Commissioner Peirce On SEC’s Next Moves

Part of what we have to do now, though, is explain that, hey, you know what, some things actually are not— despite some statements that have been made by this agency in the past, some things that are labeled crypto, in fact, many things that are labeled crypto have nothing to do with us. Now let's focus on where people are using a token, for example, as part of an effort to raise money. And that capital-raising function is something that we regulate. Or take someone who's trying to figure out a new way to issue a security using blockchain rails, tokenizing securities. That's very much within our realm. Or if you have someone who's creating some kind of investment product that collects crypto assets, that too is within our realm. And so that's kind of where we're thinking about what can we do to make sure that our, our rules are modern enough that they can— principles-based enough, really, so that they can accommodate new technology, new ways of doing things.

This episode is brought to you by SKALE, the next evolution in Layer 1 blockchains. Explore the gas-free ecosystem at scale.space/ecosystem and follow their journey on X @skale_network. Thanks to SKALE for making today's episode possible. Nothing said on Empire is a recommendation to buy or sell any investments or products. This podcast is for informational purposes only, and the views expressed by anyone on the show are solely their opinions. Not financial advice or necessarily the views of Blockworks. Our hosts, guests, and the Blockworks team may hold positions in the companies, funds, or projects discussed.

All right, everyone, welcome back to Empire. Very excited about this episode. We have Commissioner Esther Perce joining us on the podcast. Uh, Blockworks was founded end of 2017. Uh, Commissioner was sworn in in 2018. We've kind of grown up in crypto together. I've very closely followed her journey. Um, obviously I think most of the listeners have, so Commissioner Peirce, welcome to the show.

It's great to be here. Thanks for having me. And I do want to start with my disclaimer, which is that my views are my own views as a commissioner, not necessarily those of the SEC or my fellow commissioners.

Yeah, got to get that. Got to get that in. Okay. So I actually have a more personal question for you at the top of this, which is, you know, oftentimes on Empire, we have a lot of investors and founders and they like to sometimes gloat about being right and about being early and about, you know, that kind of stuff. And, uh, you know, I know that's not really the role of a regulator to, to, to gloat and say I was early, but you, you were early. And I'm just curious from a personal point of view, you know, I remember when you were really the only pro-crypto, um, person at the SEC, and a lot of people were kind of anti and against it. Obviously, we all know what happened in the last administration with the SEC, but I mean, how, how do you feel today having been so right so early?

Well, what I'm happy about is that people who have been living under a cloud of uncertainty now for, for a lot of years, and people have been— who have been pushing up against, um, really hostile regulation, or at best ambiguous regulation— and I think the two can kind of be the same thing, because if you have ambiguity ambiguity, it's really hard to know whether and how to move forward. So I'm really happy for people that they're out of that wilderness now and that they can be in an environment where they can actually get hearing from regulators across the government. And, you know, I hope to get to a better place because some of the hardest moments for me as a regulator have been talking with people who have poured their whole lives into building things. And, you know, and all their money and time and talent. And it's— they've had to shut down or, you know, fold the project because they just couldn't move forward. And so it'll be nice. And it is nice to be in an environment where that is generally not the case anymore. So that's what I'm happy about.

I'm curious why you've You know, this industry is a funny industry, right? Because there's so many times that you, that you can turn on the industry. Like, there's so many, there's so many reasons why someone could not like crypto. You know, there was a lot, you know, there was the 2018, 2019 was a very dark bear market where it's kind of like, is this even going to work? And, you know, after FTX and SBF and that, there's like so many, you know, a lot of the scams and there's too much leverage in the system. And even in this bull market, maybe you could be very anti-meme coins and things like that. Like, Just curious what I guess what, what you see in the industry and why, like, why you've decided to throw yourself into this.

Well, I think generally when I came into the job at the SEC, I did know about crypto. I was familiar with Bitcoin and had been for, for some time. But it really wasn't as much about crypto as it was about knowing that my agency, an agency that I had worked at before, was not particularly good when it came to innovation. So thinking about how to regulate an industry and ensure that it's dynamic, that new competitors can come in, that existing firms can try new things. I knew that was a problem for this agency. And so I wanted to figure out a way to kind of nudge it into a better direction. That was a big part of the reason I wanted to come here in the first place as a commissioner. And crypto very much presented itself as a, as a, as unfortunately, a very bad case study in how we handle innovation. And so that was really the reason that I spent a lot of time thinking about this area. I mean, obviously, I'm someone who believes very strongly in the dispersion of knowledge across society, in the fundamental value of every human being and the ability of every human being to contribute something unique to society. And I think that concept really lines up very well with crypto, which is trying to bring the ability of people to engage with one another peer to peer and really to draw on people who society might before have shut out. If you have a centralized intermediary, what happens is that that intermediary, either of its own accord or because government tells it to do so, shuts certain people out. And so if you have truly open source protocols that anyone can access and use, it is impossible— and use on the same terms as everyone else, right? It becomes much harder to shut people out. And I think that's a very powerful concept. And so that's drawn me in. Have I gotten discouraged when I see activity and time and attention being devoted to things that I don't think have lasting value? Certainly. I mean, I think that, you know, and entertainment is fine. People do all kinds of things for entertainment and some of that doesn't, you know, it's not intended to have lasting value. But when people are really throwing their brilliant brains into working on things that might not have much value, yeah, that's discouraging. And certainly some of the bad incidents in crypto over the years have been very discouraging. Although I have to say a lot of those activities that are, or a lot of those incidents that were particularly bad were not actually crypto. It was exactly the kind of thing I see every day as a securities regulator, which is centralized parties doing terrible things to their customers, stealing their money, lying about conflicts, hiding conflicts, or, you know, behavior that is like traditionally problematic, not thinking about who your counterparties are and then realizing that everyone is exposed to the same counterparties. These are not new things and they're not crypto things, actually. So it in some ways just made me even put more hope into the idea of decentralization.

Yeah. If you look at the state of just, uh, financial markets and capital markets today, um, what, what are, what is the, is, is the, uh, when you have these, you talk about, you have these centralized entities and, you know, the banking industry, maybe we can pick on them for a second. There's been this massive consolidation of banks and now there's only a few, uh, major banks, obviously who are the, who are the major players. Um, it sounds like you're saying they, because they have financial incentives and economic incentives, they start to shut out the people at the bottom. Because maybe it doesn't, it's not economically, they're not economically motivated to support someone, you know, maybe at the bottom ring. Is that kind of what you're saying?

Well, I mean, either the people at the bottom, you know, or the people who are just politically or socially disfavored or an industry that people don't like. There are, you know, lots of stories throughout history of where the disfavored people in society had difficulty accessing the financial system. Sometimes, though, it actually is not the decision of the bank or the central, you know, whatever other financial institution. It's actually government telling them through regulation, either explicit regulation or implicitly through the examinations, the supervision process, which is much more difficult to pin down, to say you should not You should not bank certain people. And that's not the decision of the bank. It's actually very much the decision of the regulator, but it's just being mediated through the bank.

Yeah. What, what do you think of, as it, as it relates to crypto, what do you think of, um, the goal? What is the goal of the SEC? Like, what, what are you actually trying to, you wake up every day and you're trying to achieve something. What are you trying to achieve?

Well, the SEC has a very clearly stated mission, which is protecting investors, facilitating capital formation, and fostering fair, orderly, and efficient markets. And so whatever we're looking at, that's where we're— that's what we're thinking about doing. So right now, I think it's interesting that you asked that question because yesterday on Twitter, someone, someone asked me, what are you even doing? Why are you meeting with crypto projects? You're the SEC. So what, what What do you even have to do with them? And I, I think the question was meant to be kind of mean, but I actually think that the person has a point. And so let me explain how I'm thinking about what our role is. First of all, we are not the regulator of crypto. Crypto is a technology and it will touch probably every part of our lives. Different people think it'll have a greater impact than others, but You know, it kind of cuts across all of the things that we do as a society. And so what we need to do at the SEC is figure out where does it actually touch on what we at the SEC do. If you're, if you're doing something that's a securities activity and it involves crypto or blockchain, that is within our purview. And so that's where we really need to write rules. Part of what we have to do now, though, is explain that, hey, you know what? Some things actually are not, despite some statements that have been made by this agency in the past, some things that are labeled crypto, in fact, many things that are labeled crypto have nothing to do with us. And so now let's focus on where people are using a token, for example, as part of an effort to raise money. And that capital raising function is something that we regulate. Or take, um, someone who's trying to figure out a new way to issue a security using blockchain rails, tokenizing securities, that's very much within our realm. Or if you have someone who's creating some kind of investment product that collects crypto assets, that too is within our realm. And so that's kind of where we're thinking about what can we do to make sure that our, our rules are modern enough that they can— principles-based enough really, so that they can accommodate new technology, new ways of doing things.

How much of your day is, is focuses on crypto? Or there's your day, but also just the SEC commissioners as a whole?

Well, I, I think every commissioner sort of approaches, approaches the job differently. We all have responsibility for, for all of the issue areas the SEC covers. The chairman obviously has much more responsibility because He manages the staff, the agenda, and the budget. But, and for me right now, I'm spending a fair amount of time on crypto because I am heading the crypto task force. But I have a lot of other things to do. The SEC has a lot of really important issues to deal with. And so, you know, I try to spend 2 days a week really dedicated to crypto things. But I have, you know, that obviously bleeds into other days, but I have a lot of other things to do too.

Yeah, I'm guessing, uh, other, other industries or other, other areas that you focus on are not as active on, on Twitter or social, so it might not—

No, you'd be surprised. There's a lot of, uh, there's a lot of, uh, hostility brewing in many areas on Twitter.

Sounds fun. Uh, that sounds fun.

This episode is brought to you by SKALE, the next evolution in Layer 1 blockchains. With a gas-free, invisible user experience, instant finality, and robust security, SKALE allows for limitless scalability and has already saved its 50 million users over $11 billion in gas fees. SKALE's high throughput, zero transaction costs, and powerful Web3 infrastructure make it the ideal platform for gaming, AI, and other high-throughput apps. To explore the gas-free ecosystem, visit scale.space/ecosystem and follow their journey on X at Skale Network. That's Skale spelled with a K. Thanks to Skale for making today's episode possible. Shout out to today's sponsor, Katana. Katana is a DeFi-first chain built for deep liquidity and high yield. No empty emissions, just real yield and sequencer fees routed back to DeFi users. Incubated by Polygon Labs and GSR, Katana is launching with notable ecosystem of primitives, assets and partners like Morpho, Chainlink, and more. Katana's 1 billion CAT campaign is live. Bridge and deposit directly into vaults in one simple click and start earning immediately on your Ether, Bitcoin, USDC, and more. Follow the link in today's show notes to get started. As always, investments in blockchain technology involve risk. Terms and conditions apply.

Okay, so inside of crypto, so there's all these, there's all these things that are hot in the industry and topics of conversation, right? Stablecoins, ETFs, digital asset treasuries, obviously meme coins and the launchpads. There's kind of these battles between the chains. There's the, there's massive M&A happening. There's IPOs. What are the like 2 or 3 areas that have really captured both your interest and your time?

I'd say Really, right now we're focused on trying to figure out a framework for people to do token launches that is, you know, that makes sense from, from a commercial perspective, but also makes sense from getting, getting, um, disclosure out there for people to, to, uh, to who are trying to, who are interested in buying these tokens. I know that's something I hope we can talk about in a second because you guys have thought about that too. And then there's a lot of interest by, uh, in tokenization right now, just of securities, um, tokenization of funds. So spending a lot of time on thinking about those kinds of things. What does it look like, um, to tokenize? What does it look like for traditional broker-dealers, investment advisors, uh, mutual funds to interact with, um, tokenization?

Yeah. Uh, let, I mean, let's get into that. That's, I mean, it's the, it's the biggest topic, right? It's the, like the topic that is, I don't want to use the word plagued, but maybe I can use the word plagued. It's like, since, since I really, since you got sworn in and really since the industry, since probably since ICOs, um, happened in 2017, there's this question of like, when you have a token, what is the token and what are you allowed to do with the token and what platforms can you trade the token on? So. Uh, there's all these frameworks, right? I, we had, um, uh, folks from Andreessen Horowitz on the podcast the other day. They ha— they have a framework. We have the Token Transparency Framework, um, which, which you guys have been very nice to collaborate with us on. You, you guys have obviously put a ton of time and thought into it. Can you just take us deeper into that? What, what is the problem we're trying to solve and how have you guys thought about it?

Well, I think it is the problem that has plagued everyone is, you know, this is, is something unusual. People have been selling tokens in connection with promises to do things. Those tokens travel on their own and they trade on liquid secondary markets. And so it is unlike what we've seen in the past when you— I mean, let me just take a step back and say the definition of security is very broad. We think often of just stocks and bonds, but you also have investment contracts which are intended to capture anything where someone says, hey, give me some of your money, I'll take it, pool it with other people's money, you don't have to do anything, I'll do all the work and you'll get profits based on the work that I do. That, that's something that investment contracts were designed to capture, and that's how A lot of these token distribution events look an awful lot like investment contract transactions. And so trying to figure out, okay, then the token was sold as part of that transaction, but it doesn't always carry that investment contract with it. How do we think about how long the obligations of the person selling the token should last to to the people buying it. And that's really what we're wrestling through. And I, you know, there have been lots of people who have helped us think about that. You mentioned Andreessen Horowitz. We had a representative of theirs on our, one of our, actually our first token roundtable, along with other people kind of thinking through that question of how do we layer the securities laws on top of this to make sure that we're capturing the capital raising transaction but not saddling the token with securities laws for the rest of its life.

What's your, what's your updated thinking on the best way to do— I mean, you guys have started to roll out some, some guidelines and frameworks.

Yeah, I mean, we have, and I think that, that, that is very much a process that's in the works of, of trying to figure out how to do that. And so I guess I would say stay tuned for that. But I do think it's important that people like you are working on private sector efforts at the same time. Because this has been always my, my view on this. The SEC, we're, we're good at disclosure regulation. That's something that we've done for years. Congress gave us the ability to regulate disclosure, not to tell people what they can and can't buy, but just to help them get the information they need to buy things. But my view has always been that that's something the industry itself could design and You know, frankly, with everything that's happened over the past years, it seems that people should demand that they get disclosures because there have been so many instances where they have seen their money taken and nothing to show for it. And so having private sector efforts out there to build frameworks from which we can then draw as we come up with The regulatory framework, I think, is very valuable. And I should also say, obviously, the work we're doing is against the backdrop of the fact that Congress is working on legislation, market structure legislation. And so I think whatever we do will line up very nicely with what Congress is doing.

Yeah. It's been interesting. So you guys were kind enough to meet with us right before we rolled out the token transparency framework, I think beginning of June, let's call it. Call it, or mid-June, we rolled this out. We've now, um, we have something like, let's call it 30, 30 protocols are included in the framework. Um, and we keep launching more and more and the pipeline is enormous because what's ended up happening is, uh, projects now go to pitch Liquid Funds because they want them to buy their token. And, you know, they're, they're talking about the project and Liquid Funds have started telling them, uh, if you're not included in the token transparency framework, we're not going to buy. We're not going to buy your token because we don't know. It's not, it's not transparent and we need transparency around who's behind this investing and disclosures and where's the revenue going and all that kind of stuff. So that's been great to see. So Liquid Funds are obviously one group that's driving this. Um, where do you think the, um, what's the right word for this? Like who will need to do it? Like, and why will they need to do it? So there's a soft incentive right now for. Projects to do it for us because of the liquid funds are demanding it. But I could see a world where like for Coinbase to list a token, the token has to, you know, maybe go through some version of like an S-1, a token S-1 or something like that. I'm curious how you're— how you think about that.

Yeah, I mean, I think that's, that's private ordering at work. And so we'll see. I think you're right that there could be some pressure that came from centralized exchanges. I think there should be some pressure coming just from retail investors as well. And then, you know, if your framework isn't doing it for people, then someone else will come up with a competing framework. Right. But that is why I think sometimes we as regulators assume that we have to solve every problem. And, you know, it's actually not true. Yeah.

Yeah. Private market's good at solving.

So yeah, even if we don't do anything. But, but I, you know, I talked to a lot of people way back in the day when I was working on my Safe Harbor, where I was trying to think about what kind of disclosures people wanted. And it was really helpful just to get the views of people who were dealing with this every day and, you know, telling me what, what they needed to see. And I'm— it's, it's nice to see some of those same elements reflected in that framework that you developed.

Yeah. What do you think will happen with ICOs? Because ICOs obviously got a really bad, bad name from 2017, but they're a phenomenal way of fundraising. And they kind of— the industry It didn't really happen for years. Now you're definitely seeing a comeback. You have platforms too, like Legion and Echo, that allow for kind of regulated ICOs. But still, in the US, you, you oftentimes can't access ICOs, nor can you access airdrops. And maybe two reasons for that. One is in the US. The other is if you're not an accredited investor as well. But I guess it comes down to accredited investor rules. So what do you think happens with— maybe two-part question, like accredited investor rules as well as just what happens with airdrops and ICOs. And I know you've talked about safe harboring these for a little bit, but yeah.

Well, I think if we do, I mean, the goal is to get a framework in place that would allow people to do those kinds of, um, you know, to do ICOs, uh, to do airdrops in a way that they understood was compliant with the securities laws. And then I think you would see that kind of thing happening here. So that certainly is why we're working expeditiously to try to get something done. It is, you know, it's never good to see U.S. people excluded. Now, the accredited investor problem is really, I mean, that's something that I think is a problem for broader reasons than just crypto. We have sort of this well-intentioned system that's developed under you know, for under the law because of the way, you know, the courts have interpreted things as well. And so you have this system where people have to have money in order to invest in certain things. We have thought about expanding the accredited investor definition. We made some baby steps at doing that a few years ago. And I think there's a lot more interest in thinking about how we can expand that definition so that more people can invest in things they want to invest in, especially as the private markets in the US now have become so much more of a place where so much more of the activity is happening. Um, so keeping everyone out of those markets who doesn't meet the wealth and income thresholds has more consequence now.

Yeah, I was actually going to ask you about this. It's not really crypto related. I mean, maybe it could end up being crypto related as these private markets get tokenized. Um, but I just saw Databricks raised a $100 billion Series K, I think it was, um, which I've never seen a Series K in my life. Uh, you'll probably have some trillion-dollar private companies soon, right? Whether it's OpenAI or Stripe or SpaceX. What do you think of this dynamic of companies staying private for longer?

I mean, candidly, it's, it's not my preferred outcome. I'd rather see companies. Going into our public markets. And I think that it does suggest that we need to do something at the SEC around how we regulate public companies, because I think that is one factor in the reason that companies are deciding to stay private longer. Is it the only factor? No. I mean, as you said, companies can find a lot of money in the private markets, and so there's less incentive to even go through that step. But I do think that we can do some work to really restore the, the luster of being a public company. And, and why is that important? I mean, one, I think it, it's helpful in terms of you get more transparency on what the company is doing, and that's helpful for valuation purposes, but also because retail investors are going to access most of their investments in the public markets. And I really want them to be able to have a chance to participate in the growth of all these companies.

Okay. How do you balance desire to protect consumers with a desire to innovate? And maybe if we tied it into the, the last question about Stripe and OpenAI and stuff, I saw a platform yesterday that allows you to trade perps on private companies. So you can trade, you can, you can liquid, you can basically just trade Stripe and OpenAI and Figure and. SpaceX, you can trade perps. It's a crypto platform, but it's— I mean, there's a bunch of janky workarounds that I'm sure they're— it's a—

yeah, it's not—

it's not a perfect way that they're doing this. And I'm sure some people will end up getting hurt. But also it's cool to be able to see innovation and perps on private markets. It's just cool to see innovation. So how do you— how do you balance those two? Maybe specifically with a— when you see a platform like that?

Well, I mean, I think first I should tell people, as a regulator, I have to say, you know, there are a lot of Securities and, uh, rules. And also CFTC has a lot of rules. Um, and so, you know, check to, to see what rules cover you before you start doing activity in the US. Um, you know, we want to get to a place where our— where you can work with regulators to offer products that people want. I mean, that's important. And I think one of the connections between innovation and investor protection that gets lost is, um, it's the— if you don't allow innovation to happen, you're depriving the people that you're allegedly protecting of getting access to better products and services, because that's the whole point of innovation. And so, uh, not that all innovation is good, but if you, if you shut innovation out, you're actually sealing your, your, the protectors you're trying to invest in, in an old way of doing, in the old ways of doing things, which might not be as good as the, the newer products and services that would otherwise be available. So we as regulators have to take the risk of allowing innovation to happen in our markets and not trying to shut it down, which it is tempting as a regulator to do that because If you shut the innovation out, then, you know, no one's going to blame you, right? But if you let the innovation in and something goes wrong, people will blame you and they'll say, well, why did you let that stuff in? So we as regulators need to take the risk. I mean, I hate to talk, even say the phrase allow innovation because I'm very much someone who believes that people should generally be able to do as adults make decisions that are best for themselves and have the freedom to live their lives as they want. But the reality is we have a pretty intense set of financial regulations that are in place. And so people have to, have to be aware of those. And we as regulators should be working to make sure that those do not stand in the way of innovation, do not stand in the way of new competitors coming into the marketplace.

Yeah. One of the dynamics that I think would be tricky if I were in your shoes is, um, is licenses actually. And just the financial market infrastructure is incredibly complex in the US. And one, and one of the things that I think regulators have done to try to make it safer is they hand out licenses to people to say that you can go do this thing. And that system has worked actually quite well for, for, for decades. Um, and so if you want to trade You want to be a platform where you can trade futures, you need like a DCM or you want, you know, there's like you need or you want to do something else, you need an ATS. Like there's so there's these licenses that exist. But then what happened is now you have, you can build these open, you can build markets with crypto. Crypto allows you to build markets 100 times faster, 100 times cheaper. So a market that used to take 10 years to build now maybe only takes like 1 week to build and you can do it with a team of 10 instead of a team of 1,000. And you see this with folks like Hyperliquid, right? Um, now the— there's great innovation and a lot of the capital has flowed onto these platforms, but a lot of them don't actually have the licenses. So how do you think about the on-chain products and whether or not they need licenses or don't need licenses?

Well, I think if you are a centralized entity offering products and services that are regulated in the U.S., you should get the, the, you should register as what you need to register in order to make those products and services available. I think the questions are more interesting when you get to truly decentralized protocols that allow peer-to-peer transactions. And there I would say we should, we should be open to the idea that, I mean, there's one, there's no one to— who could register, right? So you've got, you got that problem there. I suppose we could try to prohibit peers from engaging with one another, but I think that would be very un-American. And so I think if people want to opt into a peer-to-peer world where they're not dealing with a registered entity, they're dealing with a software protocol, then an open-source software protocol, right, that everyone can see and they understand what the the how, how it works, then I don't think that regulation has as much of a role to play because the protocol itself is serving in the function of a regulator. Now, that opinion is probably not going to be popular with some regulators, but, you know, I view the role of regulation as being particularly valuable in instances when you have centralized intermediaries offering a product or service. Because they sometimes do things that are, um, you know, not in the best interest of the customers they're serving. And so then you can argue either for private regulation or, as we have in the United States, government regulation of those kinds of things.

So one of the big— I mean, all these like crypto founder group chats, you know, and one of the, one of the main questions right now is like, I still don't really get what's allowed and what's not allowed for on-chain products because it seems like things have changed. And, you know, maybe the two people oftentimes point to is Kaito launching a token where they have a centralized team. So for people who— I mean, most Empire listeners will know, but you used to have to go through all these crazy things to build on-chain products and launch tokens. Like you used to have to get a Kaiman entity and a Labs entity and a foundation and all these kind of funny, funny shenanigans that ended up really honestly just wasting time and money, I would say. Um, so Kaito launched a token and then Hyperliquid is like a small team of like 10, 15 people. And it's like a centralized team just built, but they've built on-chain products. So how do you, how do you think about it? Like, can, you know, could Blockworks today, like if Blockworks today, you know, we're in the US, centralized team, could we go launch like an on-chain market?

Well, I mean, I think there, you know, there's certainly, as a lawyer, I'm going to tell you that facts and circumstances matter, right? That's what lawyers always point to, but they really do matter. And so I can't answer your question without knowing more facts and circumstances.

Yeah.

I mean, my view, though, is that there's some really fundamental issues that we need to establish now, which is, if you're a developer, developing software, you're putting out open source code, you can't be expected to be responsible for what everyone does with that code, right? I mean, people can use it for good, they can use it for bad. So I think there's, there's that issue. And then there's another issue of, you know, say you decide you, you not only develop the code, but you, you put up an interface, a user interface so that people can actually easily access the code. But you're not, you're, you're just making that interface available so that people can access the code. Again, I don't think that a registration makes sense in that situation. You know, things, change if you're taking more than de minimis custody of, of, of users' assets, right? Then, you know, we start to think this looks a lot more like the entities we're used to regulating already. And so I think there are a lot of questions to be asked about how is that system actually operating, what is the role that those people are playing with respect to it. Are they setting up a system that makes it easy for them to walk away with customer money? You know, that's an area where a lot of people would say, hey, regulation might make some sense there.

Yeah, yeah.

Um, so these are very much live debates, and I really urge people to participate in them. I know the temptation is just to try to do everything that you can do now and assume that everything goes. Everything doesn't go. We still have securities laws in the US. The CFTC is still regulating futures and derivatives markets. And so, you know, do things wisely, but participate in the debate because we're going to establish those rules now that will become fundamental going forward.

Yeah, yeah, very much so.

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Maybe switching gears a little bit. So there's, um, uh, the Bank Secrecy Act, right? So I was, uh, I read your speech. Where did it come from?

It was, uh, out in the Science of Blockchain at SBC.

Yeah. Um, a couple of weeks ago in early August, phenomenal, like phenomenal talk. I really encourage everyone to go read the speech online. Um, and we can, we can link in the show notes to it, but It was possibly the most eloquent pushback or takedown, uh, depending on what word you want to use, of the Bank Secrecy Act that I've ever seen from a government official. And I'd love for you to, uh, if you're comfortable going into just like the Bank Secrecy Act and maybe what's broken with it and your, your thoughts around it.

Yeah. Well, I mean, what motivated that speech is just a real concern that we have ceded all of our privacy when it comes to financial transactions and You know, it is kind of a tortured story of how we got there. But the idea is that when you're dealing with a third party, which you are when you're dealing with a bank or other financial institution, you're handing over very private information about yourself, but you are handing it to a third party. And so the way that the courts have sort of looked at it is, hey, you handed it to a third party. And so there's nothing that should require the government to need to get a warrant to go get that information from the third party because you just handed it to someone else. And so my view is, you know what, we need to maybe rethink this because we all use financial intermediaries for so much of our lives. And so if you just remove that whole section of our lives from Fourth Amendment protections, They're real concerns. Now, I think one very interesting development is that technology is now saying, ah, you actually don't need a third party anymore in the middle of that financial transaction. And so you can just do this financial transaction peer-to-peer. So that means that the third party doctrine that enabled the government to get access to a lot of your financial information doesn't really work anymore. And so I think one thing that the, that at this moment it is very important for us to establish is that that is a good thing, that people can reassert privacy over their financial lives. And it actually is something that the government should be championing, not prohibiting, because it is good for our citizens in the US to be able to keep their information private from bad actors. And so we want to make sure that they can do that. Now, are there implications for the government trying to do its job of protecting citizens from bad people and from terrorists and from, you know, enemy nation states? Yes. And we have to look for ways that we can make sure that the government can continue to do its job. But the way to do that is not to cede all of our financial privacy. It's to celebrate these disintermediating technologies.

Yeah. Maybe let's go deeper on that. So there's private, like privacy, I think will become probably next year, maybe the year after one of the big themes in crypto. I think it'll end up being like one of the big hot button issues. And there'll be a lot there. I mean, there's already billions of dollars flowing into like ZK tech and stuff like that. How do you think about where, what is the most likely outcome? Like, okay. So one, one outcome is like, everything's extremely private. Like no one can see it. It's like full ZK, like government can't see it, the, the platforms can't see it, other users can't see it. That feels a little unlikely because I feel like the government wouldn't like that. And then there's maybe confidential transactions where it's like, okay, you can't see mine, I can't see yours, but like if someone up here really needs to see it, like they can get access to it. Where, uh, where, where do you— what's the likely outcome of how this lands?

Well, I don't know what the likely outcome is first because I don't know how the technology is really hard from what I understand. Now, it was very interesting being at that Science of Blockchain conference because there are a lot of people who are working on some very interesting things and they're really smart and they're doing interesting work there. So, but so I don't know the technology side, but on the, on the regulatory side, yeah, I mean, I think right now the trajectory that we're on is that, is that the government gets to see everything that you do in the financial sphere and you have no expectation of privacy even if you've done nothing wrong. But I think that we can take this moment where the technology is going to allow more selective disclosure of information, that you get to disclose the information only as you need to, only to the people you want to. I think this is a moment where we can try to maybe pull back some of the, the, the, the just, you know, expectation of surveillance, right? I don't know if I'm as negative on the possibility that the government is really going to come in and and protect people's right to be private unless there's an expect— unless there's a suspicion that the person has actually done something wrong, in which case, you know, the government can get the information that it needs. It may need to have to do a little work to do that, but it can get the information. And again, I mean, in that speech, I went back and looked at what had happened during the encryption debates of the '90s about whether or not encryption software could be available to private citizens. And there was a real debate over it.

They didn't like— they did not like encryption.

Yeah, the government didn't like it. But eventually, actually, the people who were the cryptographers who were fighting those, those battles actually managed to convince government that this is a good thing for the U.S. to have this software, to have this cryptography available for private use because it will protect the American people. And that, that eventually won the day. And I think we can do something similar here too. And so I guess I would urge people who know the technology much better than I do to really engage with policymakers and, and help us think through how we can get to a good place and a place that's consistent with America's fundamental values.

Can you explain— this is actually— I just don't even know this. How does it work in the stock market today? I think you can basically— like, the SEC monitors the entire stock market at all times.

Yeah, this is another pet peeve of mine. We have something called the consolidated audit trail, which came out of, again, good intentions. There was, there was a flash crash about 15 years ago. and it was really hard for the SEC to reconstruct what had happened. And so people said, you know what, we need to create this kind of Hubble telescope is what some people called it, that can watch everything that goes on in the, in the markets. And it'll be easy then to reconstruct events. But what that has, has morphed into is now we collect data on every transaction, every order that every person places in our markets. And it's tied to the person who made it. So the government can watch everything that you're doing in our, in our stock and options markets. And that actually has— it's very costly for one thing because it's actually a lot of data, and so collecting and storing that data is pretty difficult. But people have started to really kind of get concerned about the privacy implications of this as well, and about the possibility that this could be a database that some bad actors might want to hack. And so there has been pushback on it. We're kind of reconsidering under the new chairman. We're reconsidering the scope of the CAT and trying to get it to a better place. So I'm sorry, I'm going down this—

No, no, no, that's fascinating. Because like, if I think if you talk to most people who have built financial technology and financial products, they'll say if you said what's the biggest waste on the system, they'd say probably 98% of them would say KYC, AML. Um, and I don't know if that falls under your jurisdiction at all, or your—

yeah, some of our entities, um, are, are, uh, subject to that. So it does. Um, and, and we, you know, the, the whole suspicious activity report, um, monitoring, we, you know, people have to file that we regulate have to file those. Um, and it is really expensive, and I think people worry that the expense isn't proportionate to the benefit that comes out of it.

So I think that's the cost expense, right? It's the, it's the, you're creating a honeypot of data for hackers, whereas you're not really, there's not much that you gain from it.

So it's the cost, it's the privacy. I mean, we do, we do find some bad activity through that. So it's not to say that it has no purpose.

Yeah.

But I think that the, the, the, what a lot of people are looking at now is that if we can use some of these technologies to so that you can sort of take your AML KYC with you when you go from one institution to the next. It could vastly reduce the cost if you had a digital identity, for example, of doing this. Now, again, I still think we have to focus on the privacy concerns that are associated with it too, but I think the new technology offers us some real promise.

Yeah. How did this, one of the most, We've talked about the Atkins speech a bunch on the podcast already, so I won't go too deep into it. But one of the amazing lines was this like desire to keep self-custody. And I'm curious how that actually came about behind the scenes. Like, was there a room that you guys were all sitting in and someone's like, what else should we put in the speech? And it's like, well, the crypto people like self-custody. Or was it actually like, this is a fundamental right? Like, why? How did that come to be?

Well, I have to go back to what I said at the beginning of the podcast, which is my views are my own views, not necessarily those of the SEC or my fellow commissioners. That was his speech, right? So, you know, that's Chairman Atkins. But, you know, self-custody is not— protecting self-custody is not that radical of an idea. I mean, that's kind of what we should expect as Americans. I think the ability to hold your own stuff and not have to do it in a custodial with someone else custodying it for you. That's just normal.

True. That's true. Let's talk like some combo of DATs and ETFs. So DATs meaning digital asset treasuries. What do you think about this DAT phenomenon that's happening right now?

I mean, it's good you connect it with ETFs or ETPs. They're, you know, in some ways very similar. I think we saw the first DAT emerge when the US, for whatever reason, decided not to allow Americans to buy exchange-traded products that had Bitcoin in them. So you, you saw the emergence of, I think, the first DAT as a result of that. But, you know, I think it's really important when these are public companies that there's good disclosure around how that, how those assets are being managed, around what, what the potential liabilities might be of the companies that were, you know, if they, if they took another, another public company to turn it into one of these DAT companies, it's important for people to understand the information they need to understand what they're buying when they when they buy that public company? Um, you know, are there liabilities that come along with it that people should know about? Um, I, you know, I just— good disclosure is people can do what they want. They can, they can, uh, they're, they're free to experiment in this area, but just good disclosure.

Yeah, yeah. I connected it with ETFs and ETPs because I, I basically view them as, um, uh, what's the right way to put this? DATs only exist because ETFs don't exist for most.

I think, um, I don't know that I would say only, but I think that is—

sorry, I actually shouldn't say, cause I don't— there's two reasons they don't, they exist because ETFs don't exist and they're actually a way to push a little farther out on the risk spectrum as well. Um, so for example, like an Ethereum ETF, maybe you have Ethereum ETFs where it's just ETH. Then you have Ethereum ETFs where there's staking involved and you can get, you know, 4% or whatever it is. And then you have DApps where you take the ETH and then you move it on to AAVE and then you, and then you loop it and you can get maybe, let's call it 8 to 12% based on the on-chain activity. So it's— but most people don't want to do that. They don't want to deal with AAVE. So I actually just view DApps as being like slightly farther out on the risk spectrum. Now, the real risk comes when the— there's a lot of risk that retail doesn't see, like the underlying— like you— a lot of these PIPEs that they're doing, the underlying has a bunch of liabilities that aren't open to the public. And, uh, the management teams of some of these are not the most buttoned-up teams. So there's— so those are— those are risks that probably retail doesn't see.

But that's what I'm saying about disclosure, right? It's so important that there be good disclosure so that people can make make wise decisions about whether they're willing to take those risks, because I think the ones that you laid out are, you know, very real. We need transparency.

Yeah. Yeah. What do you have any thought on what happens to the debts?

Again, my job is not to tell people what to do. It's just to tell people that, you know, you've got to disclose if you're taking public retail investors' money. It's very important that you're making those disclosures.

Um, I agree. I agree. Um, do you have thoughts on when— I'm actually, I'm sure you can't discuss this now that I start to ask it, but I'll ask it anyways, but you can punt on it, which is, you know, we have Bitcoin and Ethereum ETFs. Everyone's, I think, waiting on a few other ones like Solana and Ripple and things like that. Um, I only use Solana and Ripple because they're Uh, this, the, there's like 4 CME-approved assets. I think it's like Bitcoin, ETH, uh, SOL, and XRP, I'm pretty sure. Um, but yeah, what, what's, what do you think happens with ETFs? Like when, when do we get more essentially?

Well, I can tell you that our staff has been really inundated with, with applications for people wanting to do different ETPs and have been working very hard. I mean, the goal is to get to, uh, uh, listing standard that's sort of more generic so that people know what they have to do. And that's what we're working toward now. And I think once you have those in place, you know, everything becomes easier.

Yeah. Do— is— when, when will that framework come?

I mean, we're working. We're in the process right now. So I think—

don't you like dealing with crypto people?

Yeah, I know you guys always want more.

Yeah.

So certainly I'm not going to give you any specific dates, but I can tell you that, you know, this is something that is certainly on our agenda and we're working very hard at.

Nice. Why was it important to include staking in these products? I mean, you guys had an important update on this a couple of weeks ago. Why?

Sort of for the reason that we just talked about, right? I mean, ETH has this ability to stake stake, and you're leaving money on the table if you're not doing it. And, and so enabling that to, to happen, I think, is important.

Yeah. Yeah. Um, one thing that I don't really understand that I wanted to get your take on is that other people tell me exists, but I don't— I've really never talked to anyone in either of the organizations about this— is kind of the, um, maybe the, the power struggle between the CFTC and the SEC. Um, I would love to get— I'm sure you can't say too much on this, but just, yeah, your, you know, your view, not the SEC's view, but your take on this power struggle.

Well, the SEC and CFTC are unusual in, you know, when you look at the world of— across the world at regulators, it is pretty unusual to have two regulators, one on the future side and one on, on, on the equity side. And so that is going to put us in a situation where, where our jurisdictions are often bumping up against each other. And so over the years, you know, sometimes we've gotten along better than others for sure. But I think what is important to know about the, about right now is that Chairman Atkins is someone— again, I'm not speaking for him, but having worked for him at an earlier point in my career and working with him now, I know he's very committed to doing what is best for the American people. And that means not trying to fight the CFTC for jurisdiction that it makes more sense for the CFTC to have. And I think as we're working with Congress and seeing how Congress is thinking about this, um, they do have in mind a pretty big role for the CFTC when it comes to crypto. And that's that's fine. I think the piece that we're thinking a lot about at the SEC is ensuring that our regulated entities can continue to do what they can already do under our existing rules. And I don't think that's in any way inconsistent with what the CFTC will be doing. It just enables our entities, if they want to make available to customers the ability to trade a stablecoin or a Bitcoin or alongside a tokenized security, they can do that. And, and so really, I think I'm looking forward to this phase in our relationship with the CFTC. We're working well with them now. They're awaiting a new chairman, and when the new chairman comes in, I'm looking forward to that as well. Chairman— Commissioner Quintenz and I work together very closely on some issues where the two agencies' jurisdictions were closely aligned in the past, and I expect to continue to do that.

Yeah, nice. Do you have thoughts on— I think prediction markets like Polymarket and Kalshi are more under the jurisdiction of the CFTC, not the SEC. I don't know if I'm—

what they're doing. I mean, you know, if they're, if they're doing something that fits within our jurisdiction, they would have to be within ours.

But most of those contracts that I think are few are futures.

A lot of those, that activity is at the CFTC.

Do you think that I guess from a consumer protection point of view, like, is that something— is that a product that you like, the ability to to make predictions on like all these global, global and societal and even cultural things?

Well, I mean, first of all, it doesn't really matter what I as a regulator like. So that is important. But one thing that I have said in the past is that prediction markets can be quite helpful at doing something that I believe strongly in, which is accumulating the views of lots of people to try to develop an expectation of what's going to happen in the future. And because I believe in the uniqueness of the individual and the unique ability of an individual to, to contribute to something, I do think that prediction markets can play a valuable role in different areas. But again, what I like as a product is really irrelevant.

True. Yeah, that's fair. I care about your takes on products.

I appreciate that.

One of my concerns has been, and I think some other people are starting to get concerned about this, is that the industry has gotten a little too partisan. Like, it's— things are going phenomenally well right now, I would say, and it's been great and we're getting all these things passed. But maybe if, like, you know, a Dem gets elected in 2028, that things could, could flip. Again, I don't know how much you're able to— if you have thoughts on that or if that's a fair concern or not a fair concern, but I'd love to hear your take on that.

Well, I mean, I certainly saw what it was like to be working in a time when the government was trying to eradicate crypto from the United States, right? And so that's— it's good that we're not in that time. But what I say to people is use this time wisely because you need to build, you know, for all these years you've been hindered in what you've been able to build. It's been very uncomfortable for a lot of people. A lot of people have chosen to go to other industries where they felt safer or they have, you know, chosen to build more ephemeral things because if you build something lasting, it might attract the government's attention. Okay, so now we're in a new time. Use this time to build things that are valuable, that are good, that meet the needs of your, of your fellow Americans, people across the world. Build real things with real value for society, because that is the best way to make sure that good crypto regulation will last from administration to administration.

Yeah. Yeah, well said. I agree with that. Um, Commissioner Purse, anything else that you think is important to cover that we haven't?

I know we've covered a wide-ranging amount of topics here, but I think we got through a lot. Yeah, probably have had enough.

Um, well, this is great. Thanks for everything that you've done for the industry, and thanks for everything that you've done, yeah, just for a lot of the founders in the industry. I think we, we appreciate you greatly. So thanks.

Well, thanks for a great conversation, and, and, um, I, I look forward to continue and see what you all do.

Indeed.