Opposing views of regulation emerge at Durland Lecture

Hester Peirce would rather the fledgling cryptocurrency market go through growing pains and come to a natural state of self-regulation, instead of governments imposing numerous restrictions that could both help and hinder its evolution.

Andrew Karolyi, frankly, isn't as confident in crypto's self-regulatory abilities.

This year's Lewis H. Durland Memorial Lecture, held March 25 in Statler Auditorium, was less a lecture and more a respectful sharing of views. As part of Cornell's academic theme year, "The Indispensable Condition: Freedom of Expression at Cornell," the annual event took the form of a conversation between two experts with opposing ideological perspectives.

Peirce, one of five commissioners on the Securities and Exchange Commission (SEC), came to Cornell for a back-and-forth with Karolyi, the Charles Field Knight Dean of the Cornell SC Johnson College of Business. Their hourlong conversation was followed by approximately 30 minutes of audience Q&A.

"I am so grateful that you were willing to come and do this," Karolyi said to Peirce as the event wound down. "It would have been easier just to give a speech, but to actually have this back-and-forth where we actually disagree - respectfully disagree - on different views about how we should be doing things, I just really appreciate that."

President Martha E. Pollack welcomed the in-person audience, as well as approximately 600 registrants to the livestream.

Peirce and Karolyi touched on a range of topics: the regulation of cryptocurrencies such as bitcoin and ethereum; environmental social governance (ESG) disclosure rules; and regulation in general, with particular focus on the merits of the Public Companies Accounting Oversight Board (PCAOB), which is overseen by the SEC.

Peirce, who earned her law degree from Yale Law School and has worked in both government and the private sector, laid out in plain language why she feels that less is more in terms of government regulation of markets.

"One thing that's been fundamental for me is just seeing the complexity of the markets that we regulate," she said, "and really understanding the value that each individual person brings to those markets. … And if we as a government tried to come in and override that, we actually cut off from our markets information that's really valuable. … that appreciation for the value of the individual has really shaped a lot of my thinking."

Karolyi pressed Peirce on that point, noting the SEC's decision in January - after years of resistance - to approve the listing and trading of a number of spot bitcoin exchange-traded funds. Given her ideology of limited regulation, Karolyi asked, what would sensible safeguards in this area look like?

"It's difficult to talk about crypto in this one bucket and paint it with one brush because it means a lot of different things to a lot of different people," she said, noting the crypto market has gone up and down and is now in bull territory, which can lead to risky behaviors.

"I guess my core message is that people, when they're taking their money and buying anything with it, need to be asking some questions," she said. "They need to be skeptical about the promises that are being made to them."

Peirce said some regulation of crypto can be covered under existing securities laws, "though we may want to have a bespoke disclosure regime" in some situations. The regulation that she is adamantly opposed to, however, is "a regulatory framework that's just designed to push everything outside the U.S. That's my one caveat, and I think a lot of what we've done as regulators so far is we've used regulation as a way to try to force all of this activity to happen outside the U.S."

Karolyi pointed to recent research colleague Will Cong, the Rudd Family Professor of Management and director of the FinTech at Cornell Initiative, conducted that found that, of 29 crypto exchanges he examined, "there was a significantly higher fraction of volume on the unregulated exchanges that you would associate with fake types of transactions," Karolyi said. "That's a call for a very focused perspective on the importance of (regulation)."

Peirce noted that Europe and Bermuda have established comprehensive regulatory frameworks for crypto. She asked Karolyi if he felt that the markets would figure out a way to self-regulate if the U.S. simply didn't do anything.

"I have less confidence - I'll just be honest with you," he said. "I just feel like the U.S. should probably be at the forefront of (defining the size and scope of regulation)."

Regarding ESG disclosures related to the sustainability priorities of a company, Peirce again said the SEC - which earlier this month adopted rules to enhance and standardize climate-related disclosures by public companies - shouldn't be in the business of "telling companies what we think is important for them to disclose, instead of what has traditionally been the approach of companies making a decision: 'Climate risk actually is material for me, and so I'm disclosing it.'"

Karolyi referenced the Sarbanes-Oxley Act (SOX) of 2002, which mandates certain practices in financial record keeping and reporting for corporations.

"There were a lot more forthcoming disclosures, and that was probably a great enhancement for the capital markets," he said. "I'm guessing this is our sort of post-SOX 2.0, in the green space."

Karolyi referenced a statement Peirce made in December regarding the PCAOB and the fact that, 20 years on, its inspectors estimate that 40% of the audits they reviewed in 2022 had at least one deficiency. His question: Does Peirce feel the PCAOB is worth its $385 million budget?

"I'm thinking, are you as an audit regulator doing your job of not only spotting problems, but helping to work with audit firms so that they don't have these problems?" she said. "You probably have to ask, how serious are these problems that they're finding? But I think it's a fair question to ask whether there's a different way that we could regulate audit firms."

The Durland Lecture was established in 1983 in memory of Lewis H. Durland, Class of 1930, who served as Cornell's chief financial officer for more than 25 years.