Simon Taylor & Cuy Sheffield have the honour of being joined by Commissioner Peirce to discuss SEC Project Crypto and making America crypto-friendly, self-custody as a fundamental American value and more!
Simon Taylor & Cuy Sheffield have the honour of being joined by Commissioner Peirce to discuss SEC Project Crypto and making America crypto-friendly, self-custody as a fundamental American value and more!
Timestamps:
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This episode is brought to you by Visa
A world leader in digital payments, Visa is bridging the gap between traditional financial institutions and innovative blockchain networks, helping players in the payments ecosystem navigate the ever-evolving world of tokenized fiat currencies with confidence and ease. Learn more at visa.com/crypto.
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We’d also like to remind you that the views or opinions of our contributors today are their own and do not necessarily reflect those of the companies they are representing. Nothing we say should be taken as tax, financial, investment or legal advice, do your own research!
Music by Henry McLean
Speaker 1 00:00
People have been avoiding the US in the crypto world because we've had regulatory ambiguity or regulatory hostility, or usually a combination of the two. And now we want to really change that. We want to come up with a rule set that makes sense, that accomplishes our regulatory objectives, but also lets people try things here in a way that's commercially viable and that will not lead people to cut out us participants, and won't lead people to decide to go to other places to build their businesses.
Sy Taylor 00:41
Welcome to tokenized. The show focused on stable coins and the institutional adoption of real world assets. My name is Simon Taylor, author of FinTech brain food, head of strategy at sardine. And I am joined, as always, by my friend, my co host, my colleague, Kai Sheffield, how you doing?
Cuy Sheffield 00:58
I am fantastic. Back to Back shows two in one week. We have a very special guest today. I'm excited for this one.
Sy Taylor 01:05
Yeah, welcome to the show, sec, Commissioner, Hester Pierce, how are you doing?
Speaker 1 01:11
It's great to be here. I'm doing well. I'm excited to be on your show. I do want to start with my disclaimer, which is my views, or my own views as a commissioner, not necessarily those of the SEC or my fellow Commissioners? No,
Sy Taylor 01:22
indeed. Well, we're just about to get into disclaimer time as well. So before we get into the show where we are happy to remind everybody that this podcast is brought to you by our friends at visa. And as always, I'm reminding everybody that views and opinions of contributors today are their own and don't necessarily reflect those are the organizations they represent. Please don't take anything we say is tax, legal or financial advice, and do your own research. Folks with that said, My goodness, Hester, it's been a busy week for the SEC chair, Paul Atkins gave a recent speech about making America the crypto capital of the world, there was a White House crypto report, and Kai mentioned you had given your own speech as well. So I'm very interested, from your perspective, what is the recent slew of announcements really designed to do? And what are you trying to achieve at the SEC in order to make America the crypto capital of the world,
Speaker 1 02:24
I think it helps to start with the PWG report, which is so the President's working group is a group of agencies that comes together, and we work together on the report, which shows you the breadth of The issues involved in crypto regulation, with different agencies having, obviously responsibility for different areas. But I think the point of that report was to say, you know, we realize there's a lot of work to do, and here's a roadmap for how that work might be carried out. One of the agencies with a lot of responsibility is the SEC. The report included some recommendations for the SEC, including, you ought to use your existing authority to get things rolling. Then Chairman Atkins gave a speech saying, look, here's how we're thinking about using our existing authority to get things rolling. And the SEC is not the only regulator at work here, but we do have an important role to play, and this is what we're planning to do. The point is to say that people have been avoiding the US in the crypto world because we've had regulatory ambiguity or regulatory hostility, or usually a combination of the two. And now we want to really change that. We want to come up with a rule set that makes sense, that accomplishes our regulatory objectives, but also lets people try things here in a way that's commercially viable and that will not lead people to cut out us participants, and won't lead people to decide to go to other places to build their businesses. And I think that's really what it was about. I gave a speech also, and mine was really focused on financial privacy, which I think is a really important piece of this. A lot of these technologies that are being developed are being developed to disintermediate financial institutions or other centralized intermediaries, and I don't think that we'll end up in a world where there are no centralized financial institutions. I think there'll be a lot of instances in which the technology is technology that centralized financial institutions can use to better serve their customers. But I do think that we will have more options for people to engage in peer to peer or peer to protocol transactions, and it's really important that at this moment, we not allow our fears of how technology can be used badly to prevent these technologies from getting into the hands of people, regular Americans, who want to use them for their regular everyday. Tai lives, encryption has been really transformative in a lot of the things that we're able to do. And I think at this moment, we should recognize that disintermediating technologies can be equally transformative. I
Cuy Sheffield 05:15
want to get into the speech more, which I thought was fantastic, but before we go there for Project crypto, it seems like there's this pretty big task of a ton of work that the SEC has to do that is divided into, in my mind, maybe two categories to start with. One is, how are crypto assets treated? How do you decide what an asset should be categorized of? What are the rules? How should they be treated and then the second is, how can you leverage the technology to represent traditional assets, bringing traditional assets on chain? Can you talk a little bit about is that the framework that you have in within each of those categories, what are some of the top priorities that you're focused on that you think are important being able to give clarity to the market?
Speaker 1 06:00
Yeah, I think that lays out the issues. Well, there's the issue that's been plaguing all of us since 2017, or whatever, which is thinking about when you have a token, and what is that token? Is that token a security? Is it not a security? Is it a non security that's being offered as part of a securities offering? And those decision on which category that fits in has implications for how that asset has to be treated, where it can be traded, what the responsibilities are of broker dealers, investment advisors that are interacting with that asset. And so that is a piece of what we're doing is we're trying to bring some clarity there to when you think about an asset as a security, or when it may not be a security, but it is being transacted in a securities offering. But then you're right to say there's this other set of issues, which is taking real world assets and tokenizing them, and specifically taking securities things that we all agree are securities, and tokenizing them, and those obviously will be regulated by the SEC and generally, will be regulated the same way a non tokenized security would be regulated. We need to make adjustments to our rules in areas where the rules are such that they don't accommodate the new technology, but generally, if it's a security you know all the same rules will apply. So just helping people think about how those apply in this context,
Sy Taylor 07:36
I'm aware there's also the clarity act that's currently working its way through the Senate and needs to hit reconciliation and more things will happen there in the future. And this word clarity keeps coming up for sort of securities versus commodities versus other things. I think chair Atkins gave the example of a car title, of something that is very clearly something that could be represented as a token, but is not necessarily something that financial regulator would have the same sort of jurisdiction over. The speech also talked about explicit exemptions for ICOs and airdrops and things of that nature. Could you talk me through some of the thinking there and the goals around supporting innovators? Yeah.
Speaker 1 08:19
So I think one of the things that I had been looking at now for a while is, can we have some sort of a safe harbor to allow people to do something like an Ico right? Something where you're trying to do a token distribution event, you're trying to get these tokens into the hands of people who can actually use them. And that has been a persistent problem, to figure out a way to do that that's consistent with the securities laws. So I suggested a safe harbor several years ago now, and I think we're looking at, is there something like that we can do where you as a buyer get protections in terms of disclosures upfront, when someone's doing one of these token distribution events, that you can understand, what are the token economics? Who's the team behind it? The things that you'd want to know at some point, once those promises have been fulfilled, or once the token is functional, there'll be a way for you to move out of that disclosure framework. That's kind of one of the approaches that we're thinking about. And
Cuy Sheffield 09:22
then one of the pieces in chair Atkins speech that felt like it really stuck out to the industry and was incredibly well received was this idea of reaffirming self custody as an American value. Tell me more about how did that come out? Like it's not something people would expect to hear from the SEC how have you thought about self custody as a new way for consumers and investors to interact with their assets? What does it mean to self custody and equity? What do you see as the potential value and why it's important to make sure that that is a fundamental
Speaker 1 09:56
right? Yeah. I mean, it's in some ways new, in some ways it's a real. Emergence of something that people could do before you could hold your stock certificate when they were in paper. So if you're owning a tokenized equity, you should be able to have it in your own wallet. And I think that is a fundamentally American value that you would be able to do that. It's not to say that everyone's going to want to do that, but just giving people the option, I think there are some things that we'll have to work through as we think about what is a peer to peer transaction of tokenized security. What are the implications of those kinds of transactions? So and I don't imagine that some of this is going to happen overnight. Either, there's a lot of interest in tokenizing all kinds of things, and we'll see which ones take hold and which ones maybe are not as meaningful and people decide not to do
Sy Taylor 10:49
it. I think that's a good link to the conversation around privacy as well, because a lot of folks see direct custody or self custody as purely a private conversation. But privacy is nuanced. Can be commercial confidentiality if you're a very large financial institution, versus consumer privacy. So talk a little bit about your speech and your thinking that really drove that speech.
Speaker 1 11:14
I've been a commissioner now for a really long time, and I've been watching with some concern the increase in financial surveillance that we have in the United States. We at the SEC have a program now where we're monitoring what everybody is doing in the stock markets all the time. And some people may say, Well, you know, that's fine, right? Because I'm not doing anything wrong. So do I really care if the government is is watching me. In fact, I probably like it, because I want to make sure that the people who are doing bad things are going to get caught. But I think that isn't really how we as Americans generally think about life in general. You should be able to go about living your life without having the government follow you around to just watching you in case you might do something wrong. The idea is there's supposed to be a suspicion of guilt before they start following you around and watching you. So for some reason, we've given up that concept in the financial space, and I think part of the reason is that, and this kind of gets into very lawyerly things, but we have Fourth Amendment protections against searches and seizures of our private things, papers and effects. But if you hand your your information over to a financial institution, then you're viewed as having kind of consented to that being public, or agreed that that's going to be public. So the government has come to rely very heavily on financial institutions handing over data about their customers. It's just kind of a treasure trove of information. There's something called suspicious activity reports that get filed, and so you think, Oh, well, that is suspicious activity, but the standards are pretty low to those being filed. So there's a lot of information that's being passed about regular people's activities to the government, and I think that it would be wise for us to take back our financial privacy, a presumption of financial privacy, and so one thing I've observed is that a lot of the technologies that are being developed now are actually really powerful in doing that, because they do allow you to conduct transactions that you would have once had to do through a centralized intermediary that could then do what it wanted with your information, and now you can do that directly. And so that means that we can take back some of that privacy, and that can be a very concerning thing from a government's perspective, because then that means that we've lost that window into what's going on out there in the world. But what I wanted to say with the speech is, hey, government, remember that this technology can be used by regular everyday people to protect themselves from having to give their information out to people. It's a dangerous world out there. So people really do want to keep information to themselves and only let other people have access to the minimum information those other people need to engage with them on some kind of transaction. And so let's embrace these privacy protecting technologies, because they really empower regular citizens to go about their everyday lives in ways that are safer and that are more privacy protecting, and that's something that really goes to the fundamental dignity of a person. So I think it's a great moment for us, because we have great new tools, and so it's just a moment where we should embrace them and not run away from them in fear.
Cuy Sheffield 14:40
I love the name of the speech, peanut butter and watermelon. And I was like, what? How's this really peanut butter watermelon? It's a great story that you tell. I think one area that resonated with me, I was thinking about stable coins as I was breeding through in the number of conversations that I have with banks today, where. Their their starting point is to say, wait a minute, how can stable coins have different AML obligations than deposits do? Like, how is that right? Isn't it same activity, like, same risks, like, same rules, just because it's on a another type of ledger? Why are they able to have a consumer across the world spin up a wallet that they download and be able to hold without the issuer having to go through and conduct KYC, and I think that's a very common question that we get, and I think on one hand, it speaks to the technology itself can enable you to do things that an existing core ledger can't. And so the fact that a stablecoin issuer can still be able to freeze and seize funds that law enforcement doesn't have to wait for a suspicious activity report that they can monitor on chain. And so it seems like these new technologies are enabling new functionality that can then be interpreted by regulators to have a different set of rules. But then it also gets the point that you can, on one hand, lose your privacy, because everything is public. And so how do you think about those challenges of digital privacy in the context of the way that stable coins operate today, it's great that everyone it's permissionless, you could access them, but then all these transactions are public on chain. Do you think there have to be balances between that?
Speaker 1 16:18
Well, I mean, I think that is certainly true. And stable coins are interesting because they're issued by a central at least most of them now are right, centralized intermediary that then can do things like freeze and seize. There's a lot more control there. But I think when you're thinking about the transactions themselves, that is the reason that a lot of people have have really embraced privacy, protecting blockchains or privacy, protecting mechanisms that can enable you to shield your transactions so that everyone doesn't know all of your business. To a lot of people, that sounds kind of shady. Well, why would you want to obfuscate your transactions. But I think, when we think about it, you know, you don't take your credit card bill and hand it to someone and say, Hey, do you want to see how many times I went to the store and bought chocolate? I really don't want people to know that about me. A list of all the transactions that you engage in is very revealing about who you are, a list of who's employing you, a list of where you're donating money. These are very personal things, and so I think that's why some people have embraced these privacy protecting mechanisms. And then I will say, you know, with stable coins, specifically, when we think about cash, right? We think about, two regular citizens exchanging cash that typically would not be the kind of thing that anyone would be watching, right? So you can give someone cash and there's no record of that transaction. And so I think a lot of people are looking for ways to replicate that in the digital world. How can I have a transaction where I can just pay Simon without anyone else having to know that I've paid Simon. And we should be able to do that as human beings, right? We should. I mean, there are obviously, there are tax issues, and there are all these kinds of things people have to be compliant with the rules. But that doesn't mean that we should have regular citizens transactions with one another being recorded for everyone to see or for the government to see.
Sy Taylor 18:27
As you say, with the technology like zero knowledge proofs and the technology like programmable transactions, you can automate a lot of the things that you would care about, like taxation and classification of a transaction without necessarily having to invade the privacy of that underlying individual or reveal it to everybody in the network. So I think that's gonna be fascinating to kind of watch. I did want to ask if, if you indulge me on this piece around, sort of the some of the protections for software engineers and software developers, and some of the some of the challenges we've seen there for creating defi protocols and doing those onshore. What's the thinking there around what those might need to look like, and the goal then to kind of onshore them. How are you going to start to unlock that? Or is that still policy work that needs to be done?
Speaker 1 19:16
Well, I think there is policy work that needs to be done, and I think a piece of that is really explaining to people that when someone writes software, it is a form of expression. I mean, we think about poetry, but it's also writing code. I mean, that is a form of expression. And so when you do write open source code and you put it out there, someone can use it in ways that you didn't intend or can use it to do really bad things, and you have no control over whether someone uses it any more than you know. If I'm manufacturer of kitchen knives, someone could take one of those kitchen knives and instead of cutting up a green pepper, they could do something terrible to someone else with it. And so I think we need to be careful not. To put responsibility on the wrong person. And I think some of these conversations around software development and defi really requires us to sit down and have that conversation. And they're difficult conversations, because there are a lot of bad people in the world, and they're going to use tools that are out there to do bad things. And it can be very tempting for us to say we want to control the software developer, instead of going after the bad actor who's actually using that software for something bad. These questions can be complicated, because sometimes the developer is doing something more than just writing the software right, and then the questions become more complicated. But I do think it's important for us to have a baseline that we don't want to hold people responsible for how other people use the code they write.
Cuy Sheffield 20:50
How do you see traditional financial institutions interacting with defi over time? Because something we get excited about as product people and technologists is it's almost like you have this new open source lending infrastructure that can then easily be embedded inside all different types of applications, where the cost and the barrier to offering a product where someone can earn yield or they could borrow against their assets is getting lower and lower. You don't have to build all that yourself, but it feels like there's just, there hasn't been the clarity of, if you're a FinTech, if you're a traditional financial institution, and you want to serve as, like, a gateway into one of those protocols, how should they look at that? Like, do you see a path and, and I love that you shouted out the defi mullet in the speech, which I think is the first time that that's been in the SEC record. If, if I'm not mistaken, but like, do you see that world happening where you've got these FinTech interfaces on the front, defi plugs it in the back, and then, yeah, how do you manage the risks and obligations between the defi protocol and how those interactions happen, versus at the centralized interface connected
Speaker 1 21:54
to I mean, I think it is a really interesting and exciting area that it will enable people. I mean, these, these are great tools, and so I think centralized entities will want to make those available to their customers. And I think that answers a lot of the concerns that people have. You know, people are concerned that in this brave new world, people will be using these decentralized finance tools, and they won't have any protections at all. I think there will be people who are comfortable taking that risk, and that's that's great for them, but there are others who are going to want to go through the firms that they've always dealt with, and those firms will be able to offer them better and cheaper services because they're using these defi tools on the back end. And then I think, really, it's not that new of an idea to hold a financial firm. You know, that's the context I'm thinking of. I told a financial firm responsible for the products and services it offers to customers, regardless of what those products and services look like on the back end, it doesn't really matter. You know, if you're using humans to do something, to do loan underwriting, or you're using a defi protocol to do loan underwriting. Doesn't really matter. You're still responsible for the product that you offer to your customer. That's why I think we are going to see when regulatory clarity comes to this area, I think we're going to see traditional financial institutions looking for ways that they can use these new tools, again to serve their customers better.
Sy Taylor 23:28
Are non serving them better. There's a really interesting idea of financial super apps, because my understanding is that offer some of the non securities products alongside securities, but also to offer to be an ATS or to be a registered broker dealer. There are so many licenses and licensing pathways that one might have to go down in order to be that Super App, to pull a name out of the air like a Robin Hood or somebody along those lines. What's the thought on trying to streamline those and could you more adequately, sort of start to capture risks if you do that? Because I think in chair Atkins speech, he gave the example of how financial institutions, banks in particular, are generally not required to get lots of smaller licenses if they're federally chartered, because the assumption is they have the highest level of risk is the thinking there along those lines, and how do we solve those problems?
Speaker 1 24:25
We have a very complicated financial regulatory infrastructure in the US. We have federal regulators, state regulators, banking regulators, commodity futures regulators, securities regulators, so it is extremely difficult for someone who's trying to jump into the US and offer financial products and services, even to figure out who they need to go to to get regulatory licenses. So whatever we can do to streamline that, I think is helpful. I mean, it is good to have some regulatory options, I think because then if. Someone is getting it wrong, someone else might try to do it differently, and I think that's really served us well in different ways in the US. So I'm not arguing for a super regulator, but I think having a world in which we have regulated entities that want to have stable coin trading trading against a tokenized security, or bitcoin trading against a tokenized security, that that can be done without having to get all kinds of new licenses to do that. I think that makes sense in terms of efficiency in serving your customers. So I think that's kind of how I'm thinking about it already an exchange or an ATS can already offer non securities alongside securities. It's in some ways just consistent with how it already works, but it'll be interesting to see how you know, there's, as you've mentioned, the legislation, the clarity Act passed the house, there's work in the Senate. And so I think that Congress is grappling right now with these really hard questions about, where does it make sense to have the regulatory authority lie, and what does that look like? And I think trying to give the most flexibility so that we make sure that we get the regulatory protections we want, but also that we give flexibility for entities all across the spectrum to experiment with this stuff is really important.
Cuy Sheffield 26:25
You mentioned stable coins trading against tokenized assets. I feel like this has been this concept that's been written about for like a decade now, the delivery versus payment, and if only everything was on the same ledger, if you had your stocks and bonds on the ledger here, and then you have tokenized cash on the ledger. That everything could just settle instantaneously. But has it really happened in practice? How do you think about that concept of delivery versus payment? Do you see a world where that will be possible, that you will have stable coins trading, 24/7, on chain settling, or what role do stable coins play within a broader tokenized asset ecosystem?
Speaker 1 27:07
You know, as a regulator, I'm going to tell you that my vision of what the future may be is probably limited and may not be the most imaginative and may not be the most accurate, but I think that now that the genius act is law and there is a clear regulatory framework around stable coins, there's going to be much more interest in integrating stable coins into the traditional financial system. And I think, as people are looking now, there's a lot of excitement about tokenizing securities. And again, I don't know whether all of that will materialize, but as people are looking at that, I think the ability of stable coins and tokenized securities to be there on chain together is going to lead to some efficiency. And so I do think that we'll see some of that materialize sooner, now that we have more regulatory structure. There
Sy Taylor 28:04
was a really great piece in chair Atkins speech where he talks about the paperwork crisis in the 1970s and the rise of digitization. And Vlad tenev, the CEO of Robin Hood, has said he believes that tokenization is the biggest breakthrough since the invention of the Central Limit order book. I'm interested in how you're framing sort of tokenization as a risk as well as an opportunity. Are there new risks it presents, and how do we become thoughtful about what those are as well?
Speaker 1 28:34
I think anytime you try to change the rails of the financial system, they're risks, because you never know what you're opening up. And you have to be thinking about that. I mean, there are risks to having a much more 24/7 market. There are risks when you build things on a public blockchain, right? That's something new, and if you're doing it on a private blockchain, there are other risks that come from that. Certainly we have a lot to think about there. One of the things that I think is really interesting about tokenizing securities and about being able to layer on smart contracts is that you can really automate a lot of the processes that would have required some sort of human intervention before. But that means things can happen really fast. It's great from the perspective of making sure that that collateral goes where it needs to go when it needs to go there, because it's been programmed in before according to terms that both parties agreed to. But it also means that that stuff really then happens quickly. So I think that's one thing also, you know, if we're talking about doing settlements that are immediate settlements, or virtually immediate settlements. There's a lot more pre funding that has to occur, and that has to happen somehow and that so that's something we also have to think about. A lot of people have looked at this and said, Whoa, you know, sec, you need to slow down, and you need to be very careful about how this is done. Of course, we need to be careful about how this is done. Yeah, but I think the way to do this is to allow people to come forward with things that they want to try out, allow them to try those out and not try them out in the sense that we're expecting that this is just an experiment that we get to have a write up and put it in the history books and shut it down, but really try it out with the idea of figuring out what has commercial viability, and then having a path for long term regulatory framework around that that makes sense, that does adequately protect investors and protect the integrity of the financial system. We don't want to have another paperwork crisis of the 60s. I mean, that was, I was glad to see that Chairman Atkins mentioned that because that was a very wild time in the markets. It shows how important back office stuff is, and the markets had to close so that people could catch up on what was going on. And a lot of firms didn't survive that period. So I think we really do want to do this in a thoughtful, careful way. I'm
Cuy Sheffield 31:01
just fascinated to see how smart contract risk plays out as smart contracts become more and more integrated into the financial system. And I think we've seen time and time again in defi, major hacks that have happened. And it's interesting, the difference in defi is when you have crypto assets that are entirely permissionless. A smart contract gets hacked. Eth is stolen, Bitcoin stolen, like the money is gone. It feels like there might be a version of smart contracts connected to tokenized securities or stable coins that could have more protections in place where you should expect, there's no chance that there's gonna be no hack of a smart contract ever. But it's like, what is the mitigation if a hack happens, then what? And if you have controls in place at the asset issuance layer, what other things need to exist when a smart contract resolves in the way that it doesn't? And so do you see that being a role for the SEC in the future around standardizing smart contracts? Is that too much in the weeds and Tai How do you balance the private sector and the public sector for dealing with these new generations of technologies that the technology itself has these embedded risks in it that's very hard to predict and plan, for
Speaker 1 32:16
taking it away from smart contracts, for a minute, I have supported A principles based approach to regulation, as opposed to a super prescriptive approach to regulation. So for example, when it comes to cybersecurity, like I think the firms we regulate need to have good cybersecurity programs, but I don't want to tell them what those programs should look like, because when I start telling them, here's the checklist of things you need to have in your program so that it's an effective program. You get people in those jobs who are really good at following checklists, who are not very good at thinking ahead about where the risks might actually be coming from, and you just divert all the resources to thinking about the risks that we've pre identified. So that can be really problematic. You want to have a more principles based Hey, think about the things that are important in light of your facts and circumstances and what you see going on in the world. And so I think similarly, when it comes to smart contracts, while we may have a role to play in thinking about standards, we should be very careful, because we could end up baking in standards that become not the best thing for people to use. I've seen that happen before with SEC regulation, where you have a technology that's actually baked into the rules, and so the industry is using that technology to satisfy our rules, and then they're doing something else for what they actually rely on. So I'm thinking about record keeping systems. You got one to satisfy the SEC requirements, and then you have the other one that you actually use, what a waste that is, and that probably also introduces new risks. And so I think whatever we do here with respect to standards around smart contracts, we should be thinking carefully about the risk that we could be embedding old technology into the system.
Sy Taylor 34:00
Avoiding being prescriptive is certainly a opportunity, more than a risk. And principles I'm sitting here in the UK, another principles based regime, and one of my observations was the FCA projects, innovate and sandbox, Digital Sandbox, and now the supercharged Sandbox has been a great benevolent honeypot for the regulator how to have transparency over what is happening in the innovative space, and how can we have a conversation about what we the regulator view as could be risky, but let the market decide how it's going to solve that problem and continually to adjust that and you need that relationship where it's a conversation in order for that to to continue to work. And one area where there was a real lack of clarity, where there probably wasn't a conversation happening, or if there was, it was it was not happening in a positive way, was around liquid staking. And there was a recent SEC staff statement that outlined participants deposit their cryptos into third party staking providers and then they receive receipt. European tokens, the staff statement said that won't require securities law disclosures. Can you talk me through the thinking behind that statement, and what that you think that means for the market as well? Yeah.
Speaker 1 35:13
I mean, I think the thinking is this is part of our larger effort at the SEC to provide clarity where we can about where the securities laws don't apply, so that people understand the limits of our jurisdiction, so they understand we're not getting the protection of the securities laws in this space. But it also enables people to do things without feeling they have to register their liquid staking program. And I mean, I think the idea is that you can stake directly, but a lot of people are going to want to use illiquid staking programs for reasons, so they can have more liquidity and flexibility around the tokens, but also so that they don't have to deal with the technical aspects of it. And so that really isn't an area where our regulation makes sense to come into play. What that will lead to, I think there are a lot of people who are excited about us weighing in on that. It was something that people had wanted us to weigh in on, but we'll see what the implications in the marketplace
Cuy Sheffield 36:11
are. So we have a good number of regulators that we've heard listen to the show and have found it useful. What advice do you have for regulators, particularly in other countries that are earlier, is starting to approach the space in terms of the mindset, and how do you even look at some of these new technologies and the principles behind
Speaker 1 36:32
them? Well, I'd say approach this with not fear, but with more of a sense of awe. And I've said this more generally, with respect to technology, it doesn't mean that you go in with rose colored glasses on. It isn't all good, right? There are things that are bad that can happen. There are risks that can be uniquely caused by some of these technologies, and we should think about those, but go in with a sense of awe, because these technologies have the potential to improve the lives of the people whom you serve as a regulator. And so you are jumping in front and saying, you know, no, don't use any of these new technologies. We're not going to allow these in our jurisdiction. Is depriving the people that you are signed up to serve when you joined as a regulator, it's depriving them of the ability to benefit from these things. We think about crypto, and we think about a lot of the bad things that have happened with crypto, of the frauds that have happened. But I would also point these regulators to the fact that a lot of the bad activity has occurred through centralized entities that are exactly what we're trying to avoid. When we go to disintermediation, you take the centralized entity out of the picture, or you limit its role, and then you have less chance that someone will defraud someone else, because there isn't that intermediary there to steal the money or to have a conflict that's not disclosed, and so forth. So think about the potential of the new technology to solve some of the regulatory problems, thinking about smart contracts and about the ability to program stuff in the ability to actually have the asset travel with the disclosure that is important for the buyer of that asset to have. These are new possibilities that the technology allows. So balance your skepticism, which is good. I'm always arguing that regulators and people buying stuff be skeptical, but balance that with the idea that just closing the doors to all new technology is going to hurt the people that you are charged with protecting.
Sy Taylor 38:43
I had a couple of thoughts that ran through mine. First of all was Dr Chris Brummer, a friend of the show, runs blueprint, the disclosures startup that's really helping with Mika compliance and many, many others. But he has said for a while that disclosures themselves are not always effective. They're designed to give consumers solve the information asymmetry, but there might be better ways to do that in the future. So what do you think the role of disclosures might start to look like? And what do you think the role of consumer protection needs to look like in the not too distant future? So that was one thought I had.
Speaker 1 39:19
Well, Professor Brummer did write a paper on how he was thinking about disclosure being used in this it's kind of a new era for disclosure because of the new technologies. And I think that's something that has helped me kind of think about this space as well. I mean, disclosure is always going to be important. I think you always want to live in a world where the people buying things understand what they're buying and what purpose it's going to serve in their investment portfolio. For example, I think both sides of that transaction, if you've got honest people involved, should want the person buying it to know what she's buying. But I do think that new technologies give us new ways to communicate in. Information, and maybe more effective ways for that information to be communicated and absorbed. I think that's where I'm most excited, is seeing new technologies that enable people to really interact with the information. Investor and consumer protection are going to continue to be important. I think that some of that can also be coded in in a way that it couldn't be before. If you have a lock up period, for example, where an insider shouldn't be selling something for a certain amount of time, you can actually program that right in. I think that's really an interesting investor protection mechanism that the new technology allows. So I'm optimistic that even though there's some scary things that new technology. I mean, when I think about AI and about the ability of people to do deep fakes and rip people off that way, that is scary. But there are some counter measures that the technology offers as well.
Cuy Sheffield 40:53
I just wanna say it's amazing how knowledgeable you are and how the SEC has become on on just the core technologies and issues that matter to the ecosystem.
Speaker 1 41:05
Well, we have a lot of great people at the SEC. I know the SEC has gotten a bad reputation over recent years, but there are a lot of really great, hard working, smart, technologically savvy people here. And I think once the leadership of the agency said, Hey, we want to go in a different direction. The staff was ready to jump in with enthusiasm to get regulation right.
Sy Taylor 41:29
Indeed, they call it public service and civil service for a reason. The service is noted and appreciated. I did want to sort of ask if somebody is in the industry, whether they're an entrepreneur, an engineer, a builder, or even a CEO of somebody that had been in a defi project. How should they engage with the SEC? What's the right way to do that?
Speaker 1 41:50
Well, we have on the SEC website, sec.gov you can go there's a crypto Task Force web page. We welcome written input. We welcome meeting requests. We had a series of round tables here at the SEC we're on a road show right now. We are particularly interested in meeting with small, I mean, very small and very new projects. And the idea there is to hear from you about what the regulatory fears and obstacles you have, what you think we should be doing as we're thinking about constructing this new regulatory framework, we had our first one of those meetings in Berkeley, and it was an extremely useful discussion for me to hear. And so I'm hoping that we'll get some other interested projects
Sy Taylor 42:33
that's absolutely fantastic. And is there anything we haven't asked you that you wanted to talk about and you wanted our audience to be aware of?
Speaker 1 42:40
I think you've done a great job covering the landscape of where things are. I mean, things are moving quickly, and so I guess my advice is, speak now, because you really can have an influence in shaping the way the regulatory framework works. I've focused a lot on the US, but I think what happens in the US will end up having an effect on the way things are done in the rest of the world.
Sy Taylor 43:04
I certainly expect that some of our regulatory listeners will be paying a lot of attention to this, and it's something as a UK citizen, I hope we can take a lead from especially the pace and the velocity. It's just been incredible to watch the speed at which the agency is moving. I know that takes a lot of hours, and it takes a lot of work for a lot of the staff, so we certainly appreciate that. So thank you so much, Hester for joining us. I really hope people will check out the SEC and check out your work and get involved in Project crypto. Thank you so much for joining us. And Kai, is there anything else you want to say before we close out?
Cuy Sheffield 43:38
No, just I echo Simon's comments, thanks for your leadership, and I think it's an incredibly exciting moment in time for builders to figure out how we can use these technologies to actually help improve people's lives.
Unknown Speaker 43:50
Well, Simon and can I appreciate you having me?
Sy Taylor 43:52
Thank you. Thank you so much, and thank you for watching or listening. Everybody. Remember to hit the subscribe buttons, and this is gonna be an episode you're gonna want to Share. So share it with everybody. Bye for now.