Fintech

She's not your 'Crypto Mom': Hester Peirce's fight with the SEC

The commissioner, who often finds herself at odds with her own agency under Gary Gensler, wants the SEC to break its “unhealthy dynamic” with the crypto industry.

SEC commissioner Hester Peirce

"My main criticism of the approach this agency has taken is that it is leading with enforcement. It's failing to sit down with people and provide them a productive path to compliance."

Photo: SEC

SEC Commissioner Hester Peirce is celebrated in memes as “Crypto Mom.” She’s considered crypto’s staunchest ally on a regulatory body that’s become the industry’s nemesis.

It’s an off-target moniker and a flawed portrait, Peirce said.

“It's kind of funny because I don't have children,” she told Protocol in a wide-ranging interview. She denies being an advocate for the crypto industry and thinks it’s a bad idea for people to think of the government “in parental terms.”

But Peirce is sympathetic to the crypto industry’s key complaint about the SEC: that under Chair Gary Gensler the agency has failed to offer adequate guidance to the industry on the regulations that apply to cryptocurrencies and digital assets.

“A lot of people say to me, ‘Just tell us what the rules are. We'll figure out a way to comply with them,’” she said.

The SEC’s heavy emphasis on enforcement, she argues, is a mistake. When the agency announced last week that it would nearly double the size of its enforcement team, a plan that entails hiring more supervisors, investigative staff attorneys, trial counsels and fraud analysts, she asked in a tweet: “Why are we leading with enforcement in crypto?”

Peirce elaborated on her criticisms of the SEC’s approach to crypto in her interview with Protocol. She shared what she thinks of Gensler’s leadership and why she believes there’s still an opportunity to “break this unhealthy dynamic” between the SEC and the crypto industry.

This interview was edited for brevity and clarity.

Why are you critical of the move to expand the SEC’s enforcement team?

The number of lawyers you have looking at cyber issues and crypto issues in itself is not the issue. The issue is that we have a dearth of work being done at the agency on the regulatory framework for crypto assets.

So why don't we think about spending more of our resources to try to work on a framework that makes sense and address some of the real questions that are out there?

We can do work on the enforcement side. There's a lot of fraud to go after in this space. There's certainly a lot of cyber issues. My question is: Why not provide guidance on all of those subject matter areas?

So it's that lack of balance. We sometimes tend to fall into the trap of thinking about ourselves as an enforcement agency. But we really are an agency that has a lot of tools to build a good framework within which our capital markets operate. One of those tools is enforcement. But it should never be the leading tool that we use unless you're dealing again with something like fraud.

Educate me a little bit, commissioner. Chair Gensler does not have to consult with the commission or get a vote to implement something major.

No, and that's a good question, because the way the SEC is set up, the five of us share the responsibility for voting on rules, for voting on enforcement actions. But the chairman is the operational head. The staff reports to him. He makes the budget decisions, so a lot of that is concentrated in the chair.

When did you first hear about bitcoin and crypto and what was your reaction?

I think it was when I was at George Mason [University]. Some of my colleagues were working on issues around bitcoin. And my reaction was: It's really interesting, this idea of a non-sovereign type of value that allows you to transfer value over the internet. That's a powerful concept.

We've been able to transfer data over the internet and now we can transfer value. And, you know, money has always been what people think. They decide they're going to put value on it, right? And so here's this new idea. So I thought it was certainly an interesting development.

How do you feel about being called “Crypto Mom?”

Well, on the one hand, I think it's kind of funny because I don't have children. And so I always say, “Well, I always thought if I had children, I would never know what they would turn out to be like.” And so indeed, this is certainly the case.

On the other hand, there are a couple reasons that I push back a little. One, I'm not an advocate for any industry. I think innovation is really important. And I think the regulatory relationship to innovation is very important.

But I also think it's important for people not to think about the government in parental terms. Because when you do that, then you sort of think, “Oh, I can sit back and, you know, Mom and Dad are gonna take care of me and if something goes wrong, I'm gonna go live in their basement or they're going to bail me out.”

This country is about taking responsibility for your actions, making decisions for your own life, but the government is there to help you in the sense that we at the SEC help you get the information you need to make decisions. We're out there if there's a fraud. We can go after the fraud. But responsibility still lies with you, the decision-maker.

I think no matter what you're doing with your money as an individual, you need to be using your own brain, first and foremost. You need to be looking out for red flags.

That’s a good segue to my next question. You said in a video that the role of regulators is “not to be sitting in every car and telling every driver what to do, when to do it and how to do it.” How does that apply to crypto?

I think no matter what you're doing with your money as an individual, you need to be using your own brain, first and foremost. You need to be looking out for red flags. That's the same in crypto as anything else. We can play a role in saying, “There is stuff out there that sounds great. It's in the name of crypto. It sounds new and exciting and it's [potentially] fraud so you've got to be careful.” But we can also play a role in setting the rules for the road.

I'm trying to think about how I translate this to the analogy of the car. If we see that there are people dropping nails in the road, so that people will get flat tires, we can go grab those people and pull them out of the road. And we can also set up rules by which people have to drive on the road. And that's what I think we failed to do.

Now what we're doing is we're pulling people over and saying, “Well, you didn't follow the rules of the road.” And people are like, “What were the rules of the road? And are you, SEC, even the one who should be setting the rules of the road?” I think we're sort of getting ahead of ourselves there.

Can you talk about your conversations with Chair Gensler about crypto after he took over?

I can't talk specifically about that except to say that Chair Gensler and I do talk about crypto. He's someone who does know a lot about crypto. Even though I'm not happy about where we are, we still have the potential to do this the right way even though we've started out on the wrong foot.

He understands a lot about this technology. I think we could do a good job and we just have to set about doing that. Because of his knowledge and his background, I'm still optimistic that we can get it right.

When he was announced as the new SEC chair, the industry reacted positively because he had taught blockchain at MIT. Clearly, the industry’s general attitude has changed. He’s often criticized harshly on Twitter, including by many key leaders of the industry. How do you react to that?

Look, ad hominem attacks are not a good way of doing policy or anything else, frankly. One of the reasons this country is so wonderful is it's built on ideas. It's not built on personalities or people. It doesn't matter that I'm sitting in this chair or someone else is sitting in this chair, we need to build principled approaches that will last over time.

The goal is to work together. The commission is set up as a five-member body. Each member brings something unique and different to the job. Each one of my colleagues brings something unique and different that would be valuable in this conversation around crypto. I just want to have a conversation about crypto. I don't want to make this about personalities.

Sometimes we talk about responsible innovation. I think we should talk about responsible regulation, too.

What is your main criticism of Chair Gensler’s approach to crypto?

My main criticism of the approach this agency has taken is that it is leading with enforcement. It's failing to sit down with people and provide them a productive path to compliance. It's failing to use the tools that Congress gave us to use for just this kind of situation.

Of course, Congress didn't foresee crypto or any of the technological developments. But what they did foresee is that things would change and so they built this framework and they said, “All right, SEC, you have broad exemptive power. So when a rule or a principle needs to be adjusted to allow for this new thing to happen, you can make that adjustment and put appropriate conditions around it.”

That’s a long way of saying my biggest complaint is that we have not used the non-enforcement authority we have to make a workable way for this industry to innovate in ways that appropriately balances our regulatory objectives with the need to move forward.

Sometimes we talk about responsible innovation. I think we should talk about responsible regulation, too. It's not responsible to come in years after the fact and say, “You did something wrong,” when people were saying to us, “Could you please help us figure out how we can do this right?”

This is how some crypto industry leaders I’ve talked to illustrate their dealings with the SEC. They’re asked to come in, then the door is closed and they’re told “You're doing this wrong. You have to stop and you have to pay the fine.” Do you think that's a fair characterization of the way the SEC is operating when it comes to crypto?

I do. We say, “Come in and talk to us.” [Ideally] you come in the door, you talk to us and you walk out the door and you actually have a workflow plan to move forward.

Sometimes we're going to have to say “no” or “absolutely no.” But we can also take advantage of those authorities that we have to say, “Well, okay, we understand what you're trying to achieve here. And this is what's really important to us. We need to make sure that people who are buying your product get good disclosure, so they know what they're buying. So let's work with you to figure out a way that they can get that disclosure.”

But instead our response is often, “No, we don't like what you did.”

I guess it's a lack of creativity and imagination on our part. And that has bred frustration in the industry. And then that in turn breeds [a feeling] in us [that], “Well, they don't want to come work with us.” So it's a very unhealthy dynamic that we've got spun up now.

We have the potential to say, “You know what, we're going to break this unhealthy dynamic. We're going to have public conversations, not conversations in the back room in the context of an enforcement action. We're going to have public conversations that involve not just one big player, but a broad range of people from the industry, small to big, people who use the products and services and other interested parties.”

You can bring in investor advocates, whatever other group you want to bring in, bring in the CFTC, too, and [say], “Let's work this out in a public way, understanding that we all have objectives we're trying to meet, and we can do that together.” I'm still confident that we could if we just chose to break this unhealthy dynamic that's built up.

One area the SEC has focused on is lending. Coinbase announced that it was shelving its lending product and recently BlockFi announced that it has to pay a $100 million fine for a lending product the SEC said is illegal. Can you talk about these developments?

I think lending is a good example. Here's a product that retail people were using and were liking and we looked at it and we said, “Okay, looks like there's some securities laws implications here.” Well, we should have gotten in early to say that and then we should have said, “Okay, what are we trying to achieve here? We're trying to make sure that the companies that are doing this are being forthright with their customers, that they're telling them what the risks are around what they're doing and that there's real clarity there.”

Maybe we decide the securities law framework is the right way to go. Let's figure out a way that they can make the disclosures they need to make, that the product can move forward. Let's focus on getting good disclosure, because that's what we want.

Doing it through the context of an enforcement action is just not my preferred way of doing things. BlockFi is a big player in this space. There are a lot of other players in this space. There are a lot of people who use the lending products, retail folks who also wanted to have a voice in how this all worked out. And so let's bring them all together. Let's have the conversation. I think that is a good example because I think we didn't go about it in the best way.

There’s also the view of some in the crypto industry that it’s better to just follow the rules to the best of your ability in doing whatever you want to do, instead of going to the SEC and saying this is what we want to do, and waiting for the permission to proceed.

People can come up with their own strategies to deal with the haziness. Here's the problem with the approach we've taken. We do put people in a very bad position because one, they spend way more time thinking about regulation [than] is productive. A lot of people say to me, “Just tell us what the rules are. We'll figure out a way to comply with them.” And two, it puts people in the position of taking legal risks. There's no benefit to anyone from that.

Three, it makes it easier for the people who don't care about the law — who are lawless in a negative sense of trying to hurt other people — much easier to do their bad stuff. Because there's no way to distinguish the good actors from the bad actors.

And then fourth, it's really hard for a lawyer to give good advice to a client if the only guideposts she has are a few random enforcement actions.

I just think we've created a very inefficient environment and that means that either people decide, “You know what, I'm just going to not involve U.S. people at all so that I don't have to deal with that.” And that is happening a lot.

They also complain about the cost.

It is expensive. It’s very expensive. The financial world is heavily regulated. So it's going to be expensive.

But it's nice if you're going to spend a lot of money on lawyers to know that the advice you get is going to be solidly rooted in something the SEC has said, instead of this game of trying to connect the dots based on random enforcement actions that come out several years later.

There is the view that some in the industry want to sideline the SEC given the perception of a strained relationship, that they want the CFTC to take the lead or some other agency. Do you see that, too? What is your reaction?

Yeah, I've certainly seen some of that kind of feeling. And I understand it because, again, I've been critical also of how the SEC has handled it.

I do think that if we're thinking about, for example, who might regulate crypto trading platforms, we do have some experience regulating retail-oriented trading platforms that would be valuable here. I also think that the CFTC might have an interest too. But we could work together with them. In fact, Chair Gensler has suggested something similar recently.

In any event, during this exploratory period where we're really trying to figure out where the rules should be, it seems to make a lot of sense to sit down together.

Are you optimistic that that could be done in this situation?

Absolutely it could be done. You've got a chairman at the CFTC who is certainly interested in crypto and you've gotten now a number of new CFTC commissioners who are also very interested in crypto. I'm interested. Chair Gensler is interested. Commissioner [Caroline] Crenshaw here is interested in crypto issues. So we've got the support. We just have to move forward with it.

A big worry is that crypto is growing so fast that it could lead to financial instability that led to something like the crisis we saw about a decade ago.

I think it makes sense for people to be paying attention to crypto because there are a lot of aspects that are growing very quickly, whether it's stablecoins, NFTs, DeFi. There's a lot happening in the space and I think it certainly makes a lot of sense for regulators to pay attention to it.

But we should be doing that in a clear-eyed way. We shouldn't look at it just from a risk perspective. Decentralized finance can actually spread out risk across more people, which tends to be good for resilience.

The fact that the code is open source means that there's a lot more transparency into some of this stuff then there was into balance sheets in 2008.

There are different challenges with this technology. There are different opportunities with it, and I think we should be paying attention to all of it.

The fact that the president puts out an executive order and says, “Hey, this is something we're going to look at,” the fact that the president's working group says, “We're gonna look at stablecoins,” the fact that we're talking with our international colleagues and regulatory colleagues about these developments, all of that makes a lot of sense.

You have to try to stay ahead of things. The fact that there are warnings going out from regulators to people, “Pay attention to what you're doing and understand that there are risks here,” those are all good things. It's understandable and expected that government will be paying attention.

Can you comment on what's been perceived as a holdup on the approval of Bitcoin or crypto ETFs?

There certainly is a holdup. I would agree that we haven't moved forward. It doesn't make sense to me. I don't think we've been applying the standards the same way we apply them to non-crypto products.

Coinbase has said there should be a special regulator, either one within an existing agency or a separate body itself. What do you think of that proposal?

I understand the desire to have a regulator that has specialized knowledge, because the technology changes fast. There are a lot of different facets of it. I can speak personally [that] it’s very difficult to try to stay on top of everything that's happening and to understand the technology.

We've seen that it's hard for traditional financial regulators to be flexible and adjust quickly. It's generally hard and so I can see why people say, “Yeah, let's just create this separate regulatory entity.”

But the problem is that if crypto really matures into what a lot of people think it will, it will be infused in traditional finance, which means that if you pull it out and regulate it separately, it's just not going to make sense because it's going to be integrated into traditional finance.

But again, people are getting frustrated. They're looking at the SEC, and they're saying, “Well, the SEC can’t handle it. So let's pull it out and give it to a wholly new regulatory entity or give it to the CFTC.” So I can understand the frustration, but I think we have to think about the best way to do this. And ultimately, it's not my call. It's ultimately Congress' call. So I will defer to whatever they decide is the right approach.

I think people are very capable of making their own decisions about how to spend the money that they work very hard to earn. And so I don't need to stand in the way of them doing that.

Is there a way that the industry or crypto is evolving that worries you?

I, like everyone else, worry a lot when there's a lot of money flowing into something. I want people to be careful. So I worry that people get drawn in just by the desire to see numbers go up without anything else.

But again, I think people are very capable of making their own decisions about how to spend the money that they work very hard to earn. And so I don't need to stand in the way of them doing that. But I can serve a role in saying, “Okay, let's figure out ways to make sure that we can get them as much information as possible to make sure that they are aware of the risks they're taking.”

If they want to use DeFi, for example, that's fine, but they need to know that when something goes wrong, they can't come to the SEC and get redress for that.

As long as people are eyes wide open, that's fine. Sometimes there's going to be failure in crypto as there is in any other facet of human life. And that's fine too. Because often, out of failure comes the steps that you need to take to get to something successful. Someone learns a lesson from a failure and goes on to build something that addresses the thing that caused that failure.

I think we're seeing that [in] a lot of the recent events in crypto where money has been taken from a protocol or stolen from a protocol. People then take a look at that and say, “Okay, what was the point of failure there?”

So there's a lot of self-criticism in crypto that I think is very healthy. It can be really brutal the way different groups of people within crypto attack each other. But that's also healthy in bringing to fore the problems and exposing the problems and then figuring out ways to solve them.

I want to touch on the Ripple lawsuit since you were there when that happened.

I can’t talk about ongoing litigation. I get asked about it a lot.

What’s your biggest worry with crypto?

I worry about us not just sitting down and doing the hard work to create a framework that makes sense, that kind of framework [that] would be good for protection of investors and consumers. It would be good for financial stability. It would be good for market integrity. That's my biggest concern that we're missing an opportunity to do the right thing.

Do you own crypto, commissioner?

I do not. For the reasons that we talked about before, I don't feel comfortable owning it. I want to be able to work on these issues and I wouldn't feel comfortable working on it if I owned it myself.

So Crypto Mom does not own crypto.

No. But a lot of her kids do — the people in the crypto world.

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