An SEC official is no longer pretending.

Author: 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, SEC Commissioner Hester Peirce delivered a stunning speech at the University of California, Berkeley, where she quoted the Cypherpunk Manifesto, publicly criticizing the U.S. financial surveillance system and standing up for privacy technologies such as zero-knowledge proofs and decentralized networks.

This regulator, known as the “Crypto Mom,” has rarely stood on the side of the regulated, even more aggressively than many crypto geeks.

This is a wake-up call for regulators.

Peanut Butter and Watermelon, a Regulator’s Awakening

August 4, University of California, Berkeley.

SEC Commissioner Hester Peirce delivered a speech that left the audience stunned. 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, it was a fierce attack on the existing financial regulatory system.

Pierce started by telling a family story: her grandfather hated eating watermelon, and to swallow it down, he would always spread a thick layer of peanut butter on it. This strange combination always attracted neighborhood kids during summer picnics. Years later, when a telephone operator was connecting a call for her grandfather, she actually asked, “Are you the 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 the telephone operator, a profession that is about to be eliminated by technology. The later automatic switching systems allowed people to dial directly, eliminating the need for human intermediaries, and more importantly, no longer allowing neighbors to 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 working on the Senate Banking Committee, before being appointed as an SEC commissioner by Trump in 2018.

The cryptocurrency industry has given 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 mild-mannered facade and laid it all 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 “A Cypherpunk’s Manifesto” written by Eric Hughes in 1993, a work 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 went on to say, “Where the law cannot protect us due to design flaws or inadequacies, technology may be able to.”

It sounds nothing like what a civil servant should say; rather, it resembles a rallying cry for a technological revolution.

Universal Hammer

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

She first harshly criticized the “third-party doctrine,” a legal concept that allows law enforcement to obtain the information you provide to banks without a search warrant. As a government employee, she condemned her employer for using this doctrine as a万能的大锤.

“The third-party theory 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 according to the third-party theory, customers still have no expectation of privacy regarding this 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 making banks act as informants for the government.

The data is alarming.

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 escape,” encouraging banks to report any suspicious transactions, resulting in a flood of useless information drowning out the truly valuable leads.

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

The SEC’s comprehensive audit tracking (CAT) system can monitor every transaction in the stock and options markets, tracking 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 through cash like water, having already spent $518 million by the end of 2022 without being completed, almost eight times the budget, but crucially, it allows thousands of SEC employees and private institution staff to view anyone’s transaction records at any time, and importantly, without any suspicion of criminal activity.

Imagine an FBI agent publicly criticizing wiretapping laws, or a tax official defending tax evasion; Pierce stands on the opposite side of the system.

Technical Redemption

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

She publicly advocates 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 old hand in cryptocurrency, 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 kick centralized service providers out. Some blockchains come with privacy features that protect sensitive information 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 some people will use them for bad things.”

This statement coming from the mouth of government regulators 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 to resist, ultimately persuading the government to allow the private sector to freely use encryption technology.

Phil Zimmermann, the developer of PGP software, is one of those 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 a constitutional level. She quoted Supreme Court Justice Brandeis’s famous saying: “When the government’s intentions are good, we must be most vigilant in protecting freedom.”

She urged the government to protect the public’s ability to “not only communicate privately but also to 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 the ability to decide to whom to disclose their information.”

She emphasized that “the American people and government should earnestly protect the right of people to live private lives and use privacy technologies.”

The timing of the speech coincided with the trial of Tornado Cash co-founder Roman Storm, and this case is a typical example of the government’s crackdown on privacy technology. Pierce made it clear: “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 entirely consistent with Hughes’, and are even more radical.

Hughes wrote in the “Declaration”: “If two parties have a transaction, each party will remember this interaction. Each party can talk about its own memory, who can stop them?” This is actually a defense of the third-party theory; since you provided the information to the bank, the bank can certainly inform the government.

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

This discrepancy is quite interesting. Hughes, as a technical anarchist, somewhat accepts the harshness of reality; while Pierce, as an insider, instead demands more thorough privacy protection.

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

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

However, changing social perceptions is not easy.

Hughes said, “To make privacy widespread, 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 this with a quote from privacy scholar Daniel Solove: “This argument of having nothing to hide represents a narrow view of privacy that deliberately ignores the other issues brought about 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 rallying for the technology being regulated, 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 greatly comforted and say, “You are one of us!”