BBW23 – Day 3 – Federal Digital Asset Regulation: A Moderated Debate

[Music] so pleasure to be here today I think Regulatory and legal questions are a topic that may be one of the most consequential for the success of crypto industry so it's very important to know something about it it's also an area that evolves all the time so glad to be here my name is marit tunen I'm a lawyer with cryp uh flips side crypto and also an out professor at uh Boston College Law School with me here today are two tremendously talented legal Minds Megan Spain from gwin and gas gold debella from through um I know from personal experience that both of these lawyers have advised high-profile crypto companies very very uh important cases so can you talk about your background what are the types of projects you work with and uh what do you do sure um I guess I'll start nice to see everyone my name is Megan Spain I am quiny born and bred uh currently live in New York but I went to notredam so I most of my high school boyfriends are from BC high so I uh I work at Goin Proctor which also has a boss in office um and I'm a litigator so that means that I'm interacting with the government and also with um counterparties basically resolving disputes and for my crypto companies really trying to resolve them as quickly and cheaply as possible so they can get back to innovating um but we represent issuers uh we represent all members of the blockchain ecosystem and we also to represent investors like like Gus and others that that want to put money into this important technology um so I'm really happy to be here Mari and I used to work together when she was at Goodwin so this is a a great reunion for us as well and uh yeah I I'm happy to dive in all right thanks and thanks to all of you for being here today Ian uh knows that I only show up on panels when there's a smoke machine so this is perfect um so I'm Gus Cella I too was that Goodwin Proctor um we all practice together more or less uh over time uh but I started my career uh long ago uh in the mid 90s uh and I was a uh a Securities and government investigations lawyer at Goodwin which means when our clients got that call that nobody wants to get you're under investigation uh I would be the next call um and that provided unfortunately really good training for being in crypto because uh a lot of what you're going to hear today is sort of the the the conflicts the Borderlands between innovation in crypto and maybe the lack of innovation in regulation um uh in the United States and around the world so quick background on me is after Goodwin uh I went to work in the federal government I was the deputy general counsel and then the acting general counsel of the Department of Homeland Security in Washington DC um back in uh sort of the mid 2000s and that experience was super intense but it caused me to really focus on those areas where new technology and regulation Collide uh and then when I came out of the government uh I found a company based here in Boston called circle circle is the issuer of uh the US dollar coin which is a stable coin which is something you're going to hear about a little bit later today uh and I was lucky enough to be their Chief legal officer uh during the time that we rolled out that product and uh I haven't looked back I've been involved in crypto since then I was the general counsel of a fund called Paradigm and now I'm a partner at true Ventures uh which is a general Tech investor we do early stage investing uh but what I like to do is help our Founders especially our crypto Founders try to navigate the uncertain and always changing environment of crypto regulatory it does change all the time and by the way guest and Megan have agree to take questions throughout the panel so if you have something urgent just raise your hand and uh I think Eric will give you a microphone we'll also have uh some time at the end if if you can uh wait but if you can't just ask Eric uh so evolving all the time just two weeks ago the SEC the Securities and Exchange Commission sued uh or went after an nft platform for issuing nfts Stoner cats so I was hoping we could talk about that uh action how do we unfold this question and what are the implications to the prer nft industry and crypto industry uh for the SEC going after an nft issuer because I think it was actually surprising I would think they spent their resources going after someone else but nfts this time yeah so I think if you're anywhere in the Press you know that the SEC has been doing regulation by enforcement for a couple years which means that they're not providing clear guidance they're not telling you what the rules are but they're defin ly telling them telling you when you break them um so you know they they go after iOS they go after all kinds of tokens but for a while I think us in the industry thought nfts which are non-fungible tokens were were pretty safe on the risk Spectrum right um so a few weeks ago they they settled with a another company called impact Theory but that was a more traditional like almost Ico like thing they sold their nfts saying you can make a lot of money they sold their nft saying if we're successful you'll be successful and those are the kind of things that the SEC has been concerned about for a while because they lead someone to buy them with an expectation of profits but instead of you know kind of buying it for its intrinsic value um but yes this uh the the the cats was a different thing because basically it was we're making this TV show and you can buy an nft which will give you certain rights to watch the TV show and be involved in the TV show and was a TV show that had I think like munis and Ashton Kutcher and others as as um as as some of the participants um so really Hester PC who one of the commissioners of the SEC has said this is akin to back in the 70s when people sold toys in Star Wars to build hype and build excitement around the release of the Star Wars movies something that feels very very far away from something that should be a Securities transaction um but yes they went after them said that those those n nfts were in fact Securities and they had to settle for for a big fine so we Gus were you surprised by this outcome uh I wasn't I wasn't I mean I think the um the main thing that we have to focus on is that you know regul this regulation by enforcement concept that you talked about Megan is I mean people might say well what's wrong with that if there are rules and you break them what's wrong with enforcement but it's the regul by of that phrase that's the problem because what people want to do when they're developing uh crypto technology or any technology is take risk they want to take risk that the technology that they're building is going to be accepted by the public that people are going to pay them for it that uh you know they're going to hire these folks and hopefully that put them to productive work and ultimately there's going to be an awesome world changing product at the end of it but what we have when we have a regime of Regulation by enforcement is a kind of risk that Founders aren't used to which is my God am I going to get sued by the SEC and the way to bring down that risk and the reason that we all criticize regulation by enforcement is because the SEC has another thing that it could do which is to say here are the rules if you do this if you issue an nft we think it's a security if you do these sorts of things like if you Market it and you say the value is going to go up send me some money I'll build a company with the money that you sent that sounds like a security if if instead you set you issue an nft and it's art and people collect art just like they collect Star Wars cards or Rolex watches and as a consequence of you know people getting excited about the thing you've made then the price goes up and there's even a secondary market for it the SEC could say yeah that's outside of our jurisdiction that would give Founders the ability to really deploy their capital in the right way and not have to hire people like us to worry about where the where the borderline is that's not where we are right now and unfortunately you know after I don't know how long we've collectively dealt with the government but after having dealt with the government for 30 years myself you never find an agency that voluntarily Narrows the things that it can oversee agencies just want to expand what they can oversee and that's what the is doing now so Congress really does have to step in and say I'm drawing a border around what the SEC can regulate and outside of that maybe somebody else regulates it or maybe outside of that there is no Federal Regulation because it's an an innocuous Behavior but we'll see that's actually a great point so if if there's no hope with uh agencies like the SEC giving us guidance they go after us after the fact really our eyes turn toward Congress what could the Congress do there are multiple bills that are debated at this moment uh do you have a favorite Bill and uh how what what do you think would be a very good bill how to regulate the crypto industry uh is their hope and what is the timeline for the Congress passing something that would regulate stable coins or defi or token issuances yeah so you guys probably remember Schoolhouse Rock from growing up I'm Just a Bill well I'm only a bill so you know in order for any of this stuff to work you have to to get everyone to agree or at least a lot of people to agree both in the House of Representatives as well as in the Senate and then obviously going up to the president so there's a lot of variables in play here um and and some of the bills that have been introduced and there have been like 40 bills introduced this session and I think it's really ripe for the legislators getting involved in the wake of things like FTX and Voyager and Celsius that really gut everyone's attention about things that can go wrong when you don't have regulation when you don't have clear rules and frankly when you have some bad actors but that's put a laser focus on these issues which is a good time for the legislator to get involved because they're protecting their constituents um but in terms of favorite bills there's a bunch on kind of both sides of the house so I I think I will I will talk about some of the highlights and then guess I know you're going to talk about some of the perils that are existing I don't want to be the uh the dark cloud in this panel but I will um so there there's a bunch of legislation that is currently pending a lot of it came out like on July 26 27 28 right before they close for August um one of the things that you know we consider and I think you said yesterday on your panel to be lwh hanging fruit is there's a stable coin bill um and basically what it would do is it would say let's let's make a box where a stable coin a digital representation of of a a dollar um could be used in Commerce and let's regulate it but but let's let that exist and they have certain parameters around it it has to be one for one with something like the dollar they actually have to have dollars saved in a place that represent the onetoone correlation with these assets and then there would be regulation around who could issue them and under what circumstances and who could custody them and then there' be a regime where there was some disclosure around all these things um that seems pretty straightforward as I just described it and it's hard to understand why there couldn't be bipartisan support for such like just a very basic concept we're not talking about algorithmic stable coins we're not not talking about anything funky um but I think that there's a real concern among some members of Congress that even a bill like that could threaten the Primacy of the traditional US dollar and could make our treasury have less control over Financial transactions but I think on the flip side if we if we don't get with the program and come up with some kind of Bill that would allow a basic onetoone Fiat stable coin to function the rest of the world's going to leave us behind um Singapore has issued legislation China as you know already has their own stable coin so basically if we can't get this right the Primacy of the US dollar may actually fall out of favor in exchange for some of these so you know I I don't know maybe I don't know if that's my favorite one but so much as as I think it's the one with the most promis and the most common sense and the least I think really legitimate reasons to challenge and you know Megan the the the other thing that I love about that bill and and actually I learned something on my panel yesterday that I didn't know which is that there's a bipartisan group of of uh house members who are working on making sure that this is something that both parties can support that increases the likelihood of success in the house and in the Senate when you have people from both parties as supporters but the thing that I love about the bill is that if you rewind a few months you'll remember that one of the banks that uh that provides funding and Loans uh to a lot of the start ecosystem called Silicon Valley Bank failed over a weekend and what we learned what some people at Circle knew but uh what we learned afterwards is that uh the reserves for usdc that dollar backed stable coin the same kind of stable coin that the legislation that Megan just described would regulate it was all at Silicon Valley Bank and that caused a scare uh in the ecosystem as you would imagine it's like is this Bank going to fail is my usdc going to be worth less than a dollar because the magic of a stable coin is that it's always worth a dollar and you could use it on chain um Jeremy aair who's the a friend of many of us in the crowd and the CEO of circle uh sort of reversed the thing that a lot of anti- crypto people said he said the banking system is a systemic risk to crypto as a result of this happening and what this bill would repair is that the reason that Circle had the reserves all All in One bank is because the banking system discriminates against crypto companies they feel because their Regulators say so that um that crypto might be an unjustified risk for their uh reserves and to offer accounts to what this bill will do in addition to all the things that Megan said is to unlock the the doors to all of these Banks so companies like Circle and paxos and others that issue stable coins can diversify the banks that they hold their Reserve deserves with so I love this bill what can I do to make it past should I call Ian or what should I do uh you should always call Ian I will uh but what you really should do is call your elected representatives and it's not just about this bill but about uh when your elected representatives do something that might be anti- crypto um I I think we have uh sort of a rhythm uh as people who are in crypto that hey everything happens on Twitter and Twitter is everything that happens that is not the case right posting hey Elizabeth Warren your bill is terrible doesn't do anything but calling Elizabeth Warren's office actually does something what is what is wrong with Elizabeth Warren's bill um I'm glad you asked that question uh so uh there there are two bills uh Elizabeth Warren was one of the sponsors and I think the author of the first one uh that that that attempts to well if if you step back for a moment the magic of crypto systems is that it removes intermediaries from Financial transactions now we have intermediaries in some of our crypto Financial transactions we can choose to buy our Bitcoin from coinbase and have it held at coinbase that's like me buying a you know a stock from Fidelity and storing it at Fidelity that's great but that's not crypto's you know full magic what it allows me to do is interact with you directly without using a bank I could send you value across the internet as easily as I can send you an email or I can enter into a a more complex financial transaction by interacting with a bit of code on a blockchain now that all sounds great and it is great but what does it leave out it leaves out that intermediary and for about 40 or 50 years the United States has been monitor in financial transactions for Bad actors and bad behaviors using intermediaries so Banks and broker dealers and others have a responsibility to report suspicious transactions they have a responsibility to uh know who you are when you open up an account with them so if if you take sort of the old Paradigm that I just described and the new paradigm that crypto allows which is no intermediaries as policy makers you can go in one of two directions where we want them to go is to embrace the technology and build in safety and say well people can have intermediate transactions without intermediaries uh uh with within you know bounds that hopefully some of this positive legislation will Define but what Elizabeth Warren's Bill and another bill called the can see act do is say well we have to reintermediate you're not going to be allowed to have peer-to-peer uh transactions or peer to protocol transactions without doing kyc like you have to report who you're interacting with and if you're a protocol you have to keep track of everybody who interacts with the protocol and if there's suspicious activity you have to report it to the government now you could see how that works with a bank and you could see how it does not work with code on the internet so the the the main thing that is the problem with Elizabeth Warren's bill is it's a backdoor kill shot to crypto yeah and then you think about um defi which is decentralized finance platforms oftentimes you know someone writes the code someone builds the smart contracts which is all the rules by which the code will the the transactions will go but then often times you take your hands off and you and you let the protocol go and people interact with it and and and that's how they do their transactions so under this can C Bill and these these bills that Elizabeth Warren and and others have set forth they basically want to leave someone holding the bag for those transactions so who who would it be number one they would go after the people that actually wrote the code and and find them if they haven't put in those Bank secrecy act protections and number two there's a proposal that they would go after anyone who has made a $25 million or more investment in one of those protocols so they'll go after Gus they will this is the main reason I hate this bill but you just think about it I mean do you want to discourage venture capital from investing in blockchain projects it seems so contrary to everything that's good but it's really going to quell the ability to invest in these kinds of projects or take that chance take that risk if you might be left holding the bag by virtue only of your investment yeah and and I mean one more quick point is like there is no limiting principle there if there is a behavior that the government doesn't like like if cani becomes sort of the way that we think about it it they could say well we're going to hold the investor in that project uh liable so in addition to sort of the crypto Community being against this bill uh for all the reasons that we discussed I think there's a good chance and by the way I'm sort of drumming this up so I hope there's a good chance that the investor Community even investors who are not crypto investors will be interested in uh in putting stop to this interesting the the one I'm sorry Mario the one other thing I wanted to say just about like what do you do CU um but there is a website that you can go to that I wanted to read to you it is stand with.org and it's a nonprofit that's been set up by uh Brian Armstrong of of coinbase and others but it's a One-Stop shop for everything you need to know how to interact with your legislator so there's like a button to click on that will make the phone call for you and give you a script about what to say there's another button to click on that will help you write an email there's a button to click on where you can mint an nft that will go to support this foundation and what I actually think is fascinating about this website is you can go down and it basically gives a report card on every member of Congress so it gives them a rating like Pro crypto anti- crypto very anti- crypto so Elizabeth Warren for example is on that end of the spectrum but then you can actually click and see the bills that they've supported and the ones that they haven't and they actually keep track of their tweets they like all the negative tweets they've done about crypto but it really allows you to make an informed decision about who you're going to vote for who you're going to support or who you going to pick up the phone and call and and make sure that your opinions are know and and what I just to underline this I think there are some members of Congress that when they think of crypto they think of Silicon Valley they think of everybody sort of out on the west coast uh a small group of programmers making a lot of money and maybe doing some scams right they think about SBF they think about FTX but what this group what having this event in quinsey mass does is tell people like Elizabeth Warren and other representatives from Massachusetts I'm not saying that in fact one of the best uh members of Congress on crypto is from our state as well uh Jake ainl from District 4 I I I don't know but he's he's he's great um he's he's a big supporter uh but here hearing from constituents that we are interested in this we are programmers of this we are founders we're employing people in Massachusetts to work in this space May moderate these extreme positions and Elizabeth Warren's positions on this are extreme she tweeted out I am forming an anti- crypto Army you know with a with a a fist in the air like come on uh so uh yes tweet as much as you want want but use the tools that um uh that Megan just described to contact your uh your representatives and then we have the first audience question go ahead I have a question about the CI regulation um do you agree with those who say that this bill is potentially anti- constitutional because it potentially violates the First Amendment since code is a speech and if you limit the ability to write code you you limit the freedom speech and my second question is um do you think this the current US hostility towards crypto and the essentially the regulation by enforcement risks driving the industry um of sure sure thank you excellent questions yes and yes you want to take the first one so um I I your mic flipped on when you were talking about which bill but I think what you were talking about was just to to zoom out is a bill that seems to restrict the publishing of code uh challengeable under the First Amendment and I think the answer is yes now uh if the act that you undertake is the simple publication of code to a blockchain I think there's a really strong argument that that is protect protected by your freedom of speech uh and we'll see what happens as these these uh laws if they pass if they're challenged and if they're challenged what a judge says about them the the the the gray area starts to creep in when it's not just the publication of code to the blockchain but the maintenance of code on the blockchain or revenue generated from code on a blockchain and that could give uh judges something to distinguish it from Pure publishing now uh I tend to to move uh uh with coin Center which is one of the advoc advocacy groups in in Washington DC that we should have a policy of protecting the publication of uh of code in this way and then the second question uh was you is this going to affect uh uh the us if this sort of uh anti-crypto stance becomes pervasive and the answer is of course it will we are living in a in a world where other countries are um are trying to overtake the US in the thing that do the best which is innovation and crypto is at the Forefront of innovation if we just say yeah we don't want to do this here we're essentially going to make it illegal to publish code and it's going to be a problem for investors to get into this and unwelcome and who's going to jump in Megan named some of the good the countries that are aligned with our values uh that are uh that are very interested in crypto including Singapore I'll add the UK to that a lot of European countries but also our Global adversaries are very interested in uh coming up with technologies that steer value around the internet because it furthers their surveillance of value going around the internet I mean China is very very interested in how people spend money and where they go and what they do so if we leave this vacuum the vacuum will be occupied and it may be at some point too late for us to regain the Primacy that we we could have yeah and one high-profile court case actually that relates to your question is the tornado cache case uh we also have other very high-profile cases uh in court processes at the moment coin uh desk uh coinbase um uh Unis web FTX is there a case that you monitor more closely than others and how do you think that case will shape the crypto landscape okay so I I would like to highlight very briefly because Ian Ian recommended that we not turn turn this into a law school class which I think has been successful so far um but when you start to get into case law it becomes a little more tricky um but but it will be interesting to watch I think uh the the difference in opinion that has emerged between judge taorus and the uh Ripple case and judge raikov and the terraform case so there are different procedural stages which is one of the things the Ripple case they just decided summary judgment and the terraform case is still at motion to dismiss and at motion to dismiss you afford the plain of like more deference and you give them more Second Chances and it's like a lesser standard um but judge Tores came out with a case in the Ripple case that basically said let's evaluate the token as being a security not based on the token itself but based on the method of sale so the idea being if if you want to establish an investment contract under the high test you need an investment of money in a common Enterprise with an expectation of profit based on the efforts of others the expectation of profit and the efforts of others are always the ones that we focus on and in Ripple it gave the court a reason to distinguish between which ways the xrps were sold so investors that brought xrps at the beginning and they did it when when the company was still forming and on the up and up and they were told that their xrp would increase in value those were found to be Securities and all the investor protections were found to attach to those for you and me buying X r p on coinbase the court found that there was not that same relationship we didn't know who we were buying it from no one had made us any promises we couldn't have bought that token on the secondary Market with an expectation of profits based on the efforts of others so in Ripple they kind of separated into chunks and found that xrp in some circumstances was a security and in other circumstances was not a security two weeks later judge raikov ruled a motion to dismiss in the Terra form case which is a very different set of facts um but politely declined to following follow the reasoning of his colleague he said let's call a spade a spade it doesn't matter how it how how it was sold let's look at the characteristics of this particular item um so it it's interesting the the Ripple case is now being appealed by or the SEC is is endeavoring to appeal the case and one of the things I thought was very interesting is in their kind of application to the court to do an interlocutory appeal they've said that there are naughty legal problems that issue here that need to be addressed and that language is very funny because it is it it flies directly in the face of what chair Gensler has been saying for the past couple of years which is this is all straightforward we've told you everything you need to know it's very clear to apply now all of a sudden arising out of the same tests are these naughty legal issues that that need to go up through the court system um so that's definitely one to watch I don't know if you want to talk a little bit about Unis swaper I'm happy to because there's a lot of exciting comments that came out of the the Court's opinion in that case yeah you just just a brief bit on Unis Swap and then maybe some lessons that we could uh extract from all of this litigation so uh Unis swap is a DEX a de de centralized exchange that allows anyone to uh essentially create a pool of of two tokens and once there's a pool of two tokens on Unis swap then any user with an ethereum wallet can go buy those tokens from the pool so uh some uh agree people who bought some tokens from Unis Swap and felt that they were defrauded when they bought those tokens from Unis swap not by uniswap but by the people who created the tokens brought a lawsuit against uniswap and said uh you violated the Securities laws uh and what the what the judge said in uh the decision on the motion to dismiss in that case was hey you know what there might be a bad actor here it's the person who issued and created that token that person may have violated the Securities laws by not registering if that token was actually a security but what Unis swap built was code on the internet that allows anyone to to do what I described before and you can't hold responsible the person who built this infrastructure for the Securities Law violations or even potential Securities Law violations of another uh and and one of the comments that the judge made was uh uh especially uh important for all of the litigation that we're talking about which is she said hey you know what in the absence of guidance from Congress or higher courts I'm not going to be the first one to say that somebody who deploys software on the Internet is liable under the Securities laws so it it that's a very significant statement um and the other cool thing about this judge she's also the one that's priding over the coinbase case so there are now three SEC challenges to centralized platforms bitrix binance and coinbase but having that kind of advocate who really knows her stuff and it was clear from her opinion that she understands the technology I think is is a really exciting thing the the other comment that was made in the decision that I think kind of brings it home and you guys this is like a relatable example she equated trying to hold Unis swap responsible for these scammers to trying to hold PayPal or venmo responsible when someone decides to do a drug deal on their platform like obviously you have no idea what's going on there's Bad actors that are interacting with your software why should you be responsible for that drug deal that they did on Beno yeah exactly no reason to have higher standards for crypto just because of the technology you have to regulate the activity not the technology do we have any audience questions before my final question which go ahead um so I don't know like too much about like digital currency but um on the usdc and because I've heard there's like a lot of I guess rumors of guess cryptocurrency kind of devaluing the actual like dollar so I was wondering when there's no intermediaries in a digital coin is being I guess transferred to another where is that physical version held of the actual digital coin it's it's a really good uh question and I think there are two questions in there one is uh why doesn't having something like usdc uh red reduce the global Reserve status of the US dollar and then like as a practical matter where's the money right okay on the first question uh because every usdc is backed by a dollar my opinion and I think I know circle's opinion and the opinion of everyone who thinks about it is it actually uh supercharges the global Reserve status of the dollar it gives the dollar crypto Powers so if if it were a token that's completely divorced from the US dollar that became a primary currency of the world that might be something and I know that that is something that worries some folks in Congress but this does just the opposite it takes US Dollars which the fed and the US governments still have control over and puts them into the internet as a liquid form of uh of transactional currency that's great um what we were talking about before is where those dollars are kept so they're they're kept at Banks and uh it's interesting there's there's sometimes a difference between the market price of a usdc like based on Trader confidence sometimes it could go up a little bit sometimes it go down a little bit but the important um aspect of usdc and other dollar back stable coins is if you go to the the issuer with your digital token and say I would like my dollar back that they'll give your dollar back I think we are out of time uh but do you have a quick question okay if it's very quick uh we have like 10 seconds for you do you think um uh the crypto industry can hold off the SEC with the major questions Doctrine yes I I I think you know the major questions doctorine is something that the Supreme Court has has shined a light on in in decisions over the last three or four years which which essentially says a regulatory agency needs Express uh authorization from Congress if it's going to regulate an important area of the economy uh I don't want to I don't want the industry to over rotate on the major questions Doctrine in crypto though I think it can be helpful because you have to remember that the sec's authority comes from the Securities Act of 1933 and the Securities Exchange Act of 1934 which were designed to be extraordinarily broad so the SEC can argue actually do have authority in this area but watch this space because every plaintiff uh every defendant in cases that the SEC brings will be raising major major questions Doctrine arguments yes thank you guys thank you Megan thank you audience very nice to be here today thank you all [Music] right