Almost everyone has an opinion on how regulation in the digital asset space should be handled. But what do the regulators think? Bitcoin Association sat down with researcher, lawyer and SEC Commissioner Hester Pierce in the second edition of Blockchain Policy Matters to talk about her experiences since joining the SEC in 2018, how her time working with George Mason University’s Mercatus Center informed her approach to regulation and how regulators can work with innovation – rather than against it.
You’ve probably heard of Hester Pierce – if not by name, then almost certainly by nickname. Pierce is affectionately known as ‘crypto mom’ within the digital asset community, for her focus on and support of digital assets since the relatively early days of 2017.
‘In some sense, the issue was handed to me,’ she tells Bitcoin Association.
‘At the time I came into the SEC at the beginning of 2018, we certainly had a lot of [digital asset] activity in 2017 and Bitcoin had been around for quite a while. And so, there had started to be a lot of interactions with our regulatory framework and a lot of questions about how our regulatory framework would affect the space, so it was natural for me to pay attention to it.’
‘I wanted to think about how the SEC could be better on innovation generally, and this sort of presented itself as an example of a space where there [was] innovation going on and there might be innovation that touched our space.’
Lessons from Mercatus
Before joining the SEC, Pierce was a senior research fellow at the Mercatus Centre – a non-profit think tank aimed at bridging the gap between policy and real-world practice. It isn’t hard to see the connection between Pierce’s work there and her work as Commissioner at the SEC.
‘The Mercatus Centre was really one of the pioneers in thinking about regulation, how to do it better, how to do it more effectively, and also in ways that were less distortive of the economy and allowed entities to do what they needed to do to serve people – but at the same time make sure that there are appropriate protections in place,’ Pierce says.
‘That was the reason I went there – to really learn from the economists who worked there how they thought about regulation, and how they thought about measuring the costs and benefits of these kinds of things. That has really informed and helped me to think through regulation. I’m always trying to think through what are the unintended consequences of what we’re doing? What can we do after we’ve done something to take a look back and learn from what we did and, if necessary, change it?’
‘I think that kind of flexibility and that kind of willingness to think about the full range of consequences is really important in this space where things are changing really fast and where it’s sometimes difficult to anticipate in advance what the consequences of something you do might be.’
These are important insights, and the rapid development of the digital asset community provides an almost-perfect storm to put theory into practice and test these ideas in the real world. With Bitcoin and blockchain technology, regulators are faced with a disruptive technology which comes attached to a highly involved and opinionated userbase with clear ideas about how regulators should approach them.
‘I think we can take some measure of hope from the fact that people are paying attention to this space and they realise that it’s something that’s worth talking about,’ Pierce says.
‘What I would urge my fellow regulators and people at the Fed to think about is to not only have the reaction of looking at where the negatives are, but to really look for the positives.’
‘Remember that a lot of the real innovation happens in the private sector. Don’t try to squelch that out and don’t view this as a competition between the private and the public sector. I think that you can have a public sector, you can have a public central bank digital currency (CBDC), but you can also have a lot of this stuff happening on the private side,’ she adds.
‘There tends to be a conservatism, which I think is reflected in a lot of comments from regulators. But look at it optimistically, too: look at the potential for technology to change things for the better for everyone. I don’t think we win out as regulators when we try to prevent innovation from happening or try to shift it outside of the United States, I think that will ultimately not serve us well.’
At the end of the day, the technology itself is already bringing massive innovations which continue to change lifestyle and commerce for the better. These are the developments which have caused such excitement around Bitcoin and blockchain, and this is what Pierce says we should keep in mind.
‘From a securities regulator perspective, I think about how blockchain can assist us in making more efficient some of the processes that came to light over the last couple of months as we’ve been seeing the rise of meme stocks and concerns around settlement times and things like that; tracking where shares are, who owns what shares – those kinds of things matter not only for settlement purposes but they matter for proxy voting purposes,’ Pierce says.
‘I think the benefit of some of these distributed ledger-type innovations is that they do contribute to resiliency by taking away common central points of failure that everyone is using. To the extent that we can use this technology to enhance the resilience of our financial system, I think we’ll be better off.’
‘I think we do have to be careful, as always, with these kinds of things. Sometimes I get excited about the new technology and the potential for changes that will come out of that. We have to go in eyes wide open – solutions can come from new technology. There can [also] be new risks that are associated with it. You’ve got to think about the whole picture.’
How to plan for disruption
Regulating for disruption is hard. It is not as though legislators and regulators can anticipate every possible innovation which might need regulating – disruptive technology is disruptive in part because of how few people see it coming. Nonetheless, regulators are expected to be able to provide certainty.
‘Our securities laws are meant to be very fluid and adjustable to whatever the newest way of doing securities offerings is; we shouldn’t have to change them every time someone comes up with a new way of doing things,’ Pierce says.
‘Now, that said, as I’ve learnt more about this space, I see a real need to provide specific clarity, because the lines between what is a securities offering and what is not are actually much more difficult to draw in this area.’
The disruption is ongoing, which is part of the difficulty. The reality is that businesses are embarking on ventures which will live or die by how they are viewed by regulators. A decision to consider an ICO a securities offering can sink the entire project, and that decision might not come until after the offering takes place.
‘What we really need to do is help people think through how they can do a token distribution event without having it fall under the securities laws. One answer is to say you have to do it just the way Satoshi did, and you let people mine the tokens and do it that way. But I don’t know that you can say that’s the only way you can do something compliant with securities laws,’ Pierce says.
‘Again, I’m not weighing in on behalf of any particular technology or how any particular network has gotten started, but I think people really need something to grab hold of there so that they can feel confident in releasing tokens into the wider world.’
‘What I’m concerned about is that we can’t wait three years to go back and say, “OK, well, this is what you did, and here is how it violated securities laws.” If we’re seeing things now, then we really need to be telling people now,’ she adds.
‘But it’s hard, because everything is changing so fast and a lot of it doesn’t even fall within the SEC’s jurisdiction. But I think for other regulators whose jurisdiction it might potentially fall, I think it’s instructive for them to think about providing clarity earlier and try to provide some kind of guiding rules, a framework that people can operate with and experiment with them.’
As much of a cliché as it has become, innovative problems do require innovative solutions. For regulators, this means thinking broadly about how they can better meet the needs of industries which are rapidly evolving. Regulatory initiatives such as sandbox programmes are increasingly being employed by authorities around the world to work with novel technologies and businesses to build a regulatory regime which achieves its mandate without stifling innovation.
‘I think that a sandbox-type approach could be quite useful across agencies in the United States,’ Pierce says.
‘It can be difficult for someone with a new technology or new product and service that doesn’t fit neatly into any one particular box. We could create a sandbox that would allow someone to come to one centralised place and would facilitate conversation among the regulators and consider it together. That might be a good way forward.’
‘It’s complicated, legally, because an agency like mine is an independent regulatory agency. Some of the financial and banking regulators are part of the executive branch, so it can be complicated – but I think it might be worth Congress wrestling with some of those things to think about creating something like that,’ she says.
Even with sandboxes, regulators should be careful that their engagement with innovators does not dampen their disruption, Pierce adds.
‘I worry that when you’ve got a regulator playing in the sandbox with the innovators, it affects the way the innovators innovate. I think that’s something we have to bear in mind when we design these programmes.’
Another such initiative are safe harbour programmes. In February 2020, Pierce outlined a proposal for a three-year safe harbour programme for digital currency businesses that are interested in offering tokens which would make them exempt from the registration provisions of U.S. securities laws provided they meet certain conditions.
‘I think the thing that drove me to think about a safe harbour was this idea of wanting to provide a level playing field, so that anyone can take advantage of it on the same terms as anyone else,’ Pierce says.
‘The idea is that if you’ve spent a considerable amount of time and money developing a project and you’re ready to launch your network and you want to get the tokens out into the hands of the people, [a safe harbour programme] would allow you to not have to answer whether that token distribution event was a securities offering or not: instead, you would make the disclosures prescribed in the safe harbour, which are intended to get to the things that token purchasers would be interested in.’
‘Then the theory is that at the end of the three years, you’re going to have a stronger case that it’s decentralised or that there’s a utility to the token.’
The programme proposed by Peirce has three requirements that projects must meet before a token issuance can fall within the safe harbour provisions:
- The development team must intend for their network to reach maturity within three years.
- They must disclose the plan of development, including the current state of and timeline for the development of the network.
- The token must be offered and sold for the purpose of facilitating either access to, participation on or the development of the network.
Pierce says she is collating and considering feedback on the proposed programme with the goal of presenting the complete idea to the incoming SEC chairman, Gary Gensler.
Looking ahead is a large part of a regulator’s job – so how does Pierce view the future of digital assets? And what mark would she like to leave on it?
‘It’s so hard for us sitting here now to envision what the next decade will bring. There’s so much happening in this space and some of it’s going to fall away. Part of building something new like this is trying stuff, seeing where this technology works and where it really doesn’t add anything or even adds more complexity,’ Pierce says.
‘I don’t really care, frankly, about my mark. I think no regulatory structure is about a person – it’s about setting up a set of rules that work and they work not arbitrarily, but consistent for everyone. My hope would be that my fellow commissioners and I join together and we provide some real clarity for broker-dealers, investment advisers, and people trying to do token offerings, people in this space.’
‘I hope that we’ll be as nimble as a regulator can be and willing to get people answers more quickly than we have been in the past several years.’
Watch the full interview: