SEC Commissioner Hester Peirce & Marvin Ammori

so with that i want to quickly introduce our first and my most exciting talk for the day i want to welcome the scc commissioner hester purse and marvin amari they'll be talking about all things defy and regulation and um if you have any questions from the audience please type them in the chat and we'll be able to relate those questions back to to marvin who will be moderating and interviewing um and uh i i won't spoil all the content here there's so many things we want to talk about so i'll just let them dig in directly so marvin and commissioner purse welcome thank you thank you kartik commissioner purse uh you might want to unmute so we're going to be asking you a lot of questions all right i'm ready great well welcome uh we're so excited to have crypto mom herself here uh and so very excited to to have you here now you know as you might have heard it's about a thousand developers at this conference and i'm wondering uh how is this audience different from the audience that an sec commissioner usually speaks in front of well thanks marvin for having me here and it's a delight to get to get a chance to talk to you and to all the developers out there you know typically at the sec we talk to we we talk to a wide range of people but they're typically lawyers not developers uh just just candidly um but i my door is always open so i love talking to all kinds of people um so this is a wonderful chance for me to get a chance uh to speak with you i have to give you my disclaimer which is that the views that i represent are my own views not necessarily those of the sec or my fellow commissioners got it well hopefully you'll persuade them to come over to your views soon enough commissioner purse trying so um tell us you know how have you been think have you been thinking about d5 you know what's the awareness of d5 at the sec um you know what are your what are your thoughts about its potential benefits uh you know just sort of generally how are you guys thinking about it well again i think this is an area where we are learning a lot you know the growth in d5 has been pretty remarkable um in a in a short amount of time regulators tend to take a long time working on things and thinking about things so it's it's a bit difficult to keep abreast of everything that's going on in the d5 world that said we are trying to do that we have a a dedicated office at the commission not dedicated just to d5 but dedicated to financial technology and there are people in that office who are quite knowledgeable and who are talking to people in the defy world frequently and uh and we're working with our our fellow regulators across the world to try to get our arms around around d5 personally you know i've i've found it really fun to try to learn about it i'm i am a lawyer by training so it's a bit of a uh stretch for me but but i i do enjoy hearing people talking about the projects that they're working on and trying to learn a little bit about it i think it's a wonderful opportunity for people to try to build a financial system and and i think it's not just related to finance i mean i think finance is probably step one but i think there'll be other things happening in this space that allow people to engage with one another without intermediaries that they've traditionally had to rely on and to build things with people who are you know spread far far and wide across the world and so it's it's a way to bring capital and people together i think that is is pretty um unprecedented in our history and so i'm excited to see what comes from it that said it does cert it certainly does bring its own regulatory challenges um so often when uh when developers are working on um projects they're looking for real world problems to solve right so i'm wondering you know from where you sit at the sec you know are there any problems you see in the financial ecosystem the traditional what we call trad fi that you think maybe d5 could solve because it could remove intermediaries do you see any things that you know you might not have the solution but maybe the developers should be thinking about solving some problems that you see well i think from from my perspective when i look at the traditional financial system there are a number of problems that i think consistently pop up one of them that we've we've seen is systemic kind of risks when something goes wrong at one financial institution or or several large financial institutions it can have pretty widespread consequences and so that's something that i think is inherently something defy could be addressing because of the decentralized nature another issue that we see is people taking advantage of other people telling them they're going to do one thing and doing another thing again something that i think defy can address because it is something where where it should be transparent where you can see everything that's happening you understand exactly how a transaction will occur and what the terms of the transaction are so that's something that i think is promising um so those are a couple areas where i think we see problems all the time um but i i also think that something that defy can do because it it does try to bring together people um many people into a a system together you you can take advantage of decentralized knowledge in a way that it's much more difficult for the traditional finance financial system to do that so if you think of something like credit ratings where you're you're trying to understand the risk around around something it's helpful to have a lot of different points of view coming into play there and so i think that's an area where where certainly defy can play a role now from a regulatory standpoint i also think having those eyes and ears of lots of people being applied to a situation can be helpful um we're trying you know we we're limited in our resources and so trying to monitor what's going on everywhere is is difficult but i think defy can probably be part of that solution now that maybe will look more like self-regulation than regulation but to the extent we can offload some of the work that we that we um do and offload it to people who can can watch over the system themselves that could end up being a good thing another area where defy is often thought about i think as as part of the answer we worry about the ability of the financial system to serve people all across society and i think that's something that defy can do well but it's not only individuals i think we we need to think about how d5 can be valuable for getting capital um to entrepreneurs that's something that i think about a lot in my role as a commissioner um so that's that's another area where you might apply your your development expertise do you guys hear nothing [Music] oh okay okay great um so uh the some of the things i heard there commissioner were uh d5 can expand financial inclusion could also help uh with getting uh financing to entrepreneurs could help with uh monitoring the markets with many eyes on uh the transparent blockchains uh such as you know the ethereum blockchain obviously right there's so many people monitoring transactions on that it could also help reduce systemic risk and one of the main causes of systemic risk in the system are these intermediate intermediaries uh one thing i find interesting is uh your point about self-regulation right do you have any any thoughts you know within the traditional financial world there's lots of different self-regulatory bodies uh and i'm wondering have you given any thought to how self-regulation could happen in the defy ecosystem at all yeah i mean most of the self-regulatory bodies in the traditional financial system are actually quasi-governmental regulatory organizations because we actually do play a pretty big role in regulating them and thus and you know regulating the ultimate end that they're trying to regulate so i i think in d5 if we were trying to take advantage of self-regulation i would want to see it be more a pure form of self-regulation where you really are um working as a community to try to monitor what's going on with different projects you know again a lot of this is it's code based right so so you can look at the code and know and and understand what's going on and i think that's a very valuable form of of regulation so that's where i see um the strongest case for it i mean i think that one of the worries i have about about what's going on in d5 i think there's a lot of positive but one of the concerns i have is that you know we we portray everything as being very decentralized but there are often is a very centralized element of a lot of what's going on um you know there there are ways for an administrator whether that's one person or a group of people together to make changes and those things need to be very transparent and so i think it's really important for the community to really take that seriously to to insist that projects are very upfront about how changes can be made and who can make them and what the safeguards are around that i think there are a lot of you know because there's so much money now tied up in so many of these projects there is going to be a lot of interest from a lot of people whether it's it's someone associated with the project or someone um from outside who's a bad actor or maybe um a regulator is going to be looking in that at that pool and so i think people really need to be building systems that are are able to handle large amounts of money in a way that's safe and in a way that they can prove to be safe to their users so a little honesty i think can be really key in this area and i think that's where self-regulation comes in while you were speaking that that reminded me and i wanted to to clarify for developers who don't know the sec tends to not be a merit regulator turns out to regulate the merits underlying an investment opportunity and tends to focus more on disclosure making sure the market has a lot of disclosure and but that just made me made me realize so some people who are listening might not know very much about the sec we just kind of dove right in talking about defy maybe you can just sort of explain where the sec kind of fits within the broader federal government when it comes to you know investments in general and securities versus commodities et cetera that might be useful for a paragraph summary or two paragraphs sure i should have i should have done that at the beginning i don't expect developers to really be familiar with the sec it's it's one of many federal financial regulators and we we regulate broker dealers investment advisors the stock markets options markets and we also regulate public company disclosures and mutual funds exchange traded funds and you you're correct to say that we're we're not a merit regulator though sometimes we give way to our worst selves and we start to edge into merit regulation but really what what our main goal is is to get disclosures out there so that investors can make decisions about what they do want to invest in and to make sure that when financial professionals and financial intermediaries are dealing with investors that they're doing so in an honest manner so that's kind of our our mission facilitate capital formation protect investors and you know protect market integrity that's kind of the core of what we do great uh and uh and also the jurisdiction is limited largely to things that are securities right so the question of whether or not that's particular cryptocurrency is a security or not cut is a big threshold question that determines whether or not a token will be regulated a certain way and i know that you had proposed uh a safe harbor uh to try to get some clarity uh um because it's a new area of technology it's new market structures and a lot of the existing laws are totally crystal clear until you propose something that would be crystal clear do you want to sort of explain the safe harbor in a few sentences and kind of where it is in the process so i can't promise that the safe harbor would be crystal clear either but it's designed to give a little bit more a little bit more definition around when something needs to be treated as a securities offering and how you could do a token distribution event consistent with the securities laws right now we have a very broad definition of security which is intentional because you want to make sure that if someone is raising capital to build a company that that is encompassed within within our our jurisdiction so we have this kind of open-ended definition that captures those kinds of things but that has been quite difficult for a lot of a lot of projects that are trying to do a token release that are trying to get the tokens out there so that people can use them in the network and that the network can take hold with network effects and so what i what i proposed is you have a three-year period um where you make disclosures to the people who are buying your tokens you update those disclosures periodically you're telling people what the token economics is you're telling them what your plan for development is and you're when you tell them that you better be telling them the truth because you're subject to the anti-fraud rules under the securities laws but at the end of three years if you can show that your token is a utility token essentially or if you can show that your network is decentralized then you can move out of the securities framework and you can go about your merry way without worrying about the securities laws um this is something that from talking to people in this space they think it would be useful because we've we've tended to provide most of our guidance in this area through enforcement actions which can be a very unpleasant way to learn the law and i think it would behoove everyone if we set out clear guidelines up front so that people who are really trying to do the right thing had an avenue to do that got it and so your reference to enforcement action reminded me uh i believe it was last week or the week before the sec put out a list of priorities for the year i think they were rule-making priorities and i if i'm not wrong nothing about cryptocurrency was on that list uh how did you interpret that or how should people think about that potentially well yeah i was not too happy about the emission of crypto on the list i think not only would i like to see my safe harbor on that list that's i should clarify i'm one of five commissioners and so i'm not the chairman so i don't set the agenda but i i put the safe harbor out there in the hopes that the chairman would put it on the agenda so that disappoints me and i think there are other areas um related to crypto around custody where we could be providing more clarity for people um now our chair is new and so and does know this space quite well so i expect that we'll see something regarding crypto happening he's been speaking out already um and i think what he'd like to see is he'd like to see the cash markets the crypto cash markets so exchanges he'd like to see those regulated whether that's by the sec or some other regulator but that would require congress to come in and and give that jurisdiction to someone right now the cftc has some limited jurisdiction over over those markets but um but it's it's something that he's spoken out a number of times now already on got it um we have a question from the audience i think is a great question uh the question is is there a department or liaison at the sec to help new companies navigate this burgeoning field are there lots of potential legal land mines and is there anything that an entrepreneur can do to to sort of have a channel with the sec well so i mentioned our our office that deals with financial technology and that's the place where i would recommend you start so it's called the fin hub and you can find that on our website and you can contact them and they will meet with you probably now it would be virtually and they do a lot of meetings with developers so that's what i would recommend you do you're always welcome to come talk to me i enjoy talking to people um but the the difficulty and i just i have to warn people about this i think i i always recommend people go and talk to finn hub but you can end up in very protect protracted discussions that can be frustratingly slow and ultimately you really do need to get your own lawyer they'll flag for you some of the things that you need to think about but this is not this is not an easy area of the law and certainly the inter intersection between crypto and securities laws is a difficult one and there are a lot of potential land mines on the way so you really do have to be careful um you know i try to push us to move faster on things but um i've been at the commission for three years now and uh it's it's been you know sort of a slow going um to get stuff to move faster yeah so this is not legal advice i'm a lawyer but not anyone's lawyer uh you know step one try not to do anything shady try to do something that's you know good for the world right already you're in a better place right if you're actually trying to do the right thing even if you don't know what the law is two if you get any traction get your own lawyer right and then think about uh interfacing with with finn hub because those lawyers all know fin hub uh there are lots of great law firms that work in the space and uh you know i'm i'm at amore on twitter uh and i can you know i'll recommend one right right now right i think the folks at goodwin do a good job the folks that uh there's a set of law firms uh latham that do quite a good job but um feel free to dm me and and uh and i'll send you to one of my one of my friends one of the lawyers i think is good after talking to many many lawyers in the space but i think i think what what commissioner said makes perfect sense you need your own lawyer um so the other uh question we have here is um you know this is actually a great question you know when someone launches one of these d5 protocols commissioner it is not just in the us it is global right uh and uh you know i i i was an internet lawyer for many years i you know i remember when people said code is law the first time in 1998 you know when larry lester's what came out about it right and uh there's a whole set of thoughts about how the internet would route around domestic laws and and and there would be no domestic anywhere and they were wrong obviously you know laws is uh resilient and and countries were able to impose their own laws in different ways when it came to the internet now when these protocols are launched um you know globally on day one how should people think about um the law in general right should they should they prioritize the u.s should they should they um you know should what what do they prioritize their local law how would you think about that if you have any thoughts well i think you have to think about where you're you know where you're based obviously you need to think about the law there and you know the the reach of u.s law is it's we have a long arm and so i do think it's worth people thinking about u.s law unless they make very explicit attempts to exclude u.s persons from being involved in the project it pains me to say that because i know there there are instances where people do that in order to avoid our law but you know i think really if you're being realistic your project is probably going to have some kind of breach into the united states and so because we do interpret our jurisdiction broadly we may have something to say about it so you know work with your local regulator but you've got to think about eu law u.

s law and and law laws otherwise other in other places too that's why you know this is really a fraud area it's a very difficult area to do things um do you have any thoughts on how early people should start thinking about that you know i feel as though you can probably wait until you have some traction before you have to think about it but i don't know if uh if you have any thoughts well i mean i always think it's good to start thinking about these things as as early as you can but you know realistically you're right you know getting legal advice is expensive and so you know you're going to have to figure out when in the process you want to do that um but you know i think starting out with what marvin said you know do don't do shady things that's a good that's a good start you can get a lot of free types of guidance um you have to be careful with it of course but i mean there are a lot of things that you can you can look at and read to try to figure out what you need to do but the problem is if you're building something you really do sort of have to understand the framework in which you're building and the regulatory framework is a big piece of that so i'm always you know yeah i can see your point about you you wait till you get some traction but if you get traction you might end up having to adjust what you're doing also so i say earlier the better yeah yeah i think you articulated what i meant to say much better than i did there so um you know is there a concern about uh some of the top crypto projects leaving and going abroad or um or are industry falling behind you know other countries i mean one one narrative you sometimes hear in crypto right is that you know finance is the biggest exchange in the world kind of by far right and they didn't quite have to play by the same rules as coinbase coinbase is a great company but smaller um is there a concern that if we don't provide clarity or kind of permit folks to to compete on a level playing field that you know the largest companies in the space might be abroad is that kind of is that an important consideration that regulators have in terms of you know american industry versus versus you know talent moving elsewhere i mean it's certainly a concern i have i want the united states to be the place that everyone wants to come to build to build things and to innovate and to raise capital and to to uh to draw from our capital markets so i want i want this to be a place that people want to be and want to do things and build things but um you know i have heard from projects that they that they've decided not to do it because there's not enough clarity here i think one of the disadvantages of of being in the united states as a regulator is that we we do move slowly and and that's in a way good because that's why we have you know we have very well established capital markets they're very effective and good capital markets and safe capital markets um and so that's a good thing and and and part of that is because we have a a regulatory system that is stable and doesn't change rapidly so those are all good things but at the same time you need to have be nimble enough so that you can adjust so that you can be a place where someone can come in and say an innovator can come in and say hey i have a new idea i want to try something new um how can i do this in a way that's consistent with the law and we and when we come back with with with a willingness to work with people to that end and this has been something that we're not great at whether it's crypto or or innovation in traditional finance we've been you know quite slow and i think that's part of the reason why you see um less competition in the financial services industry than you would otherwise see if you really did have a more nimble regulatory structure so i certainly do worry about that got it well it looks like we have two minutes left um uh you know i guess i guess the last question i'll ask um without being redundant is is there any way that these developers can help you uh in the commission kind of get more educated about d5 keep up with all this information um you know what's sort of the most useful and helpful on your end well i think one thing is just come talk to me and tell me about what you're building and what what you're seeing in the space that's always helpful if there are things that you're seeing coming out of the commission that are particularly problematic for you in terms of what you're trying to achieve let me know that as well and if you see bad actors point those out to the sec as well we we have a whistleblower you can come in as a whistleblower that's on our website because i think if we if we do go after the bad actors the good actors are more likely to dominate the space and then maybe regulators maybe it'll be easier for me to convince my colleagues that there's something really wonderful being built here and then just keep up your good development efforts i don't want you to spend all your time thinking about regulation i want you to build things that are going to change the world for the better well crypto mom you know i asked you if this was like your usual audience you speak to i mean these are your people so uh so so thanks for for speaking to this audience and joining us today uh kartik is is all we have thank you so much it's my pleasure mr purse marvin thank you so much for that amazing talk and i think it was a really positive and optimistic note especially as a thousand developers get into trying new and crazy things so hopefully uh we get a more safer sandbox way for them to experiment this to the broader world but uh in the meantime we'll play with what's possible on test nets for the course of this event so thanks again and uh really appreciate you taking the time