Bufficorns & Regulators: Fireside Chat w/ Tung Chan (Colorado) and Russell Castagnaro (Colorado)

you think it's okay that a regulator happens to have a buff aorn on her lap I think that's totally reasonable don't you great well um Tong thanks for giving me the opportunity to talk to you it's a pleasure to be here um I uh I wanted to ask you just because of the crowd and the the the way things are going uh nfts so um from a regulator's perspective can you uh can you give us any interesting tidbits on your thoughts on nfts yeah so if you guys are working with nfts or you want to start working with nfts there are some things you want to think about um nfts are non-f fungible tokens but for Securities Regulators we really look into whether they actually are funable and the other issue that uh folks need to think about are whether or not you're going to you somehow have them fractionalized so if you have them fractionalized you can run into regulatory problems but definitely The Regulators are really interested in NF chees right now and it's definitely on the top of the list cool so be careful when you meant those nfts guys um so one really cool thing that you may well I guess you know now but but uh that t you worked for the ethereum foundation or you worked with them right and uh so how did it feel to be on the opposite side of regulators but also viewed as a valuable contributor to The Regulators at the same time uh so I did okay oh sorry uh so as the general first general councel for the ethereum foundation I was there in the early days and it was really exciting um because you know like with any startup especially ones um actually with any startups you don't know where they're going to go I think there was always a vision by the um by the tech leadership but it's amazing to see where it is now and when I think back I think that um you know a lot of the issues that we were dealing with here now um are similar to uh ones that were percolating right at the beginning yeah very cool the uh you know something that I'm very interested in because the color you know the Colorado um jam in um incubator and the Dow associated with it um and a lot of people here are very interested since ethereum is basically funded by a da um what are your you know from a regulator's p perspective how do you look at Dows that's different from other sorts of organizations and other sorts of ways of doing business yeah so right now we're looking at uh a lot of these daos or Dow starting up I think historically if you are doing this kind of work you should make sure you you read the opinion of the SEC from 2017 about the um first generation da and how they actually did find that that da was not uh decentralized enough to uh get around the howi test so if you if you're doing da Dow work that's something to think about and I know this later generation of D Dows are are more decentralized but the thing to think about if you're if you're serious about building building something out and you are concerned about regulations and you're the thing to think about is that Regulators are thinking about two primary things one is um disclosure so part of the Securities Market the way the US market works is disclosure that is like explaining the material risks to anybody investing um the second thing is accountability so if you're doing something decentralized and you want it to pass regulatory um you know through the regulatory scope you need to be able to speak to Regulators about who's going to be accountable if things go south and I know you know innovators don't like to think about things going south but Regulators do and so those are the two things that would be the same things anybody working on a dow would really should be thinking about so so basically somebody to go to in case you have issues right in case legal service those kinds of things yeah that's right that makes sense you don't want to just send your send send your funds or send your your whatever your work into one and have it just disappear the next day that's right um so I mean one thing to think about is that um regulators and innovators both have really important roles in society I mean speaking to you guys you know innovators are pushing the envelope that's what you guys do and it's important it's like you guys are race cars you know and um Regulators on the other hand are not pushing the envelope their job is to protect the regular people who are investing like your uncle or your mom or your you know or your kid who doesn't you know who doesn't have the money to lose but they're interested in being a part of it and so they put their money in so Regulators are thinking like that and I think that um the industry is only going to flourish if there's some way that regulators and innovators can work together great well you know one thing that um I found very frustrating over the years and I think many people here do is that not just Regulators but a lot of people don't under they think all all crypto all blockchain is crypto and all tokens are crypto and and they don't like crypto so they don't like blockchain they don't like anything about anything that has to do with it um so what can we do to to gently help those folks who who have that kind of view of the blockchain ecosystem what can we do to help them along it's the thing that helps the most is use cases if you have use cases that you can show are valuable and work without um really Without Really creating too much risk for investors then you you that's really really helpful um I was at a regulator conference recently and those were the kind of questions that came up like is this just a big fraud and it's like no there's so many valuable uh uses and that's one way to help uh move the conversation along one thing that's really odd with crypto is like when you talk about oil and gas scams with Regulators they understand that the oil and gas the oil and gas Community is a real one and then there are scams in it but when you talk about crypto scams sometimes people just think it's just all crypto scams and what what we want to do is move that to the same way of thinking about it as oil and gas or any other legitimate um legitimate Market that also has this element to it so I think that's one way of speaking about it to to emphasize that you know there is this legitimacy uh valuable use cases um but also there is a scam El there are other um unscrupulous unscrupulous people taking advantage of the excitement around this industry so that's fascinating so it's actually the the the anonymous aspect of it right the I mean it's even in the name for AAL right but but that that there's not that they they know that oil and gas that they're those scams but since they know that they're legit but scamming Enterprises or businesses or whatever right that somehow they have a way to to um to enforce when there's something against them right I think in in in the general Public's mind they can separate that out and within the regulator's mind they can separate out that there are legitimate products and then there are uh fraudsters but with the crypto industry you know it's been harder I think there are two reasons for that one is because crypto is harder for um non-technical people to understand and so there's a fear element that makes them lump it together and I think think the second element is that um there there has been so many uh different uh different PE unscrupulous people taking advantage of the excitement around it bit connect no sorry yeah but uh you know that is um there there are so many different ways that I want to go with that actually we'll Skip and we'll go to something that I think is something that most people don't know you have had a pretty remarkable career um both in government and in blockchain and I'm interested in find when did you first start thinking about blockchain and thinking oh it's not all magical internet money and I want to be a part of this I think that's I think that's a really A funny question personally because I think the first time I started really thinking about block trade was when I was talking to you in like 2012 I think I'd read an article in the world Wall Street Journal about arms dealers using blockchain and and I thought oh God this is this is not this is like something like it's not going to go away you know when you when you think of so many um so much money and so many uh things moving with it um so I think it was like 2012 probably then yeah we we've worked together quite a bit in Hawaii when she was the commissioner of of uh of Securities there and I uh ran the uh um the internet portal for the state so we go back away ways but then what was it was like two years before you went on or three years three years before I be I started working with ethereum yeah ethereum and then and you've also advised um startups and and things like that also right I've advised a lot of um startups uh a lot of blockchain startups yeah that's true in private practice and how like when you're when you're invis advising startups and blockchain groups trying to trying to get into it what do you think like as what is your role primarily now I know she advised me so I I have some personal understanding that but I'm interested the other ones too well look if if you have if you have a lawyer who's helping you I think their first role is to keep you to keep you safe enough so that the business can continue you know that's got to be right up there um I think uh and that's difficult because uh innovators like I said want to push that's your nature right you want to push um and and you're lawyer is not a regulator but their job is to keep you out of prison and keep your business going um so I think that's probably the number one one of the number one roles that you have um but I I've seen a lot of them and I know you wanted to know like what are the commonalities that you that I've seen in successful startups and I would say as a lawyer um you know I have a different perspective than the innovator but I'm the first thing in a field like this is you really need to know your Tech I think you guys know that like this is not an area where you can fudge it you need to know your Tech and then the second thing is I think you have to be able to take a hit and pop back up and um and then the third is just luck you know it's it's luck um so I've I've advised a bunch of them and some have done fairly well and ethereum is this incredibly successful one and it's I think they had all three elements obviously italic and his team really know their stuff um they they could take a punch you know there things didn't always go smoothly and they could just pop back up and they had a lot of luck the right time the right place the right idea great so I know with me it was like Russell I just don't want you to go to federal prison that was a that was a lot of it like let's let's keep you out of jail Russell that's really important yeah well you know I think uh money transmitter laws do have have a criminal overlay so you do want to be very careful with money transmitter laws yes I took that to heart and that's why I'm still working for government so um the uh so as a regulator you know now we've got the digital token act we've got folks submitting their their token offerings to you through a form and everything and like for everybody here that's thinking about doing that eventually um in in some way shape or form what are the key aspects that they should understand before they come to talk to Dora um about you know about the token economics or about what they're trying to do well you know when I started um when I started working in this area the the word Hoy test didn't mean much people were like I don't know what that is I think we all know or many of us now know what it is and I think um because of that you can do a preliminary assessment of your token to see if it falls under the Howie test and if it does uh it's a security and then you have to find ways to register it and you have to make sure that if you're trying to uh get investors that you are very very careful in what you say and and the accuracy of it so I think that's probably the first test and if for those who don't know hoe is a US Supreme Court test um that they that the Colorado has also adopted um and and all is the LA is the law of the land and it has to do with um whether uh there's an investment of money in a common Enterprise um uh with an expectation of profit derived by the efforts of others so that's the four-point test there are a lot of other uh there there are other tests as well and I think um you guys have heard of blockfi are you guys yeah and you're familiar with the settlement so there was a settlement recently with State regulators and the SEC for $100 million on block so um blockfi used a different test uh they used the Reeves test and that was for notes notes are also security so Howie is the one that everyone knows but if you have notes you should be looking at the Reeves test and that's Reeves versus uh erston young a 1990 US Supreme Court case and for those who oh okay I'm going to quickly just say blackfly because I think you guys know it and you probably interested in it just for those who are not lawyers to make you sure you understand um block five was not charged with fraud they were just charged with not registering and that's a big difference um not registering means you have a pathway to register and I think The Regulators really set out a pathway for registration so there's also a grandfather clause which means that uh if you have money and you have a and you invested with a a particular deal with blockfi it's still good so the regulator said we're not going to shut you down you don't have to return any of the money you just have to register and they gave blockfi a path to registration so what that means is in the next couple months blockfi will be the first mover they'll be the first one to try this path to registration and I think this is a really big deal if they succeed it's going to be really great for the industry for folks who are doing similar things they'll know how they can come into compliance they won't have to live with uncertainty of of um whether or not their uh project will uh end up being in trouble if they don't succeed if they can't register this will also be a big deal and um it'll probably be quite chilling uh for the industry so I would keep an eye out on that but also if you have a account with black fight it's supposed to be uh you know fine with The Regulators uh for now and you should just know that it's not an a fraud uh a fraud action so I I did want to touch on that because it's a you know it's it's quite a a big settlement so so that's pretty that's pretty amazing that they are letting they're saying here's a here's a path that you can have and and if they are successful then a lot you know there's a lot of people doing what blocki does I think this I think this is what Regulators like myself and a lot of people in the industry have been clamoring for that that is to say okay uh you're going after us for all these things give us a path to compliance and that is what um this block by settlement is doing in a big way um I think what's surprising with the settlement and Heather Pierce at the SEC has mentioned this as well is that the penalty was so High um so for for not registering but this is where we are now and um keep you know I think it's going to be a really big um Moment In Time for for regulation in terms of whether or not the industry C can come into compliance and whether The Regulators have give given a viable path to compliance great um you know one thing that um hasn't been talked about much uh in the last um in the last year or so is banking the unbanked is what banking the unbanked right and uh um you know I think that certainly when I was doing like gue cannabis businesses they they they could get bank accounts and so banking the unbanked was a was a really big thing and and it sort of turned around to becoming unbanked the banked especially in the United States you know where in in other countries where banking is a lot more difficult um banking the unbanked makes some sense intuitively but but with all of us I mean basically when we're looking at banking services that are web only what's the difference between using them and using an unbank like a blockfi or something like that from from the standpoint of you as a regulator I know you're not a banking commissioner or anything like that what do you think about that change that's happened and what it means to to Regulators in the future I'm not the I'm not the banking commissioner but I think um in another way of viewing it from my perspective is um when you say um unbanking the bank you're talking about uh defi right I mean you're really talking about Defi and so defi goes back to the same two tenants I don't know the path to Defi and I I you know Regulators keep talking about Defi and we're and thinking about it I don't know what the path to compliance with that but again if you're doing a defi project and you were trying to speak to Regulators in my view uh the two principal tenants you need to think about are who's going to be responsible if things go south if all these Moms and Pops are investing in your in your project and it goes south uh they can't pay their mortgage uh they can't pay their hospital bills they can't pay their college tuition and so The Regulators are going to care about that and so the thing to think about is um and I know innovators don't want to but if things go south how do uh how do these people get protected and Regulators will want to know that so when you're talking about Defi and you're saying there's no one Central um if if that is synonymous with no one being responsible you know that's not that's not going to be that's not going to work with Regulators I think they're not going to be okay with that and the second tenant is um is disclosure like making sure that everything you tell the people who are putting money in your project uh they know everything the good the bad the ugly everything uh that's a really important part of uh at least Securities regulation I think banking but I'm not the banking commissioner you I think great thanks a lot you know we uh that's I think we're over our time but uh I hope you all appreciate how how what a unique experience it is to have the commissioner of Securities here as a part of eth Denver a part of a of a of a blockchain crypto web 3 event who's here talking to us on an equal level to say hey look the government is here to work with all of us to make what we're doing possible and to make the world that we imagine real so please please give her a hand um thank you very much thanks for having me