A Q&A with the SEC's Hester Peirce on token safe harbors and what's next for her crypto proposal

Commissioner Hester Peirce of the Securities Exchange Commission (SEC) introduced her token safe harbor proposal earlier this month, sparking a spirited debate among industry stakeholders and players.

Under the proposed rule, projects would have three years to sufficiently decentralize their networks without fear of complicated securities laws as long as they register with the SEC and satisfy disclosure requirements. Peirce has since opened her proposal up to comment with an email address linked in her Twitter bio, among other avenues.

Peirce spoke with The Block about the thought process behind the framework, touching on how the U.S. will require its regulatory approach to crypto and how the token safe harbor rule can help distinguish legitimate projects from the illegitimate.

Below is an edited transcript of our conversation:

The Block: What was sort of the genesis of this proposal, or the point where you said, this is the time where I'm actually going to attempt to codify this and present this as a rule proposal. 

Commissioner Hester Peirce: Well, it seemed like the earlier I could get it out, the better because it's better to get it refined so that when there is an opportunity to do something, there'll be something ready to go.

The Block: What sort of conversations were you having in the lead up that helped you draw up the proposal? 

Peirce: ...I went to a conference, not that long after I started at the SEC, and someone asked me whether we needed to do something special for tokens, and I said, no, that's not a good idea because our securities laws are flexible and they should be able to accommodate all kinds of things. But, you know, in subsequent conversations with people, I started to see that question's point, why he was pushing me to think about something different for this space and then I came around. So it really is a whole series of conversations that went to the point of deciding that something was necessary. 

The Block: I understand you took a set of trips to Asia, including Singapore, where you heard more about some of their regulatory frameworks surrounding crypto. Could you speak to that a bit?

Peirce: Yeah, I took a trip to Asia last summer...I was there to talk to a lot of people about a lot of different issues, but one of the issues certainly was crypto, and there’s just a lot of activity happening there. People feel much freer to work on innovation where they know that they'll be able to work with the government. It's not to say that there will be no rules and regulations, but they know that the government will work with them to build a framework that does work for them but also protects investors and financial stability and whatever their other mandates there are.

The Block: Were there specific points in other nations’ regulatory frameworks that you felt it was important to emulate within the proposal? 

Peirce: This proposal was really uniquely designed within the U.S. regulatory mindset. This is really taking the general principle of trying to work with innovators to find a way to allow them to do their innovation in a way that’s consistent with the regulatory framework in whatever country you're working in. So that’s more the general principle that I took rather than any one specific thing.

The Block: Could you point out any specific needs you’re seeing in the U.S. space that are different from, perhaps, other countries?

Peirce: I think the major thing in the U.S. that’s unusual is that our definition of security is a little bit more fluid than it is in some other places, and so providing some clarity over what side of the line things fall on is probably more necessary than it is elsewhere. Although other countries too have tried to design token frameworks – Switzerland has worked on it, Bermuda has worked on it – so we're not the only one where these areas where the lines are matter, but it's unique in the U.S. But certainly, you know, countries like Japan are thinking about how to regulate trading platforms. Singapore is open to working with people in sort of a sandbox-like environment, if I recall correctly. So there are different approaches and different jurisdictions are thinking about different issues depending on what the concentration of the industry is in that country. [For example,] Japan has just attracted a lot of trading platforms, so obviously they’ve had some notorious problems there, so that was a natural place for them to direct some attention. And, they have really taken steps in that direction. So it’s been really interesting to learn about all that, and what they're doing, I'm sure, will inform what we're doing here on those kinds of issues. But there are a lot of issues to think about in the crypto space. The token safe harbor is just one of them, but I think we've got to tackle each one individually. 

The Block: With the safe harbor proposal, were there any cases domestically that you had in mind that this type of rule would help clarify?

Peirce: Well, I talked to a lot of people who said that they had token networks that they really wanted to launch here but they didn’t feel that they could. They didn't all give me the details of what those networks were trying to do. But I think it was really those conversations with people who gave me concrete examples of what they're trying to do, and it was really in response to that. And it was in response to my concern that people who had tried to do things the right way, they had tried to raise money using venture capital, for example, somehow using a true private offering they had raised money to build the building blocks, and they wanted to go and launched the network publicly. And they felt like they could not. So it [the proposal] was also reacting to that as well. 

The Block: I saw very soon after that Telegram had submitted the letter in their case. What was your reaction to seeing that already people were really taking it seriously? That even as a proposal, it was making waves and could apply to some cases in some ways?

Peirce: Well, I can’t speak to any particular enforcement matter, but I appreciated the fact that people across the community have been willing to look at it. The reaction has not been entirely favorable, but I’ve gotten some great feedback already on the very concrete things which I have to give some more thought to, and that is the kind of feedback I was looking for. I've gotten other feedback that is much more dismissive or wholesale critical to the idea of a safe harbor. That kind of feedback is welcome too. In typical crypto twitter fashion, some of it is quite harsh, which is fine, but I think the idea of having regulation to bring up somewhat organically through a conversation between regulators and people who actually would be subject to that regulation is a healthy way to approach things. To the extent people take issue with my approach in that regard, I would be very interested to hear what they think would be a more effective way to develop regulations.

The Block: How did you arrive at the three-year time frame? I understand that it’s in proposal form and things could change, but how did you arrive at that starting point? 

Peirce: That was really a function of talking to people and trying to get a sense of how much time would you really need to get things up and running if you are fairly far down the road. I think one of the criticisms I’ve gotten is ‘you’re trying to start another 2017 ICO craze and what social value does this provide?’ My response is...it’s really designed for people who are fairly far down the road about thinking what they want to do. They're at a point where they can actually explain to people what it is and it’s quite concrete. I think three years, based on conversations I’ve had, is enough for those kinds of projects that are fairly well-formed to get to fruition.

The Block: There's a very heavy focus on disclosure. How would this change things for the SEC if you had all of these projects on the radar? Right now I would imagine that a lot of them can fly under the radar, but this would have many projects disclosing a lot of information. Would that change things at all? Was that a concern – having crypto projects be registered in some way? 

Peirce: Well, that is a great point in the sense that it allows us an even better picture of legitimate from illegitimate projects. It allows us to have information about the project and if they're out there to rip people off, it does make it easier for us to pursue them through an enforcement action. So from that perspective, yes. I don't think it really increases the workload, though, because the way it's set up is that you just you basically say, 'I'm opting into the safe harbor here and providing all this information on a public website and that doesn't really require the SEC to do a lot of work unless you start getting complaints from people who are saying these guys said X but they’re doing Y. Then that might be something that we would look into in terms of an enforcement action. But we get all kinds of tips all the time anyway. So we're always running things down, and that's part of our job.

The Block: Aside from workload, I mean, was that something that you were trying to address within the proposal as a way to sort of keep a closer eye in some ways on a lot of these projects while also allowing them some regulatory freedom and an ability to work? Was it like a two-prong problem that you were trying to solve? 

Peirce: I don't think I would describe it like that...the difficulty about looking at it from that perspective is it is a safe harbor, it’s not the only way to do things legally if it were to go into effect. It would be only one approach. Just because you don’t choose to take advantage of the safe harbor doesn't mean that you're not a legitimate project. I just think that a lot of legitimate projects probably would take advantage of it because it would provide a neat framework presuming we can get it right, that it would be consistent with the expectations of people who were interested in buying tokens, it would provide them the information they need. So that kind of framework, if it were the right framework, I think a lot of legitimate projects would gravitate toward it. And then, to the extent that there were people who were getting token networks up and running and trying to sell tokens to people outside of the safe harbor, it could lead us to ask questions about maybe why they weren't using the safe harbor. But again, it wouldn't be it wouldn't be a mandate. Then having the information out publicly on a website, it does make our job easier certainly.

The Block: Looking forward, I understand this is the start of a long road, but is there any sort of timeline or next steps that you're looking towards either specifically for this safe harbor proposal or just helping to clarify regulation for the crypto industry? 

Peirce: Sooner is better, but part of what we need to do is build in as many comments as I can get from people. I do have a lot of other things I'm working on so I have to sort of slot this in with other things that I’m working on, but I'd like to be able to put together a revised proposal. Unless the bulk of the feedback I got is that this isn't worthwhile, don't bother. In which case I won't go forward with it. So it’ll depend on what the community comes back with. It's still pretty early. But if people tell me it's not worth going forward, I'm really not going to waste any more time on it.

The Block: I know it’s a moving target, but do you have a sense of when you’ll close the comment period?

Peirce: I think there’s no definite point. If I were to get to a point where I thought I could convince enough of my colleagues that they were willing to put something up, then that would be my goal, to get that done as quickly as possible. If I sensed the tide is turning, then my comment period will close and I hope a real comment period will open.

The Block: And where's the tide right now among your other commissioners? I understand that this is your proposal and it reflects what you're working towards, but what’s the general mood? How far away do you feel you are?

Peirce: You would have to talk to them about their perspectives… I would really love to be able to present the proposal in a way that people could feel really comfortable that it was meeting their objectives. That was the goal in designing it the way we did with the strong disclosures that we designed it. It was really designed to address some of the legitimate concerns that my colleagues had about activity in this space. And so, if there are other things that there are other ideas people have about how we can strengthen that part, certainly we're open to that.