A SEC official is no longer pretending.

Written by: Liam

In the world of cryptocurrency, government regulation is often seen as the biggest obstacle to the development of privacy technologies.

On August 4, however, Hester Peirce, a commissioner of the U.S. Securities and Exchange Commission (SEC), delivered a stunning speech at the University of California, Berkeley, where she cited the Crypto Anarchist Manifesto, publicly criticized the U.S. financial surveillance system, and advocated for privacy technologies such as zero-knowledge proofs and decentralized networks.

The regulator known as “Crypto Mom” rarely stands on the side of those being regulated, and is even more aggressive than many crypto geeks.

This is a wake-up call for regulators.

Peanut butter and watermelon, an awakening of a regulator

August 4, University of California, Berkeley.

U.S. SEC Commissioner Hester Peirce delivered a jaw-dropping speech that left the audience in awe. The title of the speech was “Peanut Butter and Watermelon: Financial Privacy in the Digital Age,” which may sound like a food sharing session at first, but in reality, it was a fierce critique of the existing financial regulatory framework.

Pierce started off by telling a family story: her grandfather hated eating watermelon, so to make it more palatable, he always spread a thick layer of peanut butter on it. This strange combination always attracted the neighborhood kids to watch during summer picnics. Years later, when a telephone operator was connecting a call for her grandfather, she surprisingly asked, “Are you the Mr. Pierce who puts peanut butter on watermelon?”

It turns out that the operator was one of the onlooking children back then.

Pierce is not interested in the combination of peanut butter and watermelon; her focus is on telephone operators, a profession that is about to be eliminated by technology. The later automatic switching systems allowed people to dial directly and communicate without a human intermediary, and more importantly, there were no neighbors eavesdropping on your private calls.

Hester Peirce was supposed to be a steadfast defender of financial regulation. She graduated from Case Western Reserve University School of Law and spent many years working in the Senate Banking Committee, before being appointed as an SEC commissioner by Trump in 2018.

The practitioners in the crypto industry gave her a loud nickname, “Crypto Mom,” because she has been much friendlier towards cryptocurrencies than other regulators. But in this speech, she completely tore off the mask of moderation and laid it all out.

“We cannot expect governments, corporations, or other large, indifferent organizations to provide us with privacy protection out of goodwill.”

The quote she cited comes from Eric Hughes’ 1993 work “A Cypherpunk’s Manifesto,” a piece by a technological anarchist. It is as strange for a government official to quote an anarchist to criticize the government as it is for a police officer to quote a criminal to criticize the law enforcement system.

But Pierce is still not satisfied.

She then said, “Where the law cannot protect us due to design flaws or deficiencies, technology may be able to.”

It sounds completely unlike what a civil servant should say; it feels more like rallying for a technological revolution.

Universal Hammer

Pierce’s real firepower is focused on the existing financial surveillance system.

She first harshly criticized the “third-party doctrine,” a legal concept that allows law enforcement to obtain your information given to banks without a search warrant. As a government employee, she condemned her employer for using this doctrine as a universal hammer.

“The third-party doctrine is a key pillar of financial surveillance in this country,” she pointed out an absurd phenomenon: banks can use encryption technology to protect customer data from theft, but under the third-party doctrine, customers still have no expectation of privacy concerning that encrypted data. In other words, banks can protect your data from being stolen by thieves, but the government can look at it whenever they want.

Next, she turned her attention to the Bank Secrecy Act. This nearly 60-year-old law requires financial institutions to establish anti-money laundering programs, effectively turning banks into informants for the government.

The data is shocking.

In the fiscal year 2024, 324,000 financial institutions submitted over 25 million transaction reports to the government, including 4.7 million “suspicious activity reports” and 20.5 million “currency transaction reports.”

“The Bank Secrecy Act has turned American financial institutions into de facto law enforcement investigators,” Pierce said bluntly. The government has created an atmosphere of “better to wrongly kill a thousand than let one go,” encouraging banks to report any suspicious transactions, resulting in a massive amount of useless information drowning out truly valuable leads.

What’s even more outrageous is that Pierce doesn’t even spare his own unit.

The SEC’s comprehensive audit tracking system (CAT) can monitor every transaction in the stock and options markets, tracking the entire process from order placement to execution. She and her colleagues directly described this system as a “product of a dystopian surveillance state.” This system not only burns through money like water, having already spent $518 million by the end of 2022 with no completion in sight, almost 8 times the budget, but it also allows thousands of SEC employees and private agency staff to view anyone’s trading records at any time, crucially without any suspicion of criminal activity.

Imagine an FBI agent publicly criticizing wiretapping laws or a tax official defending tax evasion; Peirce stood in opposition to the system.

Technical Redemption

Since the law cannot be relied upon, Pierce places his hopes on technology.

She is publicly advocating for a series of privacy protection technologies: Zero-Knowledge Proofs (ZK), smart contracts, public blockchains, and decentralized physical infrastructure networks (DePIN). If you are an experienced cryptocurrency investor, you must be very familiar with these concepts.

The charm of these technologies lies in their ability to bypass traditional intermediaries.

Zero-knowledge proofs allow you to prove your identity or age without revealing other information; privacy mixers can conceal your income, donations, and purchase records; decentralized networks simply eliminate centralized service providers. Some blockchains come with privacy features, protecting sensitive information much like private telephone lines did in the past.

Pierce even expressed the radical viewpoint implied by Hughes in the “Manifesto”: these technologies must be allowed to develop freely, “even if someone will use them to do bad things.”

This statement coming from a government regulator carries extra weight.

She also brought up historical lessons. In the 1990s, the government wanted to control strong encryption technology for national security reasons. However, the development of the internet relies on encryption technology, and a group of determined cryptographers rose up in resistance, ultimately persuading the government to allow the public to freely use encryption technology.

Phil Zimmermann, the developer of PGP software, is one of the heroes.

It is precisely because of their efforts that we can safely send emails, conduct online banking transfers, and shop online today. Pierce has elevated privacy protection to a constitutional level. She quoted the famous saying of Supreme Court Justice Brandeis: “When the government’s purpose is good, we must be most vigilant in protecting liberty.”

She urged the government to protect the public’s ability to “not only communicate privately but also transfer value privately, just like people transacted in cash during the time the Fourth Amendment was drafted.”

“The key to a person’s dignity is her ability to decide to whom she reveals her information.”

She emphasized, “The American people and government should eagerly protect the rights of individuals to live private lives and use privacy technologies.”

The timing of the speech coincides with the trial of Roman Storm, co-founder of Tornado Cash, which is a typical example of the government’s crackdown on privacy technology. Peirce clearly stated: “Developers of open-source privacy software should not be held responsible for how others use their code.”

More radical than geeks

Interestingly, Peirce’s views are not completely aligned with Hughes’, and are even more radical.

Hughes wrote in the “Manifesto”: “If two parties have a transaction, each party will remember this interaction. Each party can talk about their own memory, who can stop that?” This is essentially defending the third-party theory; since you have given the information to the bank, the bank can certainly inform the government.

But Pierce is precisely attacking this theory, arguing that even if information is in the hands of a third party, individuals should maintain control over their privacy.

This divergence is interesting; Hughes, as a technological anarchist, somewhat accepts the brutality of reality, while Pierce, as an insider, demands more thorough privacy protection.

In the author’s view, this seems to be what can be called “zeal of the converts,” similar to Korean believers in Christianity, who are more enthusiastic about going around the world to preach.

Of course, as a regulator, she understands the problems of the existing system better than anyone else. Her long-term regulatory experience has made her realize that true protection may not come from more regulation, but rather from the solutions provided by the technology itself.

However, changing social perceptions is not easy.

Hughes once said, “To make privacy ubiquitous, it must become part of the social contract.”

Pierce also acknowledged this challenge. Whenever she criticizes financial surveillance, there are always people who say, “I have nothing to hide, what’s wrong with the government monitoring everyone to catch bad guys?” She countered by quoting privacy scholar Daniel Solove: “This ‘I have nothing to hide’ argument represents a narrow view of privacy that deliberately overlooks the other issues posed by government surveillance programs.”

More than thirty years ago, Hughes wrote: “We, the cypherpunks, seek your questions and concerns, hoping to engage in dialogue with you.”

Thirty years later, Pierce responded to this call with this speech.

Compared to others, Pierce’s identity contradictions are the most fascinating aspect of this speech: a regulator cheering for the regulated technology, a government official quoting anarchists to criticize government policies, and a guardian of the traditional financial system standing up for the decentralized revolution.

If Hughes were still alive today and heard Pierce’s speech, he might feel gratified and then say, “You are one of us!”