AMA w/Tung Chan, Colorado Securities Commissioner; From Ethereum to Colorado

jeff good to see you what's up john gets me back yeah thank you so much so we're going to dip into our evening content jeff thank you thank you so much for letting us bleed over on that we had so many great pitches and it seemed like tongue was having a very good time so we just kind of let him do it and and of course i stole a few minutes there at the end but we're going to get out of your way what we've got is a an interview in ama format so the way that this is going to go down is jeff is going to spend some time talking with tom one-on-one but please put your questions in in the comments on twitch and jeff will be reading them as we go and or once he's done and he'll be asking tom any question you want so put them in the chat and we will do our best to get them all in take it away guys thank you thanks much for joining us hi again you're the colorado securities commissioner which means you're for the state version the sec but you were also the general counsel of ethereum right i was i was the general counsel of ethereum and i joined i started working with vitalik and ethereum at the launch of the genesis block uh it was like the same month um and i was with them for about three years okay so you got to tell us what's that like being vitalik's lawyer it's it's terrific i i mean it's terrific at that time because it was uh you know it was something that was just taking off i think there were a lot of people who had a lot of faith in it but if you can think about it um you know at that time nobody really knew which way it would go and uh how it would look and it was really exciting you know being part of a unicorn is uh for some uh uh something they do often but for me i think it was a once in a life experience i bet yeah it's really funny because i've met some i have a good pleasure meeting vitalik a few times and some of the early ethereum people and they're pretty uh you know they're they're they're pretty casual put it that way you know i said yeah a lawyer you know sitting in suits and board rooms and stuff and it's kind of a funny mixing of the two but uh that's neat that you were involved in the beginning um uh regulation's a big part of the crypto landscape right now but a way to make this relevant to the people watching i guess is this what advice do you have to all these sort of promising startups out there so that they don't get a call from your office or from the sec how do you you know and at what point do you need lawyers are expensive when you bring them on so give give some advice to the folks out there about when they have legal questions what they should do about it sure so let me just start by saying i'm here on in my individual capacity i don't speak on behalf of the division or the state of colorado um and i i just want to make sure that i say that because i'm a lawyer and that's that's important to say um for for folks who are working in the blockchain space one thing to think about is that when you're dealing with tokens um you're dealing with uh the economy in a way that's really direct like money and so what you have is you have multiple you have regulations right securities uh or uh it can be considered a coin so i mean sorry you can be considered money so it can be considered a commodity and all these things are regulated and uh there are multiple regulators for different aspects of it and then you have banking regulation so um if you have an idea i think the first thing to come to say is if you have an idea that is not trying to use a coin uh to unbank the bank and things like that where you're clearly stepping into banking um then as long as your coin is used um like a laundromat token where it's purely you know used for within that own system and it doesn't end up being liquid or exchanged for money then you are in a better situation uh anything any coins where you're trying to eventually exchange it for money exchange it for real cash or fiat uh some kind of fiat uh you're going to start to be triggering regulators i'm going to interrupt you what if you want to raise money because you know you can you know you have a great idea you're building it you want to share some of the tokens and you know i'm going to sell some of these tokens to my friends um you know that's not really issuing a security that's a private sale but it seems that what if those tokens start leaking into the broader universe it can all be security so there's the howie test which is the federal supreme court test for what a uh uh securities is and if you're selling something like tokens where there's some kind of uh the people who are buying in think they're gonna do it to get some profit and that's reasonable right why would you give somebody money and not expect something back right so if you're doing it for that re reason you're doing a capital raise and you're expecting to give these people something back um you can your your pro there's a very good chance you're going to be in the securities route so that's what i'm saying if you can if you're doing something that is uh not close to that then you are in a better situation generally however in 2019 colorado passed the digital token act and that has a carve out for tokens that are you being used um as a utility so that means once your platform is going and your tokens are being used um you know like in the laundromat system where it's just used within that system um then you can then you don't have to register with the securities regulator in the state and there are some provisions that might allow you to do some kind of raise now what that means is though big picture is that if you do that it has to be within the state of colorado because only colorado controls uh colorado law and so that means you can do it within colorado but you might but this definition of digital token which is very similar to utility token that singapore and switzerland have uh uh promulgated um can't cross the border can't go to wyoming it can't go to nevada as long as it stays in colorado the digital token act of colorado would apply and you'd have these exemptions from registration um so that's not a bad thing because i think i've mentioned before colorado has over 5 million people and that is the same population as the entire country of singapore so it's like a small country so you can still do a lot of commerce within those parameters if you want to do that then you do have to file a notice with my office the division of securities and there are other provisions uh that you need to follow but let me give a citation for any states that want to for any um businesses that want to look into that it is um crs colorado revised statutes 11-51-308.7 so that's 11-51-308.7 you can look up the provisions there and see if it works for your business uh but tim what if it's just a small projects good idea seems to have some traction and they need a lawyer um i know if you call up a big law firm and say i want a securities lawyer you're gonna get um you know a request for a retainer of a hundred thousand dollars and some very expensive advice uh what if you're sort of a small scrappy startup you don't have the funds but you have the idea what's the best way to kind of get some common sense legal advice without you know basically handing over all of your your fundraising wow that's a that's a difficult question i guess you'd uh you know you could look for pro bono uh attorneys who are helping small businesses start out securities is a is a tough area to uh just you know security is a tough area to start out in um and uh you know you can always if you want to start something up you can read you can read the laws yourself you can read a lot of the different uh journals that are out now that publish things i think coin center usually talks a lot about um how this works uh the key things to think about are like the howie test and it's not it's not difficult to read you can read the howie and understand the four um the four elements to it and um and i think that you know i think that that would that would be the way to go it's it's a tough area and i think um as a public policy matter i think society makes it tough because they you know money policy being able to control it within uh a country is is uh pretty important so i don't really have i don't really have good advice on that i'm afraid yeah get a lawyer everyone um well let me let me say when i started with ethereum uh i did it for free i knew i knew people they needed help and i had all this background and corporate governance and securities and so you know well they weren't they'd already issued so i didn't do any of the securities work but they needed some corporate governance work and um and you know i just did it for free because i knew the people a lot of i think a lot of entrepreneurs and the ecosystem is made up by a lot of people who volunteer so that's another way to go that's a great idea and you mentioned coin center they're a wonderful outfit in dc and some really good people working there they do a good job of explaining a lot of stuff in plain english so i think that's a great tip um i've got some interesting questions in the comments about uh colorado's initiative what you're describing sounds like it's sort of a sandbox you know stay within the state borders you're gonna be okay um that said that the very nature of blockchain and crypto is sort of global how do exactly do you do that do you geofence your users or you know how do you not i give out some tokens to some people in denver and they give them some in boulder and the next thing those tokens are popping up in montana and california you know so how practically how do you avoid how do you use the sandbox without getting in trouble okay so first of all um i would just step back and say it's not really a sandbox a sandbox is a place where there you're innovating with with special waivers from the regulators right this isn't a waiver for just this project or that project this is a state law and everybody gets to use it right now um so how do you use it though well this is a and this is not a unique question because uh switzerland i did a lot of work with swiss law switzerland uh actually set out something very similar to this before colorado and they they will they they set out something called a utility token singapore has done something similar and um it only applies for their jurisdiction right so uh this isn't something that um is is it's something that i think every jurisdiction is grappling with because we don't have uh consistent law across various countries or even states so uh what what us what singapore has done is they do kycaml so you do you have to know your customers and they have to certify that they are not from wherever or they're not going to use it wherever and they're not using it for profit they're just going to use it in this system and that is how other jurisdictions do it and i think that um you know your intention to keep it within the state of colorado and um making sure that the people you sell it to stay within the state of colorado that would be the way to do it um i don't think it's that unusual uh nowadays for example marijuana had the same situation where you need to stay within your state because federally it's not illegal and so you just have to find parameters to do it hopefully people can i have to say i moved to um colorado two years ago from new york but i do like the regulatory environment here i like i love the marijuana here the beer and now there's tokens too so i think colorado is doing a lot of things right um but i do want to go back to sort of the serious stuff for a sec um namely what's going on in washington uh there's a you know it seems like the blockbuster case of the sec suing ripple um and you know ripples i think older than ethereum and you know xrp is for a long time in the third biggest token traded out there i'm curious you can give us some insight into how that's going to play out because if the sec can sort of crush ripple and the sec is also suing ripple ceo brad garlinghouse and chris larson one of his founders you know i know ethereum's now in the clear but for other projects out there this seems like big trouble so how is this going to play out you know here's the thing that we can't underestimate uh in this particular situation which is um you know we've had a change of administrations and uh we both at the president both at the level of the president but he's going to uh have his own sec commissioner and so clayton has resigned and gensler is uh has been i believe nominated and he's going to go through the process of being confirmed and so it's not clear how this is going to play out it probably wasn't clear before but now it's really clear as mud because you have a new chair and the balance at the sec is uh also switching because uh you know you have a number of uh you have a number of uh commissioners and it was uh the final but was i think claims because i think it was a an odd number not i can't actually remember but you know the chair is now going to be a democrat and it's going to be gensler who was the head of cftc who was a very strong and uh forceful regulator who believed in really uh results so where is he going to put his energy what's going to happen with ripple i think is really you know more money than it was uh when the opinion first came out when the filing first came out that said you know it's a long opinion i'm sorry i keep calling it opinion it's a long filing and ripple the sec is using the howie test uh and we'll just have to see if they uh if it comes out and it goes to court and a court comes out and is able to distinguish factors uh uh applicable to ripple and at that point then you know i think it would be a good idea for anyone who's interested in issuing coins to try to find a way to distinguish themselves from ripple in a meaningful way and relying on what that opinion says yeah it is messy out there and i believe when ethereum sort of got the green light and was officially in the clear the secures were sufficiently decentralized uh it was suggested that a project can start out centralized like ethereum kind of was in the outset and then in time become sufficiently decentralized whatever that means is that still the kind of going yardstick and you know how on earth do you tell when the tipping point is when you go from centralized to decentralized well actually the the language in howie is common enterprise right so so if they're in a common enterprise uh and the profits and people in uh buy in expecting or hoping for some profits and there's a common enterprise that you're not actually participating in uh then then that is a security so so for example in ripple when i read the opinion they talked about the number of things where um i'm sorry i said opinion again when i read the filing um the filings uh talked a number of times about how ripple would have control over xrp uh but they also talked about how they were ripple was promoting xrp and saying you know we're gonna xrp if our software works you know ripple was uh is selling the software to institutional banks if our software works xrp is going to increase in price and you're going to you're going to make money so that kind of promotion is uh you know is is evidence of uh people expecting a profit and and the people who are uh controlling ripple knowing it and believing that it's that profit is tied to a common enterprise so i think that will be very fact specific ripple will have its day in court and trying to prove that there isn't a common enterprise and that they didn't promote the idea that uh investment in xrp was for profit um so they're going to have to work you know that's it's going to be very very fact specific and my my guess is they're gonna have um they're really gonna have to prove there's no common enterprise and and it may be difficult uh based on the filing that i read yeah that makes sense um it's messier there i've got a great question here though which is that if you could identify one piece of legislation like if you're going to pass a law to clear some of us up what would you ask for you could wave a one tomorrow and congress passes a law that's going to bring some clarity what should that law target names for three things that should be congress's first priority when and if they're going to clear up some of these questions here's here's the thing that i've i don't mean to talk around this but i think what i found in my experience so i started out as a wall street attorney uh for a large uh law firm in new york city and uh and then you know i became a regulator and then i went in-house so i've had this um i've had this career over uh a number of decades uh from different perspectives and i think what what you got what this community wants is the same thing that every financial community wants which is certainty so i don't know that i could i don't know if i would wave a wand exactly what i'd want but what i want is some certainty i'd like some either the legislature or the uh of the sec to come out and say we've decided and you may like it and you may not like it but this is what it is then we can build around that certainty i find that the uncertainty is really the problem and and and especially in this community people are so creative it's not i don't know that i don't know that we you'd have to ask for one thing or another thing i think you just set the rules and then they will you know the community will find a way to work with it so i i can't say as a regulator what i'd like to see other than um what i think everyone wants to see which is some clear guidance on this so that entrepreneurs can start out and build and not um you know not be taken by surprise down the line um in terms of how regulators are going to treat what they've done um that makes a lot of sense um here's another question i'm curious about your job i know often regulators are you know kind of charactered as kind of know nothing out of touch luddites but i also know i've met enough of them true you seem very savvy and you're you know you're the gc of ethereum so but i'm curious for how do like you know lawyers and regulators at the sec in your agency get their hands dirty with crypto i mean do they bring people in do they have like um hardware wallets do they have coinbase accounts like what's you know take us behind the scenes a little bit into you know how you educate regulators on you know what this stuff is all about i think that once the once so i was not a state regulator when obviously when i was working with ethereum and when that was all kind of getting really exciting so it's hard for me to say i think state by state it depends on the state regulator and how much interest they are they have and how much they uh are engaged in it you know i know state regulators who have been commissioners for 30 or 40 years they've spent their whole career there and they're not necessarily going to be the most flexible in terms of new technology right um so if that would be dependent by state of state but i would say the sec the sec is very interested in um in whatever is happening that is creating a lot of uh security issues so i think they brought in people i think they trained up i think they uh they you know they were interested and and uh concerned uh pretty early on and my i can't say for sure but i think so and i would say that um they probably are thinking a lot about it i mean they just started a fintech hub just recently and i think that is uh pointing to their interest and concern also you know i just don't think you've got what uh market capital of what 200 billion dollars right now for ethereum i don't think i don't think the sec is pretending it's not happening right um so i think they train up and they do that now how do you reach regulators here's the thing if you want to know what securities regulators think about they think about protecting the public they think about the retail people protecting the public so if you can get on their level in terms of thinking about that they're really going to hear you right so if you can explain to them how whatever you're doing isn't going to somehow uh end up with a mom and pop investing and losing their money and you know going on going on welfare or losing their life savings so they can't put their kids through college if you can think about it like that and speak to them about that that's what that's what they're concerned about right so i i i think par what i see is um industries sometimes thinking they're luddites and regulators thinking industries just you know don't care about anybody and they're inconsiderate and they have all these big ideas but they don't realize they're harming people right and that's a disconnect i don't think that's true on either side i think the reason why regulators might seem like they're out of touch is because they're thinking about something all the time that most people aren't which is how do we protect the retail investors so that they aren't taken like they were with tulips right or a lot of people lost a lot of money we joke about that but that was a big deal um and they're not taken by things like bernie madoff where people's lives weren't ruined right that's what they're thinking about all the time and uh so that may be the disconnect because um they're not thinking about how to make this business better and how to um you know how to change the financial industry they're thinking if you do this how many people are going to end up destitute that's what they're thinking right and i think that's fair i'm getting some pushback in the comments though i mean i certainly would i watch the ico boom up front and a lot of those people were flat out scammers and criminals and the sec nailed them to the wall that said we're watching what happened in the markets this week and you're saying you know we have to protect people but we're also letting people kind of match their robin hood app and buy stonks all day long and lose all their money on games yeah it's a real problem barely singled out here well no it's a real problem because you've got a you know the the regulators are part of in the u.s we're part of a capital market which means that you've got to have rules but the rules can't tell people what you can and can't buy right so that's where i i know it doesn't seem that clear um to to people who want to use robin hood but the the thing is the it's you want you want rules like disclosure right so the idea behind securities is you need to disclose everything but once you disclose that people are allowed to buy and sell whatever they want right and with robinhood that was the case but then there's these other triggers right their capital um there are like capital net capital requirements uh that you have to meet with robin hood in particular um there was say there was a there was some talk about the fact that settlement so the settlement houses that are settling their trades if they see too much volatility or they see that the brokerage is out too much money they'll they'll immediately ask for a net capital call and so robin hood has to put up that money or they or uh they won't be able to continue right and so i think with robin hood that was what caused the stoppage it wasn't um the sec didn't swoop in and say you have to stop right they had their own clearinghouse um net capital requirements so uh i'm not sure if that is it to the people who are listening whether they think that is different than uh the regulator saying you need to follow disclosure requirements um you see i think that's fair i mean yeah it's all about the disclosure and you're right with robin hood the trading was slowed down or halted because robin hood had basically a giant margin call and that was you know some people like was a conspiracy with hedge funds it wasn't it was simply that but you know my point is that we can let people go wild buying you know foolish things on robin hood like gamestop no disrespect to those you who like buying game stock but you know traditional market analysis says that was you know sort of a silly idea based on the future cash flow um but i'm just wondering if this sort of the rains are too tight on the crypto world um it's sort of a double standard so no the the crypto world is held to the same standard so gamestop did disclose everything right uh they just and whether people read it is a different thing we we're not in a country that says you have to read it or if gamestop uh uh says they're kind of in a bind you're not allowed to buy it we're in the capital markets where we say hey everybody gets to buy whatever they want the only the rules of this game are that whoever selling can't lie and has to tell you everything right so it's the same thing as crypto anybody who wants to issue in crypto you got to do that whole registration that camp gamestop did talk tell and in that registration you have to list all the risks you have to file with sec just like gamestop did gamestop did all those things so did uh amc so did nokia right they all followed those rules and if you do it then yeah you can trade it then you can say look my thing is super risky you might not even make any money and if people buy it the regulators won't stop you the the the rule is you just got to tell everybody exactly what you're doing even the bad stuff that's the rule it's a disclosure issue so if the crypto guys want to issue they can just they have to tell you everything and then they can't like coinbase is about to do direct listing but they still gonna have to put out uh you know they're still gonna have to put out disclosure about how their business runs and what they're doing and if they do that then they can they they can start selling their shares so you know everybody needs to follow that the idea is everybody has to do that same thing they have to register they have to put out that information and then and then people can choose to buy or not to buy yeah that's fair i mean i think transparency and disclosure is important and we saw in the ico era when you know issue tokens oh but i'm not going to tell you i've actually pocketed 10 million from for myself and that changes the calculation investment and you're right that should be out there um what about the criticism though that um you know compared especially to asia that america risks sort of stifling crypto innovation here people say a lot i don't know if it's true i don't know how many people actually leaving but is that something that comes up you know enters your mind or comes up in conversation with regulators i mean you know do we risk kind of killing the golden goose you know i think new york's bit license is very unpopular for good reason is there a risk that you know all the action moves to singapore and hong kong and zuke switzerland i i think that is a serious risk i think that unfortunately you know we still don't have certainty in a lot of areas for tokens and i think that's i think it is unfortunate uh in terms of uh where the business goes i mean if you assume that it's a it's here to stay which i i do and that um and that it's good that it's just a different part of the economy um then then to give that to give that economy certainty rules clear rules that they can follow as soon as possible is a uh is is important i think is a is is how is how is how um uh economic communities thrive they just need to know the rules and they need to be clear on them so i think that clarity i think because we had didn't have that clarity for a long time singapore and switzerland trying to put out that clarity earlier um made them uh more more popular and more attractive for a number of uh uh companies yeah that makes a lot of sense and everyone if you have questions please send them our way we're getting some good ones already i like this one what will be the sec's take on unit swaps airdrop now we're going to get into the field of defy and um is that something you're watching i'm watching it but you know i don't know again i i don't speak for the i don't speak for the colorado division of securities here i'm speaking for myself but i definitely don't speak for the feds um the sec so i don't know what their take is going to be on that and like i said um i don't know there's just there's if there's if there's a time that you don't have clarity uh now is the time because we really need to see what genso's gonna do we're gonna see we're gonna need to see how uh heather pierce who is uh uh is a commissioner at the sec she's very pro uh crypto you know how her influence is going to play out um she has proposed something like a three-year period where crypto companies can start up and start issuing tokens and then within you know after the third year if they can show it's really decentralized then they kind of have a pass and i i'm paraphrasing but you know she has she has these ideas and i don't know how much traction they'll get um and so i i don't really know what that is going to do with unison right but you know i'm going to push you a bit i know you're right not to give us sort of a really direct answer because you know you're not sure in csc's purview but with like forks and airdrops i mean i find it interesting like with bitcoin sv or whatever it is you know in my opinion some garbage token i didn't want anything to do with and it appeared accounts because they did a fork and that you know risks a tax headache for me i didn't want that so i mean i think sort of these forks and air drops you know one hand very cool if you like it but you know also sometimes it's being forced on people who don't want it in the first place is that um is that something that we might see regulators take up in the next couple years maybe but i think that's more of a tax issue you know if you get something for free like a fork right and it ends up uh being realized you know that's you're gonna get taxed on it so you know i don't know that that's a securities issue as much as it's a tax issue but i will say i've known people who have gotten um you know tokens um and there's been some delay in when they actually get it and so they end up paying taxes on um on when it i mean the i'm sorry let me rephrase it there's a delay in terms of um when it was paid and when it was owed and then they ended up with huge tax bill and you know that i've seen that with tokens a lot uh but that isn't really that isn't really new in the sense that if if it was some if it was a car or you know somebody gave you cash it was the same kind of thing if you had a delay and when it was promised and when it was given you could have uh you know a disproportionate tax tax bill so um that's that's i think with the drops it's more of a tax issue i think they've pretty cop pretty much come out and said i'm sorry the forks uh they pretty much come out and said you know there's a fork and you get extra tokens um you got to pay tax on them right yeah and part of this is just that tax is a headache and none of us can dodge it for sure and also i'm impressed the number of companies that are coming up building stuff to kind of automate compliance and tax software but before we put the audience to see if i don't stick with that too long um how about this i mean do you want any bitcoin or theorem yourself um i don't really uh i don't you know i have a little bit here and there but i mean i don't really talk about my own personal holdings but i certainly don't um you know i don't think anybody i think it's a capital market people should buy what they want to buy right and hold what they want to hold and and uh sell when they want to sell for us for regulators it's just a matter of whether the people who are selling this stuff to you are uh fulfilling the requirements to fully disclose in the u.s right that's the us that's the u.

s paradigm uh other countries have different paradigms but in the u.s if you're doing it in the u.s to u.s people it's got to be fully disclosed and that's how it works here i promise to move on from tax video one more thing i know coin center and others are calling for a de minimis exemption which basically i buy a cup of coffee with a you know a bitcoin debit card for three dollars that doesn't trigger a capital gains event i think the call is to make like everything under 200 is you know it's kind of it's too small potatoes to tax the law currently doesn't view it that way but what do you think of those calls for de minimis exemption and do you think that might happen um i don't think that's going to happen but i do think that if they ever did it it would seriously uh attract business to any jurisdiction that did that because like you said who wants to run afoul of tax laws because you've been paying for coffee with bitcoin for 20 years you know dude nobody wants that right um and yeah so i think that that's the i don't i i would have serious doubts i don't speak for the irs i'm not part of the irs but um but even for where i don't speak for them but i it'd be hard for me to imagine that they would do it um but if they were to do it i think they would really attract a lot of attention go to you know attract businesses to to come here and be creative we just have two minutes left but um let's go right into the deep end here's the question what about staking uh if one ethereum goes sister 2.0 people getting sticking rewards you know every six minutes or something you know how we're going to solve that in terms of clients and or do you want to say that for next year well i we can save that for next year but i i think with taxes if you get it uh reward you kind of have to record it and pay taxes or else uh you know there are problems with that so i think you know taxes are a big issue with the with the tokens and value okay and way in the deep end i confess this goes over my head but i don't know what they're referring to has the sec reviewed eip one five five nine i do not i do not believe that they have i'm sure that's their i can't imagine that they're not talking about it um it is uh where the and you guys who are more technical go ahead and shout out and tell them that i'm full of it but i believe it's this ethereum improvement proposal where uh they're going to burn um the fee the transaction fees when when you when you're paying fees instead of going somewhere i guess they burn it and so it ends up reducing the number of overall ethers in the ecosystem is that right guys and they're they saying yes or no yeah did i get it right give me a whole bunch of this stuff for for next year i believe we're at the top of the hour i think some of the vip best guests are coming on um vitalik's former lawyer uh thank you so much for joining us and uh look forward to seeing you all in person next year thanks jeff thanks everyone thanks jeff thanks tong we really appreciate you guys