Mike Pieciak: NASAA – A “To The Moon” Approach to Regulating Crypto (#285)

Transcript

[Music] this episode of epicenter is brought to you by Microsoft Azure do you have an idea for a blockchain app but are worried about the time and costs it will take to develop the new Azure blockchain dev kit is a free download that brings together the tools you need to get your first app running in less than 30 minutes learn more at aka OMS slash epicenter hi welcome to epicenter my name is Sylvester Cujo and my name is Philip II kannst today we're speaking with my P Jack Mike T jack is the

president of NASA and so we wanted to speak tonight because they're planning on taking cryptocurrency to the moon actually that's so NASA in this case is the North American securities administration's association and so it's it's a regulatory body actually it's more of a an association of regulatory bodies that includes every state level and provincial level financial regulator in the US and Canada as well as Mexico and the federal level securities regulators so it's an organization that not a lot of people have heard about probably but that came to light in the crypto space about a year ago when they

launched operation crypto sweep which sent cease and desist letters to over 200 icos that were deemed to be fraudulent and so we want to speak with Mike about you know about NASA as an organization because it's not we're very well known in this space but also to understand his position and the association's position with regards to regulation in the crypto space and I was actually quite impressed and pleasantly surprised to learn that at least this association has a pretty positive view of blotching and IC o---- in general and are really just trying to go after fraudulent projects mike is also the commission on financial regulation in

Vermont and it seems a lot of good things come out of Vermont so what they recently pioneered the Dow LLC the blockchain based LSC with a new legal framework which we will also talk about and of course as Mike also mentions Ben and Jerry's is also from Vermont yes and so that's at least one reason to go there so you had an announcement you want to mention that you're going to a conference - oh yes I'm going to consensus in New York in May so I'd be there may 12 2008 on the 13th so find me if you want to talk to me great I will not be there but have fun so without further delay here's our interview with Mikey jack hi so we're

here today with Mike Petey ACK Mike is the Commissioner of the Vermont Department of financial regulations and the president of the North American securities his administration's Association Mike thanks for joining us today yeah no my pleasure thanks for having me it's a pleasure to be here and happy to participate in the podcast great so tell us about your background so you've been in financial regulation for some time as the Commissioner of the Vermont DFR sorry well what did you come from and how did you get involved in this position yeah sure so happy to talk about that I grew up in Vermont and you know always had wanted an interest in going to law school and being interested

in a legal career also had always been interested in policy policy development politics things of that nature so I did go to law school and I did start off my legal career working in a major law firm in New York City where I was focusing on a lot of merger and acquisition deals a lot of international companies that were you know doing business transactions and the thing that first got me interested in securities laws was not really you know the work that we were doing in connection with those M&A transactions as the work that we were doing in connection with the SEC with those transactions was really non equity crowdfunding so it was the Kickstarter's

of the IndieGoGo zuv the world I remember being in New York City and hearing about some really interesting Kickstarter crowdfunding campaigns and some really interesting IndieGoGo crowdfunding campaigns and was looking into some of the products and some of the companies and I thought to myself boy this would be really fun to invest in these products and this is sort of at the time I understood that to be sort of the whole concept that you can invest in these projects these projects buy with a little dollar amount and then you know you could see them grow and and lo and behold I sort of all of a sudden became aware of the very protective in some ways a framework that exists around a smaller upstart offerings localized

offerings basically the crowdfunding offerings so I got really interested in you know how do you what is this framework why does it exist and then is it appropriate for the way that businesses want to raise capital in the 21st century particularly businesses that would be prime for localized crowdfunding or national or international crowdfunding so I got really interested in those issues I came back to Vermont because the deputy commissioner position opened up of our Securities Division and I certainly saw an opportunity to come back and work on those issues which I did we created a couple of different crowdfunding exemptions for Vermont we also worked with the SEC to make their regulations

more modern in terms of being able to offer products over the internet within a single state so that you were in compliance with the federal securities laws and Vermont has always had this tradition of localized investing sort of crowdsource to invest in Ben & Jerry's which is one of our most well known brands started from a Vermont only offering they raised $750,000 from about 3,000 Vermonters in the early 80s and that allowed them to expand their production facility that allowed them to widen their distribution network and the next year they did a national IPO so that was really a success story that

started with the ability of neighbors consumers of products of friends and family being able to legally invest small amounts of money but legally invest into a startup business so that was really what intrigued me that crowdfunding movement to get involved in regulation then about three years ago I became the Commissioner of our department so we as a department oversee the securities industry the banking industry and then also the insurance industry as well and a subset of insurance called captive insurance which Vermont is actually an international leader in we have about half of the fortune 100 companies have a captive insurance company based here in Vermont eighteen of the Dow Jones

Industrial 30 companies have a captive based here in Vermont so we have a rich tradition generally in insurance but specifically in captive insurance world and many of those captive insurance companies are experimenting with various blockchain projects so that got me interested more certainly in the space that we're going to talk about today but so did the concept of an ICO I mean the ICO sort of to me is sort of an out shoot of this crowdfunding movement that in some ways that you could have a project have an idea and instead of doing it through you know the federal crowdfunding regime that was created you know you could get the same type of bang for your buck by doing an ICO and

raising a tremendous amount of money as you certainly know some of these AI SEOs have achieved in an extraordinarily short period of time so in some ways I became interested in the space also as a cap as a capital formation tool and how this might be a new way for for tech businesses for startup businesses to raise considerable money again in a period of time that's much less than a traditional Roadshow through an IPO or other other means that currently exists well that's super interesting and we will get into the potential of a blockchain based projects and fund raising a little bit later you're also the president of NASA which is not what

it sounds like [Laughter] nasa widest and so and what it does yeah i be happy too and you know everybody has their own funny story but mine was i came and worked here at the department for you know my first week and and we were talking about crowd funding regulations and somebody in the meeting said well you know so-and-so used to work in nasa and this is his position on the regulation and i thought to myself wow like i guess that's impressive that this guy used to work for you know the space agency what does it have to do with financial services at regulation so then I had my introduction to our NASA the North American securities administrators Association so NASA is a

membership Association it's made up of all of the jurisdictions in the United States so the 50 states plus is the District of Columbia plus some of the United States territories Puerto Rico is a member but then we also have members from Canada the provinces and territories in Canada and Mexico as well so all in all there are 67 jurisdiction members that make up the NASA community we are celebrating as an organization our 100th anniversary this year in 2019 so we're founded 100 years ago in Kansas and the reason that NASA was founded the reason that state securities regulators were founded was that during

that time period there was a lot of fraud occurring in the central part of the country in America's heartland in Kansas and Iowa and other parts of mid-atlantic and Midwestern states and unfortunately you know people were coming from the east coast and and and providing great investment promises and great expectations of returns to these farmers that really didn't know any better and really they were just fly-by-night fraudsters taking people's hard-earned earned money taking their life savings and then vanishing without a trace so NASA and state securities regulators were founded on the concept that people that are going to sell investments in

our jurisdiction in our state should be registered with a central regulatory body in this case the Department of Financial Regulation and that their products should be vetted by some means to determine its legitimacy and then also that the individual selling the product so the brokers the dealers the investment advisors should similarly have impeccable backgrounds in terms of being honest people having sufficient education and knowledge to be able to guide these people in their investments you know handling your life savings handling your investments is a really obviously critical a critically important item to many families all families really but many people in the

United States and worldwide it means how much you're going to be able to spend on your next home or how much you're going to be able to help your children go to college what your retirement is going to be like once you leave the professional workforce so all of these things are really determined on how smart you are and investing throughout your career so certainly we want people that are honest and knowledgeable selling good products to our constituents and providing them good investment advice so at the heart of it that's why state securities regulators were founded we were founded decades before the SEC and NASA was founded decades before the SEC we were the quintessential cops on the beat if

you will within all of these local jurisdictions trying to ensure that the capital markets were clean and safe so that the American economy could succeed so now today I mentioned NASA as a membership Association so the main purpose that NASA serves now is really getting these various jurisdictions in three different countries to come together and work together on model policy model law model regulation so we have a deliberative process where various project groups we have a corporate finance project group an enforcement project group a broker-dealer project group investment

advisor project group and then also an investor education group and they all work on policy to try to improve the marketplace to try to keep up with tech logical changes try to keep up with the change in these various financial services industries and then we pass these models within NASA as a body and then each individual jurisdiction goes back to its legislature or its legislative body and implements these model rules so that we have uniformity among 67 different jurisdictions acting on separate cases in a separate way but that we have a uniform sort of playbook

that we're all working from okay so most of these regulatory bodies Center actually quite independent in their local jurisdictions but rely on so the guidance that comes from these working groups to implement policy locally is that yeah that's exactly yeah that's exactly right we try to have a lot of internal discussion at NASA among this policy we try to get consensus so that you know if there is disagreement it gets ironed out at that level so that people do go back and implement these regulations we also hear from industry and consumer stakeholders during our process so that we get a full the full understanding of the pros and the cons of various

policies but at the end of the day NASA as an association it does have it does have a corporate office it does have staff it does provide a lot of services to our members but our members are the autonomous independent regulatory authorities that at the end of the day have to decide to take an enforcement action have to decide to implement a policy or pass a model regulation so at the end of the day each jurisdiction like Vermont maintains its regulatory authority how many people work at NASA so it's an interesting question that NASA corporate office has about 20-25 people that work in the corporate office but we're really driven by our membership so we have about 400 people that are on volunteer committees in of

those various categories that I mentioned so all in all you know there's about 4 to 500 state securities regulators staff people and corporate office members that are working to staff the NASA organization staff the resources that we're providing back to our jurisdictions and also helping us develop the model regulations that I mentioned and expand our message out beyond state securities regulators so that we you know our known quantity within the financial services world this episode of epicenter is brought to you by Microsoft and the azure blockchain workbench getting your block Tang from the whiteboard to production can be a

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click in the dev kit and you can parse these files and have two data embed it in transactions whatever you're working with the dev kit can read transform and act on the data to learn more and to build your first application in less than 30 minutes visit AKA OMS slash epicenter and be sure to follow them on twitter at MSFT blockchain we'd like to thank Microsoft and Azure for their support of epicenter so I actually learned about NASA when someone mentioned that that you guys were involved in the takedown of Jordan Belfort you know the infamous wolf of Wall Street can you tell us a little bit so briefly about that and I think this

relates to you know the your enforcement power and what what kind of law enforcement bodies you rely on in order to coordinate this countrywide or like continent-wide in this case action so the other the the Jordan Belfort the Stratton Oakmont case is a great example of NASA working together in a multi-state enforcement action to bring an enforcement action that doesn't just impact one jurisdiction or two jurisdictions but really the national scope in terms of its impact so nASA has a multi enforcement mechanism where all of the states together will act against an individual or an entity and the

Stratton Oakmont example is certainly one of those where we were we were able to get a national settlement using NASA as the mechanism to do that certainly in the 1990s and 2000's beyond Stratton Oakland and the very publicized Walsall Wall Street there were certainly other cases related to auction rate securities the prudential settlement some of these settlements totaled in the billions of dollars i mean these were really large impactful settlements that nasa was they were able to achieve and in many ways although we have you know we regulate the industry in different ways certainly when we're acting together through enforcement means in some ways

is when we as state regulators are the strongest in doing some of our best work so protecting the investment public but again at the same time all enforcement actions certainly are derived for going after bad actors but by going after those bad actors who are also helping the integrity of our capital market system so that you and i and and everybody that's listening has confidence that they can invest money in the United States in a business and they are not they might be investing in a business that will go defunct they might make wrong business decisions they might go bankrupt but that it's not a business that's going to steal their money that is an important element of a free market you know a capitalist system

that we have in the United States that there is some confidence that there's legitimacy in the capital markets within the businesses and the advisory firms that work within that space basically NASA launched operation crypto sweep about a year ago so between May and August 2018 NASA investigated 200 crypto projects mostly for securities violations and it's resulted in 50 plus enforcement actions it was in the news somewhat last year can you tell us the story and maybe give us an update yeah no be happy to so you know the operation crypto sweep was again taken out of the

sort of NASA multi jurisdictional playbook it basically tried instead of each individual state trying to bring enforcement actions against these cryptocurrency icos that were operating within many jurisdictions is not all jurisdictions there was a collective effort to work together to leverage each other staffs and resources so that for example Vermont and New Hampshire weren't working on an investigation against the same IC o---- the same cryptocurrency that we would decide which state was going to handle which matter and then in that way we could look at a much broader spectrum of cases and bring a much broader a number of enforcement cases rather than us not

coordinating with each other so again this was a classic example of state regulators working well together working through this multi jurisdictional process to get some results so the main reason that again we saw this as an opportunity for state regulators and an opportunity to protect the marketplace was because so much of the ICO activity I mean you see a report from 2017 that suggests you know 70 80 % of the activity had some element to it or was in some way illegitimate either the project just you know wasn't going anywhere they didn't invest any resources in developing what they said they were going to develop so with that being the backdrop we thought

we could play an important role in helping this space innovate helping the space grow and develop by taking out the clearly bad actors that were promising you know a hundred percent investment return a 70 percent investment return you know they were promising that you would you know get all your money you know guaranteed no risk so these are the classic red flags and fraud that we see whether it's a cryptocurrency or whether it's someone coming to your grandmother's door and knocking and trying to sell or something these are the the hallmarks of fraud that you know again are timeless in some way regardless of the mechanism that's being used to try to perpetrate it and again that was in the backdrop of the big

run-up in the price of Bitcoin through 2017 so at the end of 2017 when everyone you know was sort of in this manic phase about Bitcoin and buying and was too late and what other icos are out there that I can buy you know there was a lot of fever around let's get in on the next best thing and there may very well be the next best thing out there and they're very very well may be good investments to be made or good opportunities to be had but they're also unfortunately a lot of criminals a lot of fraudsters and bad actors that we're trying to take advantage of that mania trying to take advantage of that hype and simply trying to steal people's money they weren't trying to do any legitimate projects so in that way we really I think as an

organization have played a helpful role in weeding out some of the bad actors and in trying to clarify you know those that are attempting to comply with the securities laws or in fact are compliant the securities laws okay so I think when a lot of people see regulatory bodies or government agencies come out with you know either advisories on crypto projects or in this case actual enforcement I think the sentiment for a lot of people is you know here we go another regulatory body trying to assert power over or our innovation or

innovative space where we're just trying to innovate and do all kinds of interesting things but it sounds like that wasn't really the case the case was like okay here's some actual frauds like I mean we in the crypto space I think we're amongst the first to be able to notice these and specifically like having a podcast we were spon barded with requests for people to come on the show and like we see these projects I think this is clearly a fraud like this is a ponzi scheme or BIV feel free to refer those to us if you'd like I've got an inbox full of them I don't know if there are any of them are still around but yes so like we see these things and you know I think in our eyes it's quite obvious which ones are frauds and which ones are the most more reputable

projects now whether or not those are those are risk complying with securities regulations isn't that a story but it sounds in this case NASA was actually just doing what it's meant to do is protect investors and go after those that were actually frauds that's exactly right I mean I as a regulator and I think every regulator whether they're at the federal level at the state level and insurance and banking I mean you really have two core balancing principles as part of your mission one is to protect investors or protect consumers and the other is to ensure that the capital markets or that the products that are out there that there is innovation occurring that there

is efficiency in those marketplaces that there is an innovation in those marketplaces that those markets are robust and strong because if you really are focusing too much on the investor protection element it's really at the end of the day to the detriment of those investors because they're going to have more expensive products they're going to have less innovation they're gonna have less choice they're going to have less available to them then if you focus too much on the other side of that prong if you focus too much on the innovation and focus too much on on the on the robustness of the marketplace then you're going to see bad actors come in you're going to see fraudulent deals come in and those bad apples are gonna destroy the trust and the legitimacy of that capital market so

you really need to have those two elements in mind and you really need to balance them and have a good perspective to allow innovation to occur but at the same time think about what new innovation means to investors and how do they need to be protected I know the you know the SEC has set up a cyber unit within its agency and I think NASA and the SEC have a very similar mindset we see basically three buckets of companies three buckets of icos if you will there's those that are just the outright frauds there are those that are trying to comply with securities laws or maybe they're not even aware that there are such a thing as securities laws but they're white papers are trying to be

transparent they're trying to provide a detail about their project they have a legitimate project and then there's a final bucket which you know is doing the belt and suspenders and following all of the regulations and all of the requirements and our focus you know our interest is in going after that first bucket the bad actors in helping that middle bucket understand the securities laws and helping them comply with the regime so that they can offer their product and then just monitoring that last bucket so we really don't have an interest in trying to stifle innovation by going after you know these people in the middle that maybe are forgetting to file a notice filing or forgetting you know in some cases they might even be

doing something that is more severe but again unintentionally so it's not an attempt to play gotcha regulation but it's really trying to educate and help them get into compliance I think that's an important role that we play how are these projects brought to your attention so do you join as really scammy Telegram groups odd well some I'll tell you some of the obvious ones today I think probably I'm not giving away any state secrets by saying this but you know there certainly you know you can monitor Reddit you can monitor Craigslist you can monitor various you know sites out there that are going to be places where Vermonters and other

citizens are going and trying to find more information out about the newest ICO newest cryptocurrency so those are really effective ways of just beating back some of the nonsense that's out there so that's sort certainly a number one at the end of the day we really do get a lot of our cases through complaints so investors that are harmed will be complaining to us unfortunately that's more of a reactive method because at that point that means someone has been out there selling something for quite a period of time the investor has been dragged along for some period of time and then finally they realized that they're probably involved in a fraud or they're not getting their

money back and that could be three or four years after they made the investment the price of the ICO busts I mean you know these projects were raising money and you guys went after them I mean this descriptive sweep occurred just around the end of it you must have been monitoring quite a few projects is like actively monitoring the space to figure out which yes projects were fraudulent did you have any like clear criteria that you were looking for here yeah so you're absolutely right and we've so in this space we were trying to be more proactive and monitoring and taking action quickly so really a you know first and foremost we tried to understand if the company was registered anywhere if they had had any

conversations with securities regulators that was just sort of a baseline question that wasn't something that decided if we did an enforcement action but then we were looking for again these hallmarks of fraud where their next bit was their promise that this was risk free was their promise that this was a guarantee how far along in developing the project were they was it really just sort of a pie in the sky idea or was it something that could actually be operationalized through the investments that they were seeking again did they promise outsized return so were they saying you can get 50 60 70 percent return on your investment these are things we would be looking for if we were just in the traditional sort of

Ponzi scheme you know type of fraud and we saw the same exact things in the ico space people that were over-promising and were unable to deliver and we can detect you know we can pretty easily sort of understand those red flags and then we would go in and subpoena the companies for information and then based on that we would decide you know do we need to bring an enforcement action or not at it you know we mentioned that we had 200 investigations you know I know we had investigations here in Vermont and we would you know he'd send a subpoena the company very well might just all of a sudden fold up shop but in other cases we had to go out and bring an enforcement action which we did from a

number of different states Texas being one of the big leaders in North Carolina as well against some of the actors out there that either disputed that they were not acting inappropriately or fraudulently or against some of the people that you know we thought were the more egregious situations that we had to take action against and how many enforcement actions has this resulted and how many do I mean basically this was one big sweep but I assume you also had you also do this on an ongoing basis so how much of your time do you actually spend with a crypto scams and can you put some numbers on how many you bring enforcement actions against yeah sure

happy to yes people in jail well the jail takes some more time but there are some of our so our membership has various authorities some of them do have criminal jurisdiction and you know they very well could bring criminal charges but because we were proactive in all honesty for example the cases that we brought in Vermont did not yet have any investors in Vermont so by acting proactively we believed we prevented a lot of people from losing their money where if we had sat back you know these more of the scammy type I SEOs would have unfortunately raised some money and then either failed to deliver or

outright left with with with the proceeds but to answer your question you know we had about 200 investigations during the first six months of operation crypto Suite 50 enforcement actions that number I think is now almost double and the enforcement actions I think it's closer to a hundred so that's a pretty significant number when you think about the type of you know the type of due diligence diligence that we have to do in bringing an enforcement action and the fact that this operation crypto sweep although you know certainly a point in time effort it continues and that has only been about a year and a half or 18 months where it's really been in earnest in terms of investigating

these matters so that's a pretty significant amount of cases to have brought in that period of time so moving on now to the broader topic of regulation in the blockchain in crypto space you know first what do you see as the main innovation that blockchain and more specifically I think we should focus the conversation at least at this part on permissionless networks you know public networks at kathiria bitcoin in others what's the main innovation that you see here with regards to securities law and how do you think it sort of changes the focus or changes how one should look at these regulations in the future yeah I mean I

think I think you've hit the key issue as it relates to financial services or global finance or even international business is how do permissionless blockchains enable how do how do you how do companies operationalize concepts on a permissionless blockchain what are the projects that are able to meet problems that these financial service companies or these international firms are facing and to date in all honesty you know there have been hurdles that companies have not quite been able to get over in the financial services space I think there are a lot of discussions and a lot

of concerns around the concept of privacy so in a public fully transparent permiss permissionless blockchain how does a bank or an insurance company a securities firm do the transactions make the accounting that it needs to make the and and at the same time protect the identity of a transaction protect the identity potentially of the individuals or any of the other sensitive business information that needs to be protected and in some ways they could even you know it could just be the fact that the transaction is happening and that people could from that determine who the who

the various participants are and then take advantage of that some way in the public investment arena so I think that that concept is something that people are still struggling with you sir lisi private blockchains be utilized in financial transactions just today I was reading about a French lender that was issuing bonds the blockchain at first there was some discussion that this was going to be a public blockchain but then they had to clarify that it was really the French lender issuing the bonds to a subsidiary of itself so it was a private blockchain transaction so we continue to try to see examples of it in this in

this public space but again there's they're struggling a little bit with those with that first question and a couple of more questions that I'll mention but just a note on that transaction I just mentioned the thing that's that's pretty interesting to me is that the credit rating agency that rated the bonds when they took into account that the blockchain was used they gave that as a credit positive element and basically what that means is they looked favorably on that and the reason they look favorably as they said it provided greater transparency to the transaction so you know that cuts a little bit against the privacy element that the credit the credit rating agency

saw that as a benefit and then they also said that it was going to cut down on mistakes it was going to cut down on you know human error that it was going to make it more you know more accountable and better from that perspective so that's an interesting development certainly when thinking about you know other players that are operating in the space that businesses need to take account for like regulators credit agencies banks and the like there's also been a lot of discussion in this permissionless block chain space certainly in the insurance community among interoperability so how will various public block chains connect with

each other and interact with each other and there's some companies out there that are trying to provide a solution to this and that's some that's one area where I know you've had guests recently on your podcast that have talked about this so that's one area where I'm certainly personally interested and how does that develop I know industry is interested in how that develops because I think that probably solves a lot of the questions that that people have about what does this look like in five years there's one company I know that's trying to make an attempt at this called Korda enterprises and they have made plays in the financial services space and in the insurance base they have one interesting insurance play that Ernst & Young and a company called

Gard life are attempting and it's a very discrete type of insurance but it's for marine vessels or for big ships and the same point that I'm going to make can apply to any insurance transaction for the most part but they see the process is being inefficient because there is the thing that they are insuring the boat there is the owner of the boat there is an insurance broker that's brokering the insurance and then there is an insurance company that's providing the insurance then there is a reinsurance broker that's working with the reinsurance company and then there's the reinsurance company providing the reinsurance maybe there's even another layer on top of that depending on how far they go on the reinsurance side so

they view that as being an inefficient streamline and not a streamlined but an inefficient process and also when you have a process like that similar to the Bond example I gave it invites inefficiency and invite invites human error so Ernst & Young has created with Cordia a block pain solution that would allow a new vessel that comes into somebody's possession to be entered into this distributed ledger program and immediately be under written for the criteria that they have plugged in for that contract to have been immediately issued and then for the reinsurance underwriting to occur almost

simultaneously and for that for that policy also to be issued so that's one you know example of trying to allow for a permissionless public blockchain to be incorporated into financial services but again that interoperability is it remains a question and then the other thing I hear and I'd be interested in your thoughts on this as well but I was just recently at a insurance panel with the NAIC the National Association of Insurance Commissioners and there was discussion about the scalability of permissionless our public block chains and whether the speed of transactions

that need to happen in financial services will be able to be achieved through a permissionless block chain they were talking about how for their current databases and private lists blockchain potentially could complete thousands of transactions in the same amount of time that a public blockchain might only be able to complete a dozen or so of those transactions so I've heard a lot of discussion around the scalability issue how much can how quickly can these transactions be verified and implemented and then the flipside of that too is what is the cost of that both in terms of dollars and energy consumption as well somebody

mentioned that I think it's the country of Iceland it spends more money on mining Bitcoin than it does on all energy consumption through their entire households in the entire country which was kind of an interesting fact I don't know if that's been verified or not but I think it does bring a point that you know how do you account for that scalability in terms of the speed and then also in terms of the secondary impact of energy consumption and and the cost of that both in terms of financial cost and also in terms of environmental costs you make merry interesting points so I think there's a couple of things here that I'd like to talk about for

sure so one being the interoperability the other being scaling and the third being the energy consumption that comes from the proof-of-work mining that's currently going on in Bitcoin and the etherium and also many other chains the one thing that I want to talk about first is privacy so you talked about privacy in the very beginning I mean well it's completely true that etherium and Bitcoin in terms of privacy are terrible because everything is out there there are now technologies that preserve privacy right so I don't know whether you know about zero knowledge proof things like Z cache where you you can have shielded transactions where

it's no longer public knowledge who does what and how do you feel about these yeah III I'm not familiar with those particular companies but I am familiar with some that I think are aligning the same type of concept I think the one I mentioned Corte Enterprises is working on similar items where basically if you're doing a deal two parties are doing a deal that a competitor third party wouldn't have the information about your deal stored on their network if they were operating in a distributed distributed ledger network so that they are protecting the information in that

way and I think that's a good advancement because although again it's not that it's not that the business world or financial service world doesn't want to be transparent but that there is certainly information sensitive information business information that individuals want to keep private certainly you see this with SEC filings I mean people need to make confidential filings with the SEC all the time because they don't want that information to become public before it needs to be public or at the appropriate time and they don't want people to you know manipulate the stock market because if they've gotten non-public information so certainly those are I think are good

advancements on a global perspective and able to protect the sensitivity of transactions in the sensitivity of this information and then the next question of course in the privacy piece is personal privacy and personal information and you know certainly you know on the one hand in all honesty you know the current ways that corporate entities and and financial services firms are protecting folks identity is is lacking I mean there have been a number of cyber security breaches that have been quite well-known throughout the last three or four or five years a company certainly are doing everything they can do I think most of them at least a good good actors

in protecting a privacy and the confidentiality of individuals information but you can in the current structure you can't prevent it you're just trying to mitigate it minimize it and then respond to it when it happens so you know if a distributed ledger technology does have some hope in securing our networks to even greater degree that equally would be a good development but I just I personally continue to wait and see what will come about that on both of those points in terms of individual privacy and on the sensitivity or privacy if you will of of transient transactions generally I would

like to come back to a point you made in the very beginning about crowdfunding because I also think that is a tremendous benefit to blockchain technology and you said that you became interested in crowdfunding in turn in the times of IndieGoGo and GoFundMe and Kickstarter and I would like to add and maybe discuss that why in in traditional crowd funding campaigns you actually fund a product right so basically you buy say a supercar oakwood I don't know could you or something that you were that you really want because it has 20 functionalities so I think the one that was like the best was that one that was

the cooler that was maybe also a radio or something like that and you pays a $70 for the promise that if they manage to build them they will ship you one first for these seventy dollars but they they only sell you the product they don't sell you a share in the company so basically if this company M becomes fantastically successful you you as someone who actually funded the development do not benefit from that and I think we have seen this time and time again for instance in the oculus rift case I don't know whether you were you're familiar with this only people people crowdfunded this VR headset and it got a fairly lacking prototype the company was

sold for several billion dollars to I think Facebook the the founder cashed out and support for the things that had already been delivered was was phased out so the people who actually who actually kick-started this in the best sense they they didn't actually have any part in the success that this this company had in the end and with them with ICO is in the best case this you become a stakeholder in that company and you you benefit from the future successes yeah no I think that's right I mean that's what that's why I see this connection between crowdfunding in the

ICO space and how it can be you know in many ways you know there's been some amount of crowdfunding in the equity crowdfunding space at the federal level but I don't think it's been as great as many of us or the SEC or those in that space may have anticipated and it's interesting because at that same time when federal crowdfunding finally had the rules finalized and it was allowed this concept of the initial coin offering and the initial token offering came in at the same time and all of a sudden you had businesses that could raise capital not just from the United States but internationally in a in a way that again was in some ways more efficient some ways they were not doing it in compliance with regulations which

made it more efficient but that they were able to do it more quickly and and more efficiently in terms of the mechanism of raising the money so it is quite a fascinating interesting concept and I do agree with you you know in terms of the non equity crowdfunding the oculus rift case I remember I talked about it quite frequently because I think if I remember right the headsets were three or four hundred dollars something in that range and if that three or four hundred dollars had instead been an equity investment you know they would have gotten you know 67 to $70,000 of return on that investment so that would be you know quite substantial and instead like I say you know many people were waiting by the

mailbox for their check to come in not appreciating that they had bought the product and not invested in the company so I do think there is great value in giving people normal people and people like us I mean people that are not working at investors that are not investment banks that are not pension funds they're not hedge funds that are not extraordinarily wealthy individuals that get the private deals that are going on and are the first ones to get in on the IPOs that are going on within you know the New York Stock Exchange and others but to give every day you know investing public an opportunity to get in on some of these opportunities at the very earliest stages that is I think a

tremendous upside to crowdfunding and then also to icos so I mentioned earlier that balance between you know invest you know between facilitating capital and facilitating investment and then also investor protection and the rub is that although these are exciting opportunities for the businesses and for the investors that get in with the business at the ground floor putting aside the fraud putting aside any of bad actors you know startup companies you know for every oculus rift there is probably 10 to 20 companies that have you know fallen on their face and the investment went nowhere so you know it's up to us a little bit to teach

the traditional concepts of financial literacy to understand that you need to do some due diligence on the business you need to not put more money than you can put in that business assuming that you lose everything in terms of your investment you don't put more than you can afford to lose make sure you have a diversified portfolio so certainly you know in terms of advances and what you're talking about when you get to a place where you are starting to have a fund that is investing in various ico so you can achieve that immediate diversification or an ETF I know there's a number of you're trying to get licensed regulated on the New York Stock Exchange when you get to that next level that also will

you know be a positive development both for businesses and for investor protection yeah that's a good point but to come back on frigates point that when when you look at this this oculus rift story it looks a lot more it has a lot more of the same characteristics as as a fraud in the security space where like there was a promise that it would deliver this product but in the end the product is never delivered and you know people were disappointed maybe it's of course you know the amount invested in the wasn't as much as say it would maybe put an IC o---- and the outcome expectation was maybe the same but in a sense people would promise something in the end they

didn't receive it and I don't know if crowdfunding regulation actually you know takes that into account or not so if just in a general consumer sense if a business's promised to do something then they don't deliver every state attorney general you know would have the ability to bring in consumer action against that company and some attorneys generals did in fact bring actions against businesses on Kickstarter and other non equity platforms that did not fail to that fail to deliver because just to your point just because it's a 300 dollar product versus three hundred dollar investment if they took that money making false promises they should be certainly held accountable I'd like to move on to another point which is the transnational aspect of blockchain so yeah blocking projects and the teams themselves are

often transnational so a lot of teams working in the space have remote workers and the projects themselves are targeted and and can potentially be attractive to people from all around the world but great securities regulation itself is is a very national or state level type of activity how do you serve all that peg or square that circle and and make those two fit together in a way that you know you can you know have innovation and I think some extent you know have this these these organizations that are truly global and also have regulation that protects investors yeah it's a it's a great question it's um it's both a practical

question and a theoretical question almost in one and I have a couple of different ways that I want to answer it I first want to give a very specific example as relates to operation crypto sweep and some of the enforcement actions that state securities regulators are bringing so to your point that you know both the good and the bad but focusing on the bad icos are international you know when we are bringing an action and it turns out that the individuals are located not just outside of our jurisdiction meaning our state or our providence in Canada but they're outside of our country they're over in a country or a territory that maybe we've never even heard of on the map we have to look it up and how do

you enforce the subpoena against that person or that entity that's far outside of our jurisdiction even the SEC has challenges with that even the Department of Justice have challenges with that in terms of enforcing subpoenas and then enforcing legal actions against individuals that are operating outside of the United States so that's a really practical issue that we're now confronting in a way that really in some ways we've never confronted before because there certainly was the internet and there's certainly you know made communication effortless around the globe but you hadn't seen on such a large scale the ability to make investments in companies that really

were not they weren't corporate international multinational companies that were trading on the New York Stock Exchange but operating everywhere in the world these were companies that were coming out of icos and cryptocurrencies that were coming out of nowhere and blockchain projects coming out of nowhere that are able to operate anywhere in the world and in many ways do so we are confronting that real sort of jurisdictional limitation to your point just about you know how do you develop a policy that around that worldwide infrastructure certainly incumbent companies struggle with that I mean to be frank I mean companies have to deal

with the United States and in its securities laws the United States and its privacy laws the European Union and its new regime relating the privacy and its securities laws and and certainly in Asia there their laws and can be even considerably different and even the approaches that these countries were taking so that's something that international companies certainly have to struggle with and they they have the resources and and the ability to navigate that but a lot of startup companies a lot of new projects might struggle pretty severely with that and it could certainly stifle and prevent innovation so I think what's what's the solution loosen yeah I think so there's one just one historical note you know in

the United States when somebody did a national IPO nowadays you go to the SEC and they register your offering and then you offer it nationally it used to be that you actually had to bring that offering to each of the individual states in the United States and get it approved and if it wasn't approved in Vermont you could do your IPO and the other 49 states but not in Vermont so you basically had 51 regulators if you take the 50 states and the SEC approving an IPO and then in 2000 or sorry in 1996 much sure grinev state regulators but they had federal Congress passed something called Nizhny I was basically a national improve the the markets act

and the intent was to take the state securities regulators out of that decision and put that authority with the SEC because it was a national offering it wasn't localized it did have an impact on a local jurisdiction but it was a much broader national scope in terms of its impact in a national regulator should be the one with primary authority over that so my point in telling you that historical anecdote is you know could you see a situation many years down the road we're an international multinational securities offering is being regulated by some body that you know is overseen by multiple member country nation members and maybe that's a solution you know if you're

trying to think again on the theoretical side but certainly first steps to get there there's certainly two concrete first steps to get there I think one is that individual jurisdictions have to wrestle with this and wrestle with the guidance that should be provided so the SEC recently put out a framework for icos that was a helpful first step but then on the national level and international level the sec nasa other regulators internationally need to start working and communicating with each other in a more concrete way we certainly have organizations that have facilitated that interaction in the past but more so now

than ever is the need for national regulators to interact with each other because it's no longer a United States issue is no longer a Canadian issue it's a worldwide issue whether you're talking about blockchain development icos cybersecurity issues these are really matters that are impacting a business anywhere in the globe by anybody anywhere in the globe so we really you know need to start facilitating better communication so those are sort of two concrete steps better formalize your guidance within your jurisdiction and then work to harmonize that guidance with other international regulatory bodies

despite the fact that in principle these steps that are being developed by proctoring companies would be usable all over the globe many companies have actually chosen to geo block the u.s. in orders to not get in a sticky situation with US securities laws so US securities laws are seen as much more restrictive in many terms compared to to other jurisdictions do you think that in itself stifles innovation yeah it certainly can certainly can stifle innovation and and I do have just a couple of reactions to that first and

foremost is you know I've even as a rip state regulator I've been surprised by how open the SEC is to having conversations with cryptocurrency ico blockchain products that that impact you know the securities marketplace are implemented and you know they have an involvement in the securities market place they have been very open and interested they have a FinTech group at the SEC that has had individual meetings with companies that has provided them guidance both in terms of guidance that is individualized and also for companies generally that are operating in that

space state securities regulator similarly are certainly open to hearing new ideas and new projects so certainly my first piece of advice to those companies is to engage with the regulators here in the United States to make sure that you fully understand the avenues that are available to you to get either registered or to get an exemption from registration they're basically at the very broadest levels three different categories that an investment can fall into it can be a registered offering which means you go through the full registration process at the SEC or at the state level or there can be an exemption from registration so you know

the SEC and the states have found that certain transactions don't need to be fully regulated by a body here in the United States or the joke is that the rest of the third category are all illegal transactions and you know I think it just illustrates the point that that folks should think about how do you get into compliance either from either from registering and I do agree that registration process is largely for companies that are more mature that have a more sophisticated you know sort of a footprint and offering and it costs a lot of money it costs money to get professionals attorneys accountants investment bankers so that is certainly an opportunity that does not present

itself to everybody particularly startup companies and then if it's not through a registration process what are the exemptions that are available to this community and largely is circles back a little bit to a point we had earlier largely those exemptions that are available are private exemptions meaning that you can sell to wealthy individuals to accredited investors but largely Main Street investors are shut off from that opportunity so there have been discussions at the SEC recently and we've been engaged with them on this to change the definition of an accredited investor to broaden it so that different categories of people come into that

definition and certainly that's something on a personal level that I've been supportive of particularly younger people they might not have developed the assets to become a accredited investor they might not have the income yet to become an accredited investor but they have sufficient knowledge to make them a sophisticated investor and certainly the SEC should think about that and and can you allow people to make investments in these private offerings if they have sufficient knowledge and expertise and I would suggest that you should look to allowing them to do that but at the same time you should try to protect and mitigate the amount of money that could

be lost so maybe you put an investment cap on those type of individuals that they could only invest you know $25,000 a year $40,000 a year whatever it might be so to answer your point you know the u.s. laws can be complex as they exist now it's hard to get a token offering into the hands of a Main Street investor but it is possible and there are other exemptions that people are trying out in an effort to do that so I do encourage any projects to sit down with a regulator to try to get more information to try to work with them to see how you could structure your deal to make that plausible a but at the same

time there's certainly more work that needs to happen on our side of the equation on our side of the Ledger's regulators to think about how do you what's the appropriate balance to allow folks to get into this marketplace as investors while still making sure they have a level of protection and don't you know lose their entire retirement or life savings in an investment that goes south yeah I think that's a decent approach to to look at investors more on the basis of you know sophisticated and unsophisticated rather than wealthy or non wealthy because you know in today's day and age I think probably this wasn't

the case before I mean obviously wasn't think it's before it maybe this is why these laws were implemented today people haven't access to new buses an abundance of resources that allow them to become highly knowledgeable and gain this is a sophisticated amount of knowledge about you know things like I SEOs things like investing in these types of projects that didn't happen didn't you know exist before and and so I think that changes the landscape and I think that the European approach to this freely and I both being in Europe is is you know a nuanced approach to that where you know when you open an investment bank account for instance the you know you you you

get asked a lot of questions about your level of sophistication and of course any investment product has to come with a prospectus and like all these guidelines and what the investment entails etc so since we're coming you know towards the end of our show here like to talk about Vermont absolutely and your Vermont has positioned itself as a place that like to attract blushing companies one interesting thing that I learned right before this podcast is that Vermont has was in the process of implementing a blockchain base LLC m'a that would allow to dowse to have some sort of a corporate status tell us a bit more

about what's going on in Vermont and both this PDE LLC yeah happy to talk about the blockchain LLC and and that was one we had a bill last session in our legislature this was one element of that bill that I really did get interested in and excited in because you know oftentimes particularly with regulators but legislators you know we need to try to see some of the practical applications of some of these laws or even some of these blockchain projects we want to see you know how does this get employed how does it make people's lives better how does it save money and this blockchain LLC was one where I did see it solving a quite

legitimate problem or confusion in the corporate world which is you know when you have all of these various players that are operating in a token offering or in a cryptocurrency you know what is the legal relationship between these participants you know are they someone that's helping mine public blockchain are they an independent contractor or they employee are they a shareholder are they you know whatever and I think you can make theoretical and legal arguments as to what they might be or what they might not be but what the blockchain LLC was attempting to do was give a legal entity and a legal framework for the companies for the projects rather to

decide what those legal relationships would be for themselves so there's certain parameters that they have to fall within like any corporate entity but really it provides much greater level of flexibility for them to legally define the relationships of all of the various players in a public blockchain so again this was a little bit theoretical but again trying to make it more operational and more practical we'd have had I think just about a half dozen to maybe just close to ten blockchain LLC's that have filed with the Secretary of State's office here in Vermont over the last six months so

there has been some interest we will at the you know appropriate time I think it's a year out take stock of who has been availing themselves of this new entity how is it working in practice and and then how might it need to be improved upon or what other you know features do we need to think about adding to it but at the heart of it again the concept was to allow the project's to define these legal relationships which otherwise are unique and undefined and ambiguous so that they are providing themselves some level of certainty as they operate very cool and absolutely needed in this space and Vermont also announced a pilot project

in captive insurance and for our listenership could you first explain very briefly what captive insurance is and talk a little bit about this project yes happy to and and yeah captive insurance what is it as a question that we get off off asked pretty often so the 30-second summary is that it's a formalized mechanism of self-insuring so you all of us on this podcast that we needed auto insurance or homeowners insurance we would go to one of the big insurance companies and purchased that policy from an independent third party large corporate entities however might not find it to be the most cost effective efficient to go to you know

AIG or some other large Lloyd's of London travelers some other large insurance companies to purchase their insurance instead they might decide to form their own insurance company internal to their company and that's essentially what a captive insurance company is they can better control their risks they can better manage their risk they can have immediate access to the reinsurance markets so at the end of the day it ends up costing them less money to have a formalized self-insured insurance company within their corporate structure rather than buying the insurance from a third-party insurance company so as I mentioned Vermont you know we are really the gold standard when it comes to captive insurance we

have about 600 of these companies in our state they write about 30 billion dollars of premium through the 600 companies in Vermont so very large marketplace and the reason why we thought this pilot project with the secretary of state relating to blockchain technology was was useful in this space is because those 600 companies belong to really large international companies that are familiar with distributed ledger technology familiar with its upsides trying their own pilot programs within their companies so they have a level of interest in participating in a similar pilot and then from our perspective you know what it really accomplishes and

again I'll get back to this concept that you know I really am trying to appreciate the academic and theoretical nature of a lot of the discussion that I've had with many people in this space but trying to bring it back to a practical and operational concept an idea and for me this is a really really small first step that Vermont can take as it relates to the way that government operates to better understand the technology and not just myself but our staff here at the Department the staff at the Secretary of State's office here in Vermont that that on a granular level individual staff members here in state government can get more familiar with

the technology that companies can file basically what the pilot would do is allow new captive insurance companies to file with us their corporate registration documents their annual filings and the like through a distributed ledger rather than the traditional paper or online filing and again I don't think we're going to get a tremendous amount of great efficiencies I don't think this is going to be the greatest you know thing that any state government or or the industry has ever done but what is really going to do in a practical level again get us more familiar with the technology and then allow us to identify areas where we can scale up so the Secretary of State handles thousands and thousands of filings is there ways where they can use a private or public

blockchain in a way that makes their operation more efficient from a regulatory standpoint are there ways that we can use the technology to make the way that we take in information or the way that we regulate the marketplace can we make it more efficient can we make it more transparent can we make it more accurate those are all of the answers that we're hoping to get out of this pilot project so we're very excited about it you know we're one of the first if not the first insurance departments in the country to actually step out and try to take on their own distributed ledger pilot program so again we're very we're very excited about the prospect of making an incremental step and then seen

where that will take us great that's that's really fascinating and so finally I'd like to ask you a little bit about your your goals as president of the net of NASA you know what you hope to achieve here in you've been with the organization now for I think over just over six months yeah but yeah that's exactly right we're halfway through my presidential term okay so okay so presidential terms are quite short then now what do you what do you hope to achieve deterring this this short time yes for sure so you're absolutely right I mean you can't achieve much during a single year so you really what you have to do is make sure that you start early

you lay the groundwork for any initiatives that you have early and that you develop initiatives that those that are going to follow you are going to be interested in continuing on so personally what I hope to achieve I'm the first millennial president of NASA we wanted to have more focus on millennial issues as it relates to investing and as it relates to retirement savings and the like so basically as you probably from Millennials are saddled with student loan debt they're delaying decisions that you know the traditional hallmarks of adulthood like purchasing homes by having children saving for retirement and it really in some ways is causing many different social impacts than

people are I think even appreciating and realize and certainly states like Vermont you're seeing Millennials have to leave the state to get jobs at our higher pain and pay off that student loan debt that's having a direct and immediate impact on our economy and then you're seeing again young young folks that are just starting out or folks that are in the middle part or early part of their career you know having nothing saved for retirement and that's going to be a considerable issue when they don't have time on their side anymore and they're getting closer to retirement age so highlighting those types of issues is one of the things I really wanted to accomplish as NASA president get that Congress conversation started and to get policy makers in Congress at the SEC and

at the States more focused on on millennial issues as relates to financial services great well that's very encouraging well thank you for joining us on our podcast today and good luck for the rest of your term well thank you it's been my pleasure I really do appreciate it and I do congratulate you as well for for sticking with this podcast I understand you guys been doing it now for five years and every week that's that is something that's really difficult to keep up with and to do so I applaud you for your perseverance and and focus on these issues that are really important issues thank you both thank you thanks a lot that yeah it it has been five years and it's not always

easy but all right thank you Michael thank you we released new episodes of epicenter every week click here to subscribe for hundreds of insightful interviews with some of the leading minds in blockchain and crypto you can also listen to the audio version of the podcast on iTunes Spotify stitcher and other podcast apps click here for a full list of places where you can listen thanks for watching at the center and we hope you'll join us for our next episode