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Hester Peirce: Lawless in Austin

SEC | Oct 8, 2021

Wild west image - Hester Peirce:  Lawless in Austin

Thank you to the Texas Blockchain Summit for the chance to be here today.  I have to start with my disclaimer that my views are my own and not those of the Securities and Exchange Commission or my fellow Commissioners.  I am interested, however, in what my colleagues have to say, which is why Chair Gensler’s habit of calling the cryptoverse the “Wild West” has captured my attention.  He is not alone in referring to the crypto landscape as the Wild West, a place we imagine to have been lawless—a society in which the gunslinger with the best reflexes and worst morals wins at everyone else’s expense.

See:  SEC likely to target stablecoins this week, report says

Merriam-Webster defines the “Wild West” as “the western U.S. in its frontier period characterized by roughness and lawlessness.”  Bringing government into that kind of an environment to establish some order seems like a no-brainer.  Today, however, I will offer a different take on the Wild West and, with that picture in mind, suggest a way forward in crypto regulation.

Texas may come to mind more readily than my native Ohio when we think of the old West.  Here too, though, the Wild West was marked by more order than the movies would have us believe.  Andrew Morriss, who, after a stint at Case Western Reserve University, moved West and eventually ended up in Texas, researched the Wild West and identified numerous forms of effective private regulation, which were effective precisely because they faced competition.  He explained, for example, that Texas cattlemen, whose ranches were delineated by clear property lines, were able to “creat[e] order on their ranches.”  One ranch’s code “prohibited cowboys from gambling, carrying six-shooters, keeping private horses, running game with [ranch] horses, drinking, and stealing cattle from other ranches.”

See:  SEC commissioner: Investors have the right to make their own decisions without regulators standing in the way

As detailed in an article titled “The -Not So Wild, Wild West,” western order was not limited to ranchers imposing gambling bans on their cowboys, but also included an array of private organizations dedicated to maintaining order:

[I]t appears in the absence of formal government, that the western frontier was not as wild as legend would have us believe. The market did provide protection and arbitration agencies that functioned very effectively, either as a complete replacement for formal government or as a supplement to that government.

On the other hand, ironically, our gunslinging ways in the old, supposedly staid, government regulatory world back East are causing people to question our commitment to the rule of law. Let me explain by raising several questions about our regulatory approach to date. I will conclude by suggesting that it is not too late for government regulators to set clear rules that respect the unique attributes and challenges of life on the crypto frontier.

I. Is There Really Legal Clarity Around Digital Assets?

II. Are We Enforcing Rules by Settling or Settling for Ambiguity?

III. Are We Fighting for Investors or Fighting for Jurisdiction?

IV. Are We Protecting Investors or Denying Investors Opportunity?

V. Are We Going to Pretend Everything is Centralized So We Can Regulate It?

VI. Are We Catching Bad Actors or Creating a Catch 22?

See:  Hester Peirce on personal liberty, crypto regs and retail investor particiation

  1. Can the platform custody client assets, a feature typical of centralized crypto trading platforms?  If so, how, given our concerns about custody of digital asset securities?
  2. If not, could a sufficient number of broker-dealers navigate the registration process to make a liquid market?
  3. Would the conditions placed on their registration permit them to function as market makers or to facilitate trading on behalf of retail investors?
  4. Can the platform trade non-securities alongside securities? If not, how can the platform, using two entities—a broker-dealer entity for digital asset securities, and an affiliated non-broker-dealer entity for non-securities, offer a seamless, or at least serviceable, trading platform to customers, who are likely, for example, to want to trade both digital assets and digital asset securities and pay for transactions in digital asset securities using non-security digital assets?
  5. How can a trading platform and its customers determine whether a particular digital asset is a security?
  6. If a token was sold in a securities offering as part of an investment contract, how long must secondary transactions in that token be deemed to be securities transactions by platforms trading the tokens?
  7. What are the mechanics of registering tokens sold as part of an investment contract as a class of “equity security” under the Exchange Act?

Conclusion

These questions are intended to spur a deeper cross-government commitment to searching for sensible regulatory solutions.  The stakes are high because the government is riding into crypto town with the promise that it can do a better job than the existing informal disciplinary mechanisms.

See:  Hester Peirce on personal liberty, crypto regs and retail investor particiation

We do have regulatory experience that we can bring to bear here, but we have to do so carefully.  As government agencies consider how to regulate, they ought to take their lead from Congress, work collaboratively with one another, and actively consult the public who will be subject to and protected by the rules.  I might approach this whole endeavor with a less strict hand than some of my fellow regulators, but the real question is not what I or any other regulator wants, but what you the people—the intended beneficiaries of this regulation—want.  I am eager to see what you accomplish on the crypto frontier once we set some sensible, clear regulatory parameters.

To paraphrase the standard closing words of a popular crypto podcast, which follow an appropriate warning about the riskiness of the space, “[You] are headed West.  This is the frontier.  It’s not for everyone. . .”

Thank you for allowing me to drop in on your journey West.

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