Assessing Risk Regulators Innovators Jeff Roberts Miller Whitehouse-Levine Tung Chan Lizandro Pieper

one we're here to talk about risks and regulation all that good stuff uh if you build a crypto product will you get sued will the government sue the crypto industry into Oblivion uh stay tuned to find out uh we're very lucky to have with us a couple very smart people on this topic I'm going to let them introduce themselves we have a regulator and an advocate um tongue if you can just tell us who you are and what you do sure hi my name is Tung Chan and I am the Colorado Securities commissioner for the state of Colorado I started with crypto many years ago in 2015 when I was the general counsel for the ethereum foundation and I'm really happy to be here and I'm looking forward to your questions Jeff and the questions of the audience my name is Miller White House Levine I work at the Deep high education fund we do research advocacy Outreach around D5 policy issues generally focused right out the federal level in the United States do a little bit on the state level and internationally yeah since this is the D5 stage you're probably gonna go pretty deep on that stuff tornado cash and custody and all that good stuff but um first just painting a broader picture um you all have probably heard of this Gary Gensler guy yeah three cheers for Greg answer no okay but but also Gary gesture is not the only regulator out of there so um Tom can you sort of explain your role there's also state regulatory bodies or csec so how do you guys all play together that's a really good question so we have confirmed jurisdiction with the SEC for matters in Colorado our our focus is the investors in Colorado coloradans and the enforcing the laws uh set by the Colorado legislature so we have three sections we do enforcement for anti-fraud and we also have investor education and then we have examinations of the industry so if you're already a firm or you work for a firm uh you've probably been subject to our exams those are the three areas God shiver helpful and um Miller just go to you because you're the DC guy what is the deal with Gary Gensler right now I don't know that is uh the million dollar question I feel like I've spent days trying to psychoanalyze them I think that you know at the at the end of the day I think that he is uh a politician and it is politically profitable for him to be anti crypto right now and to kind of bring a sledgehammer to the industry um but that is pure speculation I wish I could understand his motivations but uh I don't um you know I will say it's possible crypto Twitter it's just a wee bit bias in some things but um you know tongue do you think like people are complaining about um regulation by enforcement or people are like you know it's sort of like the SEC has been like you know guess the rules and if you if you break them then I'm going to sue you and I think the industry has complained perhaps legitimately that this is not a fair way to go about things but I mean you've worked as a regulator is that critique a fair one I think regulation by enforcement in the crypto area is one that is a very uh is a very hot topic and I I think that regulation let's stop by the definition of what regulation by enforcement is in my view regulation by enforcement means that there are issues that are ambiguous or maybe even not defined maybe not even ambiguous maybe even further out like fully undefined and then The Regulators decide to take action without passing a rule or passing laws that set out with certainty how things are going to be determined so that is that's regulation by enforcement now that doesn't mean regulation enforcement doesn't mean um I don't like being enforced against and that sucks regulation by enforcement is very specific in that there probably should be a statute or Rule and uh and then because there isn't one uh Regulators take action and I personally do not uh do not support that pretty much against it I really think that the public deserves to know what the rules and the statutes are and then then they know what you know that's the deal right you know this is the rule this is a statute and then we're going to enforce if you break that rule and I think most people want that enforcement because if it happens against them they want to be like hey somebody stole my mom's retirement you know I I want you to enforce so that that that part of enforcement is really important I think regulation by enforcement is is a really um Hot Topic with regulators and one that I actually do not support now that said that doesn't mean that under the Howie test you know because you're not sure how it applies that's regulation by enforcement that's not there's still a test and you should try to apply it but in there are cases and I think in the D5 World um you can get all the way to the D5 end where there's no human involved it's just a protocol and then you know there can be questions that right now statutes and rules do not answer yeah and I we haven't you know knock on wood gotten to the point where there's Mass regulation by enforcement and defy yet uh we'll see what that looks like I'm sure it's coming uh but I do think that you know I do think that to a large extent the SEC has uh uh embarked on that approach to crypto I think you know they've never issued a rule making on digital assets folks go in ask the divisions how to register the division say we don't know uh which means you know good luck make it happen uh we'll probably come back with a Wells notice to threaten to sue you um and you know I think that Gary Gary gensler's uh favorite motto is to come in and register you know he's always talking come in and register it'll be very simple just fill out the form on the website and what they don't say is that coming into register means shut down because our rules don't Envision blockchain-based assets uh Kraken being a perfect example the first time the SEC has ever said anything on staking was via an enforcement action against Kraken a settlement so didn't flesh out the law such that it would be clarifying in litigation and the remedy was to shut down the products completely I don't think that's a good outcome for the capital markets or for consumers um and I I hope we pivot I think another great example of it is uh the Hinman speech which was in 2018 uh at SEC official laid out this idea that a protocol can become sufficiently decentralized such that it's no longer potentially treated as a security under the Securities laws Gary Gensler you know who was CH not chair at the time uh has cut has refuses to even say the term sufficient decentralization uh Senator Toomey last year in Congress pressed him on that issue um and he wouldn't uh explain what it meant or even say it because I don't think the SEC has a clear idea what's going on in the space either uh so it's it's unfortunate because all the ambiguity means you don't know whether you're uh uh on which side of the line to the extent the line exists and that gives uh uh the SEC almost Limitless um ability to enforce against anyone and that's uh that's not the way the rule of law is supposed to work um well since we're at East Denver I think ethereum is near and dear to people's hearts here it seemed a year ago that ethereum was in the clear Bitcoin is clearly not a security it seemed ethereum was not but now again starts making noises that maybe ethereum is a security which I would obviously be you know chaotic expensive a mess um you know tongue is there a chance that ethereum is declared a security and if so what happens I think the answer to that is that we should be watching the space uh regarding the Ripple case so you know what there's been some talk rumors that there would be a settlement my guess is that there will not be a settlement and this will go through to a or to a conclusion where the courts will give some resolution so I think that's the that's the place to watch because Ripple actively made an argument that said we are like ethereum so now the Miller spoke about the Hinman uh the Hinman Convent but that's not statute of rule we know that right Hinman said he's not speaking on behalf of the SEC so there is the Hinman comment that's at ethereum um the ethers are not at this point in time when he said it in 2018 are not Securities um will the SEC uh stand by hinman's comment you know they don't have to right yeah they don't have to and I'm glad you brought up the Ripple case because the hidden speeches are an interesting element of that depending on when uh which stage during the Ripple litigation you asked whether it was SEC policy or not the SEC was flip-flopping in order to avoid the 68 drafts of this speech from being uh entered into the uh record and potentially released publicly I would love to see those drafts for a variety of reasons I think you know if there are 68 speech drafts around this uh this non-policy statement you know it might not be as clear as uh Gary gensler's duck test um I know there's not a a lot of love for ripple out there but I mean they are kind of taking one for the team by pursuing this um but what happens if they lose or hey let me put it this way what are their chances of winning and I know lawyers always like to dodge these questions by saying it depends but is it 10 is it 30 70 you can go first Miller and then just in 10 words or less I'm not a lawyer so I can speculate all I want uh yeah I mean I think that I I am less hopeful uh at the current stage of litigation than I would be on appeal uh either at circuit court or the Supreme Court well first of all I would say uh that I don't know that Ripple's taking one for the team what happened was the SEC filed an action against them so they they were responding but what they did was in their response they dragged ethereum down with them they said if we're going down they're coming with us now what will happen in this order I don't think we have a lot of visibility important things will be determined and one of them will be whether or not the court makes actively makes a a distinction between ethereum and ripple and that should be something that I think anyone interested in ethereum should be watching for what is the case that what is the chances that they do that I I actually have zero visibility but that's a really important point with that Ripple case will Ripple actively said we're gonna our argument is if we're Securities ethereum is a security so if you take us down you have to take down the whole ethereum ecosystem and I think knowing how federal judiciaries work I think they're going to try to take a narrower more precise more us more surgical approach that's my guess but what will they say I think they'll they may try to find some distance between that and and that's why we're all watching that space really closely Jeff I also think like the important thing to remember here as to why this whole question around whether an asset is a security or not is because if you are deemed to be a security uh and a court rules in the sec's favor the resolution is to shut down and that you know that makes it existential for all intents and purposes and I think that there should be a path to compliance that is not uh shut down um well let's take a um I'm trying to pick up entity well let's take coinbase for instance or um I think I think coinbase tried to issue a coin right and if that didn't work the the business would not be shut down because their main business is exchange right so you're only talking about if the coin is a security and you haven't regulated and they give you and you have to do rescission or a fine that is too expensive for you to pay or you can't get regulated then that would yes de facto mean that your business would go under but if that's part of your business and you have another function that is not a Securities related you know you wouldn't you wouldn't be shut down yeah I hear you I hear yeah I think like my my counter question would be where is the regulated compliant digital asset security Market in this country the institutions have such interest in getting involved in this or at least they did before last year and uh one would think if that were a viable path uh people would be taking advantage of it um we have about uh eight minutes left so I want to get in some defy a couple really interesting cases out there including against tornado cash you know which is a mixer of sorts and I think what they're saying is yo I just made some code this is open source code why am I sort of you know breaking the law by putting my code out there um you know and Somerset encoded speech you know why are you clamping down on me I'm just writing software code um do you buy that argument um I think the big question I think this is a really good point I think the big question if you if you step back further is who is going to be responsible for something when it goes wrong right that's a simple that's a simple reason why we have Securities laws right we want to make sure it's fair when you or your your aunt or your uncle your father your mother they buy something they get they get all the information they know before they buy that's part of the Securities Law and then the second thing is that if something is go goes wrong like FTX like we want to find somebody to hold accountable now the question is when you go to something that's truly D5 like you were saying purely a protocol there's nobody running it anymore do you go back to the developers and say you guys are responsible even though you're not running it and you weren't even the ones who launched it do you go to the person who actually launched it you know so those are questions um I think making those people responsible when they don't have a direct Nexus to what's happening to me seems unfair you know there can be a lot of other facts and circumstances around it but that is where I think when you get true defy where there's literally nobody hiring a lawyer to protect it nobody buying ads for it nobody just making any kind of decisions about it it's just a protocol that runs and then something goes wrong who do we hold responsible is the big question and I think right now we don't have a this is the area where we don't have a clear answer not to be fair and to be clear there are a whole bunch of areas where people are shouting that there's no answers and there really are right like any kind of intermediary could be held responsible that is not what we're talking about but when you take something way way truly just a protocol who is responsible I think is the question and whether Society feels like we should find somebody responsible I mean if it's you who lost your life savings if it's someone you love who lost their love savings on one of these protocols where would you feel we should go to feel Justice right that's the question we don't want people homeless because they put all their money into a protocol and lost it and have nowhere to go so that that's where and I think this is where Miller's organization comes in because you're talking about truly defy protocols right where there's no intermediate yeah and I think I think that's the unique aspect of the tornado cash uh Nation they didn't go after the developers at least domestically about Alexi's been in jail in Amsterdam for nine months without charges we don't know if that's unrelated or not uh but it's a perfect example of a protocol that uh is going to be functioning on the ethereum blockchain as long as the ethereum blockchain is in operation um and I think you know the unique thing about ofac's answer to that question you know how do you still a nofax mind accomplish their policy objectives their answer was to impose liability on every U.S person uh by making it criminal for them to use the tornado cast smart contracts uh that is an answer um but but not one I support well let's talk about another protocol we know well uh uniswap um you know that's also decentralized it's just code right at the same time there's this guy named Tatum Adams who is you know running a company making money off it and stuff like that so you know Stone was Raising like something goes wrong you know can we just go and grab Hayden and say okay you did it or what's how does that shake out yeah I I mean I think that one could I don't think it would accomplish the policy objective of uh whatever you're trying to accomplish because for the same reason that tornado cash is gonna work Forever on the ethereum blockchain so we'll unit swap um so I think it's a it's a question of uh how do you go about accomplishing your policy objectives in a new way uh it's oh it's a it's a separate question in a lot of ways yeah I hate it could disappear but I'll still use the unit Swap and we'll still have the same problems uh that we did before I don't know so is Hayden in trouble or not if something goes wrong at uniswap is Hayden in trouble or not if something goes wrong at uniswap I mean that's the question we actually I've actually heard people say you know what it should be it should be somebody the the coder it should be it should be the person who actually launched the protocol um I think there isn't uh I mean I don't I don't think there's an answer right now we would it because it's because we don't ultimately law goes to a feeling of justice and I think it right now we don't know how we would feel about Hayden being the one who's responsible if something goes wrong with uniswap I don't know where that where the Justice lies in that right now because he's not directly doing it right so um the Nexus isn't close enough for us to be really firm on it so the answer is I don't really know let's um switch a bit and talk about staking I know you we alluded to it earlier with Kraken but you know staking I think there's a lot of people are investing in it's supposed to be the kind of turbocharged industry going forward but with the recent regulatory actions is is staking now in trouble well I think this is where uh Miller and I may disagree ing circumstances right so I'm gonna say with like oh I also have to say that I am speaking on my behalf and I'm not speaking on behalf of the state of Colorado in any of this on any of these comments but I would say that um staking many many examples of staking all pretty squarely within a Howie test so I'm not all of them and so the ones that do are obviously going to find themselves uh struggling more with Regulators than the ones who don't what about like Lido and Rocket pool do they fall squarely in that category I'm I'm not going to make it as an assessment on that yeah I think the the answer to your question Jeff is we don't know which is my uh beef with the SEC there is a one-off enforcement action against Kraken the details of what they were doing are not fleshed out and so any model beyond what Kraken was doing we don't know the answer the SEC could have uh it have released something at the same time saying if you are providing staking to third parties like as a service if you need to disclose X Y and Z and uh you know in Gary's terms fill out the form online and you'll be good to go uh they declined to do that uh we only have about a minute left but I'd like to you guys to take us into the future it's two years from now already Denver 2025. um you know what is the regulatory landscape look like um you know I know you can't predict the future but best guess is this going to get clarity and what will that Clarity look like you can go first time this is what I do think we're going to get more clarity I think what's interesting is that in the American system you know we have the three branches of government and one of them is Congress and I think that the political will currently has shifted dramatically because of Celsius Voyager FTX right um in addition to the shift in the political will I think it's also brought urgency at a different level and I think because of those elements my guess is that we would get more clarity maybe in the next three to five years maybe two years but I think that where we would be looking at more clarity just because uh you're seeing what I think Regulators probably are predicted which is that these new intermediaries like FTX Voyager uh coinbase all these these new intermediaries they're still intermediaries they're just new players like in the old you know traditional model the players were Fidelity or Goldman now you have these other intermediators um and you're seeing that they are failing in different ways and so I think that the I think just the money amount and just the fact that it's causing so many people really a lot of pain uh brings urgency to the pill to the political um Arena yeah uh I think that in two years the world will probably look pretty similar to what it does today but I am I am always hopeful forever hopeful uh that's why I'm in crypto policy um I think you know the the I agree with the with everything you said about this new urgency in Congress I I think the problem right now is that the range of uh what policy makers in Congress view to be the appropriate response is vast and uh difficult to find consensus around so on the one end of the spectrum you have uh for example Senators Warren and brown who want to ban it off and that is uh the new urgent task uh that they took from last year and then on the other end of the spectrum you've got folks like uh Patrick McHenry the chair of house Financial Services who believes that crypto blockchain Etc is going to have a major part to play in the future of financial markets in this country I don't know how you square that Circle uh I guess that's that's what Congress is for uh but I think it'll take a while and it's uh notwithstanding that Congress you know is is Passion this out uh chair Gensler is is not going to wait for Congress and so I think that is uh probably gonna be the the name of the game over the next two years okay it sounds like we'll have to do this again in two years unfortunately but in the meantime and please give it up to our panel for an interesting discussion thanks so much Jeff thanks everyone