The Breakdown - SEC Commissioner Hester Peirce on a Bitcoin ETF, Custody Rules and What's Next for the SEC

Episode Date: December 11, 2020

Hester Peirce is a commissioner at the Securities Exchange Commission, sworn in for her second term in August.  Sometimes referred to as “Crypto Mom,” Peirce has been a fierce advocate for the industry in a regulatory context that hasn’t always been on her side.  In this conversation, she and NLW discuss: Why the SEC’s approach on crypto has been too slow and too ambiguous Why it matters that FinHub is becoming a standalone office The prospect for a regulatory “safe harbor” for crypto What the SEC thinks of the OCC’s crypto custody guidance The prospect for a bitcoin ETF

I've been saying for a long time that I think the standard that we set out to approve a Bitcoin Exchange traded product is one that is not consistent with what we've done in the past, is not consistent with our statutory guidelines for what we're supposed to do. You've got to look at these on their facts and circumstances, but I don't understand why we don't already have one. And I think this is something else that you've discussed in the past, which is because there's this void and that product is not available, people are looking for other ways to get into this asset class through our regulated markets. And why not just acknowledge that and allow that to happen in the ways that people are more used to accessing assets? Welcome back to the breakdown with me

NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, nexo.io, and leveled and produced and distributed by CoinDest. What's going on, guys? It is Thursday, December 10th, and today I have a very special guest for you all. Hester Perse probably needs no introduction, but for those of you who are not familiar with the woman, colloquially known as Crypto Mom, Perce is an SEC commissioner who has been a vocal advocate for the crypto industry often when her opinions were not even close to the mainstream among regulators. She has currently just been sworn in for her second term as an SEC commissioner, and as you will hear in this conversation, remains not only an advocate for crypto and emerging technology, but an advocate for a regulatory

approach that recognizes that technology will inevitably change, and we can't anchor our thinking about regulation to any one form of technology or another. In this conversation, we talk about what was and wasn't accomplished under Jay Clayton's chairmanship, why the SEC has been, in her words, too slow and too ambiguous around crypto, why it matters that FinHub is becoming a standalone office, and many other issues, including, of course, a Bitcoin ETF and the swirling custody discussion. I really appreciate Commissioner Perse taking the time to have this conversation today, so without any further ado, let's dive in. All right, Commissioner Purse, welcome to the breakdown. I'm so excited to have you here.

I'm excited to be here. I'm a fan of your show, and so it's great to have the chance to talk to you. I have to start, of course, with my standard disclaimer, which is that the views I represent are my own views and not necessarily those of the Securities and Exchange Commission or my fellow commissioners. Works for me because I am excited about your views specifically. So I wanted to ask you a few questions, just kind of, you know, we're at this moment of transition. We're at this inflection point. Obviously, Chairman Clayton has announced that. he's stepping down. And so I guess kind of looking back and looking forward, what are some of the things that you feel kind of most happy about what we've accomplished or what you guys have been able to do vis-a-vis the crypto industry over, you know, the last kind of period? And what do you think are the issues that you're kind of the highest on your priorities list moving into the next year? I mean, looking back candidly, I'm not that happy with what we've done with crypto.

I think that the approach we've taken has been too slow and too ambiguous. And so I think one piece where we have made some good progress is we've brought cases against some of these fraudulent actors who purport to be in this space. I mean, frankly, they're not even in this space. They're just trying to raise money using the crypto label. And so that's important to have the enforcement presence there for those kinds of things is good. And then just this week, actually, or maybe it was last week. I'm losing track of time.

We just elevated our FinHub to a formal office status, which means that the head of that office will report directly to the chairman. And I think that that is a good, it's a good sign of the seriousness with which we take FinTech, not just crypto, but it's fintech more generally. And so I think that that should lead to good things in the future. And then we also just recently did a no action letter, which we've done several no action letters in the crypto space. I think the most recent one was maybe the most interesting in terms of doing something or really giving relief to do something. There's still so much more work we have to do, though.

So looking forward, I'm just looking forward to us really taking seriously the calls that we've been getting for so many years now for clarity around a number of things. And for really being willing to give investors access to this asset class in ways they're used to getting access to other asset classes. Yeah, I mean, it's definitely the story of right now shows that there's clearly the demand. And I think, you know, unlike 2017, this rally is full of people who are, who want to do it in the right ways, right? I mean, not to say that there weren't those good actors in 2017, too, but there was, to your point, a lot more fraud and sort of just advantage taking of retail, you know, and I think that that's such a clear difference now that it feels like the right moment to really push it through and make it the asset class that people want it to be and

that people already treated as. Well, I think it would have been the right minute a couple years ago, but I mean, it's certainly even more ripe right now, so agreed. I wanted to ask, you actually, you kind of jumped into it, the FinHub becoming a standalone office. I guess for people who don't understand what the significance of that might be, why is that potentially so beneficial to both crypto and sort of other areas of emerging tech? Well, I think getting a status like direct report to the chairman means that you have some of the chairman's time, which is a very valuable commodity at the commission. A lot of people in the crypto space, I think when they think about the SEC, they think that all we're thinking about is crypto matters. I mean, they don't really

think that, but they probably think we spend more time thinking about that than we actually have time to think about it. So the agenda and the chairman's time is really at a premium. And so anything you can do to elevate the status so that this person who heads the office, in this case, Valce de Panic, can get access. And it's not that she didn't have the chairman's year before, but there's no chain to go through to get to him. She can just go directly and talk to him. So that's really positive. And so I think that means that we're going to see more action in terms of regulatory clarity coming in the next year. Although, again, that will depend on who ends up becoming the next chairman of the SEC. Yeah, of course. I guess that, you know, this is, I think, a really

important point that you made in terms of, for those of us in the crypto industry, you know, our engagement with the SEC is entirely focused on this part of your mandate. But if you look across, you know, I think you guys published recently just kind of the list of things that you had done. And it's like a tiny little piece of it is crypto, right? So much as, you know, other parts of the market. And so it makes sense that kind of part of the importance of this new status for the FinHub is just access and prioritization. This episode is brought to you by Crypto.com, the Crypto super app that lets you buy, earn, and spend crypto all in one place, and earn up to 8.5% per year on your Bitcoin. Download the Crypto.com app now to see the

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service. So when you sign up, use the promo code coin desk or just visit level.com slash coin desk. That's lvl.com slash coin desk to get started today. I guess I wanted to ask about prioritization in general and kind of, you know, a lot of what people are thinking about now is we're in the COVID-19 era. Hopefully we're going into the kind of vaccine post-COVID-19 era. Has this changed anything about how the SEC had to engage with markets. Will there be long-lasting impact, do you think, going into 2021? I certainly think so. It's changed the way we work. It's changed the way everyone has worked, obviously, but the commission has really been quite seamless in its move to fully work from home

mode. And it's also meant that we've engaged with industry, which was also shifting to work from home, about rules that we have on the books that were very much, um, created and moored to a world in which people are in the office and everything is working via paper. And I think you've talked about this. I think other people have talked a lot about how this COVID period has really accelerated a lot of development that would have taken years and it's compacted it into a matter of months. So I think we're seeing that here too. We've provided relief to industry about things like in-person meetings. there's some requirements that you have to have in-person meetings or that you can't deliver things electronically.

And so it's that relief that we provided, I think, will end up becoming, maybe not exactly in the form that we gave it, but we'll lay the groundwork for more permanent relief and will help push something that I've really been trying to push here at the commission, which is we cannot assume that everything works the same way it did in the 30s. I mean, things have changed, the 1930s. things have changed a lot since then, and we've got to embrace rules that are technology neutral because we don't know what the technology 10 years or 20 years from now will be. Yeah, I think it's really interesting. I mean, in some ways it sounds like part of the force, it's not just the specifics. There are obviously a lot of specifics, as you just discussed, as it relates to, you know, potential work from home rules, in-person meetings.

But there's also just a mindset shift of a real acknowledging this year that if we weren't clear yet that everything is going to change at an accelerated rate, 2020 has really made that point very clearly. And we can't design against paradigms that are outdated by the time the rules, you know, the ink tries. Yeah. And so, I mean, I, there's so much that's sad about this year, but I also at least take some comfort in the silver lining that it really has, has brought forward the conversation about some of these things. And it's, it's sort of cast doubt. on some of the arguments that people have made, which are, you know, well, older people aren't comfortable using computers. Well, you know, now we're seeing pictures of them using computers

in nursing homes so that they can talk to their, to their family. So we know that's not true anymore. Yeah. I always am for betting on people's capacity to learn and develop and be smart rather than assuming constraints in those areas. I mean, that's a really nice way of putting. because I have to say that that's one fight that I feel like I'm constantly fighting here at the SEC, which is people do have this amazing capacity to develop and learn new things. And we're always assuming, and I'm being a little bit unfair here, but it is a conversation we have here that people do have capacity, and we should recognize that they have that capacity,

not just assume that they need us to hold their hand through every step of the way. Yeah, I think people tend to adapt to how much the people around them and the institutions around them invest in their capacity, I think. Speaking of which, so there's a little bit of a detour, but one of the things that you have been very vocal about is wanting basically safe spaces for those new experiments to happen, for people to try adapting, to see where it is, do safe harbors, you know, kind of remain an important objective for you? or are there other ways to tackle some of those same issues? Look, I think there's still room for a safe harbor. I think that it's something I hope to talk to the new chairman about. I proposed a particular safe harbor, but I'm not wedded to my particular safe harbor,

though I am hoping to work on a version 2.0 here. So at least we'll have something to talk about. But I think that that's one really important way to do things. Using the no action process as we have done is one way to do things. I'd like to see a cross-agency sandbox of source where you could do some experimentation that would allow you to talk to different regulators at the same time, because right now in the U.S., we have so many different financial regulators, both at the federal level and then at the state level, but at least at the federal level, we could put together some kind of cross-agency sandbox.

Now, there have been criticisms of that approach. Some for me. I mean, I tend to not think that it's great to have regulators sitting in the development sandbox with the innovators because it constrains what you do. But on the other hand, some people have complained that sandboxes are just a way for new technology to avoid rules that should apply to everyone. And I think that's a really short-sighted approach because some of these new technologies really do have the ability to transform options available to people who haven't had options in the past. Speaking of options, I want to ask another question around crypto custody. How much is the SEC paying attention to the sort of changes going on around that? Obviously, we've seen changes from the OCC or at least clarifications from the OCC. There's now kind of, it seems like,

brewing battles. There's certainly a lot of rumors swirling around crypto Twitter. Is that something that you guys are actively paying attention to? We are. So the OCC, I think, has been a really helpful entrant in the in the discussion with Brian Brooks there trying to really make people realize that this is this is going to be the wave of the future and we we might as well admit that and accommodate it and so he's made some some very positive steps over there we see what this what's happening at the state level and somewhere like Wyoming also helpful to move that conversation forward so we're thinking about it in terms of of that interagency context and inner, interregulator or inter-jurisdictional context,

but also even within our own space, we're thinking about custody, what it means for an investment advisor or a broker-dealer to custody digital assets. Those are things that are very much on our radar and getting our attention. I am a little bit discouraged in the sense that it's taken us a really long time to get out some basic guidance. As a consequence, a lot of people have been sitting on the sidelines waiting and hoping that we would move forward. So I do think that that's something we need to continue to try to push to get some clarity around guidance for regulated entities in our space. Well, Commissioner Perce, I know you don't have a ton of time today.

I really appreciate you being here. I have two more quick questions to round us out. The first, because the listeners would absolutely kill me if I didn't ask, when Bitcoin ETF? spelled incorrectly, of course. I've been saying for a long time that I think the standard that we set out to approve a Bitcoin Exchange traded product is one that is not consistent with what we've done in the past, is not consistent with our statutory guidelines for what we're supposed to do. Again, you've got to look at these on their facts and circumstances, but I don't understand

why we don't already have one. And I think this is something else that you've discussed in the past, which is because there's this void and that product is not available, people are looking for other ways to get into this asset class through our regulated markets. And why not just acknowledge that and allow that to happen in the ways that people are more used to accessing assets? So there's a non-answer for you. All of these things are, you know, they could come with all a caveat of, I don't know, it's about this and about this. So I appreciate your candor anyways.

I guess the last question for you is a little bit more philosophical, and it's something that I think about a lot, but do you think we can keep Bitcoin and crypto from becoming another partisan football or is it already too far? You know, is this something where we can actually have meaningful engaging bipartisan conversations, or is it doomed to just get locked in the same cycles we find with it seems like every other issue? Well, I'm optimistic on that front. I think that there's a lot of interest on both sides of the aisle in this issue. Some's negative. Some's positive, right? But you get positive and negative coming from both sides of the aisle. And so I really think that this is one where we can come together.

I mean, I think, I hope that's one of the themes of 2021 is realizing that we are in, we're all in this together and we can work together. And maybe crypto is one area that we'll join together and work together on for the good of everyone. I certainly hope so. I love that optimistic note, and I really appreciate you hanging out today. I can't wait to have you back to talk more about these issues. It's obviously super fast moving and dynamic, but appreciate your leadership on them. And yeah, I appreciate you hanging out today. Well, thanks for your time and keep up the good work. Thank you. I want to reflect on this last question that I asked for just a minute. Can we keep crypto from

becoming another partisan football? On the one hand, I feel like this is a pipe dream. We live in a political economy where the division of the world into easy groups that have their talking points customized for them has been extremely profitable. It is the way of the world. It is the law of the land, it seems. But it doesn't have to be. And I don't think there's anything inherently left or right about these technologies. The idea of a technology which is pro-capitalist, but at the same time empowering to individuals and groups, regardless of where they sit in the capital hierarchy, is something that should transcend these silly, stupid divisions that ruin us over and over again. I think Commissioner

Perce is a force for the independence of innovation, and I appreciate all of her efforts to keep this industry moving forward as such. I worry, when I see things like the Stable Act and their clear intent to go after a Trump appointee at the OCC, that this is going to fall into the same traps that it seems like every other issue does, but I guess we'll just have to wait and see. For now, I appreciate you listening. I hope you enjoyed this conversation. And until tomorrow, be safe and take care of each other. Peace.