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 4th, 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 quoted the Cryptopunk Manifesto, publicly criticizing the U.S. financial surveillance system and advocating for privacy technologies such as zero-knowledge proofs and decentralized networks.

This regulator, known as "Crypto Mom," has rarely stood on the side of the regulated, and is even more aggressive than many crypto geeks.

This is an awakening of the regulators.

Peanut butter and watermelon, an awakening of a regulator

August 4, University of California, Berkeley.

US SEC Commissioner Hester Peirce delivered a jaw-dropping speech to the audience. The title of the speech was "Peanut Butter and Watermelon: Financial Privacy in the Digital Age", which at first sounds like a food sharing, but in reality was a fierce critique of the existing financial regulatory system.

Pierce started with a family story: her grandfather hated eating watermelon, and to swallow it down, he always spread a thick layer of peanut butter on it. This strange combination always attracted the neighborhood kids during summer picnics. Years later, when a telephone operator answered 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 replaced by technology. Later automatic switching systems allowed people to dial directly for communication, eliminating the need for human intermediaries, and more importantly, no longer having neighbors eavesdrop on your private calls.

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

The crypto industry practitioners gave her a resounding nickname, "Crypto Mom," because she is much friendlier towards cryptocurrencies than other regulators. But in this speech, she completely tore off her gentle mask and laid everything bare.

"We cannot expect the government, 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 critique the law enforcement system.

But Pierce is still not satisfied.

She then said: "Where the law fails to protect us due to design flaws or inadequacies, technology might be able to."

It sounds nothing like what a civil servant should say; instead, it resembles a rallying cry 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 information you provide 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 being stolen, but under the third-party doctrine, customers still have no expectation of privacy regarding 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 U.S. 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 escape," encouraging banks to report any suspicious transactions, resulting in a massive volume of useless information drowning out truly valuable leads.

What's even more outrageous is that Pierce doesn't 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 describe this system as "a product of a dystopian surveillance state." This system not only burns money like water, having spent $518 million by the end of 2022 without completion, which is nearly 8 times the budget, but crucially, it allows thousands of SEC employees and private agency staff to view anyone's trading records at any time, and importantly, it does not require any suspicion of criminal activity.

Imagine FBI agents publicly criticizing wiretapping laws, or tax officials defending tax evasion; Pierce stood in opposition to the system.

Technical Salvation

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

She publicly supports a series of privacy protection technologies: Zero-Knowledge Proofs (ZK), smart contracts, public blockchains, decentralized physical infrastructure networks (DePIN). If you are a seasoned 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 disclosing other information; privacy mixers can conceal your income, donations, and purchase records; decentralized networks simply kick centralized service providers out of the game. Some blockchains come with built-in privacy features, protecting sensitive information just like private telephone lines did back in the day.

Pierce even expressed the radical view implied by Hughes in the "Manifesto": these technologies must be allowed to develop freely, "even if someone uses them for bad things."

This statement coming from the mouth of a government regulator is particularly powerful.

She also brought up historical lessons. In the 1990s, the government wanted to control strong encryption technologies for national security reasons. However, the development of the internet is inseparable from 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.

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

It is precisely because of their efforts that we can safely send emails, make online bank transfers, and shop online today. Pierce has elevated privacy protection to the level of the Constitution. She quotes the famous saying of Supreme Court Justice Brandeis: "When the government’s intentions are good, we must be most vigilant in protecting freedom."

She calls on the government to protect the public's ability to "not only communicate privately but also transfer value privately, just like people used cash transactions during the time the Fourth Amendment was established."

"The key to a person's dignity is her ability to decide to whom she reveals her information."

She emphasized that "the American people and government should eagerly protect the right of individuals to lead 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. Peers clearly stated: "Developers of open-source privacy software should not be held responsible for how others use their code."

More radical than geeks

Interestingly, Pierce's views are not completely aligned with Hughes's, and are even more radical.

Hughes wrote in the "Manifesto": "If two parties engage in a transaction, each party will remember this interaction. Each party can talk about their own memory, who can stop them?" 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 quite interesting. Hughes, as a technological anarchist, accepts the harshness of reality to some extent; while Pierce, as an insider, demands more thorough privacy protection.

In the author's view, this seems to be what can be termed as "convert fanaticism", similar to Korean Christians who are more eager to go around the world to preach.

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

However, changing social perceptions is not easy.

Hughes once said, "To make privacy mainstream, it must become part of the social contract."

Pierce also acknowledges this challenge. Whenever she criticizes financial surveillance, there are always people saying, "I have nothing to hide, what's wrong with the government monitoring everyone to catch bad guys?" She counters with a quote from privacy scholar Daniel Solove: "This kind of 'I have nothing to hide' argument represents a narrow view of privacy that deliberately overlooks the other problems posed by government surveillance programs."

More than thirty years ago, Hughes wrote: "We, the cypherpunks, seek your questions and concerns and hope to have a dialogue with you."

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

Compared to others, Pierce's identity contradictions are precisely what make this speech the most fascinating aspect: a regulator cheering for the regulated technology, a government official quoting anarchists to criticize government policies, 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 comforted and then say, "You are one of us!"