Stephen Palley: The Regulatory Landscape for Cryptocurrencies and the SEC's Case Against Kik (#293)

Transcript

[Music] this episode of epicenter is brought to you by baltoro the gold hedging platform for the crypto community trade goal - bitcoin instantly and securely starting at just one milligram go to vault or gold slash epicenter to get early access to the v2 platform and to start trading and by Microsoft Azure do you have an idea for a blockchain app but are worried about the time and costs it will take develop the new Azure blockchain defconn 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 akms / epicenter i and welcome to episode my name is Brian from Ukraine and my name is pitted against and I'm sort of sync with Jill so we spoke with Stephen Paley today Stephen has been on the podcast before he's kind of one of the most outspoken or an articulate crypto lawyers often you know kind of railing against some of the excesses in the ecosystem but very fawful and he was right with a lot of prediction as we talked about in this episode so yeah we dove into some of the current regulatory issues and the kind of landscape so

hopefully you'll enjoy that and get some some good strategic insights about where this whole field is going so before we go into the episode we did want to cover briefly last week there was the cosmos conference so it was called the interchain conversations in in Berlin say Vasya myself sunny and May her so four or five hosts were all at the event so yeah so I see there's a bunch of content coming out from that as well no yeah and I just want to say for like oh we missed you we're really sad that you can be there but I hope everything went well I was sad I couldn't be there either but I had unmovable meetings with regulators yeah

well I hope things are moving along on that front but yeah I thought it was a really great event so one thing I guess a couple takeaways from this event one is it was great to finally be able to put a face on a lot of these usernames and avatars and also I think just like generally connecting with some of the members of the cosmos team that I hadn't had the opportunity to connect with very much before one of the other takeaways and Brian you could probably speak more to this than I can but there seems to be a really nice level of cohesion between validators so effectively you guys are competing against each other for delegations but that didn't stop you from organizing a dinner for validators where a lot of them showed up you know

and there's a lot of very thoughtful and cordial discussions about a lot of the issues that you face and how to solve those and how it like to get through those those those challenges in the future so I think that's like really encouraging that there's this healthy ecosystem where people are open to collaborating even though they're competing against each other yeah it's holy I mean I I've been working on cosmos for two and a half years and then it was kind of still you know there was sustainment world before that and this was the first larger event so it was long what we do so it was really great to just meet all these people and so

that was great then and I agree with you I think there is a healthy community and a healthy way of thinking about things and you know when it comes to yeah to validators of course there is competition but it's also you know kind of working on the same thing and trying to make the same ecosystem thrive so I think there's kind of both of that and and I think the collaborative side is very strong at this point and hopefully we'll stay like that yeah hopefully we'll see how long that stays in the status quo the other thing which was great is is to see the level of thoughtful discussion around governance atom holders are bestowed with this very validators with this with this power to govern the

network and implement changes to the network to the protocol but people are still very careful about implementing breaking changes or changes that could really mess with some of the economics and and so on and so on and so forth and so there is this this process of sort of rough consensus that comes before people actually start making proposals and I thought I thought that it's it's a really great example of like a liquid democracy being implemented and sort of a scale so I'm really looking forward to seeing where that goes as well yeah yeah I mean the Guardian system and cosmos is really simple pretty basic and his

features but it's been working pretty well and I think over time it will become much more sophisticated and complex but so far so far I I would say since the cosmos launched and I think this may maybe seven governance proposals made that were actually being voted on others have including use of us here I've had some ideas for changes yeah it looks like that is actually going to be well someone worked on it at the hackathon without even knowing that I had proposed that and as I mentioned I think the Zaki's I said someone much smarter with me than me will like implement this thing so yeah so yeah I think that so far works great and it is it is an interesting experience in online governance I think it's at least

the one I've been most closely involved I haven't seen I guess there's some others like dick read that I haven't fought so much but from at least from what I've seen it's been the one that's been most visibly success so far even though it's of course is short yeah I'm sure someone I'm sure someone from - will also let us know that that there was covered in sand - not to diminish any of those governance models but yeah so regarding this this bonus content so if you haven't already seen it on our feed we by this time we would have released two bonus episodes so we did an a live recording of the podcast on stage in front of the audience which included myself brian mayer and sunny

and you know we talked about blockchain interoperability and some of the challenges there and things like composability and how those different networks are dressing that so you know we hope you'll you'll like that it's something that I think we'll try to keep doing in the future a future events already I've got ideas for for Doc on in in August and another session that will is also part of this bonus content is a Q&A that I did with Jay at the very beginning of the event which sort of set the stage and you know says for the for the discussions to come so that's episode one and then there's a part two of this bonus content which is your validated or panel Brian so you the panel with four of the validators and

really insightful there and then part two of APIs ode to is sony's governance discussion which was very animated and sunny came in on stage dressed as a Byzantine general and debated with or organized debates with different members of the cosmos community on things like plutocracy and should dictatorships should cosmos you know enabled enables safer dictatorships and things like that so it was really fascinating I'm even more sorry I missed this now yeah that thing was really great so if you subscribe to the podcast on the main feed or on Spotify Google podcasts or stitcher you've probably seen this content already pop up in your podcast player if you listen through the LCB

network feed content will not be available there it's only available on our proprietary feeds so you can just go in your podcast player look for epicenter and subscribe there and then you'll have access to this bonus content and all the bonus content that would be putting out in the future so with that here's Federica and Brian's interview with Stephen Paley so we're here today with Stephen Paley Stephens actually on the podcast before quite a few years ago he wrote this wonderful article back then how to sue a doll and that was when to be heavy on let me just check exactly three years ago I say June 13 2016 and

Stephen has been very articulate in the blocking space he's been writing about a lot of legal issues often quite you know kind of critical of the space so it's been a welcome voice a contrarian boast voice at least come on it's call me a status chill you know you want to exactly and of course now a lot has been happening and we recently had to kick actions and so we wanted to have Steven on and talk a little bit about that but also some other regulatory whether your questions so thanks much for joining us again Steven it's my pleasure glad to be here so tell us a little bit so last time we spoke you were actually still primarily dealing me if I think insurance and

construction law if I remember correctly and then you was switching a law firm and and you filthy crypto law practice since then how has that been so I have this funny law practice where I have feel like I've got my my feet in really in three spaces at this point one is I've got a very old school almost 19th century kind of Dickensian practice where I help companies collect money from insurance companies I'm an insurance coverage lawyer so I negotiate insurance policies for large corporate clients and then when insurance companies don't pay I sue them or negotiate as the case may be and so I find myself dealing with you know old insurance policies some of which have

language that literally dates back to the 19th or even 18th century in some cases and the you know take depositions of people about an insurance placement process that bears absolutely no resemblance to anything having to do with crypto what's interesting though is insurance is all about it you know it's all about trust really which is sort of how I ended up focusing on crypto which was sort of long story short we may have talked about this last time I was on but I was building a dispute resolution platform to solve a trust problem in litigation and dispute resolution and I stumbled basically long story short I

stumbled onto Bitcoin as an interesting technological solution to how do you how do you program how do you create programmatic dispute resolution without an intermediary so my own technology company which I built five years ago now called impasse breaker was a failure I'm really good at practicing law but I had no idea how to build a technology company I'd taught myself to program reasonably well but that led me into helping clients build technology so I helped another client with an advertising platform and micropayments was a problem

which also made cryptocurrency interesting to me this was in 2015 and yeah I went I had my own firm for a while I joined Anderson kill three years ago around the time that we last spoke and the firm about a year and a half ago very graciously allowed me to create a cryptocurrency virtual currency practice focusing mostly on disputes and also I said we should accept Bitcoin and they said okay so we also the firm also blessed that we use bit pay so it's not like we're actually taking keys and then for the last I don't know eight or nine months I've been doing a bunch of

writing I'd work with the block crypto which is a wonderful crypto media platform which I'm sure you're familiar with so sometimes I feel like I wear a little bit of a journalist platform which is kind of fun a journalism is kind of like law except you don't have a subpoena power and I focus mostly on legal developments in this space so that's kind of what I've been up to in a nutshell so a nutshell since we last spoke if you're holding a significant portion of your net worth in crypto you're probably waiting for your aportfolio to moon anytime but holding crypto doesn't mean you should be irresponsible in the face of volatility risk that's where Volterra comes in Volterra is the leading gold hedging solution for the crypto community and as a stable asset trusted for millennia

gold is the perfect long-term hedging solution an epicenter we've been using volt Oro since 2014 to protect a portion of our company's assets against volatility now you might ask why not use a stable coin sub which is a great point and don't get me wrong stable coins are great and a real benefit for crypto adoption but algorithmic stable coins are still very new and experimental asset type and some asset back stable coins have been scrutinized for being under reserved with vault Oro your gold is 100% insured and secure it in vaults deep in the Swiss mountains protected by Brinks every single gram of gold is audited and holdings are made transparently available on their website for anyone to verify and most importantly it's quite literally your gold you can choose to have it delivered to you at any time to

learn more and to get access to vault arrows brand new v2 platform which includes an interface overhaul and trading in - like coin ether and silver go to volt or gold slash epicenter that's V a ult oro gold slash epicenter we'd like to thank vulturo for their support of the podcast there's been of course lots of developments in the crypto space you know things are moving quickly but if you were to give I don't know a very three minute kind of high-level take on in the last three years whether what do you think have been the most important developments and maybe developments have surprised you the most when it comes to

like you know crypto regulation and law but sounds really arrogant but I'm honestly not really surprised by very much I think I predicted very accurately that there would be a regulatory crackdown I'm not the only person who predicted it but we were I kinda at some points I felt like I was the guy in front of Baro where there were free drinks and food that happened to be laced with arsenic saying you know guys everybody like during the ICL boom was saying you know maybe think twice about eating all of that there's like there's a price you'll pay but that all happened rather as expected and I think we'll see more of that I think is 2019 winds down

in 2020 winds up that will continue to happen I've been I have to say I suppose I've been a little bit surprised at Tasos and how broadly and widely that is spread in spite of litigation involving it I didn't necessarily see that I think it also it may end up going to show that litigation and regulatory enforcement won't necessarily stop everything that that actually may be that that particular project has been a little bit of a surprise to me and that's not a it's not necessarily I'm not making a

prediction about value or the market I'm just noting that it's apparently continue to thrive and the technology is I've heard a lot of accolades and maybe I didn't see that necessarily coming sometimes what's interesting is trying to figure out how litigation and regulatory enforcement will impact something that maybe is centralized in certain ways but decentralized in other ways I suppose I've also been a little bit surprised to not see some sort of public enforcement related to theory and that's been a little bit of a surprise

to me but honestly not that much the sale itself was at a time when the technology was new getting Bitcoin was not something that was easy for folks I'm not sure everyone quite understood what it happened I think that the Dow report almost sort of an inflection point for for US regulators for the SEC in particular but you know for the most part things have happened as perhaps sort of as expected it'll be interesting to see sort of how Libra and Bitcoin play out on parallel tracks I'm not I'm not quite sure what what the right take is there at this point I guess I was also you know we were I think we'll talk about Libra in a little bit more detail

I'm not surprised that there have already been calls for congressional hearings and I believe one one member of Congress has already sent a letter to Libra saying cut it out cease and desist it's not surprising that Congress is upset I mean it's Facebook is a you know it's an organization that doesn't get a lot of love in Congress I'm a little bit surprised at how fast it came that's sort of my recent that's surprising to me do you have anything that's surprising to you that that that's surprised you in a positive way because all of these all of the things you mentioned are kind of like I can't believe they kind of got away with it sort of things right it is incredibly cool that you can send

value around the world almost instantly and convert it to Fiat almost instantly take Gemini for example you could somebody can send you I mean Brian you could send me a Bitcoin or ether and I'd have it in my wallet my own private wallet and you know let's say 15 minutes I could then send it to Gemini and they could wire me money within two hours that's actually that's amazing it's also like if we want to talk about positive it's funny you should say that because a good friend of mine has pointed out to me more than once people like a bowl more than a bear so I think the advice that I was given was like your insights

are really interesting but like maybe try to be like more bullish about things but I am Who I am and I just Popeye it's incredible literally that ten years after the white paper were having congressional hearings where people are talking about the stuff I went to a an event at the SEC two or three weeks ago and the SEC is fully engaged in an interested in the space they remember that white paper is ten years old right and you we had an entire day with high-level people at the SEC grappling with the technology and not just focusing on enforcement but thinking about how it can be useful so what got me interested in the space is actually the technology not the law I was wearing a technologist hat when I

discovered Bitcoin and I'm still incredibly bullish about the long-term potential of programmable money peer-to-peer programmable money without an intermediary without a Swiss foundation I think that that is I got it when I saw it and I still think that that has incredible potential I think we've come a long way in 10 years was that bullish enough for you yeah that was that was foolish enough you you said earlier that the dow report was kind of seen as an inflection point in in the ecosystem and recently and the sec has taken action against a number of projects most recently against kick can you give us a little bit of background

about that about kick yeah sure and was it where at what year are we in 2019 so in 2017 shortly after the the kick I see oh the sec apparently commenced an investigation considering whether or not the tokens that kick sold were investment contracts and the securities under US federal law it's a fairly long and involved process it involved testimony under oath that involves subpoenas of documents and apparently involved millions of dollars in legal fees towards the end of that

process I believe in the fall November 16 2018 to be precise the SEC had essentially wrapped up its conclusion it sent something to the Kix lawyers saying we think that we've basically we've made a preliminary determination to recommend that the Commission file an enforcement action against your clients click interactive and the Kin ecosystem foundation alleging violations of a part of the US securities law that require you to register a security with the SEC before selling it to the public I'm oversimplifying a bit this was called Atwells notice and in the u.s. once he received Wales notice you can write a letter back to the SEC a Wells

submission trying to convince the SEC not to sue you kick did that yeah kick and kin did that actually and apparently it wasn't good enough at least as respects kick and the SEC sued them on let me get you the date on June 4th 2019 in federal court in the Southern District of New York the SEC filed a lawsuit against kick interactive alleging that it violated the portion of the US securities law that require you to register as security before selling it it's a pretty long lawsuit 49 pages see I've got my yellow stickies and all of the interesting parts and you know it's I think Brian you listen to a presentation I did last

week with with a coin desk as I I said I was asked about how long this would take I mean a federal lawsuit of this nature in complexity can take two to three years to resolve it could take another year or two to go up an appeal for five six years before we see any sort of resolution I know the folks with kik have said they're prepared to go to the Supreme Court whether the Supreme Court considers this and decides to reconsider the Howey test they do have very fine lawyers the SEC does too I'm skeptical that this makes her to the Supreme Court but it's certainly a possibility but you know I think one of the questions is is this lawsuit going to give us clarity about the law and the

application of the Howey test to tokens at any time in the future I don't think so not not in the near future anyway I mean the question let's say to take this to the Supreme Court so there I guess that is that in the end though how kind of clarity you would come about is that like you know somebody takes it to the Supreme Court and the Supreme Court says okay you know the Howey tests we interpreted this way when it comes to equip the tokens or do you think this is gonna play out some different way answering that requires a little bit of sort of framework about how law works in the United States that how we test is a test that comes from a Supreme Court case and there are a bunch of different

ways that law is created in the United States one way is we have judgment law case law common law that interprets statutes and that's what the Howey test is but you also have laws themselves so you have the securities acts of the Securities Act of 1933 the Exchange Act of 1934 which are federal statutes those are laws as well then we have administrative agencies essentially like the SEC which are given authority by statute to promulgate regulations so you've got statutes you've got regulations you've got cases judges only decide the cases that are

before them so it's theoretically possible though I think unlikely that a federal court is going to say you know what now how we test an investment contra investment contract analysis that doesn't apply to crypto tokens I can't figure out why a court would say that what is so special about this asset class that a court would create an exemption to hold and establish judge-made interpretation of the Securities Act it's possible but it seems unlikely it's more likely that you would get quote unquote regulatory clarity or you'd get maybe a different way of saying it is sort of an exemption

for tokens to Securities Act if you had congressional action or you had exemptions that were created by state legislatures because in addition to complexity of federal law in the United States things are even more fun because we've got 50 states the District of Columbia and some territories as well all of which have their own lawmaking power and their own courts it's a federal system right the short answer is it's unlikely this is the case that's going to change the lay of the land anytime soon I did see a story this morning about proposed legislation that would change accredited investor rules in the United

States and would allow people with less income and fewer assets to invest in certain types of assets that might be an answer sort of a change to crowdfunding laws but I don't see the SEC creating a broad exemption for tokens anytime soon they're just I don't I don't see that as being within their their sort of their their habit or their view of their ambit quick Thank You Steven maybe quickly for the benefit of all our listeners would you be able to give us a short description of what the how it has actually entails and what it determines and how it applies maybe maybe with an

example of cake so it's a we can kind of tie this in sure the Securities Act of 1933 and the Exchange Act of 1934 have a definition of securities that includes investment contract investment contract is not a defined term the Supreme Court in a 1947 1948 I always I always get confused but in an old case called the SEC versus how we define an investment contract as an investment of money in a common enterprise with an expectation of profits solely from the managerial or entrepreneurial efforts of others that's paraphrase but that's the basic idea so it's a three-part test

investment of money of course have held for some time that an investment that cryptocurrency can be an investment of money money doesn't necessarily mean state sanctioned Fiat it can be ether it can be Bitcoin it can be Brian coin right it could be pally coin you know there's a pally token out there by the way with it's a PA LLY something to do with them I thought they were trolling me but it's decentralized social friendships and then the common Enterprise is basically a sort of a joint venture if you will and I can agreement to do something together will be expectation of profit solely from the managerial or effort or entrepreneurial efforts of another there's actually a pretty good

explanation of how the SEC views that in this case let me see if I can find it basically the SEC says investors who bought kin tokens some kik sold something called kin tokens investors who bought kin tokens through the offering and component sales made an investment of money in a common enterprise with kik and they reasonably expected that they would get profits because of the entrepreneurial managerial efforts of kik and its agents so basically they bought money that they bought tokens in a passive way pulled together expecting that somebody else would do everything necessary to give the thing value that's it in a nutshell and that sort of definition of

investment contract applies in the investment and non investment space now it the test has gotten some criticism and people have asked for you know more quote-unquote clarity with respect to crypto I mean I guess when people ask particularly people in crypto often of a libertarian bent ask for more regulation I kind of wondered about that because sort of the nice thing about that that common law judgment test is it's dynamic right it's not a static test it is principles based the SEC would say it applies to the facts and circumstances of specific cases and you know if if you well I don't like the term utility token

it does describe something that is not an investment contract and not a security you could think of a software token as being a key that gives you access for example to a digital rights management platform that gives you access to music or in the case of ether that allows you to write something the utility of the thing is the ability to right to a distributed decentralized database no I know there are people out there who'll say it's not really a database but let's let's call it that it gives you ether gives you the ability to write data right so things that have existing utility they could be tokens like the thing that allows me to access

iTunes there is a software token someplace that gives me the ability to access that library to access my songs there's nothing about a token in and of itself that is inherently a security there's nothing about a token that is inherently an investment contract it's how it's used and I think the sec it's full of no smart people who can look through the maze and the fog of white papers and look at something for what it actually is whether or not and i think the problem that a lot of the token sales had and the problem that the sec

points to in the kick sale of the Kin tokens was in many cases the token was being sold to fund the creation of a thing that did not exist yet with the expectation that by doing so the people buying that token would would profit from it that's essentially that's that's not a necessarily correct statement of the Howey test but it's a correct statement of the business problem this episode of epicenter is brought to you by Microsoft and the azure blockchain workbench getting your block ting from the white board to production can be a big undertaking and something as simple as connecting your blockchain to IOT devices or existing ERP systems is a project in itself well the folks at

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on this platform that they were going to build and so what's what's the argument that kin is making that this is not a security well they say it's a currency and that the sec doesn't have authority to regulate currency and that it's regulatory overreach and they also say that the Howey test is effectively out of date and shouldn't apply to token cells such as this one they also they don't say this explicitly but I try to put myself in the shoes of their lawyers and looking at the SEC compliance so one of the if you go to paragraph seven of the lawsuit and for folks out there who are interested you can get a copy of

this lawsuit I'm fairly certain it's available on the SEC website you will link to it in the show notes ok yeah so you'll be able to look at it yourself you go to paragraph 7 you can see a theme that runs through the complaint I'll quote faced with a shrinking financial runway kick decided to pivot to an entirely different business an attempt to what a board member called a Hail Mary pass kick would offer and sell one trillion digital tokens in return for cash to fund company operations and a speculative adventure for those of you who are outside of the United States and aren't familiar with American football a Hail Mary pass describes a move late in a football game like there's like one

second left where the quarterback throws you know from one side of the field all the way to the other side of the field hoping that one of the players catches catches the ball and makes it into the to the endzone - to win the that's a Hail Mary pass so basically what the SEC says is you know you were a failing business you needed to make money we got all your documents we've read all of the emails it is clear that this was an investment scheme that you want up using fancy crypto lingo but basically you were raising money because you couldn't go to capital market so you couldn't go back to your investors and I think if I were responding to that

argument I would say you know it's true the company needed to make money right the company times weren't good but however just because times aren't good doesn't mean there's something wrong about creating a new product to do better if that was the case you'd have to sue every company that was facing hard financial times what we did they would argue perhaps is what we did was what any smart company would do when faced with a difficult financial situation mood changing technology we innovated right we pivoted we built something new and if you're gonna criticize us for falling on hard

financial times that is a false narrative that's a narrative that is unfair and it's a narrative that you can apply to anybody you can't penalize us because we tried to innovate that's exactly what we did here that's what I would argue and you know suppose if they're watching they could steal my argument right but that's a sound a bad argument now the SEC tells what's interesting about this lawsuit is 49 page lawsuit 46 pages of it our facts or allegations the story right too maybe three pages of it describe the legal claims so the SEC is banking on this on telling a really strong factual

story that supports a very very narrow legal theory and that's um there's something about that that is tactically interesting what is your prediction like how do you think this is going to play out it's not like from a a fact standpoint like the narrative is not a great narrative for a kick you also have where is it they used the word investment a lot there's a reference to a Bitcoin meetup where kick CEO said people are going to make a lot of money they talked about getting listed on exchanges one of the

this is a great quote and it's probably one of the worst ones there's an email where a kick employee admitted to another by email when discussing lack of guidance they'd received about the the crypto stickers it was a picture of a honey badger holding a boom box saying ledge jam that was I guess supposed to be one of the bits of utility wear that the employee said basically it doesn't really matter the whole point is to make our legal department happy not the users who are actually investors and probably could care less that they got a sticker pack for their 10,000 investment two thousand dollar investment in Kinloch stuff like that doesn't look great but if you are defending kick you're gonna say all those facts are irrelevant right it doesn't matter what an employee said

this was they're not lawyers you have to look at the actual thing you have to look at the SE C's you know authority to regulate the space you have to look at what it actually is so ignore all of that and if you do that you'll see either its currency not security or that Howey test is wrong it needs to be updated look I mean they can win if I were betting and I probably wouldn't bet on this but if I were betting at this point just based on the complaint it's looking pretty good for the sec my prediction which is total gues have not spoken with

lawyers for either side I don't know I don't know that the folks would kick my guess is this settles mic also guess is that it didn't settle previously because the SEC wanted too much but you also have to understand how this played out ordinarily in a lawsuit if I prepare a lawsuit against somebody I don't have their files I don't have their their awful emails I have not taken I have not examined their witnesses under oath the SEC already did that like for the last 18 months before it filed this lawsuit the SEC sent out subpoenas examined witnesses got all of the files then they received kicks legal analysis

in the forms of form of their well submissions so what's unusual about this is the SEC already knows the other side's case already knows the universe of documents it's unusual for a case to begin that way they also well they can't take every case and while it's true that you know they have their resources are constrained by budgets it's the US government the fact that kick might raise five or ten million dollars or twenty million dollars doesn't matter if the SEC wants to make this a priority the SEC has a much larger budget that has effectively basically unlimited resources by a if it chooses to go after someone and the fact that they did means

they think they've got a really solid case and this is by the way it's a beautifully written complaint I'm sure that kicks lawyers will write a beautifully written answer a motion to dismiss but it's top-notch legal work the other interesting nuance too is that for those who follow this area of litigation a lot closely in the United States this is not a securities fraud lawsuit so the SEC is not claiming that there was any sort of broad or [Music] intentional misconduct they are saying that this is a security and you had to register that is uh that is a violation that does not require proof of intent all you have to

show is that it was a security and there was a failure to register . . i suspect the case will settle i'm i'm i'm guessing i may be wrong you stated that the SEC in principle has an unlimited amount of money to go after this and so kick is also unusual in foot for a startup in the sense that they also have a lot of money so we see how do you think this would have played out differently if kick hadn't raised a hundred million dollars two years ago well there are lots of other companies who raised lots of money in ways that may have violated securities laws this was a lot of money and they were pretty

public about it and they said a lot of things in public that I'm sure caught the SCC's attention my suspicion is that there are so investigations are private the SEC does not disclose their existence during the investigatory phase I suspect that there are scores of other companies who raise some of whom raised more money some of whom raised less money who have who are in the middle of an investigation as well and who perhaps have looked at this and thought well we don't want to be involved in litigation with the SEC for the next three four or five years and are seeing this is encouragement to settle they kind of

poked the SEC in the eye by saying we're gonna create a fund called you know they printed a website called defend crypto and they basically told the SEC to come and sue them so the SEC did maybe not the best people to taunt you know if you genuinely I don't I don't know these people I don't know how sincere they are in their beliefs but if you sincerely believe that you didn't do anything wrong yes EC is out to shut you down and they shouldn't and you have the resources so maybe you fight sometimes the government's wrong I mean the beautiful thing about the United States and one of the things I love about being a lawyer is just because the government says something is so doesn't mean they're right you can fight now usually the SEC doesn't do this unless they think

they're gonna win but they lose sometimes the tower report came out in 2017 do you think anything that happened before is fine as do you think do you think the SEC will come after any projects that did token sales before BT theorem or the token sales early deaf token sales I have no idea I would be completely speculating it is I believe that they cited the Dow report in this lawsuit I mean I remember reading also some previous SEC things and there was always like you know we've published a dollar report we told that this was and you still went ahead and you did it

afterwards yeah III think that's right I think that's a I think that represents a bit of an inflection point I mean I do I go back to the etherium token still it really do you I don't remember how many people invested at the Teran but 10,000 they're not 10,000 and they were and you had to be able you had to have Bitcoin to invest right they didn't take it right yesterday yeah because so you had to know how to set up a wallet how to work with private keys you had to know how to get crypto he had to know how to receive ether it was highly technical I don't think it's unfair for a regulator to look at that and say well alright

like technically that looks like it was in that looks like it was a securities offering but the reality is maybe we understand that how gas works and maybe it was something that was a hobbyist deal at the time so we're not going to come after you for that I don't think that that's an unreasonable approach and some of my friends in the space you know may not like that but I can see how regular a regulator might look at that and say okay it was early days we weren't watching it maybe you didn't know what you were doing I suspect that they probably had some sense but that's not a conversation I was part of I do

think however though once that report came out it became harder for people to claim like they didn't and the SEC sort of done this they've like they've ratcheted up the pressure and I believe this is the first there have been some settlements in failure register cases with a variety of penalties this is the first lawsuit in federal court so there are a couple of ways that the SEC can go after you if you violate securities laws one is they can institute administrative proceedings which are before an administrative law judge basically it's sort of oversupply and it's kind of in front of the regulator right the other way is to go to a federal court in front of a federal judge and the judiciary in the United

States is a different part of the government then the regulators are so this is the first time that I believe they've gone to a federal court in the case of a failure to register a token sale the other cases have all involved basically orders instituting proceedings they've been effectively consent orders in a in an SEC administrative proceeding they've kind of ratcheted up the pressure and the sanction and the penalty that they've applied and this appears to be a sort of sort of next phase in ratcheting up if you will so maybe just a final question on on the kick stuff you mentioned that you expect

the settlement here or you think it's likely well could such a settlement look like maybe not but you you'd have to look at other settlements that the SEC has entered into in other cases it probably be some sort of requirement of a rescission offer where the SEC would require kick to give people the ability to sell their tokens back to be required to register file reports I suspect given the fact that they made the SEC file lawsuit there probably be some sort of civil penalty that would be imposed so basically think of it as a fine they might also require disgorgement or

repayment of certain amount of profits to the SEC I mean given that you know it may be that the sanction is so onerous that to use it as a they don't survive if they settle in the terms that the SEC is requiring that may be an issue that needs to be you know that would have to be fleshed out and obviously it involves facts that I'm not privy to oh well thanks so much let's let's talk about another thing that you know this often discussed but highly confusing when it comes to the US the SCC's approach which is that they've said that you know ether

sail was basically security but now it's not the security and at some point this thing became another security and I think they use the term sufficiently decentralized at some point and now with cake as well right they're not saying that talking today is a security so it's kind of unclear whether they consider it to be a security today but I think it's been the kind of premise of all of these people using this after race that ok it's a security but then at some point it launches and it won't be security anymore so how do you think that's gonna play out like first of all do you think it day is gonna be this process of you know going from security not security and how are we gonna know when what is

what so I don't I don't think the SEC has ever squarely said in anything that is official that ether is or is not a security or that the token sale wasn't was not a securities offering there have been some I think they said like probably is something else there's have been some statements that have come close to that but I think they've been misinterpreted by by by certain people there's that you're the sufficiently decentralized business came out of speech by William Hendon last year I don't see any reason why something can't start as a security and then become not a security

I am I certainly think that is possible in the case of ether it doesn't to me look like it is a security at this moment in time as to whether or not the token sale was a securities offering I don't think that I'm not gonna a PI in on that maybe it was maybe it wasn't will be up to the SEC to decide if it's going to take any action within believe there'd be a five-year statute of limitations which is that's coming up pretty soon right now the thing about a statute of limitations of course is that can be told or that can be a state or prevented by by private agreement I

think that this sort of latest round of enforcement activity and some of the recent litigation makes it difficult for people building new platforms to sell tokens for things that do not yet exist the sort of bottom line it creates a layer of complexity that's difficult in the United States I don't know if that really answers your question but I guess I would say if you want to use a token like build a platform sell the token do you want to raise money raise money can you raise money by giving people a promise to receive tokens in the future

with the expo stations that the tokens may not be securities that's supposed to I mean talk to a good securities learn by good securities layer I mean somebody who will tell you if you're wrong which you don't want as somebody who's going to just bless what you're doing because you're paying them a lot of money you need to talk to somebody's willing to get fired for giving you candid advice I like my good friend Lewis Cohen who's actually somebody I'd recommend that people consult with if they're thinking about engaging one of these transactions he makes he made a really interesting point in that coin desk thing that we did last week and he's made it in on Twitter and I had conversations with him about this what he's pointed out is that in other jurisdictions token sales are

governed by you don't have securities regulators looking at them the laws that tend to apply our consumer protection laws and that's sort of an interesting model to think about if you're trying to find alternative ways to regulate these transactions or to ensure consumer protection in the United States so it's more of a policy issue than a what can I do now I guess what I would say is if you're selling to people tokens with a promise of future utility that is a securities issue that needs to be pinned down I don't I never liked the saft model it seemed confusing to me but I don't I don't do transactional

securities work so it's not it those are not things that I ever necessarily blessed but I certainly don't see any conceptual reason why something can't start as a security and become a non security that doesn't answer the question of what happens if let's say you sell us you sell a token that is an unregistered security it becomes a non security you still have liability for the unregistered securities offering that's sort of a fundamental existential question and problem and I don't know why anybody would want that you said that in other countries regulators are contained themselves move with consumer protection whereas the the

SEC is mostly concerned with investor protection yes do you think this is a distinction that should be removed do you think the Howey test is still applicable or sensible should it be replaced and if so by what because basically if you look at things that the regulator's let people do despite the fact that they are universally agreed to be bad for you and so for instance a go go take out a payday loan or something and that's that's not forbidden and it's heavily regulated but sure yeah yeah it's heavily regulated so you said that in other countries and regulators

concern themselves mostly with consumer protection as opposed to investor protection and like the SEC it does and where do you see the difference between the two that's an interesting question so if your focus is consumer protection you might not have the same sort of limitations on who is able to put their money into a project you might not have income requirements or sort of asset Holdings requirements you might focus more on avoidance of fraud as opposed to limiting who is able to participate in

the funding of projects now we do have a active consumer protection regulators in the United States both on the federal and state level so you've got the FTC on the federal level and on the state level you've got you've got state you've got similar regulators in gutt state attorneys general who who enforce unfair and deceptive practices laws so some of those actually include carve-outs for for securities for an investor investment claims I'm not sure if that answered your question but I guess the question would be like can you protect consumers by applying a framework that doesn't

require you to decide that a token is or is not a security I'd rather focus on sort of overall consumer protection now the I guess from the SEC perspective one of the ways that they achieve investor protection is by requiring not exactly transparency but disclosure right the reason why you have to file quarterly and annual reports for example or other reports with the SEC is so that your investors can understand what sort of the material facts about an enterprise and what risks are that are related to the investment I guess the question would be is there something better about doing that within the framework or

rubric of consumer protection laws as opposed to securities regulation so I guess what I'm getting at is there's many products that consumers can readily engage with sure that that are difficult to understand and may lose you money and people are still entitled to engaging with them so they can go to a payday loan service or they take take or people can take out a loan against their credit card and then can smoke cigarettes or you can smoke yeah exactly or you can smoke cigarettes whereas investing in securities is not only something that can be difficult to understand it can also be something that

is immensely lucrative so in a way it could actually be seen as locking people out right so the the answer might be look we don't want to lock people out we want to protect them against fraud and in order to in order to broaden the pool who can people who can participate you know maybe by putting twenty five dollars or a hundred dollars into a project we don't want to rigidly apply securities laws so we'll look to consumer protection laws instead I suppose that's a possibility for that sort of change to happen in the United States you're talking about years of lobbying and you know I mean sort of in the broad scheme and scale of history that's hardly an

impediment to change you know it may take a little bit while longer than people would prefer so one of the interesting things is of course to look at you know us also in the kind of broader context of you know the technological change in the regulatory landscape in the competition there we've seen a bunch of things recently including you know US exchanges like Beatrix on Polonius like D listing a lot of coins for Americans and finances shut down sure access and and some other ones at the same time we have a new decent trust exchanges that you know still at this point maybe usability and volume is pretty low but probably in a few years you know that would be real alternative

so how do you think the US regulators are going to deal with you know one the international pressure and competition and to you know just ways like the centralized exchanges to circumvent their rules I don't think the sec will care necessarily that offshore exchanges are freezing Americans out of the ability to buy certain tokens I just I don't think that that's anything they are particularly concerned about if there's a desire for American investors slash consumers to have access to other other sorts of

asset classes that's something that probably requires legislation or either a specific legislation or legislative pressure on agencies as far as decentralized exchanges so I went to this thing at the SEC it was sponsored by a fin hub it was almost three weeks ago now time flies and it's clear that they're grappling with decentralized exchanges one of the things that they asked a bunch of times they were asking questions about custody and things that suggested that they're they're thinking about how pure peer-to-peer exchange without sort of a custodial intermediary what that means and how that would work

within sort of the framework of existing US securities laws I thought that was interesting it's certainly something that they are aware of familiar with them thinking about but I will say that just because you call something a Dex doesn't mean that it is and we know that that's their view because they shut down in effect a Dex six months ago in the United States I can't remember the name of the exchange but just because you call it a Dex like if it's if it's the Dex in name only but there's really just a guy or a company in the middle they will view that as you know potentially I suppose a broker dealer but someone who is acting in an intermediary capacity sure that was ether they'll toe and I mean I the argument there was exactly

right that it okay it's sort of a Dex but not really that decentralized so there's still this guy we can go after and and that that's of course what you exactly expect but then there will be taxes that are not like that I mean I think already there are some like you know unit swap or like Dutch chicks that are you know pretty genuinely decentralized so they're matching engines basically so Eunice what basically has almost like a smart contract that you can kind of like trade with so it has kind of a reserve of assets and then it has always has a price and you can basically change one asset for the other but there's no order books there's no no kind of off

chain entity that has to like match trades and something like that so there's no no way to really shut that down no custody there's no custody but there's no cost either Delta also had no custody but Delta I think there was still third parties that matched trades and they order fee they had a centralized order book I mean this is also true for for unis WAP and truly decentralized exchanges they also take a take a fee but they neither have custody no maintain any sort of order book that matches trades with each other well the SEC is paying attention I mean that's probably the most maybe the most prescient insight you know if folks are working in this

space and they're doing anything that looks like they are helping either selling securities knowing something looks like a security or helping facilitate trade the trading of securities talk to a good securities lawyer as somebody who handles transactional securities work that's not an advertisement for me by the way I don't do transactional securities work but I call my buddy Lewis Cohen he's he's quite good and they're plenty of other lawyers out there to do that as well but I think the lesson is the lesson when I take away and the transactional side is just because it's new technology just because you call it a Dax or peer-to-peer it doesn't mean that sort of traditional securities laws don't apply it's a good idea to to to

ask and by the way just because you're doing something I'm watching doesn't mean that the regulator can't figure out who you are so there's another topic we wanted to talk with you and I think it's very interesting and novel topic and of course everyone's been paying attention it which is that Facebook is launching its coined now I mean it's been kind of known for a while but now there's details Libre and there are yeah interesting structure there and of course there will be interesting regulatory and legal issues so what's what's your take on Libre so I guess Facebook would probably say it's not really Facebook that's launching it but everybody the world seems to think that it is it was kind of their concept right

and they created an association I believe it's gonna be in Geneva right is where the Libre Association is Libre foundation you guys are in Switzerland right I'm from citzen and I actually am at in Sicily at the moment yes so like so like Geneva not Zog is interesting the other restaurants better in Geneva that's what I heard perhaps I mean to this tiny place probably yes I thought it was interesting that they used a Swiss foundation structure that I believe almost all of those countries are American apartment almost all the companies involved in a project are American so they're there to takes one is Facebook sees that there's something really useful about being able to use

money in app right in China by I haven't been my understanding is if you want to pay for something you've got to use so we chat I'll basically you can't it's it's difficult to use beyond so there's like a huge business opportunity by the same token no pun intended Facebook has to look at it and think you know if we try to launch our own money everybody is gonna come down on as hard we're gonna have huge regulatory risk how do we get these rails how do we get a payment rail and sort of cash within our app how do we get consumer acceptance without taking on all of that risk well let's get other people who are involved in the space including Visa and MasterCard

who've got relationships with merchants so they can socialize this with with merchants how do we create something that gets rid of some of our regulatory risk and also maximizes the ability to get people to accept this because I mean peer-to-peer micropayments one person another in app that is connected to money that you can actually use to buy stuff it's an incredibly powerful idea whatever you think of Facebook it is technology that makes sense and these are also whether or not you use Facebook whatever you think of the company or the companies involved it is a massively scalable stack that is international that is always on that billions of

people use it say and I don't think like one of the first things that happened was there was an immediate call for congressional hearings I understand in Europe there's been some governmental regulatory pushback as well I gotta believe that they saw this predicted it and are prepared for it I have no idea if it's gonna launch and be successful but these are companies that have a massive amount of money aren't scared of testifying in front of Congress and have a really powerful really powerful tech I don't and most people they can pointed this out in some tweets a couple of days ago most consumers don't really care

that these companies aren't looking out for them and abuse or use their data for profitable purpose so I think it's a mistake to understate the likelihood of their potential success I also believe that because they have an incredible amount of money they can work through some of the legal issues you've got money transmission issues you maybe have securities a lot of issues you've got consumer protection issues but you know they've got armies of lobbyists and lawyers and they've got companies that can like one of the key links is being able to socialize this technology with merchants and Facebook and visa man they can like having them involved is it's

pretty brilliant yeah for sure so I think it can't be understated how much money is behind this so if you look at Facebook alone Facebook's cash reserves exceed the etherium ecosystem by quite a lot so basically if you take the market cap of ether plus all tokens that live on top of ether that's still less then Facebook actually has in cash reserve so yeah so there's a lot of money behind this so what do you think is the motivation for Visa and MasterCard to partake in this because currently they take to the tune of two to three percent per transaction right so do you think that that will carry through to this global point global coin

model or do you think they they have just realized that they won't be able to bank on that forever I mean all they had to do is pay ten million bucks to involved and four companies of that size it's nothing they can find it in their sofa like it's it's just not it's not real money it's probably worth taking a look at it does seem like it does feel like the future the ability payments on Facebook why would you not be willing to take a look at that if your MasterCard or Visa and to experiment they also have had a you know MasterCard and Visa have had some litigation over payments and fees they believe there was just an

antitrust settlement in the last year for about six billion dollars by merchants against the MasterCard or Visa or both I don't recall so part of it is I'm just sort of conceptualizing the idea in my own mind part of it is can you create an offshore foundation that allows you to build rails you can monetize well at the same time laying off the regulatory and legal risk to that association so can you have your cake and eat it too I think that business problem for enterprises associated with public blockchain is you

don't have control over software development you don't know the quality of the data that is being incorporated into the block so if you're running a node you don't know what it is that you have so I've been curious about the willingness or ability of enterprises when they really think about the risk to participate in public blockchain ecosystem it's not a question of sort of the utility of bitcoin either by the way it's a question of how to Fortune 500 companies look at risk this is a way I understand it's also not strictly speaking necessarily a kind of a traditional blockchain data model I haven't dug into those technical details yet but this is sort of a way to if you think of Bitcoin is answering a question

how do we send money quickly or maybe aetherium how do we how do we how do we create sort of programmable money if you think about sort of generically the question of how do we send money quickly over borders without significant fee it sort of answers that question and you know the ability to do that within whatsapp is I mean it's massive having a wallet that is a cash equivalent that doesn't have any exchange rate risk you know if you can do that it's a huge win I don't know about the antitrust scrutiny or a competition scrutiny that this will face by regulators but if you

can thread that needle it's a huge win if not I mean you know the the financial and the investment at this point is is immaterial to the folks who are involved I don't necessarily buy the that sort of meme of we want to bank the unbanked I think it's a if you want to be cynical it's a sort of it's a cynical cynical use of a meme for profit taking companies maybe that's what they really want to do but you know a lot of the unbanked don't actually have money to begin with so I guess the question is does this provide that is creating this unit of exchange I'll make it easier for people to make money doing certain things maybe absolutely I think you would be interesting to see yeah to see

kind of what their regulatory issues that brings up and how does also a contrast with you know pure blockchain projects because probably they will be quite different thanks so much for for joining us a day it was great my pleasure enjoy it yeah to dive into things and yeah Villopoto to keep following you work and of course this is a topic that will keep on giving and I'm sure would be still still speaking about it three years from now as well so it's good speak to you in three years time Steven all right 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

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