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SEC Commissioner: We Should Take a 'Safe Harbor' Approach to Crypto

July 16, 2019 00:00 AM UTC
- Updated September 25, 2020 16:29 PM UTC

Hester Pierce joins Fortune’s Brainstorm Tech.

good morning has two. Thanks for coming. Great to be here. Let's jump into it. The press is w crypto mom or crypto mama. And I gotta ask, what do you think of that? And why did they call you that? Well, you know, I've always wanted to be a mom. When I got the title, I thought, Well, you know, you know, you always get kids that you don't expect you'd get, So here we are. So I don't mind the title. I should start by saying that the views that I represent today on my own views and not necessarily those of the commission or my fellow commissioners. And it's usually obvious when I start talking. Indeed. And last week, you about the SEC and finish his latest regulation for broker dealers. You described it as to believe on escape room. Do you want to elaborate on that? Well, so all I said is, if it feels like you're in a regulatory escape room here, here's the next clue. My point is that the FCC, uh, and Fender off for a long time have been saying that there would be some guidance coming out, and last week it finally came out, and that on balance is a positive thing that we have some guidance coming out. People have been asking for a long time, but I view it as a bit of a clue and not really an answer, because it's it's said. Here are some of the things that we're thinking about, Um, and again, this is a staff document, not a commission document, which makes a difference. Um, staff documents are not official policy, but at least it gave an idea of some of the things that are troubling us in this space and some of the problems that need to be solved. But it's not. It's not really a an open door, a road forward, and so that was kind of what I was getting out. I think a lot of the time when I meet with people in the crypto space, what I hear is just tell us what we need to do. We're willing to do it, but we just want some clarity, and that's that's kind of the frustration that I was expressing with that tweet. Yeah, it was similar when you serve implied your fellow commissioners would almost treat a Starbucks gift card is security. Yeah, well, I think that if you if you really apply the reasoning that some of my colleagues at the SEC have used a Starbucks card Chuck E cheese tokens, um, any babies, there are lots of things that would be securities. And when I look at my role as a regulator, I don't think Wow, I'd love to have jurisdiction over Beanie Babies Starbucks cards. I think you know what? We got a lot in our wheelhouse, and I'd really like to just keep us focused on what's directly in our wheelhouse. And so that's one of the concerns I have in this space that we've jumped in on. We started we issued at the same time. We issued the guidance on that I mentioned in connection with Starbucks Card. We issued a no action letter, which is essentially someone comes to us and said, Hey, here's what we're thinking of doing and the staff right back and says if you follow these conditions and do this, we're not gonna recommend an enforcement action to the commission, so that's a little bit of comfort. But we did that in connection with a token that someone had for a private jet service. And when I looked at it, I said, There's no way this thing's the security. Why are we even issuing this? No action letter suggesting that it might have been if it didn't meet some of these conditions. And so that was That was one of the concerns I had in that state. Right, But out of fairness to your fellow commissioners, I mean, I've covered crypt in for a few years. There's been some blatant fraud on a lot of investors getting ripped off and all the rest of it. And it seems, you know, someone needs to put the brakes on this thing. So, you know, I mean, are you you know, and I think you're fairly, you know, free markets type of world view. But, I mean, what would you do? Would just have hands off, let him at it. Well, I think even people who are in favor of free markets are not in favor of fraud. And so one thing I've noticed in this case is that, uh, you know, I've been I worked at the SEC before, before I joined the commission, and what I notice is that people who want to steal money from people think Okay, what's popular today And they crap their fraud around whatever is popular and crypto happens to be pretty popular. And so people who want to defraud people throwing, throwing Bitcoin or crypto or whatever and they got their fraud and then they steal the money and they go off and you never hear from them again. But that's no different than the garden variety fraud we've seen in the past. And that's certainly something that if someone is doing that in the context of raising funds from investors, that's something that we have authority to. Thio bring enforcement actions, and we routinely d'oh! And certainly I'm not. I want to get that fraud exposed and address because I think it does keep capital from flowing, too good projects and good uses. And, you know, even though my name is crypto Mom, I'm not an advocate of any particular technology. My desire is to see capital flow to the places where it can be put to a test and highest you, and that requires investors get information that they need to make the decisions about what they think where they think their money will be put to best. But can you do this? Is that a new act of Congress? Don't know. I think also, the SEC has got its its toolbox, and it's not really built for the crypto world. So you know they have to obey the laws that are written. I mean it somewhere the agency could do with the existing laws. Or do we need Congress to step in? And if so, what's the first thing Congress should do? Well, Congress is my boss, so I don't tell it what to do. But I think that we should remember their securities laws are they've been around for a while and they're fairly flexible. And they're designed to be able to to accommodate a man, adapt to new types of of technology that said So. So I guess I went into this when I first took the job on and started thinking about how the securities laws apply to crypto. I thought, you know, we don't really need to do anything new. We just need to apply the laws that we have, and they can accommodate crypto currencies as they do other things. But I have thought about it more. I really do think that a safe harbor approach might be the right approach in this space where you would say, Here's what you need to tell people. Tell people about what you're what you're doing about the project here, the types of things that people investing in crypto projects want to know. And if you if you comply with these these things and you tell people these things, then you can go ahead. And you can issue these without having to worry about the whole panoply of securities regulations. And so that is something that Congress could direct us to do. We have the authority to do it on our own. But sometimes when we don't act, Congress does act and tells us, No, we want you to do something like this. So that is a possibility. Yeah, And when these debates come up, I think some people in the unencrypted world wonder if you know the FCC is from out of it, are unfamiliar with it was gonna ask you straight. Have you ever bought Bitcoin? I have not. I you know, it's something that I had heard about for quite a few years before. I joined the SEC. Um, and I'm not particularly technologically savvy. In fact, my niece, who's in her twenties, laughed at me about how on savvy I am, but it is something that I understand why people are interested in it. Now, in my current role, I'm not even allowed to invest in it. So if I had invested before I joined the SEC, I think I would have it would have been an awkward thought. So I'm glad I didn't, although I had thought about doing it before I before I joined the. But would current rules allow in the current FCC commissioners to Perhaps I'll get, like, attempt a Bitcoin just to be able to testify? I I just think it's, you know, we're really restricted in the types of things that were allowed to invest in and how we invest. We have to get permission before we invest in something on dhe. Then we have to get permission before we sell it, so those constraints are in place for a really important reason. You know, obviously we don't want to be conflicted and what we're doing, and so my portfolio is very planes in a love because I'm tryingto maximize my ability to do my job without being conflicted. Yeah, I know the ethical rules. So I was important because you don't want tilting her hand favor something. But it does seem there's a certain amount of technological know how you have need tohave to navigate this. No, I mean, it's a fair point. I think you're right. If we were able to play with these kinds of things a little bit more might make us a little bit more sensitive to some of the concerns surrounding it. But you know, on balance, I think that the ethics rules trump trump the knowledge element. Of course, let's stick with Washington little longer. Specifically this morning, David Marcus of Facebook Formally, PayPal's being grilled. Or should they hammered by the U. S. Senate? You know, What do you think of all that? Do you think this is just showboating? RG think Facebook labour has a chance? Well, having had to go before the Senate to get the job on, man, I don't envy anyone who has to sit in that chair. Uh, it's not always easy to answer the questions that you get posed, but look, you know, I I'm eager to have this new technology be tested, and I love seeing different formulations of it popping up. Facebook has most recently come out with a formulation of their version of a Cryptocurrency. I have not personally talked to Facebook about what their plans are. I've read their white paper, not there. They have a full technical white paper, which I haven't read, but I've read their their broad white paper, and it contains some of the operational vision that I think, uh, it is possible for crypto currency. I mean, one of the things that excites me about it is that it's really a way to bring the world together so that people can collaborate from all across the world and get paid for their contributions to project in ways that they're actually, you know, it doesn't involve complicated currency transactions. Everyone could get paid with the same the same currency. So it's almost like the money to go along with the Internet. And I think that's where the potential value of crypto currency lives that you know there are other potential uses, but that's 11 value I see in it. And so Facebook. It's not surprising in some ways that they have thought, How can we take advantage of the user base that we have all over the world? It's not surprising to me that they're thinking about that kind of thing because they do have such global reach. But again, it's It's not something that I've that I've spoken with them about. And I will see what happens if they have conversations with with regulators, which I understand they're doing now. One point of contention of the hearing this morning was the way labors set up. It's a swift foundation, which I think some of the senators were hammering Marcus on saying, You know, what are you doing overseas? But I've also heard that the Americans have legal infrastructure, just isn't built for something like this on the Switzerland, it is simply a better option. Which raises the larger question. Is America's forfeiting some innovation to places like Switzerland or Asia? Or, you know, are these places just sort of, you know, running gun and bad news? Well, I think that's one of the worries that I have. I want to make sure that this country is the most open innovation of any of any country and one of the problems that you have when you have an established regulatory system that's been in place for a while. That were pretty slow to move. And so, um, you know, we've got people at the SEC who are working intensely on these issues in there. They're thinking about the proper approach. But as you can see with the way our guidance is sort of trickling out, it takes a really long time to make a decision, and it takes a really long time to issue anything. So we're not that nimble. Regulators just tend not to be nimble, were inherently conservative because we worry about something going wrong and someone coming back in blaming us when things go wrong and um and certainly I that that happens on so so it's no surprise that people are conservative. That said, other regulators and other places have taken a different approach and I think they're seeing innovator come to those places because they feel more comfortable there and they feel there's certainty there. So one Yeah, I worry about the innovation leaving are leaving our shores and I also worry about U. S investors being precluded from participating in those project because it's easier just to say we don't want any U. S. Investors just to avoid having any interaction with the regulators. Here on this quick technical question is report. The SEC is looking at regulating Libra as E. T F. Can you break down with that whole boat? Well, again, I don't I don't wanna weigh in on any particular Cryptocurrency have tried to avoid doing that. Each one is different and liberal Facebook and Libera have put out the broad outlines of what they're planning to do. Um, e t s are essentially their exchange traded funds. They're they're similar to mutual funds and how, except they operate, you can buy and sell them just on the market, which makes him very convenient and very cheap. Some people, you know, I have looked at, uh at we brought in. They said it doesn't fit into the investment companies face among E T f there one type of investment company, and so I'm sure that's one question that they're thinking about. But again, I don't wanna weigh in on whether I, you know, I just don't know enough about how it's going to operate. Say whether it is. There isn't any particular type of investment products. Yeah, um, as your lawyer, but also an economist would like to go to the real big picture stuff for a sec because I find it interesting this notion of new, non sovereign currencies out there and there's also debate of countries like Russian Shine are trying to get away from the U. S. Dollar because U. S. Dollars when the country's greatest assets lets his borrow cheap, it's sort of a, you know, a strategically powerful thing. Tohave, Do you think blessing these sort of like non sovereign currencies could, you know, risk accelerating the move away from the dollar? Well, I should say I'm not an economist. I'm a wannabe economist. I did. I did major in it in college but don't have a PhD because I'm not good enough at math. But if I were an economist, I certainly would not be a macro economist. I would be a micro economist because I think micro is what matters. And so that's how I approach these crypto currency issues. I think the micro payment aspects of the fact that individuals can decide to interact with one another using a Cryptocurrency is really powerful for individuals that they're able to control that. Andi. It's the decentralized nature of how these projects work. I think is really interesting because it's a way for people to collaborate and be rewarded for their collaboration and their contributions. So I think it challenges a lot of notions that we have existing notions, um that we have about how lots of things work. And I think you know one of those things. If people can figure out a way that very efficient for them, Thio contribute and be rewarded for their contributions, they're likely to gravitate toward it. You know, when I am free market. So I think people should be ableto decide what is most efficient for their transactions. I'm more questions for you, but I will. I want to put it out to the audience. I'm sure there's some to unmask with more on the turn over to you guys. Last week there was sort of a small victory will cripple. People seem to think so when blocks that got approved for a reggae plus toe offer tokens. But I've also talk to people like realistically, they spent two means of lobbying to do that. The auditing requirements, you know everything else just does not. It's not really a game changer. What do you think? Well, I was really delighted to see that there were, you know, again, not specific to any particular offering. But there were two reggae plus qualifications last week, and that's something that I've been calling for for a long time, which is to say, Look, if we want we at the SEC want people to do things according to our rules, they have to see that you can actually do things according to our rules, and you're not going to get stuck in this regulatory purgatory for years. So, yes, it did take a long time, and these getting through the FCC can be can be expensive. But I think it's really important tohave that out there to say to people, You can do this under our rules. There are ways to do it under a rule. Um, here's one option. There might be other options. And again, as I, as I mentioned earlier, I think that a safe harbor may be appropriate in the face. And so as I think more about that and I hope other people will help me think more about that. You know, it may turn out that that the safe harbor route is one that that other projects want to take. But I think we can think about having a number of different options on the table. And I'm happy that reggae plus one of those great. And please let's go to the audience, please. Your hands. Way up. Okay, great. Right there. Please. Please introduce yourself. Hello? Actually, she Perla from Ripple. Uh, I have a question on, uh, you know, innovation in the U. S. I think your point was really well taken. You know, our customers outside of the U. S. Where regulators have been clear about permitted uses of crypto currencies have benefited and with adoption, with our products also with crypto. But in the U. S. Our customers, mainly banks, are afraid to jump in until the SEC or the U. S. Government provides clear guidelines. And I'm again afraid that so much of the innovations being pushed to Asia and so is there. Is there a timeline for when the FCC will come back with clear guidelines? Uh, just leave it at that. Well, whenever anyone asks me about a timeline of the SEC. My usual answer is slow, Very slow because it's, you know, you can see how we worked in this area so far. And we have again, I'm not trying to throw our staff under the bus. We have some really excellent staffers working on this on these things, and they're they're doing PTP events here to peer events where they're going to different cities in their meeting with people in their hearing about their projects. And I think that's all really important stuff. Um, but we're cautious and again we're cautious because we're worried that something's gonna go wrong and people are gonna come back to us and they're gonna blame us. Now what? I would tell my colleagues that the SEC is Don't worry, because if they're gonna blame anyone, it's gonna be me because I've been out there saying, Could we please sing something? Could we do something here so they have a scapegoat. So I hope that that will give people some comfort at the agency to move forward. But again, you know, on the positive side, I think, as I'm thinking through a safe harbor approach, I really urge anyone of you is involved in this space to come talk to me. So let me sit in on a group of you all in a room, talking about how it's safe. Harbor like that might work just so that I can listen and learn from you. So if I can put something out there, I think it would be a least a start. But again, things take a long time at the SEC, and I and I worry, too, because innovation doesn't wait. And it finds the place where it can go where it can feel comfortable. And people can feel that they can do things and are gonna face a legal penalty for just tryingto do legitimate innovation. Any other audience questions? Okay, we'll think of one because I got one more for Hester. What's that right there? Please. Please stand and introduce yourself. Hey, Peter Smith on the CEO of block shame dot com We provide Cryptocurrency service is, um what regulators globally do you follow and have respect for the way they're handling digital asset? Well, you know, I'm tryingto look around and I think about that very thing. I mean, there have been some Asian regulators who have been more open to. And I'm actually going to go over to Asia shortly and talk to some of the regulators over there to understand their approach. So I think Singapore has an interesting approach, but I hope to learn more about it. Um, Bermuda, I think, Taken some steps. Switzerland, you mentioned Switzerland has been more open. So I think there are a number of regulators that air trying to think through how to approach this. And I think we have something to learn from all of those regulators in trying to figure out, um what what we should do that said, it's a little bit difficult because each of us comes to this from a different base of regulation. And so what might work in one place might not work in another place. So we have to, I think, step back and say All right, what are we actually trying to do here when we say we're trying to protect investors in this in this space? And that is you know, what I'm trying to think of now is what are these? What do investors really want in this case? Um What What do they need to make the decisions that they need to make? And if we think about it from that perspective, maybe that's helpful. You know, I've also been I've also admired the way our fellow regulator, the CFTC, has approached this issue. Chairman Giancarlo A k a crypto dad, uh, unfortunately, just stepped down on Friday. I say, unfortunately, he had served out his time, and we have a new a new CFTC chairman who just came in who I think is I know him, and I think he's fantastic, very smart, very forward thinking. So I expect that they'll continue to be a really positive voice in this space just to take us out. Hester, What's the next year you're gonna look like? Especially in light of President Trump's comment, sort of bashing Bitcoin in the Treasury sector secretary, saying it's a national security threat from from crypto currencies. I mean, is it going to get better or worse in the next two years from a regular Well, I think that we all you know, we all come to this needing to learn about the issues, and I think there's a lot of learning for us to do as regulators, a CZ government officials. We've got tons of things that we're thinking about. Crypto is one small part of that, but it's just one small part of it. So we all have lots to learn. And I think one thing I tell people, because I hear that concern a lot about about the space in the illegal activity going on in the space. And I think it's always important to remind people that with cash to, you know, you can't trap cash at all. So there's a lot of illegal activity that goes on with respect to cash. But I also think as time goes on goes along, we'll see Maur actual use cases, and I think there's a lot of work to be done in that in that, um, area in in the crypt, a world of showing people know there actually are some, some really use cases, and this is a way of helping to bring people who have not been involved in the economy into the economy, putting their time and their talents into the economy, which is good for economic growth generally. And so it's incumbent upon all of us who are excited about this space to be thinking about really use cases into B to be showing people what this can actually do to transform people's lives. And again, we do have to deal with the issues that are out there. The concerns that you mentioned are really concerns, and they have to be addressed. But there's a positive side to and we need to think about those. Okay. Well, Steve, a lot of things, but please give it up for commissioner person.