Legal Issues Surrounding Blockchain and Cryptocurrency - Robin Nunn

Good morning all. Uhm, we're a little behind schedule, but I'll keep to the time so we can get started soon. Um, my name is Robin Nunn. I am a lawyer. I work at a law firm called Morgan Lewis.

I am the vice chairman of the banking industry group and an active member of the digital assets team . I am very happy to be with you all today. First of all, thanks to ETHDenver for inviting me to speak on this interesting topic. Hmm, this is an issue I'm very interested in. Um, and while I thoroughly enjoyed this conference and hanging out late into the night in Denver last night, I'm pleased to be here with you this morning to discuss the legal issues surrounding cryptocurrency and blockchain.

An issue that is currently really in the spotlight in the crypto world. I'm originally from the DC area. I'm a DC native. Hmm, and living very close to Capitol Hill. And this is the main topic of today.

As you may have heard, the Biden administration is expected to soon release executive orders regarding the environment and regulatory enforcement framework. Well, the word is that the order will be coming out next week, and you all should pay attention to what it says, because it will have a huge impact on this industry and will greatly impact the US economy in ways that no one can possibly imagine. We're clearly seeing the world transform around cryptocurrencies and starting to move in this space, and the US is trying to figure out how to treat these financial assets. So, I have a very short time and a lot of slides to cover. So, I'll jump right into the presentation material.

Uhm, if for some reason I didn't cover anything you wanted to discuss, please stop me. I was here all weekend and my contact information was easily found on the internet. So, first of all, I will try to cover five topics today. Not four, not three, but five. The first is whether cryptocurrencies are legal?

Next is how are cryptocurrencies regulated? Next, who are the regulators? So next, are there any significant legislative initiatives in the market today? And finally, how successful has the regulation been so far? So, we move on to the first slide here and I want to build on the foundation.

First of all, we all understand that cryptocurrencies and digital assets are not all the same. There's a nuance to it . There are stablecoins, there are CBDCs. So, if you feel like you're looking for cryptocurrency regulation, make sure that's the asset you're actually using because there are differences and nuances using because there are differences and nuances . Again, I have 15 minutes, can't go through the whole list, but make sure you know what asset class you're using.

Next slide you're using. Next slide . Once you know that, you should really ask yourself how are cryptocurrencies and digital assets regulated in the US? And unfortunately, it's one of those complicated legal issues, the answer is it depends. There are a lot of ifs, there are a lot of ands, and there are a lot of buts.

But you basically need to understand what type of entity is using that cryptocurrency and what do you want to do with it? So, whether you are a swap fund, broker dealer, bank, or whatever, you need to know who you are and where you fit within the US legal framework and regulatory regime. And you need to know what you're doing with it. Did you save it? Do you sell it?

Did you buy it? What do you really want to do? Next slide. There have been several important legal cases in the US that have discussed extensively what cryptocurrencies are and which regulatory bodies actually have the authority to provide opinions. These are two of his big decisions.

They discussed whether cryptocurrencies are commodities. They discussed whether cryptocurrencies are securities and therefore regulated by the SEC securities and therefore regulated by the SEC . When we asked the first question I started with at the beginning of the session, is this legal? I saw some smiles and laughs because of course you can go buy a coffee and use Bitcoin or another cryptocurrency if you want and that's fine. But there is a list of activities you are not allowed to do under the US legal framework do under the US legal framework .

And some of it is obvious, you shouldn't blackmail people. You should not try to get large amounts of money from other people. It's illegal and you definitely shouldn't do it. However, there is a grey area that is starting to emerge as popularity increases, namely what exactly is this? Is this a security?

Is this a commodity? And there are many legal exams, legal oversights, and jurisprudence like this that point you to what it really is. Next slide. So, the next question is, how is this regulated? And this is a long list of many regulators who have put themselves forward to be the main regulator of cryptocurrencies .

As I mentioned earlier this hour, the Biden administration is scheduled to release guidance next week, an executive order, that will address a bit about how these regulatory agencies should work together and hopefully harmoniously develop a framework where we can all better understand how crypto should be used and properly regulated. I'm sure you've all seen Gary Gensler at the SEC giving statements. As I'm sure you've seen, Chairman Roizman recently held a CFTC hearing. Of course, the prudent bank regulators are there with the OCC, the Fed, the FDIC, the FBI with its criminal enforcement and its extensive cyber privacy regulatory work, as well as the good old IRS. I know we all know the tax deadline is approaching, but there has recently been some guidance issued from the Biden administration that you do need to pay taxes on this.

So need to pay taxes on this. So , all these parties are involved and this is at the federal level. Next slide. By now, I'm sure you've heard about this patchwork of regulations. That happens when we talk generally about states because each state has different laws, unfortunately, and we have a lot of states in the US.

So, it's not just the states, but you also have to think about self-regulatory organizations like FINRA, which wasn't on the previous slide. So, there's a lot going on. So, needless to say on. So, needless to say , there are some states that are very crypto-friendly, so to speak, and there are other states that are very much like, “I don’t know about this.” So, you have to know where you stand and who you are playing with in the sandbox, relatively speaking.

You know, there are some states like New York that have issued bit licenses and they give out charters. And then there are other states like Hawaii that are like, you know, please don't come here with that. So, you really have to understand where you are because it makes a difference considering we have federal and state regulations in the US. Next slide. CFTC.

So, I mentioned at the beginning of the meeting that Roy E. Zuckerman, the chairman, is stepping down and will be replaced, but he has provided some thoughts and statements about how the CFTC wants to be involved in this. And you can see from the slide behind me that there have been a number of guidances, as well as enforcement orders from the CFTC that have come out in the last few years regarding their view that there are parties who are recklessly sending cryptocurrencies. So, you need to be careful because they're putting out a lot of advisory guidance, a lot of interpretive guidance, but they're also starting to take decisive action. And this is the CFTC, perhaps not a regulator you hear about often, but it is definitely one that plays a role in this area.

Next slide. There are many more. I want to say that was one slide for the CFTC, but I have three slides for the CFTC but I have three slides for the CFTC , because they've hit us with some very high-profile decisions like the Kraken enforcement action , as well as, you know, there were 12, I think, digital asset trading platforms that were hit with registration failure allegations , something that I'm sure many of us didn't even know existed before 2021. BitMEX is a big enforcement action , and this is not a trivial matter. This is not just a parking ticket.

We're not talking 30 dollars here. We're talking hundreds of thousands to millions of dollars. So, we need to take note of this. And unfortunately, the rules haven't caught up. It is through these law enforcement actions that we learn what their expectations are.

Now, whether you feel that's right or wrong, we can debate that, but that's just how it is . So, you need to, whether you like law or not need to, whether you like law or not , I like law, but you need to pay attention to it and, you know, start to dig into it. Next slide. And this goes back to what I was talking about earlier about testimony. I suggest checking out and viewing some of the Senate testimony online.

Many of them are discussing cryptocurrencies nowadays. Many of them discuss digital assets. Many of them discuss stablecoins or CBDCs. Again, they are very, very, very focused on this and Behnam is clearly pleading for the CFTC to be involved in the cryptocurrency regulatory regime. Next slide.

That brings us to FinCEN. I'm sure you've all heard about AML, money laundering, and various sanctions. When I first started, I worked in-house at a couple of companies, American Express and Capital One, and I used to manage their money transmitter licenses. And that's all we really knew at the time. MTL, go to this state, visit that site, apply for a license, and you're done.

Things have gotten a little more complicated since then, but this is the organization that has really been involved for quite some time regarding anti-money laundering. Cryptocurrencies were initially considered something somewhat evil and for bad people trying to do bad things. So do bad things. So , FinCEN is the regulator of choice in that area and that's what you really hear a lot about. Now that has obviously changed a bit, but FinCEN is still someone you should pay close attention to because they still manage to do quite a bit of enforcement.

I won't name them if they're in the room , but you know, someone's been having a bit of trouble here. Next slide. Next, OFAC. It's a bit like FinCEN, another very serious regulator that's concerned with compliance obligations and making sure that you're facilitating honest and proper financial transactions with legitimate entities and people, and of course with countries that we're allowed to have relationships with and all that sort of thing. You may have heard the term KYC, as in know your client.

So, the hope is, even though a lot of things here are anonymous, volatile, and so on. There is still hope that you will know who you are doing business with and whether or not you do so. If you are a security, that puts you under SEC oversight. So, there are quite a few parties that are signing up to be allowed to get more involved with the SEC, but there are also those that don't want to get involved, and you really need to know whether the activities and entities you create are compliant with SEC rules, because they are watching this sector very closely. Next slide.

With that said, we move on to all the important cases and all the enforcement actions. Obviously, everyone probably remembers Ripple, Kik, and Telegram probably remembers Ripple, Kik, and Telegram . There have been some pretty major breaches discovered in recent years related to how they offer and sell digital assets. They are certainly not bad people digital assets. They are certainly not bad people , but these are things we can learn from and take lessons from that may not be immediately obvious in the rules and regulations.

In my opinion, the US has not done a very good job of spelling out exactly what you can and cannot do. I think that's something they're working on, but right now, it's not the reality. So, these enforcement actions, violations, and decisions they issue, I suggest you study and think about what the similarities and differences are between your business and those cases your business and those cases . Um, I'm pretty sure after working with some of these entities that they think they're doing the right thing, as we all do, but unfortunately, you can easily slip up in the current environment, the current regulatory environment. Um so, you really have to be careful.

Um one of the things I should have said at the beginning is one of the reasons why I love this field is because I'm really passionate about helping the underbanked. Um, this is a personal passion of mine, and I really enjoy working with crypto clients because I feel like we're creating financial inclusion for everyone, not just a certain segment of the population. Um, but there are rules and there are regulators, and while they're adjusting and figuring things out, we have to stay within the boundaries , and these kinds of decisions help us know where those boundaries are. Next slide. Um so, you may remember Commissioner Peirce.

They discussed safe harbor for digital tokens. The safe harbor will provide a three-year grace period to network developers to facilitate participation in network development by exempting certain actions. Um this has been released, and this is something you should consider to see if you can adapt to the framework. Um there's also a lot I mentioned that I'm from the DC area, so I love politics. Um, and there are a number of politicians who are also starting to get involved and trying to release draft laws and legislation that would help the concept of a regulatory sandbox designed to promote digital asset transactions.

So, there are a number of friendly political representatives in this area and they are trying to find ways to stay safe and healthy, but also encourage innovation. Next slide. Other concepts worth noting. I mentioned Gary Gensler, um our SEC chairman. Um, he's been making a lot of statements.

I think he even called it the Wild West. Um, but I think his comments to the House, to the Senate Banking Committee, and the like, all focused on the same thing: just wanting to make sure that cryptocurrencies are properly guided and regulated , and that there's proper oversight of crypto asset platforms and legislative authority to meet those requirements. So, it's safe to say ProShares Advisors has started offering the ProShares Advisor ETF because the SEC has not raised any objections, and there are several others coming up that are also under review by the SEC. However, we already have our first Bitcoin ETF and, hopefully, there will be more to come. Furthermore.

So, we come to my last two slides and after that I'll turn the stage over to someone else, Um, but I want to address my last point which is whether there are any significant legislative initiatives underway. And the answer is, yes. Um, it goes without saying that there's a lot going on. Um, in all directions. Um, not just on cryptocurrencies, but on CBDCs, on bank crypto assets but on CBDCs, on bank crypto assets , on, you know, prudential bank crypto regulation with all the bank regulators coming together, um, simultaneously.

Next slide. You may have heard of the Infrastructure Investment and Jobs Act. That's what I mentioned earlier where your taxes um, how the IRS is now more involved by requiring digital asset brokers to report to the IRS um, their transactions and how much they're worth. Um, so that's just, you know, one example, um, but there's a lot of things that are going in this direction. Next slide.

Um, you may have heard of the President's Working Group or what is often called the PWG. They issued a report on stablecoin regulation. The CFPB has also responded to the report. There was a hearing regarding the PWG report. There are a lot of dynamics right now regarding how all these digital assets will be regulated.

And as I said, wait for next week. We should see something from President Biden with an executive order that will provide further clarity. I was hoping it would come out before this talk, but unfortunately not, but we can discuss it next year, hopefully. And thank you again for your time and attention. I really enjoyed it.

Meet me at the conference later. See you.