous basis so that no one is deciding to shut you out of the system because they don't agree with you. There's real, there's real promise to incorporating more of the American population and the world population into the financial system by using these technologies. I got to say, it's so refreshing to hear you articulate it

Starting point is 00:20:34 in that way because that is definitely the language that we preach, and it makes me optimistic even to hear you use terms like Dow's in like a correct context. So glad you're diving deep on this. Can you make the case? So David asked about sort of the costs if regulation is not done right. But I don't think the crypto industry writ large sees the other side of this, which is, what are the benefits if regulation is done correctly? Can you make that case to bankless listeners? Well, I think getting it right means that then you give people the freedom to stop thinking so much about regulation. You know, it kind of disheartens me to listen to these podcasts. And half the time people are talking about regulation instead of what's being built. So one is just removing this distraction from people

Starting point is 00:21:22 so that they can concentrate on what they're best at. But second is, I mean, the United States has a history of being a place where people from all over the world come to work together and build things. Now, you know, I guess one could argue in this new world, we don't all need to be in the same place. Have you guys even met each other yet? Because I know what point? Not yet. David, I think that's becoming a meme. Like, are we ever going to meet? We may never meet at this point, Commissioner Purst. We're not sure.

Starting point is 00:21:51 But, I mean, I feel like you don't even, you know, you've got this really natural interaction with one another without even having met. And so maybe we don't, we're not going to be as geographic-centric. But I still like the notion of having the United States be the place where people want to come because it's a free place. It's a place where they can build things and try things and work with other people who are equally creative and enthusiastic. And so I think if we don't want to lose our place, our capital markets are the best in the world. And I, you know, I stand by that. But we have to remain nimble to do that. So I think I would say, you know, to people who are asking, why does regulation matter? It really does matter to allow people that freedom to be their best at doing what they're best at.

Starting point is 00:22:38 Well, this is what's interesting is because David and I, and I think listeners of the bankless show really believe that this parallel financial system that we're building, this thing called defy is going to play a massive role in the future of finance, in the future of money, in the future of how banking continues on the internet, basically. But you also articulated in your speech, which I'm going to refer to once again, that this kind of can present a challenge to regulators. And maybe defy is one of the bigger challenges that they've seen. We've had waves of challenges with like, what is this Bitcoin? thing and then what is this Ethereum thing? And then like what are ICOs? And now we have this defy thing cropping up. And it doesn't just touch areas of the SEC or CFTC. It touches FinC.

Starting point is 00:23:26 It touches the entire banking financial apparatus in the U.S. I'm going to read a quote out to you from your speech. Decentralized finance will provide a very good test for our ability to regulate with an eye toward protecting the interests of investors, markets, and this is key, not incumbents. Can you talk about the challenges of Defi as regulators are looking at this now and trying to figure out what's going on? Well, the regulatory model, especially a model like the ASEC, is really reliant upon looking at particular institutions as a center point, right? So if there's an issue, if there's a problem, we know who to go to.

Starting point is 00:24:07 It's that financial institution in the middle that's intermediating between two people. with defy you don't necessarily i mean you don't have a central entity to go to and you might not even know who wrote a smart contract right and and if you do is it even appropriate to go to that person i would argue not so you really don't have anyone to hold accountable and i think that that's that's kind of the the challenge it's also the beauty of this because i think when when you when you're dealing with something like Defi where it's really up to the people involved to make their own decisions, the responsibility is clearly on them. And so we have to, that's the message, right? Because when something goes wrong, people want to come to us and say, we'll do something about it. And in Defi,

Starting point is 00:24:58 I'm not sure what we could do about it if there's a problem. So it is, you know, if you think of a decentralized exchange, for example, or an automated market maker, who do we go to when something goes wrong. I don't know who to go to. So that's the big challenge for the regulator. The interesting thing is there's there's really no one to go to. To your point, this is all, this is all code. This is also why we end every episode by talking about crypto as this is the frontier. It's not for everyone. This is sort of the Wild West. And if you're playing in this space, you have to take personal accountability, a new level of personal accountability. But what you just said, That's why I actually do appreciate that disclaimer that you have at the end of your episodes, because I think that's an important message. It's exciting to be part of this, but being part of it means that you are taking a risk. And if you're not comfortable with that risk, you shouldn't walk down that road. Oh, yeah. That's why I think there's going to be, you know, even as Defi grows, I think there's going to be a way for people who aren't comfortable with that to be served. So I think there will.

Starting point is 00:26:11 will be some element of centralization that people can opt into or opt out of. And that's probably the best solution, right, that people can choose their level of comfort and their level of willingness to take risk. Completely agree. This is, we sort of harken this to the Oregon Trail, right? You could get dysentery. You could, you know, break an axle wheel. You could starve on the road. Lots of bad things can happen to you when you're on this other side. But I want to ask a question about regulators' current understanding of this, because I think you are, you articulated it very well, like in Defi, there aren't intermediaries. But we're, like, looking from the outside, not actually sure how many regulators understand Defi at that level yet.

Starting point is 00:26:53 Like some of the conversations, some of the verbiage, some of the tone coming out sometimes makes us think that they think Defi might just be another kind of banking sort of thing, where there are intermediaries, there are custodians at all times. How close are regulators to understanding that we're talking about code, we're talking about no intermediaries, we're talking about a different level of self-sovereignty when it comes to this financial system. I mean, I think people haven't spent that much time thinking about it yet. Honestly, I think it's still, as much as DFI has been having its moment and growing, or maybe its preliminary moment and growing really fast, I just think there's not a lot of attention

Starting point is 00:27:34 on it. I mean, you've got to keep in mind that regulators are just now coming around to the idea that well, maybe Bitcoin is going to be around for a little while. So, Defi is really not on people's radar. But I mean, I think we need to be having these conversations before it really grasps people's attention. Because what I'm concerned about, and I think it's better just to have this conversation out in the open. What I'm concerned about is that when people see things move peer to peer, people who are regulatorily minded, Their initial inclination is to say, let's figure out a way to grab those peer-to-peer transactions,

Starting point is 00:28:14 figure out a way to monitor them, and let's figure out a way to regulate them. And that raises those kinds of inclinations raise really profound questions for us as an American people. There are obviously reasons why we would want to monitor those things. You know, AML, KYC, you don't want the financial system, whether it's the financial system, whether it's the decentralized one or the centralized one to be used to fund activities or other illegal activity. So we get that. I mean, I guess there are other types of things that you would, you know, I think about investor protection. You want investors to be protected. But at the same time, the value of privacy, the value of people's ability to transact without having government watch what

Starting point is 00:29:01 you're doing in your individual financial life, those are really important principles. And I think if we don't put that out there and say we care about these things and you can't just plow over personal privacy and the ability of people to live their lives without being monitored, we're going to end up in a really bad situation really quickly. It's very interesting to me in the more traditional securities land that I occupy and spend most of my time in. We're just now starting this massive surveillance program for every trade in the markets, every in the stock and options markets. Every retail trade is going to be tracked in those markets now. And I don't think that's okay. And people say, well, why don't you think it's okay?

Starting point is 00:29:50 If you have nothing to hide, why do you care? And my response to that is you don't have to have something to hide. You just don't necessarily want some regulator seeing every stock you buy and every stock you sell because there's something personal about that. Now, if you're doing something wrong, of course we as regulators are going to go in and look at what you're doing. Totally fine.

Starting point is 00:30:11 But for the average person just going about her day-to-day business to have to think about being monitored all the time, I find that really problematic. And I think that's going to be a real challenge in the D5 space. And it's one where we really need to confront head on. I completely agree.

Starting point is 00:30:29 In fact, that's been sort of a, a trend on bankless or a theme, I should say, on bankless that as we enter this new digital world as American citizens or as people in their respective jurisdictions all over the world, enter the digital world, we have to be very careful. We don't erode and lose all of the freedoms we fought for in the analog world because this data, to your point, is just so easy to track. And if we don't have that conversation and set up that value system now and even embed those values into our protocols, the people are going to lose. I couldn't agree with you more. How important

Starting point is 00:31:05 is it for regulators and government in general to get sort of good narratives? I was struck by an article that I think Brian Brooks wrote from the OCC, this article about, you know, DFI being sort of like a self-driving car and the regulator's response to that. How was an article like that received? And is that sort of thing helpful to help those in government understand what's happening in DFI? I think it is important. Narrative matters. I mean, we've seen the negative narrative has really carried a lot of weight for a lot of many years. The negative narrative around Bitcoin, which has then sort of shifted to all of crypto.

Starting point is 00:31:45 And then you had all the ICO fraud going on in 2017. That negative narrative has really held on, too. So I think countering that with positive narratives is really important. And there are positive narratives to tell. I mean, this is not, you know, this, this, this is not just one-off stories. There really are positive narratives of people being empowered to make their own decisions of people being able to get paid, whereas before they wouldn't get be able to get paid and get paid and something that's of value to them. You know, so there are, there are really are positive freedom affirming values that I think. and stories that can be told, but I think people need to do a better job of telling those. And they do matter to regulators because that's what, you know, regulators think about when they approach an issue if they have in their mind, oh, Bitcoin is all about, you know, Silk Road or crypto is all about ICO fraud or whatever the current negative thing is, you know,

Starting point is 00:32:51 people will grab hold of that. It's pretty remarkable. And I think you were articulating something that is also a theme on bankless. And that's this idea that while defy and cryptocurrency and blockchain, open permissionless blockchains, we think is going to disrupt finance and disrupt banking, they're also going to coexist and coexist in some pretty cool ways. So we have this idea on bankless we refer to as the defy mullet where you've got like, you know, FinTech in the front, but you've got defy in the back. and I've heard rumor, Commissioner Perce, that you've described, you've used the defy-mullet

Starting point is 00:33:30 analogy in summary. Because I stole that from you and I used it. Don't feel bad. We're here to propagate. People thought I had come up with it. I was like, no. No, no, no, no. No.

Starting point is 00:33:40 We very much want these sorts of narratives to spread because education is so important. But can we talk about that? So the idea of the defy mullet is just a funny way of saying. that FinTech and DeFi crypto systems are going to coexist, and in fact, crypto open-permissionless blockchain systems will make banking and FinTech so much more efficient, right? We're literally building things on legacy financial rails now, and we can rebuild on these crypto rails. I'm wondering if you see the wins there in general for the U.S. banking system and if regulators see those wins.

Starting point is 00:34:18 Yeah, I mean, I think there certainly are lots of opportunities. opportunities for that to happen. We have a financial system. I mean, I spend most of my time thinking about the securities world, but, you know, our payments, our payment system is, is pretty antiquated. I think people would say antiquated might be too strong of a word, but there's definitely room for modernization. And so I think people will be looking to crypto as a way to modernize the underlying infrastructure. And, you know, whether that's with stable coins or, you know, potentially down the road, we're going to have a CBDC. But I think, you know, defy, I think that's why I do like this defy mullet imagery, because you can imagine defy. And as I said, I think some people are still

Starting point is 00:35:08 going to want to have that centralized interface. And so I think they'll do as you can set it up so as much as possible is done through crypto and defy, and then in the front, you do have a way for people to interact with people or with institutions. So I doubt that this is, again, you guys might disagree, but I doubt that this is going to be a world where we just flip immediately from centralized to decentralized. I think centralized parties in the financial system are looking for ways that they can incorporate crypto into what they do and how they serve their customers. Absolutely. Long live the Defy Mullet. Hey guys, I hope you're enjoying the interview so far.

Starting point is 00:35:49 In the second half of this interview with Hester, we get into Gary Gensler and Hester's optimism about Gary's strong level of understanding of the crypto space, but also where her and Gary don't yet see eye to eye. I also bring up the conversation of the role of tokens and how the SEC can ensure the maximum potential of tokens is unleashed while still mitigating their potential for abuse. And then we also ask Hester about how the SEC intends to make sure that regulation can keep up with a world that always seems to be perpetually accelerating. And then of course we get into the conversation of a Bitcoin ETF and even an ether ETF and some of the nuances and intricacies and difficulties that has risen as a result of the slow response to this

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Starting point is 00:39:13 where you can stake your S&X or ETH and earn fees from synthetics. If you want to learn more, had to synthetics.io and join their Discord community. Let's talk a little bit about the SEC. So we've talked about the broadly government regulation, government regulators, and sort of the cost of getting it wrong

Starting point is 00:39:30 and the benefits of getting it right. Before we talk about the SEC and maybe some of the things it's gotten right, some of the things maybe you feel like it's needs improvement off track. Can you do a quick recap for the audience on the SEC? So the purpose of the SEC, I said in my introduction, I think that's a very clean mission statement and actually a pretty inspiring mission statement. Maybe you could reflect on that. And then my understanding is there are five SEC commissioners of which you are one. And there's a chairperson. That chairperson has now changed from Jay Clayton, whom some might know

Starting point is 00:40:04 in crypto, I believe, is Gary Gensler now confirmed or is he in the process of being confirmed? Can you give us some background in SEC and everything that's going on? So the SEC is about 90 years old, and it is showing its age a little bit. It is one of the federal financial regulators. The U.S. is pretty unusual in the number of financial regulators it has, both at the federal level and the state level, and so it can be quite a complicated thicket to work through if you're trying to do something in this space. We are one of two regulators, federal regulators for the capital markets, which is basically those are the markets where investors come and they put capital in,

Starting point is 00:40:51 and businesses come and they take capital out, distinguishing it from the lending sector, which is, you know, the bank regulators handle that. So we oversee the stock exchanges, the options exchanges. We oversee broker dealers and investment advisors. We are not a merit regulator, which means that if someone comes to us with an investment product, our job is to get the disclosures in shape so that an investor can understand what he or she is buying, but not tell them don't buy this product. So we definitely write lots of rules, but our mission really, as you said, I think that mission

Starting point is 00:41:34 statement is a nice, clean mission statement. Protecting investors. And on that aspect, I always try to emphasize that protecting investors means not only trying to prevent them from getting hurt by pointing out to them that their red flags they should be looking for when they invest, things that they should be thinking about by getting them disclosure so they can really make a good informed decision, but also making sure that investors have the opportunities they want to invest in the things they want to invest in. Then on the market integrity point, we think a lot about market integrity. We want to make sure that our markets are places where people feel comfortable coming and transacting. So that's one of the things we think about, for example,

Starting point is 00:42:19 with the recent GameStop and other mean stock events where people were saying, well, the markets, they had concerns about the markets or they were concerned with the volatility and those kinds of things. We care about that because market integrity does matter. And then on the capital formation side, it's really important for people in the United States to be able to come to our capital markets, no matter the size of their business from the very smallest to the very largest, to be able to raise capital to build something that they believe that, you know, that where they're, where they're Their talents are going to be used, so they're trying to build a business. We want to make sure that our markets are there to allow them to do that.

Starting point is 00:43:04 We are, and as you said, there are five of us. We're unusual in that some agencies are headed by just one person. We're headed by five. We're an independent regulatory agency, which means that we're a creation of Congress, and we are responsible to Congress. We're not part of the executive branch, meaning that we're not directly responsible to whoever the president is. We're a politically balanced commission by law.

Starting point is 00:43:32 We're politically balanced. So right now we're at four because Gary Gensler is waiting in the wings to be confirmed. He is, I think, likely to have a confirmation vote sometime this month. And so we could see him coming in sometime relatively quickly. But we deal with lots of things. And so I think one thing to always emphasize when I talk to a crypto crowd is that crypto is one piece of what we do, but it's a pretty small piece of the whole picture. Yeah, totally understood. You know, I'm curious. So assuming Gary Gensler does get confirmed, how much does the chairperson's kind of posture or understanding of crypto

Starting point is 00:44:17 sort of change the trajectory? I think that the narrative around Gary Gensler coming in, is that, I mean, this is somebody who understands blockchains, understands cryptocurrency. And so there's some enthusiasm from the crypto community about his ability to bring this understanding into regulatory policy. Do you share some of that enthusiasm. I do. Absolutely. I mean, I think having someone like him who really has that base layer of knowledge coming in so that then he can really think about, okay, how does this interact with the regulatory structure. You don't have to have the initial conversation. You don't have to tell the narrative of there's something positive here because he already knows that. He's been at

Starting point is 00:45:03 MIT. He's been engaged with students who are really smart, who are working on these issues. He's passionate about that. I can tell just by talking to him. I've known him for quite some time and had a chance to go up to MIT actually and do an event with him a couple years ago. And so I think he'll come in with that really strong base, and that will be helpful in figuring out where he thinks we need to move forward. The chairman of the agency is important in the sense that he not only manages the staff, that's the chairman's job, but he also sets the agenda. So clearly he'll take input from others, but ultimately he sets the agenda. And so this is an opportunity for us to get some of these crypto issues that have been really not moving to move forward. I think it will be helpful.

Starting point is 00:45:52 So it's a good confluence of events. I think the industry has really mature, but we're also getting sort of a fresh start with the new chairman. And so I'm hopeful. So what will be some of your initial ask? Because you get with someone like Gary, you don't have to have the initial conversation about like what is crypto, what is blockchain, what is even defy, maybe, you know, we can even talk in terms of Dow's to Mr. Gensler.

Starting point is 00:46:20 That would certainly be exciting. But what will some of your key asks be for the agenda moving forward as it pertains to crypto? Well, so I think one of the things I'm going to ask for is that I put out a safe harbor for token distribution events, basically that it would allow people to do those in a way that they would know as compliant with the securities laws. I'm not wedded to my particular safe harbor, but I would like him to take that and say, if you're not going to do that, let's think of something else we can do in this space because right now there's such tremendous uncertainty and people really do not feel comfortable from from my understanding and talking to people they don't feel comfortable involving U.S. people in any kind of token

Starting point is 00:47:04 distribution event because there's a potential of an enforcement action down the road. So we need to get some kind of regulatory safe harbor out there for that. Second, I would say that we need to allow traditional financial institutions to engage with crypto, which means addressing issues like custody. Because right now, people just don't feel comfortable doing that. There are lots of questions. I mean, some traditional financial institutions have jumped right in, but many are standing on the sidelines kind of waiting for guidance there.

Starting point is 00:47:37 And then third, I would say, you know, a Bitcoin exchange traded product and potentially an ETH-based exchange-traded product is, you know, one of those is likely to come down the road at some point here. And we always look at these things based on their facts and circumstances. So there's no guarantee. But I think the fact that we haven't moved one of those forward yet is something that I will definitely have a conversation with the new chairman about. Can we talk about the safe harbor for a minute? Because I think that's important. So what specifically what was your original proposal in the safe harbor? Is it basically that there would be, so here's my high level, like, not researched understanding of it, but somebody, someone launches a token,

Starting point is 00:48:21 a team, a project launches a token. They would have a three-year period of time to cross this line of being sufficiently decentralized. And during that three-year period of time, the token wouldn't be subject to traditional securities regulations and that sort of thing. But after that three-year period of time, if there is clarity on the token, you know, crossing that line of being sufficiently decentralized, then it would not be a security at that point in time, be treated maybe as something like Bitcoin or something like ETH. That's a really fuzzy understanding of it, but am I in the ballpark? Good description. Yeah, that's kind of the overview. I mean, during that period, you've got to make

Starting point is 00:49:03 certain disclosures, and you are subject to the anti-fraud laws, so you can't just lie as you're making those disclosures. And I think the rationale behind doing the safe harbor was, look, there is real concern that people who are buying tokens aren't getting good information. So let's try to address that legitimate concern. But let's also try to give people the freedom to build out the networks. Because I continue to not understand how you can build a network if you're not allowed to give your tokens out. It seems like it's not that easy to do. So that's the problem I'm trying to solve with the safe harbor. With the onboarding of Gary Gensler as a commissioner, how optimistic are you that the SEC is going to get done what it wants to get done? Do you think

Starting point is 00:49:51 that he's going to help move the needle? And we could also talk about the progress that the SEC has made with regards to crypto regulation so far. How would you rate what the SEC has gotten done? And how do you think that might change now that Gary Gensler's coming on board? Well, I am optimistic. Look, I don't think we've done a good job so far. And if this is not a condemnation of the staff at the SEC, as I say, there are really natural reasons that regulators tend to be very conservative because they don't want people to get hurt and they don't want to upset the integrity of markets either. And so there's this concern. But I think what you need from the top of an agency is you need to someone to say, and in our case, it's the commissioners, to say we get that there's a risk

Starting point is 00:50:36 to allowing new things to allow. Again, I don't like to use that term in connection with regulation because I don't think that we should operate from a baseline of things not being allowed. I think we should operate from a baseline of things are allowed unless there's a reason not to allow them. But the world we live in is one where, you know, you have to get permission to move forward.

Starting point is 00:50:57 So we need from the top of the agency to be saying, we get there's a risk, but we think there's some really important rewards at the end of the day. so let's move this forward. And that's why I'm optimistic that with a new chairman coming in, we can have a little bit of a reset, a chance to rethink things. You know, I think that Chairman Clayton, much to, you know,

Starting point is 00:51:19 a lot of people in this space are not happy with the approach that has been taken over the last number of years with respect to crypto. Chairman Clayton was a very good chairman and worked on lots of issues, but I think we could have been moving faster on the crypto stuff. In fact, I think one of his new jobs is crypto-related. So I think it is an opportunity for us as institutions are expressing more interest to just take this new turn, to take a new look and to move forward. So I'm hopeful.

Starting point is 00:51:50 I don't think it's only Chairman Gensler either. I think my colleagues see the growth in this space. They see the interest in this space. And so I'm hopeful that we'll all just be able to sit down together, take a fresh look. do some of these things, revisit some of the positions that we've had in the past. But that said, on something like an exchange traded product where you've laid out an analysis and you've said, hey, this is what we're looking for when it comes to a Bitcoin exchange traded product and presumably the same comments would be given with an ETH-based exchange

Starting point is 00:52:24 traded product, then to say, okay, well, no, we're going to look at it in a different way. We're going to look at it the way we've looked at other types of exchange traded products. it's hard to go back and change the course that you're on. So that's why I have said in other contexts, I think we have dug ourselves into a little bit of a hole by taking these positions in the past, which are very crypto-specific positions, instead of applying the standards that we apply to other types of products that we regulate. What would you say are some regulatory wins that the SEC has had? What are some good examples of good regulation that you're proud of that's come out of the SEC? With respect to crypto or just in general? Yeah, with respect to crypto.

Starting point is 00:53:04 Yeah. Okay, you're going to really challenge me here. Oh, wow. Okay, so I would say one good thing that we've done is right before the end of the year, we put out a, it was sort of a pilot program that gave broker dealers five years within which they could experiment with digital asset securities. Now, that begs the question of what's a digital asset security and what, isn't. So that's a difficult question. But I think that was an important first step to saying we get

Starting point is 00:53:38 that this is going to happen. We're trying to set up a framework within which this can happen. Now, we can quibble, as I have, about how limited that was, that, you know, for example, you can't hold any non-digital, non-security digital assets, which means that if you want to get paid an eth or bitcoin and you want to have people pay in that to get digital asset securities, you couldn't do that. And there are other restrictions that I think are too restrictive. But I think that is a positive start. Now, the other thing that we've done is we have established a FNHUB, which is our office of financial innovation, basically, financial technology. And I think having a group of people at the SEC who are thinking about these kinds of things on a regular basis, who are more technologically

Starting point is 00:54:32 adept than the rest of us at the SEC. Those are positive things as well. And they've had a lot of interaction with the community. They have these peer-to-peer meetups, which they now do virtually. So that, I think, is a great interface to have. We've also issued some no action letters. I've been in a no action letter is essentially, it's a letter that you get. You describe what it is you're trying to do. You go into the SEC. They give you a letter back that says, if you do it exactly the way you said you did it and maybe apply some conditions on it, then we're not going to recommend an enforcement action against you. So it effectively gives you comfort that you can move forward.

Starting point is 00:55:15 We've used a couple of those in the crypto space. I think it's not a bad thing to do. although they've been very limited in scope. And I mean, I think in some of the circumstances, I would even argue, I'm not sure why these people even had to come in to get permission to do this, because it doesn't seem an R. Baileywick at all. But I think having that mechanism there and available for people is a positive thing. It does sound like maybe some infrastructure is there that could be useful that wasn't there previously.

Starting point is 00:55:44 But I'm also wondering about this. I'm kind of putting myself maybe in like your shoes or the people who are advocating, for regulators and those in government to take another look at crypto, it's got to be hard to do it when in 2017 you've got a lot of shenanigans going on, right? There are many empty promises and empty tokens. We all know that that era didn't have the strongest projects coming out of it. So I imagine 2017, 2018, it was probably very hard to make the case, you know, among regulators, that crypto is an industry with some staying power and doing some good in the world and doing some good for the U.S. But now I feel like things are different. So we're 2021. DeFi is here. It's actually being

Starting point is 00:56:33 used. There are protocols like Uniswop that are doing billions in trading volume. There are decentralized protocols like compound and AVE that are allowing individuals to essentially take out loans, collateralized backed loans on this open, transparent financial system. We actually have the promise of defy and crypto kind of like growing up. So there's some real stuff that's happening here. I'm just curious. Does that make the case that you're trying to make easier? Is it easier in 2021 versus 2017 when there's some actual real stuff that's built here?

Starting point is 00:57:09 Is it just as hard as ever? Well, I mean, I think you're right to point out that when I got to the SEC in 2018, the Dow report, we had just issued the Dow report to say, hey, people, you know, if you're doing some of this stuff, it could end up being a securities offering, so you better be careful. And then we've brought a series of cases. And I think I should have included that in the list of positive things we've done. I think the cases involving fraud are particularly important to say to people, if you're doing a fraudulent securities offering and you're draping it in a crypto cloak, you know, too bad. We're going to come after you because you're just defrauding

Starting point is 00:57:48 people and, you know, people are people and they will find ways to defraud people. So I think that that was important for us to lay that marker down. The unfortunate thing, and this isn't true only with respect to crypto, but a big part of my job every week is to look at enforcement cases and to vote on them. And so we're getting this constant stream of really bad fact patterns where people are stealing from their mothers, their brothers, their friends, and they're, you know, running off and, you know, using it for all kinds of nefarious purpose, using the money for all kinds of, well, I mean, they think it's positive, but it's pretty seedy stuff that they're using the money for. And so you see this and you're getting this constant flow and you think, wow, everyone out

Starting point is 00:58:38 there is trying to rip someone off because you're seeing so many bad things. And so it can be really hard to move past that even with respect to the traditional financial system. You're suspicious because you do see, and everyone does need to be skeptical, no matter who you're interacting with. If someone is doing something that looks odd to you or they're not answering your questions, you should run the other way. So it's healthy to have that skepticism, but I think from a regulator's perspective, the negative stuff can really overshadow the positive stuff. And so with perspective, to defy specifically and everything that's going on in the defy space, I mean, from my perspective, it's really fascinating to see this, right? It's this financial system that's growing up outside

Starting point is 00:59:24 of the traditional financial system to meet the needs that people have to enable them to enter into financial transactions in new ways. And I think, wow, this is really interesting that these people have kind of come up with this from scratch. I mean, you know, they learn the lessons from the traditional system, but they're coming up with it on their own. They're figuring out how to collateralize these loans. You know, sometimes things work better than others, right? And there have been some pretty big instances of people saying, whoa, I didn't expect that was going to happen. But it's still this trial and error stuff. I find it really exciting. But I will tell you that the average regulator does not find dynamic growth like that exciting. They find it to be very

Starting point is 01:00:06 intimidating because if it's happening, we need to be regulating it. So I would say that the growth, I don't know that you're getting a uniform. Wow, this is really kind of cool that this stuff is happening. I think you're getting more of, as this grows bigger, we better figure out how to regulate it. And we do have to be thinking about those things. I mean, we do have to be thinking about, do these things interact with the securities laws? So I've asked that question. Where does DFI interact with the securities laws. Because I want people in the defy world to be thinking about that too, because I don't want to end up in a situation like 2017, 2018, where people are doing things and then several years later, we're coming in with an enforcement action and saying, you shouldn't have done that. I'd rather have us

Starting point is 01:00:52 be clear up front. Here's where there might be an intersection with the securities laws, or maybe it's not the securities laws, maybe it's the banking laws, so that people know and can make decisions. And then we can think about whether we need to change the rules. And maybe we do, maybe we don't. I think that clarity is definitely what the crypto industry is craving as well. And do you think at least in the near run, we'll see some of that clarity with this sort of reset, as you called it, kind of this blank slate? Is that in one that you mentioned safe harbor, address, you know, custody, Bitcoin ETF, but like clarity is really what the crypto industry is hoping for. Is that going to happen anytime soon. Well, and I think that's the thing that I've found pretty refreshing about dealing

Starting point is 01:01:39 with people in crypto. They're not coming to me and saying, Hester, please don't regulate us. They're coming and saying, just tell us what the regulations are and we'll figure out a way to work around that. I mean, not work around them in a nefarious way, but we'll figure out a way to build our businesses, build the projects that we're building within the regulatory structure. But you can't not tell us what the regulatory structure is and then come in after the fact. and say, ha, you violated the rules that we didn't tell you. So I do think that that's, that's why I'm optimistic. Gary Gensler and I don't necessarily see eye to eye. You know, I tend to be a pretty deregulatory person by nature. He tends to be based on his prior job running the CFTC, the other capital

Starting point is 01:02:24 markets regulator. He tends to take a more regulatory approach than I do, but I think he appreciates the value of regulatory clarity. And so I do. think that we can come to an agreement about laying out some regulatory clarity for people so that they know what they're dealing with. And that's why I'm really optimistic because I think we can take that challenge on and he'll appreciate the importance of that challenge. And so I am optimistic. Commissioner Purs, I'd like to dive right into the Lions Den here and get to the subject of tokens specifically. And as we know, tokens on Ethereum have had a sketchy past. And I think this fits in the model of how technology improves. You know, Bitcoin, one of the first use cases of

Starting point is 01:03:09 Bitcoin was buying drugs on the Silk Road. That is no longer the primary use of Bitcoin. And like in 2017, the primary use of tokens were these, you know, largely vapor ICOs. But now the Ethereum ecosystem is innovating at large and they've turned into defy tokens, which represent capital assets. That's something new. But extending this into the future and something that we get really optimistic about on bankless is the coordinating power of tokens at, as community coordination tools. And we recently saw the power of a recent NFT being sold for half a million dollars that got a bunch of people to coordinate their capital because they wanted that using the power of Ethereum. And it was just purchasing a token that was a piece of art.

Starting point is 01:03:49 And there are many other tokens that represent just the coordinating power of a community at large to come together among shared cultural values and ethos to produce something as a community. And I think in the era of this very digital world that COVID has helped accelerate, and like how we were talking about between me and Ryan, how we coordinated on the internet. And now Ryan's one of my best friends and I haven't met him yet. It's the power of these communities that are built on Ethereum that makes me optimistic about the future. And so with that framing in mind, how do you see the dormant power in tokens and what could be expressed? and then how can the SEC help express that power versus stifling it? I mean, that's a big question, right?

Starting point is 01:04:34 So my first response to that is what is the SEC's role? The SEC's role is not to be the visionaries who are thinking about how these things can be used. It's to set that framework within which this can happen. And I think it's exciting to see, you know, I don't, I will candidly tell you, I don't fully understand everything that's happening in the, in the D5 space. And I certainly don't fully understand everything that's happening around NFTs. I think there's there, I have a lot of learning to do on that.

Starting point is 01:05:03 But I think what, what we should be doing is allowing that experimentation to be happening in figuring out ways that we can, again, provide that clarity so that people can feel free to enter into those transactions. I think we have to stop being so skittish about peer to peer engagements. So I think we're going to have to figure out a way to grapple with the peer-to-peer element. That's something that really is quite new for us. And then we also have to just figure out where our authority lies and where the jurisdictional lines are. That can be something that's pretty tricky, and we haven't really talked about that today.

Starting point is 01:05:45 But I think the SEC has a mandate, but the CFTC has its mandate, and then the FTC has its mandate. So whatever we can do to provide clarity on that, I think Congress has some interest in sort of nudging us along that path of dividing jurisdiction, explaining who whose jurisdiction something is. So that's, I think, a piece that if we were to do could be helpful. But there's a lot of legal work that needs to be done, too, to think about what the legal rights associated with a lot of these things are. And that's a little bit beyond, I think, our ambit, that just has to happen kind of in the private sphere as people work these things out. One of my personal favorite things about this space is how fast it moves, and how fast it moves is extremely intimidating. Like me and Ryan are full time trying to keep up with this space, and even we don't even keep up with it. So I can't imagine what it must be like to be at the SEC, where things just tend to move a little bit slower in the world of regulation. And this acceleration of innovation in Ethereum, it only seems to be accelerating even more. So how do you think about how governmental bodies in the SEC is going to be able to keep up with something that is perpetual. always moving faster and faster.

Starting point is 01:06:54 I mean, that's a big challenge for us. But I think that that helps us think about how we need to regulate, which is going back to this idea of technology neutrality and really setting some broad principles within which this growth experimentation within which that can happen. So that's the best thing we can do. I mean, we do need to have more people. at the agency who know the space better. And that is difficult for a lot of reasons.

Starting point is 01:07:29 You know, I don't think most people in this space really think, oh, I'd love to work at a regulator. And so how do we draw on the knowledge from outside? I mean, I think if people who are listening have ideas about what I can do to get better educated myself or to better, you know, to how we can better educate the SEC and other regulators. I'm certainly open to those ideas, but it will be a challenge going forward. Keep listening to Bankless Commissioner Pierce.

Starting point is 01:08:04 We try our best. Thanks, Hester. Thanks. We're at that point in the conversation now. I'm glad we graduated. Well, since we're at that point in the conversation, so I'm curious to get just your take. You might not have a take on some of these specific things, but as we're in the section of talking about tokens, and you throw out NFTs, what's your take on NFTs?

Starting point is 01:08:26 Does the SEC have any jurisdiction here? Do you have any like ideas in terms of how the SEC might play a role, or is it just too early? Well, I think partly too early, but there is a possibility that if we are talking about an NFT that you're fractionalizing, that's one example where I think the securities laws might intersect. Another example, I think, is if you're dealing, you could imagine NFTs being actual securities, so taking equity securities and turning them into NFTs. And it's a little too early for me to see how exactly that would work, but that would certainly mean that the NFTs would be within our remit.

Starting point is 01:09:12 So I think what I always tell people is if you're doing something where you're going out and you're raising money to build something or you're taking something and you're slicing it up and you're saying I'm going to manage this for you, this sliced up thing and you'll get profits based on it. You've got to be thinking in terms of the securities laws because those things sound like very securities like. Now again, I can't give financial advice. I have to give that disclaimer, but I do want people to be thinking, okay, what is the purpose of the securities laws? The securities laws are there to make sure that people who are buying into something where it's the efforts of other people who are going to make that thing rise in value and the person buying it just has to sit there and wait for the price to go up.

Starting point is 01:10:00 You might be that, you know, that sounds a lot of various securities like. So you might want to be thinking about going and talking to a securities lawyer. So here's something weird, and this is like, you know, kind of defy weird. I'm going to throw it at you and get kind of your response. And again, the response might be like, hey, it's too soon. We don't know enough yet. But there are these things, this self-driving bank, self-driving code, basically, defy protocols, right? And some of these defy protocols actually generate cash flows. And there's this, you know, notion that's become a bit more popular of a governance token that essentially allows, indify protocols, actually generate cash flows. And there's this, you know, notion that's become a bit more popular of a governance token that essentially allows, who own that token to sort of manage decisions within the protocol. And the protocol distributes the cash flow. So it's actually the code. Again, back to that theme of it's not a central intermediary. It's the code that's doing the distribution of some of these cash flows. What's your take on these governance tokens? Is this going to be part of the clarity that we're hopefully going to see from the SEC? Or do you have any takes now? Well, I think that's a great

Starting point is 01:11:03 example of like the kind of question that I would love for people. I'm always trying to get people to tell me where do you need clarity? And I think that's a great example of we need to sit down and wrestle with that. Is that what you're describing to me essentially what the Dow was that we did the Dow report on? Is that really sort of the same type of thing? Are you creating this kind of investment company that's that's decently managed? It's a really interesting idea. And I don't know, you know, I don't know how we think about that in terms of the securities laws. I really, I really think that's, that's exactly the kind of issue I want us to wrestle with at the SEC. And maybe they're, their securities lawyers at the SEC I can talk to and they'll say, well, this is clearly, this is clearly the answer on that.

Starting point is 01:11:52 But I think it's important for us to think about those things because that is kind of the trend that things are going. And I think it shows up in lots of different areas now, where. you get this, you know, where before you had these decisions that were being made by a central person or a central entity, and now those decisions are dispersed, how does that intersect with our laws? I don't think they're easy answers. Hesse, something that concerns me is that with the suite of tools that is available on Ethereum, for every rule or regulation that comes out of some governmental agency, there is a way around that. And not only is there one way around that. There's perhaps infinite ways around that. Perhaps you regulate the ERC20 token that comes from

Starting point is 01:12:38 a Dow that's issuing cash flows, and then somebody puts that into an Ethereum address that wraps it up and puts it into an NFT to escape some sort of rules. One thing, and this kind of goes back to the question of accelerating innovation. The free market, in my opinion, because of what Ethereum enables, will always be able to route around regulation. Does this concern you? Because the experimental, just power of Ethereum concern you as a regulator? Well, what I would say is that's why we need principles-based rules, not technology-specific rules, because principles-based rules are harder to engineer around. But I think another point that regulators haven't really, you know, embraced is that the market can be quite

Starting point is 01:13:19 effective at regulating itself. And I'm not saying, well, there's no rule for regulators. There is a role for regulators, but we should be happy when we see the market regulating itself. And so I've seen that in crypto where, you know, during 2017, there was this ICU. Everyone was pouring money into whatever. But then over time, people started to say, wait a minute, I'm not going to give my money to a project unless there's something behind that white paper. And so that kind of regulation. So even if people are trying to get around an existing government regulation, the people who are interacting with that are going to try to push back, not necessarily, saying you have to do it the old way, but to say you have to do it in a way so that I'm comfortable

Starting point is 01:14:04 interacting with that. So it is a challenge for us regulators. It certainly is a challenge how quickly things are moving and how easy it is to engineer around. But at the same time, we should also view it as an opportunity to incorporate some of that natural market discipline into the way we regulate the markets. I agree. Completely, like the crypto market learned a very painful lesson on the back of the ICO boom when like many of tokens people invested in lost 99% of their value. And I see in this cycle, investors are much more careful. Well, I'd like to say that, but not in all cases. At least the veterans are much more careful. Those who stuck around are now telling people and, you know, talking about sort of, so the market sort of, you know, learns

Starting point is 01:14:52 these lessons the hard way. And that's been good for the industry. I must wish, Hester, we could like put just some caution tape around the whole crypto experiment and just say like, hey, we're running this whole financial experiment over here. We've got this caution tape. If you choose to cross that tape, then it's on you. Like, this is the Wild West. It gets crazy when you cross that line. And we can't, you know, we're not protecting you in every incident across, you know, across that line. It feels to me like if we could take that sort of approach and when you choose of your own volition to go into this cryptos, you know entirely what you're getting into, that would be super healthy. Because to be honest, crypto is just trying to figure this stuff out as we go

Starting point is 01:15:39 too. Like what's valuable, what's not, you know, what's going to stick, what's not, where the product market fit is, all of these things. We're trying to figure it out as we go to. Is there any idea like that that has passed by government or regulators? We just caution tape the whole thing just let the experiment run? Well, I mean, that's a model that I think is a good model. You think of our private markets in the United States, where the public markets are governed by our strict disclosure rules. You have to, public companies have to provide, you know, required disclosures.

Starting point is 01:16:10 In the private markets, we let investors and companies work that out. Now, what we've said historically is we've said, but the only people who can be investors in the private markets are really rich people because we think that they can take care of themselves and afford to lose money if they do. And my view has always been, that's very un-American. We should allow anyone to participate, but we should take this caution tape approach and say, but if you participate in those markets, there's no guarantee that you're going to get the information that you need.

Starting point is 01:16:42 And there's certainly no guarantee that you're going to get the return that someone told you you're going to get. So please exercise great caution when entering into that. that space. But that typically hasn't been how we've worked as regulators. That said, we're not a merit regulator either. And so that is kind of more along the lines of telling people, look, here's the information, you make your decision, but you're making the decision and you're taking the risk. So to some extent, that is that kind of approach. So the only other thing I would say in response to that is that if we were to take that kind of approach, here's what would happen.

Starting point is 01:17:26 Okay, caution tape, big letters, you enter at your own risk, you know, it's not for everyone. Make sure you know what you're doing. No lifeguards. No technical support. Yep, you're on your own. There's no one to call when something goes wrong. Then something goes wrong. Twitter, I open up my Twitter.

Starting point is 01:17:44 Hester, I lost my money in this, you know, D5 protocol. What are you going to do about it? And my response is, I'm going to do nothing about it because I told you that you were on your own there. And we don't have any insight. We don't have anyone to grab hold of there. But I think that then, you know, people are really angry at the regulator for not doing anything. So it really is a responsibility thing. If you want to enter into that space, you've got to take the responsibility when things go wrong.

Starting point is 01:18:13 And you've got to take that as a learning experience and then move on from that and decide, you know what? maybe the defy world isn't for me. Maybe I'm back into C-Fi, but don't come calling the regulator who you told to stay out of it in the first place. Well said. People are people, though. And you always want to have someone to call when something goes wrong. And I get it. I do too. As we come to a close here, Hester, and again, thank you for coming on and being so generous with your time. We have to get to the conversation of ETFs. And so my questions to you is when Bitcoin ETF and when the Bitcoin ETF does come, if it does come, is there going to be one ETF or many ETFs? Well, I think that's a big question that we all have. And again, I don't have a good answer to that

Starting point is 01:18:58 because I thought there should have been a Bitcoin exchange traded product approved based on the documents we got, based on the applications we got. I thought it should have happened a long time ago. So I don't really understand what it is we're looking for. The Bitcoin market is quite mature now. sense that there's a mature futures market. There are a lot of very large players in those markets now that are arbitraging and, you know, bringing price consistency across different markets. So I don't really know that there are other countries that have exchange traded products. We saw Canada just introduced some. I don't really know what we're waiting for. I've not understood that. Again, yeah, bottom line is I don't know when an exchange traded product is going to get

Starting point is 01:19:44 approved. But again, I think it is a natural chance for us to rethink our approach, given that Gensler is likely coming in very soon. But even so, these product approval type things, and approval is not the right word, but allowing these products to move forward can take a long time. And you raised the important question of, is it going to be one? Because the first one is likely to get quite a bit of attention and investor funds? Or is it going to be multiple at the same time. And I think that's a difficult question and another example of why it does matter when regulators wait too long to do something. It makes it much harder to do it. And I think that is a cautionary tale for us regulators more generally. And that's something that you saw with Brian Brooks at OCC.

Starting point is 01:20:34 You know, he said, look, I can see that this is going to be a bigger, not exchange traded products, but that crypto is going to be a bigger thing in the future. And so I'm going to lay down the rails already for it to be integrated into the banking system. That's a really good approach. You do it before it becomes such a big thing that it's such a big deal. And then you allow financial institutions to experiment with it. I would love us to be taking that same kind of approach. The crypto space tends to be pretty good at putting on a conspiracy hat.

Starting point is 01:21:09 And I've got a little bit of that in me myself. And so I want to pose this question to you. In my opinion, the longer and longer that we don't have a Bitcoin ETF, the more and more of a political statement it is to protect the brand of the dollar as the world's reserve currency. Because there's something to say about, like, perhaps not helping facilitate Bitcoin growth if it comes at the cost of the U.S. dollar, which comes at the cost of U.S. sovereignty. And perhaps every single day that there's not a Bitcoin ETF. is an attempt to protect a dollar. How does that sort of conspiracy land with you? I mean, I think you should probably take that conspiracy hat off.

Starting point is 01:21:47 But what I do think that the American approach, the American government's approach to crypto, to Bitcoin, to defy, one needs to recognize, as we talked about at the beginning, that there's a value to these stores of value, exchanges of value to people. and both in the U.S. and outside the U.S. And because of that, we as regulators shouldn't approach it with the idea of, oh, this is bad, but oh, how can we build the regulatory system within which this stuff can function?

Starting point is 01:22:21 But the second point I would make is that I think it's really short-sighted on D-Fi because so much of D-Fi is really in dollars. I mean, it's in stable coins, but they're dollar-stable coins. And so I guess my question to people who push back and say, oh, this is a threat, to the dollar would be to say, well, actually, we're dollarizing more of the world because it's being done through private stable coins. And so that should be something that you actually like if you want the dollar to have more value. And, you know, it's really a positive in people's lives. So that's something that we have to take into account too. So people need to stop being so

Starting point is 01:23:01 concerned about standing in the way of non-sovereign stores of value and exchanges of value, I think that they can coexist with the sovereign ones. And so I don't find that to be a challenge. And I think it's, it's again a really important reminder that regulators need to remember that we serve the people. Our job is to serve the people that does mean protecting them, but it also means enabling them to engage in the voluntary transactions that they find to be personally beneficial. And that, I think, will be in the end, societally beneficial. Hester, do you have an opinion as to the market structure behind ether, the asset? And perhaps if a Bitcoin ETF becomes approved, do you think that an ether ETF would be

Starting point is 01:23:47 not far along behind it? Well, again, I think if we look at the way that the commission has approached Bitcoin, it's a very confusing approach to me because it does try to impose the market structure that we know, which is the equity market structure on the underlying Bitcoin market. And if that same thing were attempted with respect to ETH, I just don't know how that would play out because I don't understand imposing it on Bitcoin and I don't know how it would play out in ETH. So I think it remains to be seen whether someone will try that.

Starting point is 01:24:20 And if so, how we approach that one. Maybe we try the national pride angle. We can't let Canada beat us at the ETF game, can we? Maybe that'll work. Hester, you've been very generous with your time. Thanks so much for spending it with us. And we appreciate your role as a regulator and you're kind of educating others about this. Can you tell us, I guess, maybe a message to crypto, those in crypto, the crypto community who maybe think of regulators or government in a bad light? give us some optimism, right? So tell us the good stuff. And maybe you entered this conversation saying you're optimistic. Why are you optimistic for 2021 and beyond? I'm optimistic because we do live in a place where people are supposed to interact with regulators, provide input to regulators,

Starting point is 01:25:10 inform us, help us to think through these difficult philosophical, legal, technical issues. And so what a wonderful opportunity it is to be in a society where we can have these conversations. We can have them publicly. We can wrestle with these things together. And so I think that's the source of my optimism. It's that people have been willing to engage with me. They've been willing to get over that big regulatory label that I wear on my hat and tell me what they're trying to build. Tell me what the challenges they're facing. Help me to think through these issues. And so I'm optimistic because this is a world in which crowd involvement, you know, that's what DeFi is about. It's about decentralized. talent and decentralized contributions to something that people are building together. We can do that in regulation too. We can take all of the wisdom from people who are building, from people like me, who come from a regulatory background, from lawyers, and we can meld that all together, and we can build a better regulatory framework.

Starting point is 01:26:13 Why not apply that same decentralized ethos to regulation? So that's why I'm optimistic. People forget regulation is just another protocol, and we are in the protocol space. Hester, how can people help? Like those listening, how can people help? You asked for some feedback earlier. Do you want feedback on this sort of thing? How can they get plugged into this?

Starting point is 01:26:34 Yeah, I mean, you know, bring to me issues where you think clarity is needed. Bring to me solutions about what you think that clarity would look like. But even just knowing what the questions are that you have would be helpful. So you can contact me at Commissioner Purse at sCC.gov. I'm on Twitter, but I don't always see individual tweets. So if you want to reach out, you can also call my office, the numbers on the website. I'm happy to talk to you. Happy to get emails from people.

Starting point is 01:27:08 Commissioner Hester Purse, thanks so much for joining us on this episode of Bankless. Thanks for having me. Have a good afternoon, morning, whatever it is where you are. Absolutely. You too. Action items, guys, make sure you read Atomic Trading, which is a speech commissioner purse gave in February. It's absolutely fantastic. We will include that in the show notes. Also, David, Bull Market, we need some five-star reviews. How are we doing on those reviews? Always looking for a few more five-star reviews. If we want to get the bankless world to the top

Starting point is 01:27:39 of the iTunes charts, we need those five-star reviews. There is important conversations being had here like the one that we just had. And if you think that these conversations, conversations are valuable and need to be heard by more people. Give us those five-star reviews wherever you listen to podcasts. And I think this conversation was valuable because David said he's my best friend in this episode. First time ever. I'm going to treasure that. Risk and disclaimers, guys, of course, you've got to talk about risks and disclaimers when it comes to crypto. Bitcoin is risky. Eith is risky. All of crypto is risky. So is D-Fi. You could lose what you put in. But we're headed west. This is the frontier. It's not for everyone. But thanks for

Starting point is 01:28:15 joining us on bankless.

Bankless - 60 - The SEC and DeFi | Hester Peirce

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