Conversation with Crypto Mom

SEC Commissioner Hester Peirce explains how bitcoin ETFs finally got approved

Ric Edelman: It's Friday, January 26th. Coming up on today's show, a conversation with SEC Commissioner Hester Peirce. But first, I want to talk to you about AI. You've been hearing a lot of hype about it, but are we really seeing anything exciting come of it? Yeah, and here's just one example. Google's AI company is called DeepMind. They've just discovered 2.2 million materials that were previously unknown. It's all about crystals. Scientists have identified 48,000 different kinds of crystals. That's a big number. 

Well guess what? DeepMind has just created a library of 2.2 million new crystal structures. Researchers looked at 58 of those crystals that the AI said could be created. Within two weeks, they created 41 of them, and a thousand others are being produced, and probably all 2.2 million of them are going to be eventually made. We're talking crystals that could support superconductivity. That's where electrical current flows with zero resistance, or hundreds of conductors of lithium ions that could be useful in batteries. If you think 2.2 million crystals is an impressive number. There's another paper that says the eventual number will be 32 trillion crystals, everything from glass to gases, gels and liquids. 

But for all this excitement, let's remember that AI is one hungry piece of tech. Some studies are predicting that AI systems are going to consume massive amounts of energy to operate. Constellation Energy says that AI's power needs just here in the US, could be six times more than what we're going to need to charge all the electric vehicles we're trying to build.  

Ai is going to consume as much energy as is used every year by the Netherlands. That's the equivalent of the entire output of 15 nuclear power plants. In fact, Microsoft is using its AI to speed up the approval process for new nuclear power plants to power its AI. And these figures don't include the power required to keep all the computers cool. The ventilation systems are going to need their own power, and that can double the total energy requirement. So there's one puzzle that it needs to solve. How can it perform without needing so much power? Or where is it going to get the power that it does need? I hope it figures that one out pretty quick. 

By now, you've heard that the SEC has approved 11 spot bitcoin ETFs. The massive asset flows demonstrate the investor interest in these new ETFs. And if you're a financial advisor, I’ve got to ask: Are you able to make recommendations to your clients about bitcoin? Can you explain to them what it is which of these ETFs are best suited for them, how much they should invest? You need to be able to answer your clients’ questions. That means you need to become knowledgeable right now. Enroll in my online self-study course and become Certified in Blockchain and Digital Assets.  

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Ric Edelman: You're listening to The Truth About Your Future, and I'm very excited to be bringing on to our podcast today. Hester Peirce, Commissioner of the SEC, affectionately known in the crypto community as Crypto Mom. Commissioner, it's great to see you again. Thanks for joining us.  

Hester Peirce: Ric, It's great to be with you. And I do want to start with my standard disclaimer, which is that my views as a commissioner are not necessarily those of my fellow commissioners or the commission as a whole.  

Ric Edelman: Thank you for that, let's launch into some of the questions that I've got for you. And, you know, we you and I have talked for many years on a variety of subjects, particularly, the spot bitcoin ETF applications. A year ago, you were pessimistic that the SEC would vote to approve these applications. You didn't think it was going to happen and or certainly not any time in the near future. But late last year, you know, starting around summertime with the speed of events, BlackRock's filing for the very first time of an application, the Grayscale court ruling, other events, the speed of those events surprised you.  

Hester Peirce: Well, I think that it was not surprising to see someone say to us in a court filing, hey, we think you're applying different standards to these products than you have to other kinds of products, because that's something that I believed to have been true for a long time. And as you said, we've been talking about this for a long time. I don't think either one of us would have foretold this course of events, but I think certainly having someone challenge us on this was not too surprising to me.  

Ric Edelman: And the result, the court ruling itself wasn't a surprise either. 

Hester Peirce: I think the court saw that we were treating like products differently and was trying to figure out why. And those are some of the same questions I had. So I was not terribly surprised to see that result.  

Ric Edelman: You were happy at the results in the end game, meaning that the approvals finally occurred after ten years, frankly, from the original application being filed, dozens of rejections from the SEC prior to your joining the Commission. And in the almost six years since you've been on the Commission, you're happy at the approvals, clearly. But you also have expressed frustration that this took so long and required so much effort. Elaborate on that.  

Hester Peirce: Well yes, we should be happy that the products are available to people. And if people want to buy them, they can buy them. That's great. But I think we are in the situation where we are today, with all of the flurry around, when is the SEC going to be approving one of these things? And what's going to happen to the market? And it's just been this circus atmosphere around this. And I think that is a dynamic that we had a large part in creating. And so if regular way we had considered these applications as we do for similar products and not taken this whole different approach because it's bitcoin, we wouldn't have been in this situation, and it would have been better. And I think it would have been better for investors, frankly, for a number of reasons as well. Having them be able to access a cheaper product that more closely and easily can track bitcoin is better for investors, a product that they can hold alongside their other holdings in an investment portfolio. Again, I'm not advocating that investors hold or don't hold this product or buy or don't buy it, but if you're going to, people should be able to access the products that they want, as long as those products go through the process and meet the standards that we've set out for other similar products. So I just think it's really too bad how this came about.  

Ric Edelman: And even in the end, the vote was not unanimous. Do you have any thoughts on that?  

Hester Peirce: Yeah. I didn't see that we had a lot of a lot of room to maneuver after the court decision came out, certainly. There had been a pretty clear message that came from the court in my view. Again, even before the court's decision came out, I was sort of struggling to understand what the rationale was for our denials of it. This has been a very difficult time for me, in looking at these applications and trying to understand what the standards are that we're applying. And is the goalpost being moved as people bring in more data? So I just think people should go and read Commissioner Crenshaw's statement because it does go to great lengths to explain why she voted no and that will give you some insight into her thinking on it. But I really thought we were in a position where we didn't have another path forward.  

Ric Edelman: And so now here we are with the spot bitcoin ETFs are on the market. There are 11 of them. Is this the end of an era? This was a long time coming. Or is it the start of a new one? I mean, what's it all mean for bitcoin specifically, crypto generally and for investors broadly.  

Hester Peirce: I think we'll see what people are following, with the flows in and out of different funds. And so we'll see what happens on that score. And again, as a regulator it's not my job to decide whether these products are right or not right for people's portfolios. But I think it does bring in a whole new set of participants into the marketplace that before would have had a more difficult time participating in bringing their clients into this space and advising their clients. I think that is a change, but we'll see whether this means that we're going to see similar products, in the future. We'll see what the market looks like. I think it’s one thing to look at it a week out, but it's another thing to look at it a year out and see where things stand.  

Ric Edelman: You mentioned a circus atmosphere earlier. There was such a long period of time that these efforts have been underway, literally a decade, and the industry was determined to eventually get approval. That's why they kept filing application after application and had hundreds of meetings. I can't imagine how much the legal bills were by the crypto community to deal with this. They were determined, you were steadfast in your support, and it got to a frenzy, to the point over the last six months following the Grayscale court ruling that there was just this frothy environment created of excitement in the crypto community and the investor community. All the surveys have shown us over the past few years that investment advisors were waiting for these ETFs to come to market, but for them to be able to engage in crypto, many compliance departments had a lot of financial firms saying no to crypto, but we'll say yes to the ETFs. And we're beginning to see that in the past week, and we have, as you've noted, we have observed a huge generation of asset flows into bitcoin. These bitcoin ETFs have already generated a couple of billion dollars in asset flows.  

The BlackRock product (IBIT) already crossed $1 billion in just several days. And now the bitcoin ETF has more in assets than the silver ETFs, which suggests that there's been this big pent-up demand, and it's created as you referenced, a bit of a circus atmosphere about it. Those circus atmospheres are not healthy for the financial markets. They're not healthy for investors. Expectations get really too hyped up. And people are expecting with the advent of these ETFs, that it’s going to translate into get rich quick. You know, doubling your money overnight. I've expressed concern that people are getting a little too excited about this. One of the articles that I've written in our Advisor Toolkit is to temper expectations to not expect quick profits and outsized returns. What cautions would you like to offer to investors and advisors about, now that the ETFs are here? 

Hester Peirce: No, I think you're right to point out that people can get hurt when there is an environment like this, when people think they have to rush into a product. Really what we want is people thinking carefully about whether this product is right for them. And I think exchange traded products are really important innovation in the financial industry, in the financial world. And they can be very good ways for people to access different kinds of assets. But that doesn't mean that this product is right for everyone or that any that that everyone needs to have, or anyone needs to have a bitcoin exposure in their portfolio; that's really something that an investor has to sit down and think, what are my goals? What's my current financial situation? What are my hopes and dreams? What's my risk tolerance? What else do I hold in my portfolio? And that's a conversation that an investor can have with an investment advisor. And I think now, as you said, there are a lot of investment advisors who have wanted to take a look at these kinds of products. And so they'll do that. But again, it has to be a question of, is this right for the particular investor that you're working with? 

And there's no rush in getting it. I always tell people to be skeptical of everything. I think that's a good way to go into things. And never feel, no matter what the product is, that you're going to miss out if you don't buy today. You always need to take the time and figure out what is right for you. Investing is not an instantaneous process. It's a lifelong process. And you have to think about it that way, no matter whether you're talking about bitcoin exchange traded products or traditional stocks or commodities or whatever you're buying. So that’s why I don't like people to be thinking about regulatory approvals of a product like this as a seal of approval. All it is saying is that it is something that can trade. And now, if it's good for you, that if you come to that conclusion with on your own or with the help of a financial professional, that's fine. But do it deliberately and judiciously and carefully.  

Ric Edelman: A calm, cool head will always win. So what do you think might be coming next? We've already seen applications for two X and inverse bitcoin funds. There have been applications for Ethereum ETFs. Do you support the notion of such ideas, I mean, philosophically? I'm not talking about the applications themselves, but do you see that this is a natural extension that the bitcoin ETFs were first? That we're not going to stop there and we're going to see more product development? 

Hester Peirce: I think we'll always see more product development. People are very innovative in what they're thinking and so that doesn't surprise me. And I think we'll see lots of things that I wouldn't have thought of. But again, the question for me as a regulator is, do these products meet the requirements to get to approval, and then let the market decide whether or not they want those products. That's not really my call, but I think we'll see a lot of a lot of people experimenting with different ideas in this crypto adjacent space. 

Ric Edelman: You used a word earlier, and you had it throughout your statement that you issued following the SEC's vote. Chairman Gensler did the same thing. Commissioner Crenshaw, all of the commissioners have used a specific word in all of your statements, not only in your official statement following the vote, but in casual conversation. You've done it here today. And I want to highlight this word because I've noted it with curiosity, and I don't think most folks are paying attention to this. So I just want to ask you this. It's probably a geeky point that only folks like you and other finance geeks like me care about, but you have referred to these as “exchange traded products”, not exchange traded funds. Technically, as I read the S-1s that the applicants all filed, and I look at the SEC's ruling and I look at all the individual statements from the commissioners and yourself included. You are all very clear, very specific that these are ETPs, not ETFs. Does anybody other than people like you and me care about that? Is this a material fact that investors need to be paying attention to? What's the difference between them?  

Hester Peirce: Well, this can be an area of confusion how something is classified. But I think understanding a little bit of the regulatory regime and whether or not it fits within the protections of the of the Investment Company Act of 1940 is kind of what's driving all of us using the terms “exchange traded product”. We typically use the terms exchange traded fund when it's a fund that's under the protections of the 1940 ‘s Act. That is an act that was put in place to make sure that products being offered to retail investors had certain protections around how they're managed and making sure that the managers are working for the fund, as opposed to working for their own interest. But again, people need to take that into account when they think about these products. Clearly these exchange traded funds are not the only products that people buy. Lots of people buy other kinds of exchange traded products that have different kinds of protections, including the disclosures that you just mentioned, so that you can read about the product and how it works. In some of the disclosures that we require (and there was a lot of back and forth in producing those disclosures) but again, I just want to underscore that no matter what, whether it's an exchange traded fund under the 1940’s Act or an exchange traded product, more broadly, you need to think about whether it's right for you. There is no SEC approval seal of approval on these products. We do try to make sure that the disclosures match what actually happens at the fund. But beyond that, you really have to make a decision about whether it's right for you.  

Ric Edelman: And so I guess it's fascinating to me that although these are technically exchange traded products, pretty much all of the 11 refer to themselves as exchange traded funds.  

Hester Peirce: Well, there’s no official glossary on exchange traded products, of which I would say exchange traded funds are a subset, right? There's no official terminology there. But I think it is good to understand which regulatory regime something falls under. So, that's something people can pay attention to.  

Ric Edelman: And just for everyone's clarity, there are exchange traded notes, there are exchange traded commodities, exchange traded funds. In other words, all dogs are animals, but not all animals are dogs.  

Hester Peirce: And some people have talked about whether we need to have some sort of official nomenclature. Some people think that would be important. But I think really what's important is if you're buying a product, to look at the disclosures, to understand how it works and that's something you can get on all of these kinds of products.  

Ric Edelman: Before I get to my last question, any other points that you'd like to make about this entire conversation of the spot bitcoin ETFs?  

Hester Peirce: No, I mean, I think, Ric, you and I have been talking about this for how many years now? I think we first talked about it probably five years ago. Right?  

Ric Edelman: I think so.  

Hester Peirce: So it's been a long time coming and I hope that we can just close this chapter and I hope that the SEC can more broadly revisit how we've thought about crypto. I think that will result in a better environment for everyone, an environment in which it's easier to distinguish the good actors from the bad actors, which is something that I'm concerned about. If there's a lot of regulatory ambiguity, it can become very difficult for people to distinguish the good from the bad. So maybe this is a moment where we say, hey, let's take a look more broadly at how we've been thinking about crypto, and let's start engaging with people so we can get to a place where there's good disclosure out there so that people can make their own choices.  

Ric Edelman: And you kind of alluded to this, as my last question, are you looking forward to not having to spend a lot of time on this topic for a while? 

Hester Peirce: Yeah, I definitely am. I mean, this has been something that people have been asking me about a lot over my entire time here. And this goes back to the circus atmosphere point. It shouldn't be that way. The regulators’ role should be one of consistent application of the law and not adding to the melodrama. And so that's my goal for this agency, not to add to the melodrama.  

Ric Edelman: Well I share that aspiration. I wish you the best in that effort, although I love spending time with you and seeing you and hope I'll still have a lot of opportunity to do that on a lot of other issues the SEC is facing. I think we'll both look forward to not having to bandy about conversation on Bitcoin.  

Hester Peirce: Well sounds great. It's been fun to talk to you again, Ric. And I hope that you enjoy a break from the topic as well.  

Ric Edelman: Unfortunately for me, it's the beginning, not the end. Now that the ETFs are here, we're busy training advisors on how to use them and how they work and the differences between them. So my work, thanks to you, my work has just begun. But that's okay.  

Hester Peirce: Again, I hope people are careful in making their decisions. And I look forward to seeing what other kinds of products come across my desk.  

Ric Edelman: That's Commissioner Hester Peirce of the SEC here on The Truth about Your Future. Thank you so much for your time today, Commissioner.  

Hester Peirce: Thank you. Ric. Take care.  

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