Hester Peirce on Freedom, Fraud, & Fixing the SEC - The Chopping Block

This episode offers a rare inside look as SEC Commissioner Hester Peirce outlines her fundamental regulatory philosophy rooted in individual liberty, dissects the significant shift underway at the SEC regarding crypto, and discusses the challenging path toward establishing clear, durable rules for the digital asset industry.

Welcome and Commissioner Peirce's Listening Habits

• The Chopping Block hosts welcome SEC Commissioner Hester Peirce, affectionately known in the industry as "Crypto Mom." Commissioner Peirce reveals she's a listener of the show, appreciating its candid and often critical perspective on the crypto industry, contrasting it with overly optimistic narratives.
• She humorously deflects naming a favorite host, citing "facts and circumstances," and gives her standard disclaimer that her views are her own, not necessarily those of the SEC or fellow commissioners.
• Haseeb confirms her reputation as a key dissenting voice during the previous SEC leadership under Chair Gensler, highlighting how her dissents were widely shared and valued within the crypto community as a "beacon of light."

Peirce's Core Regulatory Philosophy: Freedom First

• Commissioner Peirce clarifies that her stance isn't primarily about advocating for the crypto industry itself, but stems from a deep-seated belief in "first principles," particularly individual liberty and the presumption of freedom in the US.
• She argues that regulators should only intervene when necessary, as directed by Congress, rather than prejudging innovations like crypto.
• Peirce expresses concern that the SEC previously overstepped by deciding whether the market should have access to crypto, a paternalistic approach she finds problematic.
• "My view is that that people should be able to do in this country... our presumption should be freedom," Peirce states, emphasizing this core tenet guides her perspective.
• She finds the potential for crypto technology to disintermediate traditional finance, with its history of centralized intermediary failures, particularly compelling.

Reflections on the Previous SEC Era and Future Role

• The conversation touches upon Peirce's decision to remain an SEC Commissioner post-Gensler, despite rumors she was considered for the Chair position.
• Peirce confirms she did not want the Chair role, believing a new voice is needed eventually and expressing confidence in the nominee, Paul Atkins, whom she previously worked for.
• She notes the demanding nature of running a large agency and suggests her current focus on leading the SEC's crypto task force is a better use of her time.
• Haseeb notes the industry's enthusiasm for her potential leadership stemmed from her consistent track record.

The Crypto Task Force: Goals and Approach

• Discussing the newly formed crypto task force she leads, Commissioner Peirce outlines its objectives and short-term focus.
• The goal isn't permanence but achieving near-term wins, identifying low-hanging fruit, and providing guidance.
• Key priorities include clarifying what falls outside SEC jurisdiction (addressing confusion the agency itself created) and helping projects within jurisdiction comply with existing rules, identifying and mitigating friction points between the technology and regulations.
• Longer-term, the task force aims to work with Congress on a more permanent regulatory framework, acknowledging that tokenized securities will likely remain under SEC purview regardless of broader legislation.

Navigating the "Vibe Shift": Guidance for Entrepreneurs

• Haseeb highlights the current ambiguity: while the regulatory "vibe" has clearly shifted, substantive rules haven't changed, leaving entrepreneurs uncertain.
• Peirce acknowledges the slow nature of bureaucratic change but encourages founders to engage directly with the SEC.
• Instead of the old "come in and register" mantra, the message is now "come in and talk to us."
• The aim is to understand project goals and collaboratively find paths forward, whether that means confirming non-jurisdiction or finding ways to comply.
• Peirce stresses the desire to move away from structures designed solely to avoid the SEC.
• Actionable Insight: While formal rules lag, the SEC under Peirce signals increased willingness for dialogue. Crypto AI founders facing regulatory uncertainty should consider proactive engagement to understand potential compliance pathways or jurisdictional boundaries, contributing to the development of clearer guidance.

Forms of Future Guidance

• Robert asks about the potential formats for broader guidance beyond individual consultations.
• Commissioner Peirce confirms they are considering multiple avenues: staff-level guidance (like recent statements on mining), potentially evolving into Commission-level statements or rulemaking; no-action letters (providing project-specific parameters that collectively signal boundaries); and ultimately, formal rulemaking and collaboration with Congress on legislation.
• The approach will utilize a mix of tools depending on the specific issue and its legal context.

Addressing Founder Hesitancy and Building Trust

• Haseeb pushes back, noting the fear and distrust sown by the previous SEC's actions make founders hesitant to engage, regardless of the current shift, especially without concrete rule changes.
• Peirce concedes this is a challenge and emphasizes the need for durable, predictable rules not dependent on who occupies her seat.
• She acknowledges the process will be "painful and slow" but argues that industry engagement now is crucial for developing good, lasting relief.
• This ties into a broader need, she believes, for government to regain public trust and function for the people, not as an adversary – a conversation extending beyond crypto.
• Strategic Implication: The transition requires patience. Investors should factor in the time lag for formal guidance, while researchers can contribute by analyzing friction points and proposing workable solutions through comment letters or direct engagement, helping shape more durable rules.

Learning from Other Jurisdictions and the Stance on Fraud

• When asked about international models, Peirce mentions learning from Wyoming's early initiatives, Europe's MiCA regulation (Markets in Crypto-Assets: The EU's comprehensive framework for crypto regulation), and the UK's sandboxing approaches.
• However, she hopes the US can forge a unique path that strongly favors permissionless innovation within reasonable bounds.
• Crucially, Peirce underscores that this pro-innovation stance is not an invitation for fraud.
• "This is not open season for fraud," she warns, stating the SEC remains committed to enforcement against misconduct within its jurisdiction, and other agencies (state and federal) cover areas outside it.

Crypto Innovations Influencing Traditional Finance (TradFi)

• Tarun raises the point of crypto innovations (like 24/7 trading or new derivatives) potentially flowing back into traditional finance.
• Peirce sees this as a positive development, potentially breaking down barriers to entry and spurring needed innovation in TradFi, which she feels has lagged due to regulatory hurdles.
• Crypto can serve as a testing ground for more efficient financial mechanisms.
• The changing SEC attitude, she predicts, will encourage more TradFi players to experiment with the technology, accelerating this convergence.
• Crypto AI Relevance: The potential for crypto-native mechanisms (e.g., decentralized settlement, novel derivatives) to influence TradFi creates opportunities. AI researchers can model these integrations, while investors should track which crypto innovations gain traction in traditional markets, potentially indicating broader adoption trends.

The Role and Limits of Self-Regulation

• Addressing the concept of industry self-regulation, Peirce expresses belief in its potential, particularly aided by crypto's inherent transparency (open-source code, on-chain visibility).
• She views these technological aspects as a form of self-discipline.
• Other forms include identifying bad actors.
• However, she notes past industry efforts (like creating frameworks to classify assets) were met with dismissal by the SEC, discouraging such initiatives.
• She mentions Proof of Reserves (a method where exchanges publicly demonstrate they hold customer assets) as a positive example of the market organically developing solutions post-FTX, criticizing the previous SEC for scoffing at such efforts.
• While acknowledging market discipline can be "brutal," she advocates for letting it work where possible, complementing government regulation.
• Insight for Researchers: Peirce's support for technologically enabled self-regulation (transparency, code-as-law) is notable. AI researchers can explore how advanced analytics or zkML (Zero-Knowledge Machine Learning: enabling computation verification without revealing underlying data) could further enhance trust and transparency, potentially reducing the need for prescriptive regulation in certain areas.

Disclosure Standards for Digital Assets

• Robert probes the complex issue of disclosures, especially for assets potentially deemed non-securities.
• Peirce distinguishes between the issuance transaction (which might be a security offering requiring disclosure) and the asset itself.
• For non-security assets (potentially commodities), she questions the SEC's direct role as disclosure regulator without explicit Congressional authority.
• However, she suggests disclosures could still be valuable, potentially provided by trading platforms gathering public information for decentralized projects, or by core teams for projects with ongoing development (e.g., tokenomics, team holdings).
• The key is determining what information is genuinely useful without overstepping jurisdiction.
• Strategic Consideration: The evolving disclosure landscape is critical. Crypto AI projects should anticipate increasing expectations for transparency, whether mandated or market-driven. Developing clear documentation around tokenomics, team allocations, network health metrics, and AI model properties (if applicable) will be crucial for building trust.

Critiquing the Past, Acknowledging Some Positives

• Asked what the previous SEC under Chair Gensler did well regarding crypto, Peirce pauses before acknowledging the importance of bringing certain fraud cases during a period of "shenanigans."
• She also credits quiet, under-the-radar progress in the investment management division, working on accommodations for products like tokenized money market funds.
• Haseeb adds that the SEC was surprisingly accommodative towards regulated crypto investment vehicles, suggesting underlying staff willingness to find workable solutions, albeit constrained by top-level signals.

Memecoins: Collectibles vs. Securities

• The discussion pivots to memecoins, referencing a recent SEC statement suggesting they aren't necessarily securities and could be collectibles.
• Haseeb presses for clarity, citing examples like Trump Token with concentrated ownership.
• Peirce reiterates the need to analyze the transaction through the Howie test (a legal test derived from a Supreme Court case used to determine if a transaction qualifies as an 'investment contract' and is thus subject to securities laws).
• Simply labeling something a collectible doesn't change its nature if sold as an investment contract.
• "I can take a share of a stock and I can call it a collectible... but that doesn't mean it's not a share of stock that we regulate," she explains.
• She again warns against assuming lack of SEC jurisdiction means no regulation exists, pointing to broader fraud statutes.

Re-evaluating the Howie Test for Crypto

• Tarun brings up the common industry critique that the nearly 100-year-old Howie test is ill-suited for digital assets, referencing a recent letter from Andreessen Horowitz.
• Peirce agrees the application is challenging, stemming from its origins in simpler investment schemes (like orange groves with service contracts).
• Applying it to decentralized projects based on statements made on podcasts is far more complex.
• She stresses the need to return to first principles – the economic reality of the transaction – and develop clearer, easier-to-apply guidance that distinguishes capital-raising securities transactions from the sale of functional tokens, treating crypto product sales similarly to tangible product sales used for fundraising.
• Research Opportunity: The ambiguity around Howie applied to crypto, especially AI-integrated tokens with complex functionalities, presents research challenges. Legal scholars and technologists can collaborate on frameworks analyzing how AI features might impact the "efforts of others" prong or expectations of profit, informing future guidance.

Shift from Enforcement and Resource Allocation

• Haseeb raises concerns about reports of the SEC crypto enforcement unit being downsized and resources shifted, potentially leading to an increase in bad actors alongside legitimate ones.
• Peirce argues the previous enforcement-heavy approach was inefficient and expensive, unable to cover the breadth of the market.
• Clearer regulations, she contends, make it easier to distinguish good from bad actors and allow for more targeted enforcement.
• While acknowledging resource constraints and staff departures across government, she states the Cyber and Emerging Technologies unit will continue bringing crypto cases judiciously.
• She anticipates incoming Chair Atkins will focus on agency efficiency.

Potential Dynamics with Incoming Chair Atkins

• Regarding potential disagreements with Paul Atkins, Peirce highlights their shared history and alignment on many issues, particularly his libertarian leanings.
• However, she positions herself firmly on the spectrum favoring maximum individual liberty and viewing regulation as a last resort.
• "I'm always going to be on the side of the spectrum that's that's really concerned about constraining Americans liberty," she states, suggesting while they align broadly, her emphasis on this principle might be stronger than most.

Internal Disagreements and Advice for Lawyers

• Peirce describes internal disagreements as attempts to influence policy before decisions are made (e.g., arguing against enforcement actions or rule proposals she disagrees with) rather than just writing dissents after the fact.
• She likens being a minority commissioner to yelling from the side of a bus heading in the wrong direction – often ineffective at changing course.
• She encourages aspiring securities lawyers interested in government service, noting the value of internal experience and emphasizing the importance of having regulators who don't see regulation as the default solution.

The Pendulum Swing and Industry Responsibility

• Addressing fears that a future administration could reverse the current pro-crypto stance, especially without codified laws, Peirce expresses hope.
• She believes that if the industry uses this period to build genuinely useful applications, even regulators with different philosophies will see their value and be reluctant to stifle them.
• She frames the previous era's "garbage activity" partly as a consequence of legitimate innovation being shut down, leaving less risky, albeit less valuable, avenues open.
• "I hope that in this moment people will focus their attention on doing real stuff," she urges, placing the onus on the industry to prove its worth.
• Call to Action: Peirce explicitly links regulatory durability to the industry demonstrating tangible value. For Crypto AI, this means moving beyond speculative use cases to build applications solving real problems, thereby making a stronger case for continued innovation regardless of political shifts.

Commissioner Peirce's Crypto Content Diet

• Asked about her information sources beyond comment letters, Peirce reveals she listens to numerous crypto podcasts, including "On the Brink," "Epicenter," and occasionally "Bankless," though finding the latter "sometimes too deep."
• She consumes a wide variety but finds Crypto Twitter often unproductive and potentially reinforcing negative views of the industry.

Conclusion

The conversation underscores a significant regulatory shift towards principle-based oversight favoring innovation, yet highlights the critical need for durable rules and industry responsibility. Crypto AI stakeholders must actively engage with regulators during this transition and prioritize demonstrating tangible, real-world value to solidify crypto's legitimacy amidst evolving political and regulatory landscapes.