EPISODE 121

SEC Commissioner Hester Peirce Leans In on Bitcoin Innovation

29 minutes · August 5, 2019

SEC Commissioner Hester Peirce wants a safe harbor for crypto entrepreneurs. She spoke with ICE’s Brookly McLaughlin at Bakkt’s Digital Asset Conference about where Bitcoin and other digital assets fit in the Commission’s mission to foster prosperity and innovation within the confines of regulated markets. The episode kicks off with an update from Bakkt’s CEO Kelly Loeffler on the company’s mission to provide trusted and regulated infrastructure for institutional investors to broadly enter the crypto space.

Speaker 1:

From the Library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership, and vision in global business, the dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYSE and at ICE's 12 exchanges and six clearinghouses around the world. And now welcome Inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.

Josh King:

Okay. A little ICE House inside baseball here. Over the course of our 120 episodes so far, when we've tackled issues related to digital assets and cryptocurrencies, they've proven to be very popular. It's been an educational journey for your host too. A year and a half ago, I was at the first of five stages of Bitcoin acceptance, dismissive. Then stage two, it's skeptical. Stage three is intellectually curious. Stage four is believer. And stage five, where I find myself now, evangelist. I mean, how could I not be?

Josh King:

This show has had on as guests ICE CEO Jeff Sprecher, Bakkt CEO Kelly Loeffler, Blockstream CEO Adam Back, Blockchain guru Michael Casey, Galaxy Digital CEO Michael Novogratz, and Digital Currency Group CEO Barry Silbert. Those are a lot of persuasive people. They had me at trusted infrastructure for custody. But ultimately, I'm not the guy who's convincing will turn Bitcoin into an asset class that major institutions and millions of consumers will use to buy, sell, store, and spend digital assets. Everyone is watching this space, not the least of which are the regulators around the world who work to ensure that the ecosystem is safeguarded by a combination of compliance, security, transparency, and trust.

Josh King:

Last summer, as you probably know, Intercontinental Exchange announced the formation of Bakkt, a company to solve for those issues, providing a platform where institutions can trade physically delivered Bitcoin futures with confidence, and eventually consumers can store their personal reserve of crypto and buy the products that they once acquired only with cash or credit. That day for Bakkt is very close to arrival, which is followed a period of user acceptance testing and an extraordinarily extensive and thorough process of regulatory approval. In the meantime, Bakkt has been out there pounding the pavement with potential customers, demonstrating their wares and answering questions at sessions held recently in New York, here at the New York Stock Exchange, and in Chicago where our show takes us this week.

Josh King:

Bakkt called it the Digital Asset Conversation, which was held in front of an audience at the Tortoise Supper Club, a well-known gathering spot for the trading community in the Windy City. Bakkt CEO Kelly Loeffler, who you'll hear first, gave the crowd a quick update on Bakkt followed by a conversation between my colleague at Intercontinental Exchange, Brookly McLaughlin, and Securities and Exchange Commissioner Hester Peirce. Commissioner Peirce, a graduate of Case Western Reserve University and Yale Law School was appointed by President Trump and sworn into office in January 2018. Prior to that, she served as Director of the Financial Markets Working Group at the Mercatus Center at George Mason University where her research focused on how financial markets foster economic growth and prosperity and the role that well-designed regulation plays in protecting investors and consumers while promoting financial stability and innovation.

Josh King:

Intercontinental Exchange is all about problem- solving. And that, in a nutshell, is the problem that Bakkt is trying to solve. So it's only fitting that Commissioner Peirce would sit down with us to explain how the SEC and her fellow commissioners and its chairman, Jay Clayton, are pursuing that mission. In the conversation with Brookly, Commissioner Peirce talked about how markets form and mature, how the Commission fosters innovation, and her belief in the power of capital markets to transform people's lives. In particular, she talked about where crypto fits in the SEC's overall mission.

Josh King:

And with that, we take you out to the Tortoise Supper Club in Chicago. The next voice you hear will be that of Kelly Loeffler, Chief Executive Officer of Bakkt, welcoming the audience.

Speaker 3:

It's more than an iconic building or a global financial marketplace. It's anywhere technology, commerce, and people intersect. The innovation that makes people's lives better. Dreams that were once impossible are now realities. At the New York Stock Exchange, we help tech companies flourish and change the world. So go ahead, bring those ideas to life. We'll bring it to market. We are living tech.

Kelly Loeffler:

Thank you so much everyone for being here. I'm Kelly Loeffler, Chief Executive of Bakkt, and on behalf of all of my colleagues at Bakkt, Intercontinental Exchange, NYSE, I want to start by just giving you an update on where we are with the Bakkt futures launch since this week we're now in testing. And what's great is we haven't yet announced a launch date. We expect to do that very, very soon. We expect to launch in the third quarter. We're excited to already have people in testing, even though we don't quite have that launch date announced yet. But I assure you that will be coming very soon and we're excited.

Kelly Loeffler:

I want to think back, I mentioned the New York Stock Exchange. That's an exchange that was founded 227 years ago. And 227 years ago, a handful of brokers stood under a buttonwood tree and began trading notes. And they decided to form up a market. So my hope is that those of us gathered here, those of us that gathered last week in New York to do this same type of event recognize that we're at the dawn of something important. It's an important intersection of technology and finance. This is an interesting time given all the news and excitement, bull markets, bear markets. These are events and cycles that are happening, but this is part of something secular happening in the world. So thank you for being part of it.

Kelly Loeffler:

Let me just step back and ask you to imagine a market. And it's a market that is riddled with fraud, manipulation, false price reporting. People are going to jail. Companies are going bankrupt. It's on the news. It's in front of Congress. What market is that? It's the U.S. natural gas market in year 2000.

Kelly Loeffler:

So I say that to say it's not easy starting a market or an asset class. It's important though that the foundations are put in place to bring a market into a trusted venue, like an Exchange, an Exchange with a capital E, and that regulation's put around it. And one of our hallmarks we believe is regulation and compliance. And we want to do this in a way that there aren't questions about am I complying in the right way? The regulatory certainty is there, the CFTC approval is there, the New York State Department of Financial Services approvals we're seeking is there to give everyone trust that what we're doing is the right thing. So as part of that, we're hosting these gatherings and making sure everyone knows that there's great support. There's institutional backing for this. Please tell your friends about this as well and make sure everyone's excited and ready to launch in the third quarter.

Kelly Loeffler:

So I want to introduce our speakers, my colleague from Intercontinental Exchange, Brookly McLaughlin. She is our Senior Director of Corporate Affairs and Sustainability. She's going to be interviewing SEC Commissioner Hester Peirce. So it's an honor to have Commissioner Peirce with us today. Obviously, everyone knows her as Crypto Mom, and it's really an honor to have her here. But I also know that she's doing tremendous work to deliver on the Commission's objectives and to meet the mission at the SEC. She's going to share some thoughts with us today. This is actually her second tour of duty at the SEC. So she brings tremendous experience, public sector policy and private sector to bear here as we build on digital assets. So without further ado, I'll welcome Brookly and Commissioner Peirce to the stage.

Brookly McLaughlin:

Obviously, we're here to focus on crypto. Before we kind of jump down that rabbit hole though, maybe if you want to take a minute and talk about the past year and a half at the SEC. Any big takeaways or surprises in that time?

Hester Peirce:

Sure. Well, thank you for the opportunity to be here. I love the way Kelly talked about markets forming and maturing. I think it's really exciting to be part of that. I should say before I start that the views that I express are my own views and not necessarily those of the Commissioner or my fellow Commissioners. But one thing that drew me to the SEC to come back as a commissioner was my belief in the power of capital markets to transform people's lives. And so it's been fun to be at the Commission at this time.

Hester Peirce:

I think with Chairman Clayton setting an agenda that's a really positive agenda, trying to take care of some things that we have not taken care of because other priorities have been there. Dodd-Frank took a lot of the agency's time. So now we have a little bit more time. We're still working on Dodd-Frank, but we have a little bit more time to try to think about some bigger picture-type issues. And that's what the chairman has been doing, with the focus particularly on what can we do to make sure that our capital markets stay the best markets in the world? And looking at some of the problems that we see, such as companies are waiting so long to go public, is there something that we can do to address that? We're looking at that from a number of different perspectives.

Hester Peirce:

So I think from my perspective, it's been a really wonderful time to be at the SEC. I enjoy meeting with people and hearing what people think we should be doing. It's always best if you tell me what we're doing wrong. So I hope that we'll, some of you will bend my ear and tell me what I'm doing wrong,

Brookly McLaughlin:

Jumping into crypto then, we talk to a lot of crypto entrepreneurs who have said they've had some really great meetings with the SEC. Maybe just to kind of set the stage for this discussion, can you talk about the mission of the agency as it relates to the crypto space and how you view the SEC's roles as those new ventures are coming in to visit?

Hester Peirce:

Yeah. I've talked to some who have not had good meetings with the SEC. I have not met with as many people... You know, sometimes people come and visit me when they go to visit the staff. I encourage people to do that because it's always helpful for me to hear what people are hearing from the staff. I shouldn't be so negative because the SEC has realized that this is a space that there's a lot of interest in. And so we have started to devote a fair number of dedicated personnel to the space. We have a new FinHub. Well, it's not that new anymore, but it's been around for a little while, a FinHub which is supposed to collect the expertise from across the agency in one place. And people can come in and meet with that group of people. We've been doing, our staff's been doing peer-to-peer events across the country to meet with innovators in this space.

Hester Peirce:

So I think it's that part of it is positive. The thing that's been a bit frustrating for me is that the pace has been a lot slower than I would like it to be. I think we need to be a little bit more willing to take some risks in terms of, not us specifically, but allowing people who are interested in this space to be involved in it in a way that is within the regulated framework, understanding that people, investors have to make their own decisions. We can't make those decisions for them.

Brookly McLaughlin:

The SEC is obviously a large institution. It's got thousands of staff, a budget of over a billion dollars. It also has a mission to ensure efficient, fair markets and protect investors for the world's largest securities market. Where do you see crypto on the list of priorities? And how much of the SEC's resources is it realistic to expect to be dedicated in this area?

Hester Peirce:

Well, it's certainly not as many resources as a lot of the people who are involved in this space think that we are spending. So I like to tell the story of, I have a Twitter account. Almost all of my followers are from the crypto space. Probably bots, I don't know. But in any event, we had a rule that came out about mining, and I'm talking about real mining, mining minerals. I'm not saying crypto mining isn't real, but mining minerals out of the ground. And so I put a tweet out about it and I said, "This is about mining, not Bitcoin." Okay, that was my mistake. I should have said not crypto. But I said not Bitcoin in parens. And then I got all these messages, "This has nothing to do with crypto. I don't understand what you're talking about." And I'm like, "Okay, but the SEC does do stuff other than crypto."

Hester Peirce:

So I think it's really important to keep in mind that crypto is one asset class. It's a new asset class. It is taking... We're spending a fair amount of time trying to get our arms around it. But it's really one piece of a much larger mission. And it really is not a big piece of most staff's time at the SEC. And it's just one piece of what I do too. So I think it is important to temper expectations a bit on that front.

Brookly McLaughlin:

You touched on it a little bit, but maybe we can talk a bit more about innovation. You've done a lot of work framing out the concept of the safe harbor provisions to help promote innovation. CFTC has the LabCFTC. Is there room for a LabSEC, or how do you think about ways that the agency can address ensuring that new products are able to see the light of day?

Hester Peirce:

So I think that for me the reason that crypto has been interesting is that I came into the SEC with my prior knowledge of having been at the SEC before, understanding that it's not great, the agency is not great with innovation. It's very natural for regulators to be conservative because if we make a mistake, then people are going to come blame us. And I know if people lose money, they always come blame the regulator. So I wanted to see a much more open attitude toward innovation paired with very clear message to investors that just because we let something trade in our markets doesn't mean we're telling you it's a good idea for anyone, let alone you. So be skeptical, ask your own questions. We'll get you the information you need to make decisions, but you got to make your own decisions. That's my view. Let's let innovation happen and let's let the market test products. If the market likes them, they'll succeed. If it doesn't, they won't.

Hester Peirce:

So I thought that one potential idea would be to have an office of innovation, because one thing that happens at the SEC is that it's a pretty siloed agency. So even though it's a small agency as agencies go, it's got a lot of people working there, as you mentioned. And so the office of innovation could help to make sure that the message coming from one office wasn't inconsistent with the message coming from another. That suggestion has gotten mixed reviews because some people say, well, you're going to help bureaucracy by adding more bureaucracy. And that's a fair point. But I do think we need someone to shepherd things through.

Hester Peirce:

Now, so I thought crypto was an interesting case study. And when I came in, we were running the crypto out of our enforcement division. And I said, "If you really want people to come in and talk to you, saying you're an enforcement attorney, probably not a great idea." So we were able to move it over to Corp Fin, which is a more natural place for it to be. And then I said, "Hey, why don't we have a website where people can kind of write in and share ideas and bounce ideas off each other, and we can get reactions?" That took a very long time. And then we got FinHub, which is good. But I think my point is we're pretty slow at these kinds of things.

Hester Peirce:

I think the CFTC has jumped a little bit ahead of us in the sense that LabCFTC is a really interesting idea and it's a more natural way for innovators to come in and talk to an agency. We are trying to do that with FinHub and with these peer-to-peer meetings. So I think we're making progress. It just looks a little bit different than the CFTC and is a little bit slower.

Brookly McLaughlin:

When we think about the roadmap or the timeline for bringing new products to market, can we look back historically and learn anything, for instance if you think about the early days of mutual funds or more recently ETFs?

Hester Peirce:

We're very slow to embrace innovation because of the risk to the regulator. And I think that's not a good thing. I would like to see us be not only in the crypto space, but in, we're looking at different kinds of ETFs too, in that space too. I think we should be much more open to innovation. Let the markets test it. The markets are much better at figuring out whether something is a good product or bad product than we are. We need to look at whether there's good disclosure. I don't think we're a merit regulator, and I think too often we try to be a merit regulator.

Brookly McLaughlin:

Taking a step back, looking at the global picture for regulation. Obviously, crypto assets are actively traded in Asia, in Europe. It's a little bit of a mixed picture with the Swiss regulators clearly embracing it, maybe not so much in other areas. So I guess the question is how do we stay compliant with the laws and not fall behind given this kind of diversity of approaches around the world?

Hester Peirce:

Yeah. And I think we can learn from what other countries and jurisdictions are doing. I think it's interesting to see what they're doing. We are maybe at a disadvantage because we have this established regulatory framework. And we're looking at crypto and much of crypto looks very similar to other types of securities offerings. And so when you come to us with something, we say, all right, well, you just have to, as with any other securities offering, you've got to think about what you're doing and you've got to think about how it fits within our regulatory framework. And you've got to just comply with the, find an exemption or do a registered offering just like everyone else.

Hester Peirce:

And so that, I think, puts us at a bit of a disadvantage, as does the fact that we've got a regulatory regime that has multiple federal financial regulators as well as state financial regulators. And everyone's got a different view on jurisdiction and there's overlapping jurisdiction. So it can be very frustrating to be an innovator here in the U.S. Whereas if you're starting in a country that has less established rules, they can kind of craft something that works specifically for a particular asset class.

Hester Peirce:

Now, I will say that I've come around a little bit on this topic to think that maybe we could craft a safe harbor that's specific to digital assets. And I think that that might be very useful just for the notion that if you're trying to create a token that's really a utility token, it's really hard to start it off as a security and understand how it's going to ever morph into a utility token. So is there a way that we could create a safe harbor that would allow these things to trade but would allow them to do it in a way that people, we made sure people got the information they needed about the tokens before deciding whether to buy them?

Brookly McLaughlin:

If we drill down and look in the U.S., obviously we're here in Chicago where derivatives regulation is well understood. The CFTC has said that Bitcoin and digital assets are commodities under the Commodity Exchange Act. The SEC has Howey Test. Can you talk a little bit about how between the agencies in the U.S., how the relationship's working and is that going to enable innovation to continue and the U.S. to keep up?

Hester Peirce:

So we have been working very closely with the CFTC on a number of issues. Brian Quintenz, who's a commissioner there, and I have been working together on Title VII of Dodd-Frank. And one of the things that we've talked about together is crypto and trying to think through ways that how are different jurisdictions ought to apply? Again, I think we're all looking for input from people. So again, I'd love to sit in a room together with Brian and hear from a bunch of you, if you have ideas on what we should be doing and where those lines should be drawn. But we definitely have a good working relationship on a number of issues. So this is one of them.

Brookly McLaughlin:

You know, many broker dealers have been waiting for well over a year for their applications to be reviewed. With the recent SEC FINRA guidance that came from staff, how confident can investors be in that?

Hester Peirce:

I should say this was staff guidance, not Commission- level guidance, but we're giving a little bit more clarity. I would say the best thing that that most recent guidance did is it said here are some of the things that are bothering us. So I would urge people to pay attention to what was in there. And if you have answers to those concerns that are laid out there, let us know. You'll see there are a number of issues that bother my colleagues at the SEC and those are kind of highlighted there.

Hester Peirce:

So yeah, we still need to do something more definitive in that space. That guidance was not all I had hoped it would be, but that same week we did qualify a couple Reg A+ offerings in the crypto space. And that's something that I had been wanting us to do for a long time because I think that that's a sign that, okay, there is a way to do offerings in this space in a way that's consistent with our regulations. So we're taking baby steps.

Brookly McLaughlin:

Turning to ICO's, initial coin offerings. In the first part of last year, they really demonstrated their capacity to rival traditional capital markets in raising capital. We've since seen STOs, IEOs. What's your take on that mechanism for fundraising?

Hester Peirce:

Well, I think there was certainly a wave where lots of people were doing it, and some of it was just, hey, let's raise some money and let's call it an ICO so that we can maybe not comply with the securities laws. And look, if what you're doing is just raising money and it looks just like anything else, like any other securities offering, you're just calling it an ICO, it's going to be regulated like any other securities offering. So I think from that perspective, it's good people are now thinking a little bit more clearly about... And that's why I mentioned these Reg A+ offerings. There is a way to do this in a way that's compliant.

Hester Peirce:

You know, another thing that's happened in the time since the big ICO wave was I think people started to realize, all right, we have to think a little bit more before we invest in these things. And so there's a little bit of a separation of the wheat from the chaff now. And I think that's beneficial as well. So I think experimentation about different ways to raise money is great, but I would urge people to come talk to the SEC as you're thinking about doing it. Don't wait till after you've done it. You know, come talk to the staff before. They're not going to give you legal advice, but they might give you some things to think about as you're trying to figure out how to do it in a way that's compliant with our rules.

Brookly McLaughlin:

Jumping on that, can you maybe talk a little bit about the level of activity that you've seen as far as new entrants coming to the SEC or are institutional participants looking to learn more about it?

Hester Peirce:

Well, I think a lot of people do come in and talk to the staff. Far fewer people than I would like come talk to me. You know, I understand a lot of people who are trying to build something don't really want to spend time sitting around with a regulator. So I get it. I don't take it too personally. So I think a lot of people are coming in. I think one of the... There are two problems. One is that because they're not seeing lot of movement, sort of doesn't feel like it's that productive to come in. And I would say that's not true. Come in, educate us. I know it's painful, but it is really useful to us. And it can make us a better regulator in this space.

Hester Peirce:

And the second piece of it is that because of this decentralized world is really a different world in many respects, and so people have a lot of questions about if I come in am I just putting myself in the spotlight to flag myself as a potential enforcement action? And I can't make that call whether or not you come in. But I will say that I think it always makes sense to come talk to us as early as you can in the process just to get a sense of where things stand. Even if you don't want to come in directly, but you have someone come in sort of on your behalf on a no-names basis, I think that's valuable. So there are ways to kind of get a feel for where the staff is on things without putting yourself in an uncomfortable position.

Hester Peirce:

I will say that we have a staff who's very knowledgeable, who's very interested, and they do want to come to a good spot at the end of the day. It's just that we need to get them comfortable on the fact that people are really taking regulation seriously, looking for a way to do things in a compliant way, and want to move things forward. So I think if we approach it that way, we can get some positive movement.

Brookly McLaughlin:

We've seen some prominent university endowments starting to allocate assets to crypto yields, an example of one of the early movers in that. What advice do you have for institutional investors that are looking to start allocating assets to crypto?

Hester Peirce:

I mean, it's the same advice I give to any investor. You should think about what your objectives are as an investor and you should do your research and you should be skeptical. I'm not going to endorse any asset class or any asset within any asset class. I think people are very capable of making their own decisions. And I think people are capable of making their own decisions in this space as well.

Brookly McLaughlin:

Thank you so much.

Hester Peirce:

Thank you all.

Brookly McLaughlin:

This has been extremely enlightening. I think we're all excited to see how this continues to play out.

Hester Peirce:

And again, I urge any of you who has ideas about what we should do in this space to contact me directly. You can just email me at [email protected], or give me a call if you don't want it to be an email, which is fine because it's FOIL-able. But anyway, yeah, come talk to me. Come tell me what you're doing. I'd love to hear about it. So thank you all.

Josh King:

That's our conversation for this week. Our guest was SEC Commissioner Hester Peirce, recorded live in conversation with Brookly McLaughlin at the Tortoise Supper Club in beautiful downtown Chicago, Illinois.

Josh King:

If you like what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us @ICEHousePodcast. Our show is produced by Theresa DeLuca and Pete Asch, with production assistance from Stephen Romanchik and Ian Wolff. I'm Josh King, your host, signing off from the Library of the New York Stock Exchange. Thanks for listening. Talk to you next week.

Speaker 1:

Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties, expressed or implied, as to the accuracy or completeness of the information and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.

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Information contained in this podcast was obtained in part from publicly available sources, and not independently verified. Neither ICE nor its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the information and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice.