Innovation vs. Regulation with Commissioner Hester Peirce [Podcast]
Transcript
Brian [00:00:17] Welcome to the Ether Capital podcast. Today our guest is Commissioner Hester Peirce, who has a law degree from Yale, has decades of experience in regulated financial markets and banking, of course, and is one of the commissioners of the U.S. Securities and Exchange Commission. I, along with many in the industry, are big fans of her work and her being an advocate for the space. I’m honoured you’ve agreed to join us today, so thank you, Commissioner Peirce. And for anyone who’s wondering, she’s actually agreed that it’s OK that I call her Hester. So, hi Hester, thanks for coming on the show.
Hester [00:00:45] Brian, it’s great to be here. And I do have to start with my disclaimer, which I think people in this space know well. My views represent my own views and not necessarily those of the U.S. Securities and Exchange Commission or my fellow commissioners.
Brian [00:00:59] Great. So why don’t we start off at the beginning kind of what you were working on before crypto hit your radar and then lead us into what first caught your eye about crypto. You know, what was your initial view on it and how has that evolved?
Hester [00:01:12] Well, as you mentioned in the intro, my background is sort of a traditional financial regulatory background. I spent time at the SEC before coming back as a commissioner. I spent time on Capitol Hill working on securities regulatory issues and then writing about financial regulatory issues at a research centre. And that was where I first encountered crypto. Some of my colleagues were working on issues around crypto and were interested in discussing with me some of the potential regulatory implications. So that was my first introduction and I thought it was a fascinating area, but I didn’t spend much time thinking about it or working on it at that point. When I came back to the SEC in January of 2018 as a commissioner, crypto again, that was a time when there was the ICO boom of 2017 and there were discussions around at that point. So long ago, around a bitcoin exchange traded products in the United States, and so I knew that it was likely that there would be some of my job. Some of my time spent on crypto. But it really wasn’t until after I got here to the SEC that I started to think more intensely about what the relationship between crypto and securities regulation should be in the United States.
Brian [00:02:30] Just rewind a tiny bit. So we know that you came back to the SEC in 2018, but can you give us a year when crypto first hit your radar? Just even in your personal capacity when you started hearing about it in the news? I’m just wondering what that point in time was.
Hester [00:02:44] I mean, I’m guessing that it was probably around 2014/2015, so probably then, but again, it was during the time I was working at this research centre and thinking about a lot of financial regulatory issues. And then this this new thing called bitcoin cropped up. But no, I didn’t hear about it right at the beginning, so I was a little late to the game.
Brian [00:03:07] I mean, we’re all still pretty early, but what was your your view of it out of the gate? Did you think it was too wild and that it couldn’t be captured by a regulator? Did you think it didn’t make any sense or did you think it was fascinating and going to be an asset class that was here to likely stay?
Hester [00:03:23] Well, I don’t know that I figured out whether or not bitcoin specifically would be an asset class that would be here to stay or crypto more broadly. I mean, at the time, a lot of the attention was on bitcoin and then gradually, you know I got exposure to some other kinds of crypto assets. You know, I don’t approach things from the perspective of whether we can regulate it and therefore whether or not it’s too wild. I guess I think about it from the perspective of is this something that’s going to be useful to people? And if so, then eventually the regulatory system is going to have to deal with it and figure it out. So the people that I was talking to at the time were very interested in thinking about how to make this asset class a viable one and one that would be around for some time. And so they were thinking about touchpoints with the regulatory framework even then. And so I started to think about it from that perspective, but always as someone who believes that people should be able to use, or, purchase assets they want to purchase and use value transfer mechanisms of their choice, I was very open to the idea of crypto.
Brian [00:04:13] The industry has changed a lot since, you know, 2014 when it hit your radar and then 2017, as you mentioned that big ICO boom, that big run up of the price of bitcoin, up to 20,000 Ether to 12 or 14,00 and then back down. Now we have an asset class that’s three trillion dollars and growing, mature businesses, the first public companies beginning to emerge. How do you think the regulatory outlook has changed, if at all, through those different points in time?
Hester [00:04:40] Well, I mean, I think what’s happened over time is just more and more regulators have started to think about it. So FinCEN, which is our anti-money laundering regulatory organization, Bank Secrecy Act in Treasury, they were quite early to start thinking about regulation in this space. And some of the states were quite early to think about how money transmission laws would apply and so forth. But I think over time, you’ve just seen more and more regulators paying attention and realizing we can’t just cover our eyes and ears and think that this is going to go away. Now this is here, and so now we need to figure out how we’re going to think about it through our regulatory lens. So that’s really the big change that I’ve noticed is just that it’s become something that is much more front and centre on a lot of regulators plates now.
Brian [00:05:32] There was a really interesting C-SPAN hearing actually in late 2013 where a number of regulatory bodies were asked to comment on Bitcoin or the technology. And I think at that point in time, which is funny because it’s still lingering today, this idea of will this technology get banned? Will the asset class get squashed out by regulators or, you know, government overall? And back then in 2013, there was a C-SPAN hearing where they said, “Can you come out each one of these agencies and give your take on this technology? What do you think?” And one by one, every single agency came forward and said, “You know, we’re not here to suggest squashing it out. We’re here to say we’re going to need to retool, we’re going to need to hire new people, we’re going to need to change maybe the way we’re thinking, develop new software” to make sure that, as you say, you know, things comply with the current existing laws. Do you think that that’s still a fair comment? Or do you think the regulators, I’m not talking about the SEC specifically here, I’m just talking about all of these agencies. Do you think that they’ve definitely taken a position that the asset class is here to stay and they’re not looking to push it out?
Hester [00:06:33] Well, I find that kind of interesting that at that point, they all knew what it was. So that’s a good thing. And it sounds like there were a lot more open minded based on what you’re describing there, because I think now it’s not that people are thinking, we’re going to squash this out, but it’s still a battle I feel to convince people that there’s likely to be some societal benefit that emerges from this long term, right? We’re still dealing with people who think that all crypto is used for bad purposes. And so I feel like you’re telling me that was 2013 and here we are today, almost 2022, and we’re still trying to tell people, “You know what? There are a lot of good things that could really transform our society coming out of this.” So I feel like we’re still in very early days of regulators grappling with it. I think regulators are just realizing now this is actually here to stay. So now we have to really think about what we’re going to do on the regulatory side.
Brian [00:07:34] There seems to be this huge knowledge gap between, you know, lawyers and regulators bucket assets into commodities securities. Retail investors specifically don’t probably even know what those things mean, and nor do they care, right? They they either one exposure to an asset or they don’t, and they’ll seek out a way to get that exposure, whether it’s through some kind of regulated entity, whether it’s through at this point, a decentralized exchange. Where do you think that there’s this kind of knowledge gap or why is it there and what is it going to take for regulators, you think to get up to speed? And should they acknowledge this knowledge gap?
Hester [00:08:08] Well, I think it is important to try to put yourself in the shoes of a retail investor for whom this can be extremely complicated. It’s even complicated for lawyers who have been working in this space for years to try to figure out where something which bucket something fits in. And certainly in the United States, we have a very complicated regulatory structure for financial regulation. It’s state level and federal level, and there are multiple regulators. There are different regulators for commodities, for commodity futures, different regulators for securities. And so that’s just a very complicated landscape for anyone to navigate. So it shouldn’t be surprising to regulators that it’s complicated for people not native to financial regulation, but what can be done to solve it? I don’t know. I mean, I still think there’s a lot of education that needs to happen on the regulatory side in terms of us trying to understand what it is we’re regulating. And then once we understand it thinking through, OK, what kind of a regulatory structure makes sense given what this is. But that task is complicated by the fact that there’s change all the time. And so I spend a relatively small amount of my time on crypto. You know, there’s a lot of other stuff on our agenda. But I do try to learn as much as I can, and I find I’m constantly behind the curve and trying to run and catch up. And we’ve got NFTs, we’ve got stablecoins, we’ve got DAOs. Trying to figure out all of these different iterations and it’s
Brian [00:09:43] Now we’re entering the metaverse.
Hester [00:09:45] That’s right.
Brian [00:09:46] Now we have a virtual world to play with all the assets.
Hester [00:09:50] Exactly. Maybe there will be a virtual regulator, too. So anyway, I feel like that’s why there’s a knowledge gap, because everyone is kind of trying to figure out the people who understand the technology are trying to figure out the regulatory world and that’s a mystery to them. And the people who understand the regulatory world are trying to figure out the technology, and that’s a mystery to them. So it’s not surprising that it’s been a bit of a tortured journey.
Brian [00:10:15] And how do the regulators go and get that education? Is it about consulting with the industry? Is it about bringing in people who are research analysts in-house just to keep relaying information? I mean, there’s so much stuff happening at such an incredible speed. How is it even possible or how do you see regulators trying to keep up?
Hester [00:10:36] I think it’s a mix, different things work for different people. I know for me, I found in this space podcasts can be very useful in helping me trying to learn about new things because they’re much more current than trying to read a book or something like that. And then having people come in and talk to me is the most helpful thing. Explain to me what you’re building, what your plans are, what you’re thinking of doing. And so that is, I think, a way a lot of people at the SEC, for example, learn, is by talking to people who are actually doing things. We do have expertise in the building, so certainly I’ve learned a lot from people who work at the SEC and who are knowledgeable about the space as well. But again, we’ve got a big jurisdiction and lots of things to cover and so we’re not going to have that many experts in-house in crypto, even though it is a growing and important area.
Brian [00:11:32] Do you believe that all of the assets that exist in crypto, you know, are potentially securities? You know, is this really all about The Howey Test?
Hester [00:11:40] Well, Chair Gensler has been increasingly suggesting that most digital assets fall within the securities bucket. But I think it’s like anything else, you’ve got to look at the facts and circumstances. So it depends. And, you know, one question is, is the thing itself a security? And the second thing is the way the thing was sold a securities offering? In which case we will have something to say about it. So the Howey Test is one way we look at things in the United States statutory framework is one that defines securities very broadly on purpose so that you wouldn’t necessarily get out of the securities laws just as you called the thing something else. And The Howey Test is the way to interpret one of those elements in an investment contract to try to understand whether someone gave you money with the expectation of profit based solely on that other person’s efforts. And so that’s a nice framework to look at a lot of things, including potentially digital asset sales. This has been a challenging area for us because The Howey Test already had gotten pretty broad in the way it was applied, and trying to apply it in this area has been quite a challenge I think.
Brian [00:13:00] As you’re saying specifically, there isn’t these rules about when something would become decentralized. Do you see that being something that would have to be defined at some point in time? Or is it purposely broad? And you know, Chair Gensler, as he’s saying, “If it walks like a duck and quacks like a duck, then it probably is a duck” and we shouldn’t have these very specific, “If there’s X number of nodes on a network, then therefore it’s decentralized” because you’re essentially just giving a set of goalposts that if you can cross it, then you know, you’re off the hook. How do you think about things like that?
Hester [00:13:31] Well, I mean, I can understand why people would push back against trying to define something like decentralized with that kind of prescription. And again, we tend in our securities laws, we tend to be much more about a principles based approach, right? If it meets the sort of the spirit of what we’re trying to do, then it gets pulled in, right? But I think part of the difficulty in this area has been that, you know, we’ve talked about the sale of a token as being a securities sale. And then you’ve got to go down the line and say, OK, well, when do those token sales stop being securities sales? Is every secondary transaction of a token, a securities transaction? Or is it just the initial offering of those tokens that are securities transactions? And if it is truly that, we’re going to treat the tokens themselves throughout their lives, potentially up to some point of decentralization, if we’re going to treat those as securities, that has real implications for how this space operates, because every transaction is a securities transaction is subject to the securities laws. So right now, I think there’s a little bit of imprecision in the way that a lot of people are talking about this, which has hindered our ability to really think about the hard questions of, “OK, if we’re going to assume these are all securities, then what are we going to do about how these transactions occur?”
Brian [00:15:04] Right. And you’ve been proposing for a number of years, you know, the Safe Harbor or some kind of similar proposal. Do you think that U.S. securities laws are going to have to change, you know, to accommodate that kind of development? Or are we going to see something like that? Or you think it’s just too hard to get through to create a safe space, to try and develop some of these protocols or applications that over time would become decentralized? What do you think the future of that kind of development and innovation looks like?
Hester [00:15:32] I’d certainly like to see something like the Safe Harbor or some other mechanism whereby people could experiment, try to build new things, but do so in a way that meets the objectives of the securities laws. Meaning that you’re solving the information asymmetry problem, because I think it would be useful for token purchasers to get more information, right? So you can, I think, achieve the purpose but do it in a way that’s more flexible and more appropriate for the particular technology. Whether or not that Safe Harbor moves forward, I don’t know. I mean, a lot of people seem to think there’s no problem of applying the securities laws in this space, “So if something needs to be registered and it’s just like any other security, so what’s the problem?” That’s kind of where I part ways. And in fact, when I got to the SEC, I thought it makes sense just to stay with the framework we have because it’s worked over time. It’s worked for a lot of different kinds of instruments. There’s not really a reason to try to go adjusting it, and there’s a danger to that. I mean, even when I look at my Safe Harbor that I proposed, you want to have something be as technology neutral as possible. So how can you build something that’s technology neutral? Maybe it’s better we just stick with the securities laws, as is. But as I spent more time in this space, I think there is room for some tailoring because I think there are unique aspects. There are these questions around, “Does something that starts out centralized end up being decentralized? And if it is truly decentralized, does it even make sense to apply a regulatory framework that’s designed all around eliminating information asymmetries?” Because if it’s truly decentralized by definition, there aren’t information asymmetries.
Brian [00:17:20] I guess the tricky thing about the existing framework that would allow for some sort of Safe Harbor would be the accredited investor laws. But the thing that I’ve always kind of challenged back on that is that these networks are largely being developed by people who are who are very young, who are likely not accredited investors yet. And if you want to build a protocol that is successful, you likely need the support of that group of people who are not yet accredited investors. You want to incentivize them, and the way to do that is through token participation early on. And I guess that’s where the accredited investor, you know, “Safe Harbor” becomes tricky is you just can’t attract the right amount of talent globally to participate in that new…
Hester [00:18:01] Yeah. Sorry to interrupt, but I’m glad you brought that up because you put your finger on exactly the problem that troubles me. When people say to me, “Well, it’s no problem, they can just use one of the many exemptions we already have under the securities laws.” Most of those exemptions are designed around accredited investors, which means you have to be by enlarge, wealthy or have a high income. And you’re right, the people who would be involved in these networks, probably. I mean, maybe now they do because some of them have been in crypto for a while, but a lot of them are going to be young and they’re not going to have high incomes, they’re not going to have a lot of wealth. And so it’s illogical to think that the network is totally going to be built by a bunch of wealthy people, wealthy old people. And then suddenly the network’s going to emerge and then the young people are going to come on? No, it’s going to go the other way. So that’s exactly the problem that I want to solve.
Brian [00:18:59] I won’t comment on specific projects, but we’ve seen token sales that have existed in a very regulatory friendly framework, and they typically didn’t do well long term because they just couldn’t incentivize developers to participate. Where do you think that the regulators get hung up?
Hester [00:19:18] Well, I mean, I think we’re still stuck in this initial phase of regulators saying, “Well, why should I even worry about how regulation applies to something like this because I’m not really that interested in it taking off?” This is going to require us to do some work as regulators. And if you’re not that interested in an asset class, you don’t want to put the work in. And I’m painting with a very broad brush. There are certainly exceptions to this, but I come from a regulatory agency that now for the entire time I’ve been here, has been unwilling to grapple with these difficult questions of, “What are we going to adjust to allow people who want to do things consistent with the regulations, what are we going to adjust to make it possible for them to do that?” We haven’t answered that question. And I think a lot of the reason we haven’t answered it is because in the U.S., the Securities and Exchange Commission is set up as a commission, which means there are five commissioners and we’re the ones who make the decisions on regulation and enforcement. We’ve got a big staff, we have a lot of people on the staff who are interested in crypto and knowledgeable about it, but we haven’t given them the permission from the commission level to go then and grapple with some of these questions about, “What does this look like?” So that’s one problem. I would say another problem is just because jurisdictional lines are not clear, there’s less of an incentive in some ways for any one regulator to spend a lot of time thinking about what would a framework look like, because who knows at the end of the day whether Congress is going to say, “Well, you know, it really belongs over here in this regulatory agency.” So I think that has kind of slow progress as well.
Brian [00:21:02] It’s funny because as much as people give the regulators a hard time, I do feel bad if you’re a regulator and this isn’t your day-to-day life sitting on Twitter and on Discord and being immersed in those communities. There are so many challenges and there are so many nuances that I can’t imagine sitting in that position. I think it’s important for people who are in the industry who are constantly just saying, “they need to do something” or “it needs to happen” and “come on!” I do have sympathy for sitting on the other side of what that must be like to keep up with an industry that’s moving extremely fast and also so global. I mean, there’s just people who are building on other sides of the world who aren’t thinking about, “What is a U.S. regulator going to think of my DAO that, you know, runs on Discord and I’m somewhere based in Asia?” and they’re probably also, again, young and not familiar with regulatory regimes locally, internationally. And so it’s a really challenging problem, to say the least.
Hester [00:21:58] Yeah, but at the same time, I would say I have been really grateful for the help that I’ve gotten from people outside of the SEC who have been very patient with me, who have talked with me about these issues and who have been willing to work not only with me, but with my colleagues, and try to think about ways to approach these questions and spend a fair amount of their time with us. And so I’m very grateful for that. And I think the only way to build a good regulatory regime is going to be to have people who are using the technology and those are both sort of the retail level people using it, technical people developing it. You want to have the full gamut of people involved in developing that framework so that it’s a balanced framework. But I think if we’re willing to do it, we will have many willing hands to help us.
Brian [00:22:46] If you could wave a magic wand, would there be a new regulatory body formed, specifically focused on crypto? Or do you think that there is a way to coordinate across the various agencies that already exist and figure out the appropriate frameworks for crypto to be above board and move forward as an asset class?
Hester [00:23:06] Well, I’ve been in Washington for a long time now, and one thing I’ve noticed is that if you add a new regulator, you just added a new regulator. All of the other regulators are still going to be involved. And so my preference is really to leave the existing regulatory structure in place and then figure out kind of where we should parcel out the regulatory responsibilities. Now that said, I’m also willing and open to having the discussion about whether, to some degree, some of this technology allows you to displace some of the role that a traditional government regulator would play. That’s a discussion that we would have to have more broadly because it may then require Congress to get involved and carve out certain pieces and say, we don’t think that the traditional regulatory structure needs to apply here at all. But I don’t know. My view in Washington is probably a minority view on that kind of thing. But it’s still, I think, worth having that conversation with the general public who has a real interest in having this regulatory structure designed well.
Brian [00:24:10] When you look around the world at various regulatory bodies, do you see certain regulators getting it right? Or do you think that all are stuck in kind of the same place and maybe a little ahead or behind? Are there countries to draw from who have solved some of these complex problems?
Hester [00:24:28] Well, I think everyone is struggling a little bit because again, there’s a lot new here. And so there’s a lot of learning happening in a lot of places. I think some of the states in the United States, whether it’s Wyoming or Vermont have been thinking about this, New York has thought about it. A lot of people come to different points of view, but I think Wyoming has really taken an approach that I find quite admirable, which is they’ve tried to tackle piece by piece and really have taken it very seriously. So I think that’s a model for us. I think there are examples of states like Arizona, which came up very early on with a fintech sandbox. That’s the kind of thing we could try in this space. Then there are countries like Singapore, which have taken a very proactive approach, been very inviting for people to come in and build projects there. There’s a lot of interaction between the government regulator and the projects. So I think that’s an example. Even the EU is now developing some specific laws around crypto, so we have a lot to learn from a lot of different places. Switzerland has taken has taken some steps. Canada, as you and I were discussing, has taken some steps. So I feel like we can just draw from a lot of different places and try to learn what the best approach is. And it is good that people are trying different things because then we’ll see kind of which works and which doesn’t.
Brian [00:25:54] Do you feel the pressure to come up with some near-term guidance as the industry is, you know, getting hot and there’s lots of different sectors, you know, stablecoin growth has grown and just orders of magnitude in the last two years. Lending products, platforms want to figure out how to comply inside of, you know, that jurisdiction. Is there that pressure internally to figure this out? Or is this more about sitting back and making sure that we get this right, whether it’s six months from now or a few years down the line?
Hester [00:26:22] Well, I personally feel the pressure to do something because what I worry about is if we don’t provide guidance, and this is what I hear all the time from even lawyers who are in this space, they’re really desperate for us to provide some kind of guidance so that when people come to them, they have something they can say in return, right? They have a path forward. The path forward can’t be, “Well, you just have to wait 10 years for a regulatory regime to emerge.” And so that’s what I really want to do is answer some of these questions that are stopping people from getting involved in the space. The answer can’t be, “Well, just comply with our rules” because we know that there are certain aspects of our rules that don’t work. So I definitely feel the time pressure and I welcome anyone in your audience who has ideas of questions that need to be answered or areas where I could be spending my time trying to think about what a framework might look like, please come talk to me. I would definitely appreciate the input. We can’t have the answer also just be, “Well, you’ll wait to find out the law by watching us bring enforcement actions a couple of years from now” that can’t be the answer, either.
Brian [00:27:34] And the development, this is one of my concerns. The development is going to happen regardless. What I’d love to see is not having this bifurcation of the space where we end up with these regulated, watered down versions of platforms and opportunities. And then the complete, you know, gong show and sitting out in Discord. But despite there being a gong show, I mean, there’s a lot of exciting innovation happening there and there’s a lot of experimentation. But if those two worlds split, I mean, that’s one of the things that concerns me. You’re obviously very well versed in the space. You’re keeping up, you’re listening to the podcasts. Is that something that you think about of what the risks would be of a bifurcation of the space and the U.S. being left behind or North America in general?
Hester [00:28:15] Yeah, absolutely. I think that’s absolutely a concern, and it’s a really pretty bad message to tell people who want to do things in a fashion that’s in compliance, right? And if you just tell them, “We’re not going to give you any concrete answers” ultimately they’re going to go build it somewhere, right? So it’s either going to be here, they’ll try to have it be nowhere in terms of geography, right? But they’re going to be doing something. And so that totally undermines our objectives as regulators, right? If our goal is to allow the system to grow up in a way that allows us still to achieve our regulatory objectives, then that’s not the way to do it. It’s not just, you know, having it occur out here. It’s not good for anyone because that kind of a system also means that it’s much easier for fraudsters and scammers. And we all know there are a lot of fraudsters and scammers who glom on to any space that’s popular. So there are a lot in crypto. And so it makes it much harder to distinguish the bad actors from the good actors if everything is happening outside of regulatory purview. So I think it’s a real mistake.
Brian [00:29:25] And that’s definitely a tricky thing here is you have this barbell where you don’t want to foster innovation and then you also have market integrity. And I feel like regulators tip that barbell usually towards making sure that the existing structures and rules are being enforced. And there is this kind of mandate there to make sure that innovation is still happening, but it’s not being weighed 50–50. Do you think it’s important that these things are balanced appropriately or is the most important thing here to make sure that the existing framework, the Securities Act, is held up?
Hester [00:29:58] No, I mean, I think you’re absolutely right. The problem is that this is the regulator’s dilemma, right? On the one hand, it’s easier for us to focus on saying no to things and stopping bad things than to say, OK, we need to figure out how to say yes to some of this stuff. And that’s why I’m constantly arguing that when we talk about investor protection, we need to remember that that involves not only protecting investors from fraud, but it means protecting investors opportunities set. Making sure that they have access to the products and services that they want, and to the latest and greatest products and services. And one of the reasons that the financial industry, which is so highly regulated, has been really slow, in innovating in some ways is because there’s a regulatory gate that you have to hop over before you can innovate. And it can be extremely difficult to get over that gate. And it’s especially difficult if you’re not one of the traditional financial firms, but if you’re coming from outside of the traditional financial industry and you’re saying, “Hey, I’ve got a new way to do this and it’s a better way” you’re going to run into resistance. And I think that’s been the frustration of a lot of people who have innovations, they have ideas. But even the traditional financial players have had a lot of difficulty getting new products and services to market at least in the United States regulated financial system.
Brian [00:31:33] What is your perspective on DeFi and how do you suggest something like that be regulated?
Hester [00:31:39] This is an area people are finally spending a little more time thinking about because they realize this is real and this is happening. So first, the question is, is it truly decentralized? And I think the answer is “no,” you’ve got a centralized counterparty that the regulator is going to look at. If you have something that’s truly decentralized, I think that’s really exciting, and I think there’s real potential there, and it allows for better transparency, everyone coming in on equal terms. Those are good things, right? Those are things that especially in the financial world, there’s over time, there’s been a lot of dissatisfaction with the financial system for not being more transparent, for not offering everyone the same terms. So on the positive side, I think we can help to solve some of the problems that have plagued our financial system in the past. It does make the regulators job harder if something is truly decentralized and we’re going to have to talk as a society about how we deal with that. And again, to go back to something I said earlier, I think there’s features of the technology that make it possible for the regulator to step back a bit and allow the technology to serve a regulatory function. But I think another point that I often make is that I think a lot of people always will want to deal with a centralized counterparty. They’re not going to want to deal with a protocol. They’re not going to want to deal with something, where if something goes wrong, they can’t complain to someone. And so it’s likely that you’ll see the decentralized back-end, you’ll see a centralized front-end and that front-end, you’re going to have to figure out how much regulatory responsibility lies with that front-end. And that may be a way to sort of compromise here, right? If you choose to go through a centralized, user-friendly front-end, that’s one thing. If you’re going to interact directly with the protocol, maybe you’re acknowledging that you’re responsible and can take responsibility if it doesn’t turn out well also. So I hope we have this kind of conversation. But what I see regulators doing now, and this worries me a little bit, is, “There’s no way something could be decentralized, so we’re going to find someone and we’re going to hold someone responsible for this no matter what.” That’s what I worry about.
Brian [00:33:55] And do you find that the regulators are keeping up with the narrative around, you know, finding out and making sure things are decentralized enough? If you look at now what’s happening around metaverse and NFTs and now people building different ways to fractionalize the ownership of NFTs. You know, it could fall into a different bucket because I think people’s initial view on an NFT is that it’s probably just, you know, some form of art and not a security. But you had an opinion recently that it’s potential that some of these NFTs, or the ways that they are issued, can fall into securities land. How are you seeing regulators keep up with that type of innovation? And can you comment on how we can constantly look at things like NFTs? You know, you did comment already on DeFi, but as NFTs and the metaverse become a big thing, how do we deal with global, you know, real peer-to-peer interaction?
Hester [00:34:49] Well, I think NFTs are another challenge and again, an area that’s growing so fast and another piece that’s particularly challenging about NFTs is it’s bringing in a whole new category of people. Before, a lot of the crypto world was really focused on people who are crypto native and that’s where they’re most comfortable. Now you have the NFT world, and it’s saying to everyone else, “No, come in, we have something here for you too” and so this is, I think, going to draw more regulatory attention because of that. And again, I underscore people need to be very careful. They need to think about, if you’re doing something in the United States, please think about how the securities laws might apply. They can apply to things that you wouldn’t even, that wouldn’t even be on your mind, necessarily. Fractionalization is one area I’ve said people ought to be thinking about, but even NFTs could be designed in a way to have securities-like features. And so think about that as you’re designing it, come in and talk to us. I know we’re not the only regulator in the world, and a lot of what you’re talking about is global, so you unfortunately have to think about a lot of different regulatory regimes. But this is another area I’d love for us to put some guidance out on to give people some guideposts of what they might want to think about.
Brian [00:36:01] Outside of your work, you know, as a commissioner at the SEC, what are the things that you’re seeing in the space that excite you the most? They don’t even have to be, you know, securities related. Are you most excited about DAOs, NFTs, stablecoin potential? What really is pulling you further down the rabbit hole?
Hester [00:36:19] Well, I’d say the thing that is most exciting to me is this idea of organizing people’s cooperation in new and different ways. And so being able to get a lot of people cooperating to build something in which they all have an interest. But doing so in this decentralized fashion where everyone is coming in, again, on the same terms, right? There’s something very powerful in that and I think this technology can help us solve some of the problems that we’ve seen when a particular player gets very powerful in a space, right? This is a way to push back on that and give people more control over their own activities, yet allow people to cooperate with people all across the world and building things, and that’s exciting. Can we tap human potential that wouldn’t have been tapped before because it would have been too difficult to reach it and bring it in? But now there’s a way to reach it, bring it in and to compensate people for their contributions to things. That’s exciting to me. I do think that this technology will end up transforming ways that things are done in the securities world and in the financial world as well, and will help to solve some of the problems that we’ve seen over the years in the financial world. But I think a lot of the really exciting thing is just this idea of harnessing human talent and harnessing people’s desire to cooperate with one another to build something bigger than themselves.
Brian [00:37:47] We are out of time. Thank you very much, Hester, for coming on the show today. We hope to have you back in the future and to see some, you know, exciting developments come from the regulatory front in this space. Thank you very much.
Hester [00:37:58] Thanks, Brian. It’s been a pleasure.
