Full text of the speech by U.S. SEC Commissioner Hester Peirce: Reflecting on Current Cryptocurrency Regulatory Policies from Six Perspectives

On October 8, Hester Peirce, a commissioner of the U.S. Securities and Exchange Commission (SEC) known as the "Crypto Mom," delivered a speech at the Texas Blockchain Summit. She began by drawing an analogy between the crypto world and the "Wild West," reflecting on some of the SEC's policies regarding the regulation of the U.S. crypto market and the current reasonable scale of regulation.

Peirce believes that in this rough, wild but vibrant crypto world, filled with wealth, opportunities, and various adventures, the ecosystem itself will gradually form its own regulatory rules. Moreover, it is evident that the government's simple and crude regulation is not suitable for the capricious and ever-changing crypto world. If the SEC strictly regulates from the perspective of protecting investors' interests, keeping people out of the "Wild West," it is, in fact, a form of "more tyrannical tyranny."

Chain Catcher has organized the full text of Hester Peirce's speech as follows:

I must first state that my remarks at the Texas Blockchain Summit represent my personal views and do not reflect those of the Securities and Exchange Commission or my fellow commissioners.

However, the habitual reference by Chairman Gensler to the crypto universe as the "Wild West" caught my attention; he is not the only one to refer to the crypto space as the "Wild West." The so-called "Wild West" represents a lawless place, a society where the best reactions come from the worst moral gunmen who win at the expense of others.

The Merriam-Webster Dictionary defines the "Wild West" as "the violent, lawless frontier period of the American West." It seems like a no-brainer for the government to enter such an environment to establish some order. But today, I want to offer a different perspective on the "Wild West" and the direction of crypto regulation.

In the past, the American West called to those dissatisfied with the rigid and stale Eastern society, who hoped to build a new future in a more promising place. The western frontier welcomed adventurers, outsiders, idealists, free thinkers, and restless souls.

I come from Ohio, which was once seen as the West by people from the coastal states of the East. People from Connecticut left their relatively dense and orderly hometowns, carrying grand dreams westward to this beautiful and fertile region, which was also fraught with dangers, disappointments, and hardships.

As described in The Western Reserve: The Story of New Connecticut in Ohio, life in the West was initially very difficult: "In the first quarter-century, conditions were terrible; without the construction of a transportation system and the supply of currency, no improvements could be made." These stories indeed occurred, as Moses Cleaveland and his companions explored the wilderness, and the pioneering spirit and boundless energy that supported the first settlers through their hard years in the clearing of the woods never wavered. This spirit and energy became the foundation of Ohio's prosperous industrial, educational, and cultural center.

As McCullough explains, for these immigrants, the West offered hope and promise compared to the East: since the end of the Revolutionary War, an unprecedented financial panic had engulfed this new nation. The government's resources and credit had been exhausted, the currency issued by the nation was nearly worthless, trade was stagnant, and farmers were imprisoned for debt. In fact, the severe economic depression after the war lasted longer than the war itself. But in the West, there were unprecedented resources, vast and fertile lands. The West was opportunity; the West was the future.

In the absence of a formal government, the West did not seem as desolate and savage as legend suggests. The market did provide effective protection and arbitration mechanisms, either as a complete substitute for a formal government or as a supplement to it.

History does not allow us to see how these individuals evolved over time to meet new challenges, because, as Morriss points out, "once the West had wealth, the arrival of government was inevitable." Similarly, this is also inevitable in the crypto space.

Now let us turn our attention to the crypto frontier, which, like the Wild West, seems wild at first glance: there are many coders, speculators, and vendors; this new West also has struggles between protocols and internal conflicts, friendships built through shared hardships and successes, personalities, passions, dreams, hardships, spectacular failures, and extraordinary victories.

But just like the past West, order and discipline have always existed amid all the bumps and turmoil. Because crypto is built on code, the code itself is the regulator of behavior. But crypto is also built on people, who hold each other accountable not only through unrestrained public dialogue but also through the use or non-use of protocols. Protocol users, competitors, bug bounty hunters, and seasoned skeptics monitor protocols for signs of centralization, easily leaked admin keys, slow speeds, high costs, loose security, and so on.

System interruptions, fierce competition, insider trading incidents, or flaws exposed in the code will trigger an inevitable storm. Decentralized communities collaboratively seek solutions to emerging issues. Although there is still more work to be done, these mechanisms of cooperation and competition help to clear up problems in the crypto space. Self-regulation and the ongoing demands of the crypto community for government regulators to clarify that unrestrained is not the mainstream culture of the crypto frontier.

Finally, I want to say that it is not too late for government regulators to establish clear rules that respect the uniqueness and challenges of the crypto space.

Is there really legal clarity around digital assets?

A fundamental conflict between the SEC and the public is how much legal clarity there is surrounding digital assets. I acknowledge that there is indeed uncertainty regarding the safe harbor regulations proposed after the token issuance events, specifically on the question of "when the issuance of cryptocurrency assets involves securities law." However, the SEC's general attitude is that it is clear, and there is no need to worry about safe harbors.

The clarity of the concept of "when crypto assets are securities" is sure to surprise the lawyers who have struggled with this issue for years on behalf of crypto projects. For example, the public feedback we received involved the commission's statement regarding broker-dealers holding digital asset securities, which distinguished between "security-type digital asset securities" and "non-security-type digital assets," the latter of which we do not allow to be held by special purpose broker-dealers.

In response, many commentators have called for clarification on what constitutes "security-type digital assets," claiming that it is unfair to expect broker-dealers to analyze due to a lack of transparency. Furthermore, if transparency essentially means that almost all tokens are considered securities, then why establish a committee position for special-purpose broker-dealers?

Are we enforcing rules through settlements, or compromising for ambiguity?

The SEC ultimately believes that most digital assets are securities. Even if we take enforcement as a way to provide transparency, it does not work. The final determination of a security only occurs in the rare cases where a court (not the commission) rules on the matter. Even in those cases, determining that a token was initially offered as a security does not indicate that the token itself is a security, whether at the time of the initial sale or in secondary trading.

However, most of our cryptocurrency enforcement actions are not litigation but end in settlements. In cases involving platforms, the SEC typically only states that some digital assets are securities without specifying which ones are securities or why they are securities. When one party settles with the SEC's enforcement action, it often seeks to end the case. It has no incentive to force the SEC to provide a clear legal analysis as a condition of the settlement.

I raised this issue with Commissioner Elad Roisman in the Coinschedule settlement. Perhaps this approach is understandable, as the parties to the settlement may not include those most interested in the security/non-security status of the token. However, if the SEC cannot easily articulate an undisputed legal theory to explain why a specific asset is a security, then is the situation as transparent as the SEC insists it is? Ambiguity ultimately benefits us because it effectively forces any participant with any connection to digital assets into our regulatory jurisdiction.

Are we fighting for investors or fighting for jurisdiction?

As stablecoins become increasingly popular, they have attracted the interest of various regulatory agencies vying for regulatory status. Should stablecoin issuers register as banks? Should stablecoins have deposit insurance backing? Should the FSOC designate stablecoins as systemically important? Are stablecoins money market funds? Should the CFPB intervene to protect consumers?

Given the astonishing growth of stablecoins, it is understandable that regulators are questioning whether they fit within the existing regulatory framework and what their implications are for consumer protection and long-term financial stability. However, as they conduct this inquiry, I hope they will agree on the following points:

1. Many people find stablecoins to be a convenient payment tool that facilitates the movement and exchange of cryptocurrencies, so any regulatory measures that restrict the use of stablecoins must be justified by benefits that outweigh the loss of convenience.
2. Since stablecoins are not uniform in terms of operation, pegging, underlying reserves, or transparency, regulators should be cautious in making broad generalizations.
3. Applying laws too broadly to restrict stablecoins may inadvertently limit other products and services.
4. Attempting to dismiss stablecoins based on the experiences of 19th-century private banknotes is based on a misunderstanding of both.
5. While it is good to try to understand stablecoins, fear of them is unwarranted. As Federal Reserve Vice Chairman Randal Quarles explained, "We should not fear stablecoins. The Federal Reserve has historically supported responsible private sector innovation. In that tradition, I believe we must fully consider the potential benefits of stablecoins, including the role that dollar stablecoins may play in supporting the dollar's role in the global economy."

Are we protecting investors or depriving them of opportunities?

The analogy of the crypto frontier to the "Wild West" illustrates concerns that uninformed and unwilling investors may be harmed by participating in the crypto market. For those who do not recognize the opportunities and value of the crypto market, the lack of clear regulation in the U.S. may actually serve as a way to protect investors from harm: if ambiguity prevents them from participating, then all the better! From this perspective, some projects and platforms excluding Americans due to regulatory uncertainty is actually a good thing. Only those projects that fail to keep Americans out will face enforcement actions.

The widespread geographical exclusion of Americans should raise concerns among U.S. regulators, even if it does alleviate their regulatory burden. For example, the recently publicized airdrop events excluded Americans. These tokens are a way to reward network participants. Why would we want American participants to be excluded from receiving their deserved rewards? After an airdrop, look at the comments on Twitter; the SEC will not be appreciated.

Whether through slow product approvals or the use of creative application standards, regulators cannot allow investors access to certain products and services. The commission's approach to collective cryptocurrency investment tools illustrates this issue. Currently available products include over-the-counter products and mutual funds with limited exposure to cryptocurrency futures, exposure to the cryptocurrency industry through ETH, and publicly traded companies holding cryptocurrencies on their balance sheets, which are inconvenient, indirect, and costly for investors compared to spot crypto-based exchange-traded products offered in other countries. From the perspective of a regulator that does not like crypto products anyway, there is no loss.

However, even if investors choose not to purchase specific products, they will lose valuable participation opportunities, as the ability to choose to participate is also valuable. As C.S. Lewis pointed out, "Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive… this kindly meant stab is the most intolerable insult."

Are we pretending everything is centralized so we can regulate it?

Chairman Gensler rightly pointed out that labeling something decentralized does not necessarily make it decentralized. We saw this phenomenon in a recent so-called DeFi enforcement action, which accused a company and two executives of illegal issuance.

But what happens when we deal with a protocol that facilitates peer-to-peer or individual-to-code transactions without a central intermediary? Is anyone held accountable in a way that complies with the rule of law and constitutional principles? Can we hold the developers of open-source protocols accountable?

Perhaps we should not even discuss these issues. After all, if people are using automated market makers to exchange cryptocurrencies, are they aware that the code determines how the transactions will occur and that no one is prepared to reverse bad trades? Truly decentralized platforms do not fit the regulatory approach designed for centralized finance.

As one commentator observed, "So every time they say 'the platform must do this' or 'the platform must do that'—what does this 'do' mean?! Implicitly, the only way to understand these comments is through the interpretation of securities market rules, which clearly define what types of software are allowed to be written, but that is impossible."

It turns out that many people prefer to deal with centralized intermediaries in the crypto space. If these entities engage in securities activities, we can regulate them (of course, assuming we allow them to actually operate within our regulatory framework), but the DeFi protocols that people choose to interact with should be viewed from a different perspective. In the words of attorney Collins Belton, "The SEC may be the best motivation for making something truly decentralized," and that is not a bad thing for cryptocurrencies, after all, cryptocurrencies pride themselves on being decentralized.

Are we catching bad actors, or creating a "Catch-22"?

Good participants want to know which digital assets are securities so they can figure out how to comply with securities laws, but in my nearly four years on the commission, we have done little to explain what that would look like. I attribute the commission's failure to myself and my colleagues.

We simply do not allow staff to freely consider the challenges of how cryptocurrencies operate within the securities framework. The way forward is not to drag entities into the commission through enforcement actions and force them into a regulatory regime that does not actually fit them. Instead, we should take a systematic approach to provide answers to the key issues that market participants care about.

In an enforcement action against the cryptocurrency trading platform Poloniex, I raised a paradox: treating digital assets as securities means that platforms trading digital assets and intermediary entities must register with us, but they cannot operate as registered entities under our existing rules, so they will be unable to register.

In this dissent, I asked some questions that I believe are worth repeating, because once at least one digital asset traded on the platform is deemed a security, a complexity arises:

1. Can the platform hold customer assets, which is a typical feature of centralized crypto trading platforms? If so, how should this be done, considering our concerns about the custody of digital asset securities?
2. If not, are there enough broker-dealers to establish a liquidity market through the registration process?
3. Do their registration conditions allow them to act as market makers or facilitate trades on behalf of retail investors?
4. Can the platform trade both securities and non-securities simultaneously? If not, how can the platform use two entities (one for broker-dealer trading of digital asset securities and one for non-securities as an affiliated non-broker-dealer entity) to provide customers with a seamless or at least serviceable trading platform, for example, wishing to trade digital assets and digital asset securities simultaneously and using non-security digital assets to pay for trades of digital asset securities?
5. How do trading platforms and their customers determine whether a specific digital asset is a security?
6. If a token is sold as part of a securities offering as an investment contract, how long must the secondary trading of that token be viewed as a securities transaction by the platform trading that token?
7. What is the mechanism for registering a token as an equity security as part of an investment contract under the Securities Exchange Act?

There are also some questions I did not mention in my dissent. For example, how do broker-dealers or trading venues handle non-digital assets and non-digital securities while dealing with digital asset securities? How does the Securities Investor Protection Act apply when broker-dealers engage in digital assets? What is the appropriate role of transfer agents in digital asset securities, if any? Who can custody digital assets that comply with securities laws? Should the Financial Accounting Standards Board address crypto accounting issues? How does a platform discover that the securities it is trading, due to the new clarity of the definition of digital asset securities (assuming clarity arrives at some point), comply with regulations?

If we intend to require entities in the crypto world to register, we must allow our staff to engage in the difficult exploration of how the rules will apply based on the unique aspects of the business and seek broad public input through a transparent regulatory (rather than enforcement) process while doing so.

Conclusion

These questions are intended to stimulate deeper cross-government commitments to seek reasonable regulatory solutions. The risks are high because the government is entering the crypto space with a better commitment than the existing informal disciplinary mechanisms. We do have regulatory experience that can play a role here, but we must proceed with caution. Government agencies, when considering how to regulate, should be led by Congress, collaborate with each other, and actively consult the public who are bound by and protected by the rules.

I might take a more lenient approach than other regulators in handling this entire process, but the real question is not what I or any other regulator wants, but what you, the expected beneficiaries of regulation, want. I look forward to seeing what you will achieve in the crypto space once we set some reasonable and clear regulatory parameters.

To conclude with a popular phrase from a crypto podcast, which follows appropriate warnings about the risks of the field, "You are heading west. This is the frontier, and it is not for everyone."

Thank you for allowing me to visit you on your westward journey.

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