Hester Peirce, the SEC, and Crypto: Delphi Episode Takeaways

Notes on a conversation between Tommy Shaughnessy, Gabriel Shapiro, Hester Peirce on the SEC and crypto regulation.

‎The Delphi Podcast: SEC Commissioner Peirce: Inside the SEC with Cryptomom on Apple Podcasts

TLDR

• Hester Peirce, one of five SEC commissioners, authored the Token Safe Harbor proposal, and is largely seen as the most supportive of digital assets (thus the nickname “crypto mom”)
• Current regulatory frameworks (public co. registration) are ill-suited for crypto projects. Builders and the SEC are not having productive talks.
• Peirce suggests that builders in the space and the SEC come together in a public roundtable to work on new frameworks.
• If proof of reserves and liabilities were widely adopted, the SEC and DC would have more concern over losing projects and builders overseas.

How the SEC works/Peirce’s role

• 5 commissioners (4 reporting to Gensler, of which Peirce is one). Need three out of the 5 commissioners for a vote to pass.
• Each has different view/approach (Peirce has largely been a dissenter).
• Peirce authored the Token Safe Harbor Proposal, suggesting that tokens become exempt from certain securities laws during a three-year grace period for token projects before they become fully decentralized.
• The Safe Harbor proposal has not yet caught on with the SEC.
• Peirce is discouraged that they haven’t taken more proactive approach in the space yet but is optimistic and says her colleagues have an open mind.

Current State of SEC & Crypto

• There are not currently constructive conversations right now between industry and SEC — “dysfunctional relationship” right now.
• Peirce: We need to have a reset, sit down in good faith, not assume people are just trying to get around regulators
• The SEC can’t force projects to look like Trad Fi and projects need to acknowledge objectives of the regulators
• Influence of other jurisdictions? Some other jurisdictions pushing to some extent, but the SEC will likely have a US centric view.
• People want to build in the US but regulatory pace is slow. While lack of reg. clarity has downsides, the US will take our time to write good rules.

Issues from developer vantage point

• Problem with SEC registration: Takes 10 year span for most private companies and millions of dollars in compliance costs every year to become full registrant
• SEC enforcement actions have focused on shutting down registrant ex. LBRY suit included fines and destroying remaining tokens.
• Current frameworks ill-suited for crypto projects. The public company registration model is not appropriate here.
• Difficult to put projects into current framework, need entirely new framework

What worries regulators

• Regs are very nervous that six people can control an eight figure treasuries via a multisig.
• Real consequences to the public for compromising security for speed.
• As a result of bad actors in the space, DC currently doesn’t have a lot of love lost for devs deciding to build elsewhere.
• Regulators have an inclination to centralize and have someone to sue if there is a problem for accountability.

Turning Point

• Peirce: If Proof of reserves and proof of liabilities were adopted industry-wide for radical transparency that would represent a big turning point.
• If regulators saw this and some powerful use cases, there’d be more concern about losing people, projects, jobs to overseas.
• While builders want to be fully transparent, it’s TBD whether these standards would come via industry practice or regulatory oversight.
• Builders largely want reasonable regulation for a level playing field.

Proposed Solution/Next Step

• Peirce would like for the SEC to put out principles for subareas (lending, staking, token registration, stablecoins, NFTs, etc), have people come in a public roundtable.
• Too much is being worked out in enforcement back rooms via enforcement settlements where no one else has insight into what’s going on
• It would be most useful to have a public roundtable with a group of people different projects coming together at same time. Work through issues, figure out how a new framework (or exempted framework) would work.
• For example, Congress came in with Reg A+ of the Jobs act (2015), an exemption for small businesses to raise capital from the public (accredited and unaccredited investors)
• A similar framework along the lines of A+, ASB, and Safe Harbor for tokens could be applied here, which would free up the SEC to be able to focus on individual unique cases in the future.

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