In Cryptocurrency, Will Asia Surpass the US? Exclusive Interview with SEC Commissioner Hester PeirceBy Emily Parker
Hester Peirce, Commissioner at the US Securities and Exchange Commission, is not a typical government official. She is a libertarian regulator whose friendliness toward digital currency has earned her the name “crypto mom.”
But Peirce is not your typical crypto enthusiast, either. One example is her dislike of the word ecosystem, perhaps the most overused buzzword in the blockchain world. “I think it’s a word people use when they don’t really know what they’re trying to say,” Peirce told me.
Earlier this summer Peirce visited Singapore, and one of her goals was to learn more about the crypto environment there. When I asked how Singapore compared to the US, she said, “here in Singapore there’s a much more open attitude from the regulators to try to engage with people in the community.”
This is part of a larger story. The future of crypto may be in Asia, not the US. Asia is already a key location for cryptocurrency exchanges and mining, as well as for retail investors. Parts of Asia also have regulatory advantages, and cryptocurrency talent and investment will migrate to countries with clear and friendly rules.
Today, much of the action is in Singapore. In August of last year, Singapore hosted more Initial Coin Offerings, or ICOs, than the US. Singapore is home to over 40% of smart contract platform projects that conducted 2017-2018 token sales, according to Robert W. Greene, a fellow at the Singapore University of Social Sciences. Greene says that this is largely due to the fact that Singapore embraced the open digital token sale while other jurisdictions failed to do so. ICOs, once a popular fundraising method for cryptocurrency startups, are leaving the United States. This may be true for crypto startups as well.
“What I’ve heard from people here [in Singapore] is that they’re avoiding the US, and that’s consistent with what I’ve heard from projects I’ve talked to in the US,” Peirce said. She says people who want to base their work in the US tell her that they’re “based somewhere else because it doesn’t make sense to be based in the US until there’s more clarity.”
Singapore, on the other hand, “is providing clarity in a way that we haven’t yet done. And making that clarity such that you don’t always have to do something as a securities offering if that’s not really what it’s about.” Information on Singapore’s policies toward digital currencies can be found in the Payment Services Act and Guide to Digital Token Offerings.
“What we’re really trying to get to is a world where [ICOs] are utility tokens or payment tokens,” Peirce said. “And this is where I think Singapore has thought through the issues a little bit more clearly than we have. And if you’re trying to get to that point, I’m not sure you can apply the securities law framework in the way that we’ve been applying it.”
But it’s not just Singapore. Peirce noticed that in the region more generally, “governments are also looking at this space from a very pragmatic perspective.” They see cryptocurrency as an opportunity, not a threat. The focus is less on regulation and more on: “Can we implement this?”
The United States sends a less welcoming message. In his first tweet on the topic, US President Donald J. Trump said, “I am not a fan of Bitcoin and other cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air.”
Peirce’s friendliness to cryptocurrency is not necessarily representative of the SEC, either. Last year, SEC Chairman Jay Clayton said that every ICO he’s seen is a security. The Commission also rejected the Winklevoss twins’ Bitcoin Exchange Traded Fund, a decision that Peirce publicly opposed.
The SEC’s concerns about the ETF largely focused on the merits of Bitcoin as an investment. Peirce argued that investors should be allowed to judge for themselves.
There are various concerns about ETFs. “I think custody is one of the big issues now,” Peirce said. “So it’s custody, market manipulation, and then concerns more generally that there are pricing issues,” Peirce says. Is there hope for ETFs, or what Peirce calls Exchange Traded Products (ETPs)? She says, “I’m always hopeful.”
As for ICOs, Peirce said that the SEC has already brought a number of enforcement actions, some based on fraud. “We have a lot of stuff on our potential enforcement agenda. Our rules are really complicated, people fall afoul of them all the time. And so we have to think: we’ve got limited resources, how we are going to apply those resources? And so we’re always making those judgments in any area that we cover.”
How will the SEC handle Facebook’s new cryptocurrency, Libra? “I haven’t talked to Facebook personally,” Peirce said. “Given that all we really have is the white paper, which is pretty short, and the Congressional hearings to go on at this point, I think there are just a lot of questions about what exactly it is they’re doing and where that might touch the securities laws. It’s too early for me to tell but there are potential ways in which it could.”
“I don’t want to lose that whole generation of people”
America’s problem is not that crypto regulation is too strict, it’s that it’s confusing. Peirce said, “I think clarity is the primary issue because most people I’ve talked to say: just tell us what the regime is and we’ll work within it.”
Several regulatory bodies oversee crypto, and some regulations vary by state. It also can be hard to distinguish between a security token and a utility token. One way to determine this is through the Howey Test, which can be interpreted in different ways. Earlier this year, the SEC issued guidance on Howey, which Peirce claimed, “could raise more questions and concerns than it answers.”
Howey has four factors to consider, but the SEC’s framework has 38 considerations, many of which have sub-points. Peirce wrote, “I worry that non-lawyers and lawyers not steeped in securities law and its attendant lore will not know what to make of the guidance.”
Crypto startups could break US rules unintentionally, and who would want to risk that? “Individuals and companies in the industry must comply with our securities laws or risk becoming the subject of an enforcement action,” Peirce wrote. “It is therefore our duty as a regulator to provide the public with clear guidance as to how people can comply with our law. We have not yet fulfilled this duty.”
Why does it matter if the US gets left behind in crypto? “From meeting with people who are working in this space, a lot of whom are extremely smart and extremely hard working and extremely dedicated, I would say I don’t want to lose that whole generation of people, with all of that talent, who are thinking about problems in a new way -- to another country.”
It’s great to see innovation flow throughout the world. “But at the same time I think we benefit from having groups of really smart people, working really hard, within our borders,” Peirce said. “I think our economy benefits and our society benefits from that. So I just don’t want to drive all those people offshore.”
One solution that Peirce is mulling is a kind of “safe harbor” for the sale and offer of certain tokens. “That would basically mean we’re not going to hold you to all the securities laws if you’re doing X, Y and Z, and provide this kind of information to people,” she explained.
The limits of government regulation
On the surface, Peirce is a contradictory figure. She’s a libertarian regulator. She is also a government official who supports a kind of currency that aims to be independent of government. Peirce, however, doesn’t necessarily see these as contradictions. She says she was influenced by the economist Friedrich Hayek. “He had a great appreciation for the fact that society is made up of individuals, each of whom has unique talents and knowledge.” Cryptocurrency could help bring these ideas to life. Or as Peirce said, “the idea of decentralization really captures that view that their knowledge is spread through society.”
The other strand of economic theory that influenced her is public choice, and “thinking about what the limits are of government solutions.”
“No matter who you are, no matter what your limitations are, everyone has something to offer society. I care a lot about a society that allows people to unlock their inner potential to live full lives, but also to serve other people,” Peirce said. “That’s what gets me excited about being a capital markets regulator. Because I think I can be a part of unlocking that potential.”
“Regulators often don’t function in that way,” she admitted. But when someone tells her that her judgement is better than someone else’s, she wants to say, “I don’t actually know, because that person knows things I don’t know.”
Some would argue that Bitcoin, which can’t be controlled by any central bank, undermines government. But Peirce sees cryptocurrencies like Bitcoin as attempts to find new solutions.
“This decentralization move is a way that people are saying: we see a problem in society, and we have a solution to it,” she said. “The Bitcoin white paper came in the wake of the financial crisis, and people were thinking about, we see that there clearly are problems, so are there ways that we can better address those problems?”
“I think it’s a beautiful thing when people get together in society and say, let’s think about what the most efficient way to solve a problem is,” she said. “And maybe that’s government, and maybe it isn’t.”
“So I don’t feel threatened and I think that’s one important thing for regulators to realize. We have a role, but it doesn’t have to be everything.”