Hester Peirce’s arrival to the main stage at the Block(Legal)Tech Conference in Chicago on October 24 felt like the arrival of a celebrity. Her awareness of the esteem in which the audience held her was apparent as she opened with the joke, “My opinions are my own; they do not represent the feelings of the SEC…but I’m working on it.”
Peirce, who is known as one of the most blockchain-friendly regulators in Washington, addressed the frustration felt by many in the digital asset space regarding the SEC’s approach to applying securities laws to initial coin offerings, or ICOs. She suggested multiple times that a helpful way to address this frustration might be for those interested in making the space safe for investors to create a self-regulatory organization. “One thing we need to remember is that government regulation is only one kind of a regulation.”
She also spent a lot of time talking about how the SEC makes the judgements it makes – “how we Howey.” Though Peirce reiterated her “frustration” with past judgements made by her colleagues, she made it clear that she believed the commission has a difficult job. She explained that securities laws are meant to be open-ended, because they’re meant to be used to evaluate potential violators of these laws on a substance-over-form basis. She said this allows the SEC to regulate a wide range of bad actors. “Having been commissioner for a year and a half,” she said, “I can tell you that there are a lot of people out there who want to scam their mothers, brothers, whoever…we have a lot of work to do.”
Despite the intended flexibility, she said the way these laws are applied is sometimes an ineffective way to regulate something like a decentralized platform (without naming specific platforms). She said that for some platforms to comply, they often have to operate their token sale in such a way that too few people end up able to participate in the network – which leads to the network not appearing functional. “If a network isn’t up and running after you host a token sale, we tend to think, ‘Oh, you were never planning on doing it in the first place,’” Peirce said. “I really don’t know how you get from Reg. A to a functioning network.” She also said that the widespread trend of digital asset platforms not having the traction they need to get off the ground prevents the markets from maturing, which leads to more platforms failing because they don’t have the infrastructure they need to support them. She described this as a “Chicken and Egg problem.”
Peirce repeatedly brought up the idea of a digital asset SRO as a potential solution to this dilemma. “One of the benefits of self-regulation is it’s close to the ground. It’s more flexible.” At one point, someone in the audience asked if she thought it would be a good idea for the CFTC or SEC to support the creation of such an organization. She said, “I worry you lose some of the benefits of self-regulation if we’re the ones setting it up.” She also said that some might be leery of a self-regulatory organization because – especially given the dubious reputation of some companies that have launched token sales in the past – it wouldn’t be a government organization. Despite this, Peirce said there was still potential that such an organization could be a force for good. “Just because they don’t regulate the way we do doesn’t mean they’re not regulated,” she said.