Hester Peirce's Former Counsel on Terra 2.0, XRP and a Bitcoin Spot ETF - Ep.356

Transcript

[Music] hi everyone welcome to unchained your no hive resource for all things crypto i'm your host laura shin author of the cryptopians i started carving crypto seven years ago and as a senior editor at forbes was the first mainstream media reporter to cover cryptocurrency full-time this is the may 27 2022 episode of unchained hey builders looking for one of the best scaling solutions in crypto that's easy avalanche's breakthrough subnet design lets you minimize transaction costs and maximize your speed consistency and user experience to experience web3 like never before head to avox.network to learn more with the crypto.com app you can buy earn

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in san francisco get your ticket at the graph.com graphday today's guest is coy garrison partner at steptoe johnson and until recently sec commissioner hester purse's right-hand man at the securities and exchange commission serving as her counsel welcome coy thanks for having me laura it's great to be here so apologies everyone as i am traveling and did not bring the crucial cord necessary to hook up my nice mic to my computer so you are listening to basically the best sound that i could come up with on short notice since i imagine listeners are not very familiar with your background why don't you start

by describing what your crypto relevant work history is thus far yeah absolutely so i spent the last nine years or so at the sec and crypto has been a very large part of my portfolio you know my journey started back in 2014 i was a young young staff attorney and due to my youth a filing was plopped on my desk by my boss saying here's the winklevoss bitcoin trust i don't know what a bitcoin is but you're young you can figure it out uh so from there i was off to the races and uh became the go-to person in the building for the bitcoin etp filing applications and really learned the industry through those filings i had the pleasure of working as director of division of corporation finance bill hinman's

council for about a year and a half uh where we saw a lot of crypto not only etp applications uh registered coin offerings but then of course his famous eath speech and then for the last three years i've had the absolute pleasure of working for commissioner purse advising her on all crypto matters and working with her on her safe harbor proposals and really trying to push the agency into a more pro-innovation stance and so i'm have been blessed with a lot of great opportunities at the sec and i'm excited to join this talented stepdow team and can i ask why it is that you decided to leave the sec at this particular time absolutely yeah you know it's a i really

think it's a pivotal moment for crypto regulation i think the attention that it is getting in washington is tremendous it's um it has matured so much since from the time when i first got involved and started working here you know it's it's been a passion of mine from when i was within the building to try to get the agency agency to be more open to be more facilitating and accommodating and collaborative and you know i think the opportunity to come out now when when this this really matters now because we're coming up and deciding which agency has jurisdiction over what activities and it's it's really important to get it right so for the opportunity to come out advise clients on how to how to best proceed as was just one that i could not could not pass

up so i would say at this point in time for the last couple years the sec and the crypto industry have kind of been in this sort of impasse how would you describe the current state of affairs when it comes to the sec's regulation of crypto sure it's a very tense tense time right you have chair gensler has been has been quite clear in his position on crypto and has said repeatedly that he believes the platforms need to come in and register he's said repeatedly that he believes most tokens and icos are in fact securities offerings and then on the other hand you clearly don't see platforms registered you clearly don't see tokens registered as securities

offerings at the sec so there's there's clearly a difference of opinion you know i think moving forward it's it's frustrating the agency could be doing things in a number of different avenues right commissioner purse has been advocating for a long time to get a rulemaking put on the agenda so that you can have an open discussion with the public with the industry with all interested parties to move something forward the other approach of course is using your enforcement division and bringing cases against people you think are not in compliance so far the sec has relied uh mostly on the enforcement side and so that's that's where the industry is and uh face to kind of grapple with how do you move forward with enforcement inquiries while at the

same time trying to come up with a regulatory path and recently the sec did announce that they were going to expand the regulatory division what do you think of that move amidst their i guess other moves or a lack of other moves so i believe uh the crypto unit uh or cyber and crypto united up from flubbing the the name is is within the enforcement division and so they're they're adding doubling that staff so that that certainly signals that they are expanding the enforcement team to be looking at crypto issues you know i think i'm always an optimist and always look for encouraging words and i've noticed picked up on some some nuances in chair gensler's public remarks in the last couple weeks when

he's talking about telling the platforms that they should come in and register he mentioned exemptive authority and and a willingness to discuss with folks what about the rules system you know doesn't work and i think that's that's progress i take that as a good a good sign perhaps as a tacit acknowledgement that the existing rule book does not permit all of the current activities in the crypto industry and so you know once once we get folks that are willing to accept that and discuss that i think some productive conversations can be had about how how can you meaningfully operate under the existing regulatory regime and make appropriate tweaks while still achieving you know the appropriate mission or investor protection goals that the agency has

so the previous sec chairman jay clayton was perceived as being anti-crypto when his successor the current chair gary gensler took up the role how would you say the agency's stance on crypto changed if at all it's easy to kind of contrast and compare different different chairs right and they certainly have different individual personalities and and agendas and priorities for their agendas but i think the more important thing to look at is the fact that the the crypto world has evolved so much when when chairman clayton was was at the agency you know that that was at the beginning really the ico boom there was it was it was kind of it was brand new to policy makers in washington at the time the

industry has evolved it's grown quite a bit it's become a lot more established it's it has its own you know you watch cnbc and you see the tickers for crypto on there so chair gensler is coming in in a different world he's coming in with a different set of realities but you know i think it's it's important not to get too caught up in the personalities of whoever's at at the helm and and really focus on we have an existing regulatory regime how's the best way to move forward how you know you have to comply with existing regulatory regimes so finding a way to be able to do that working with whoever is in the agency is what's most important commissioner purse did recently tell cnbc that she believes the sec has quote dropped the regulatory ball she said we're not allowing innovation to

develop an experimentation to happen in a healthy way and there are long-term consequences of that failure would you agree with that statement yes absolutely i think commissioner purse is spot on it's you know it is a shame because there there are many things the sec could be doing to work more collaboratively uh to provide guidance right um you could be really encouraging requests for no action letters you could be really soliciting input for what exemptive authorities should be exercised to allow folks to register for allow certain activities to fall squarely within our jurisdiction but you know regrettably we the agency had has taken an enforcement first approach and that's that's the tact they they have decided to take and you know it's

not all that essentially you know that doesn't fall on the hard-working people of the agency you know there's a lot of smart people that have been thinking about crypto for some time at the agency and when they are empowered by leadership to actually engage i think there will be meaningful engagement so excited that you know there's always a prospect eventually to meaningfully engage with them and and move the ball forward so when you were working at the sec what were the arguments for not beefing up the other areas um in terms of the way crypto was being regulated sure i mean there's you know there's plenty of different positions people people can take right it's differences opinions about what what's going on in this world and in these activities and and whether

there's any harm being done to investors the sec is also a very large agency that has many different responsibilities crypto is but a small tiny part of the sec it gets an outsized part of the attention in certainly in this world but in in the media but the agency is you know overseeing the capital markets in the united states so they they have quite a few other things to be doing and limited staff resources so you know i think there's a couple different factors at play so in a moment we're going to talk about a few of the specific areas that the sec could be or is regulating but first a quick word from the sponsors who make the show possible in just a year and a half since launching on maynet avalanche has built

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i think one of the main questions is just how they should be regulated or who the natural regulator is and obviously there are multiple different styles of stable coins but what is your take on which agency's purview they would fall under that's a very live and hot question right now that's being debated both in the halls of congress and within you know independent agencies throughout washington personally i think there's a strong strong case to be made that very much more appropriate for some banking regulator perhaps but i think that's you know that decision is up up to congress and up for debate and to be determined and you know you raise a good point that each stable coin is structured differently and has different incentives different methods of op business

operations it's going to be like everything else which the industry always hates it's a facts and circumstances analysis but it is one of the encouraging areas in washington that there is a lot of attention and has been for quite some time now that i'm hopeful that if there is one area in the crypto world where an agreement can be made and and hopefully you know progress be made on the hill it could be in fact stable coins and one of the big recent events in crypto and in the stable coin world was the implosion of the terra luna ecosystem and obviously that's had huge ripple effects in the industry what's your take on how a stable coin like tara should be regulated

yeah you know it's it's always a shame when you see people uh lose money and lose you know in a project fail it's uh it's part part of the system that's not not everything's going to succeed but you you you hate to see it um you know it's it's a prime example of how washington pays attention to things like this a very large high-profile crash is significant and so you have to be careful you hope that a regulatory action or a legislative action isn't an overreaction and doesn't you know that this situation we got to hope that it's not hijacked for other um ideological or political um means or or desires and hope that you know focus on

strong policy of what what do we care about here is it is it the protection of those that bought in is it the transparency of how the program works is the transparency of reserves for stable coins what's what are the policy objectives that we're trying to achieve and let's stay focused on that i think those are the conversations that are going to be most beneficial and not getting caught in the weeds of the the drama of individuals or personalities and in any specific you know uh situation yes a lot of drama and a very strong uh in particular one personality in this in this case speaking of that issue you know right now tara is trying to revive itself and there is this tara 2.0 proposal that has been approved by the

community and now it looks like a bunch of exchanges will be listing this token and the main proposer of it is the person who by and large has been seen as the lead leader of the taro luna ecosystem dokuan and so you know i know that with the bill hindman speech around eth that decentralization was one of the key factors how do you think the sec would look at this kind of situation when it comes to this decentralization angle sure you know i think this is where those facts and circumstances always come up right a lot of uh and i'll speak more broadly just in general a lot of projects use the term decentralization and it's there's clear skepticism coming from the sec of whether decentralized entities

are in fact decentralized or is there central parties or an individual is there an entity behind the scenes that are really calling the shots and i think projects have to think about that you know that's a fair question for the regulators to be asking and you have to evaluate what exactly how are decisions made who's controlling the purse strings what are you know what are those factors so i think you know it's it's fair that projects should take an honest look and uh draw a distinction between how they're marking themselves and how they're actually operating and making sure that's that's in alignment that's that's an important thing to be thinking about and so in this case where even though it was that dokwan proposed it since he couldn't unilaterally sort of impose this new chain and the

community how to prove it would that i guess give it the characteristic of decentralized for that reason or what's your take on that well yeah i mean it's going to depend on a lot of factors in my mind right i would think i'm not familiar enough with the protocol to know how the proposals work how many folks are required to approve it if you know who's affiliated that's approving it all those types of questions would immediately jump to mind but you know one of the beautiful things about crypto in general is is that and and our capital markets quite frankly is that people get to decide where they want to put their money and transparency about what people are doing with that money and how they intend to use it and what they're intending to build is something that's quite easy with crypto and it's something that we should

embrace that the capital markets regulators in the us should embrace and really lean into because it's you know individual decisions about where to put your money is it's up to you as an american and that's um that's something that we need we need to honor and and protect here in the us so um it's you know something we shouldn't be afraid of so as we mentioned you uh were working with bill hinman at the time that he made his speech saying that if was decentralized in his view and that has actually been called into question under chair gensler and i was wondering if you could talk a little bit about kind of what the thinking was that went into that speech saying that eth was decentralized and whether or not you think any factors have changed to call

into question now whether or not it truly is decentralized sure yeah so you know i think it's very important to remember the securities law analysis under howie and everybody knows how we now and howie test i won't go into details it's incredibly flexible and incredibly fact sensitive right and so the bill hinman ether speech was was an attempt at acknowledging that the facts do change as the product evolves right as something is when it is sold a certain set of promises might attach to an asset when it is sold that might make it a security but over time those promises might fall away and it might become a non-security and just a different asset that acknowledgement i think is still

very valid and still very real you know i think it's a ongoing analysis that you know people are people can raise questions all the time that's part of part of the deal but at the end of the day that that core concept i think is very alive and accurate that the security label shouldn't have to follow an asset at all times if if there are no promises surrounding the asset then it's it's curious to me how how something could be in an investment contract and so in your view nothing has materially changed about ether to call into question whether or not is a commodity at this point oh and meaning that you have a different view from chair cancer or sure no i'm not familiar enough with uh

with his thinking i'm not i'm not here to speak for chair gensler exactly why he's thinking or what how he's doing his analysis but you know i think it's just fair to say that the the analysis is the same the analysis has always been the same the the law has not changed and and i think we're all operating from the same law which is a good good starting point and in a similar vein there's another crypto asset xrp that has been going through a very long drawn out case with the sec which has charged it with being a security and with ripple as issuing securities what is your take on what might happen in that case you know sadly i can't can't speak on it based on my work at the sec

but like everybody else i'll be watching to see how it unfolds okay and i think the other big topic that people are wondering about when it comes to the sec is why it is that the sec has so far only approved bitcoin futures etfs and not bitcoin spot etfs which are seen as a superior or at least a financial instrument that's more in line with what consumers expect when they buy such an etf uh why do you think that that has not been approved yet yeah it's a source of great frustration for folks in the industry and and for me personally you know i think the the test that the commission has laid out is is there so we we know what the test is and what needs to be met it's just that

the commission has not felt that that test has or threshold has been met so essentially what folks are trying to do in in these applications is they're trying to demonstrate that they can design the rules surrounding the etp to prevent fraud and manipulation and the way you do that essentially and i'll just summarize at a high level here is you establish that you have a surveillance sharing agreement with a regulated market of significant size and you have to demonstrate that that regulated market is where somebody that wants to commit fraud would actually have to go to commit fraud right so so the to pinpoint the question the question is you have a regulated futures market but if someone wants to commit fraud in

us in the bitcoin spot market would they have to play in the futures market and that's the question and that's where academic research comes into play that's where a lot of different analyses have to be shown and that's just where the disagreement is and so that's that's a battle that that goes on and um it's it's something that you know i know there's other applicants in the hopper and there's a continual line that we'll all will all be awaiting to see who can who can convince the agency all right well it has been such a pleasure having you on unchained thanks so much for coming on the show thanks for having me don't forget next up is the weekly news recap stick around for this week in crypto after this short break thanks for tuning in to this week's news

recap tara 2.0 is on the way on wednesday terraform lab's co-founder do kwan's plan to revive tara was approved the on-chain vote finished with 65.5 percent of the total in support only 13 percent voted against while 21 abstained in accordance with the plan tara will fork into a new chain without ust the algo stable coin that caused the collapse of the entire system the current chain will be renamed tara classic and the current native token will be called luna classic or lunc as for the new chain it will be called terra and will have a supply of 1 billion luna used as the native token

which will be distributed amongst current luna and ust holders both pre-collapse and pose collapse the distribution's goal is to make tara a fully community-owned chain tweeted tara's official twitter account in that vein neither the terraform labs tfl or the luna foundation guard lfge wallets will receive any airdropped luna tokens the proposal allocates a large proportion of the token distribution to provide runway for existing terra dap developers and to align the interest of developers with the long-term success of the ecosystem they added the new blockchain will be launched today friday the 27th as per the proposal this moment will be called the

genesis of the blockchain and the new luna tokens will be distributed according accordingly in other terror-related news south korean authorities want to introduce more regulations around crypto exchanges when exchanges violate rules they should be held legally responsible to ensure that the market functions well without any troubles said representative seung el-jong of the ruling people power party south korean authorities are taking action to freeze assets from the luna foundation gore a guard according to kbs the country's nationwide broadcaster they are asking exchanges to block lfg from withdrawing assets however as this request is not backed by law it is not

clear what these exchanges will do ygt and merit circle dow tussle over tokens a few days ago a member of the merit circle dao made a proposal to remove the tokens promised to yield guild games for seed investment by refunding their initial contribution due to an alleged lack of help coming from ygg in this way the dow hopes to terminate its financial obligations to ygg for context yield guild games and ytg co-founder gabby dizon originally invested 175 000 usdc in merit circle at a price of 3.2 cents per token giving them roughly 5.5 million mc tokens in total

the token is now trading at around one dollar so the 175 000 investment is now worth more than 5 million the proposal was made by a dow member called honey barrel the merit circle dao needs seed investors who are adding value they said in the government's proposal they ygg are competitors who are only interested in extracting value and profit from the dow and their actions go against the ethical principles that merit circle upholds after the accusations ytg posted an official statement in response to merit circle's proposal explaining that in september 2021 ygg entered into a simple agreement for future tokens or

staffed with merit circle ltd to participate in their seed investment round there were no conditions in the shaft that relate to value-add services it only called for the investment of capital ytg said ygg also pointed to many of the contributions they've made to merit circle including introductions to multiple funds and angels during the seed round support during negotiations help obtaining media coverage as well as governance and support to the merit circle operations team we have always looked to be collaborative not combative with our partners this is the basis of strong partnerships ytg said as of today no decision has been made and the merit circled out is still

debating the topic scandal around milady's crater causes price slump charlotte fang the founder of milady's nft one of the most popular nft projects of 2022 by volume admitted to an association with a racist digital community which appears to have led to a major drop in the milady nft price lady maker is an nft collectible created by ramila collective it is categorized as an anime inspired nft avatar project and consists of 9 691 unique digital items released in august 2021 on ethereum last week a d5 developer under the pseudonym of xerox ngmi are not going to make it

accused charlotte fang of being associated with mia an online racist community that spreads hate against jews black people homosexuals and even women then came clear on twitter and admitted that he was indeed a mia and that the accusations against him were accurate fang expressed his apologies for trying to hide his past and also tried to unlink m'lady from mia mia has nothing to do with m'lady maker and should stay that way so i'll be stepping down from the team from here he said the price floor of the milady project sank approximately 80 percent over the last seven days from 1.28 to 0.258 according to data from nft price floor that being said the floor price fall of

meladies appears to be part of a bigger trend in crypto right now for example crypto punx hit a new year low in floor price of 45.58 or around 85 000 less than a year ago it was trading at more than 128 which at the time was valued at almost five hundred thousand dollars uniswap reaches one trillion dollars in lifetime volume uniswap hit a significant milestone this tuesday the decentralized exchange or dex passed 1 trillion in cumulative trading volume over its lifetime as announced on twitter uniswap was initially built on ethereum but has since been deployed in layer twos and side chains such as optimism arbitram and polygon with plans of

expanding to gnosis chain and moonbeam network according to d5 llama uniswap is the second largest dex in the cryptocurrency ecosystem by total value lot with almost 6 billion dollars of tvl however by trading volume uniswap is the largest dex followed by cake swap however it is still way behind centralized exchanges such as binance or ftx according to coin gecko uniswap had 1 million dollars of trading volume in the past 24 hours while binance and ftx had 12 million dollars and 2 million 2 million dollars in daily trading volume over the same period despite the milestone the uniswap token has not been performing very well

it is currently trading at around 5.50 for context a year ago it hit an all-time high of 44.90 all d5 tokens have been suffering large drawdowns the d5 pulse index or dpi which tracks a basket of d5 tokens is down 85 percent from its all-time high in may of 2021. andreessen raises 4.5 billion dollars for crypto investments despite the market downturn andreessen horowitz or a16z one of the largest crypto vcs announced a new fund of 4.5 billion dollars to invest in crypto and blockchain startups of that 1.5 billion will go to seed

investments and 3 billion to venture investments this is the fourth crypto fund that the firm has raised totaling over 7.6 billion dollars in funds for web3 according to a post by chris dixon general partner at a16z they are going to use the funds to invest in promising web 3 startups at every stage dixon thinks we are now entering the golden era of web3 and that blockchains will power the next major computing cycle the current bear market didn't stop the fund from being raised bear markets are often when the best opportunities come about when people are actually able to focus on building technology rather than getting distracted by short-term price activity said ariana simpson a general

partner at a16z to cnbc arthur hayes avoids prison arthur hayes former bit mac ceo was sentenced to two years probation after being charged with violating the united states bank secrecy act stemming from his days as the ceo of bitmex when he did not run the proper anti-money laundering laws required by the u.s government to help prevent crime and corruption the u.s attorney's office for the southern district of new york found that hayes and his co-founder benjamin dello were guilty of willfully failing to establish implement and maintain an anti-money laundering or aml program at bitmex even though the charges faced by hayes carried a maximum sentence of 10 years in prison he managed to dodge

incarceration and was sentenced to six months of home detention and two years of probation in addition he will have to pay a fine of 10 million dollars i deeply regret that i had a part in this criminal activity said hayes in the courtroom crypto takes mainstage at davos and in oslo cryptocurrencies and digital assets were among the hottest topics discussed at the world economic forum's annual meeting in davos switzerland looking to encourage wider and faster adoption plenty of crypto executives and representatives showed up at the meeting such as jeremy alaire ceo and co-founder of circle internet financial however not everyone was in favor of crypto in davos

crystalina george ava from the imf compared the case of ust to a pyramid scheme and said that bitcoin may be a coin but not money european central bank president christine lagarde said cryptocurrencies are not currencies at all during an interview for radio davos on a funnier note last sunday there was a stall offering free pizza to the meeting attendees to celebrate bitcoin pizza day the commemoration of the first purchase ever made with bitcoin also this week the oslo freedom forum which i had the honor of attending organized by the human rights foundation brought together activists and bitcoiners from around the world the programming featured a full-fledged financial freedom track which covered

issues such as whether bitcoin is compatible with democracy and included workshops which taught lessons such as how to download and use a bitcoin wallet i had the privilege of interviewing a chinese distant artist who has turned to nfts to help evade the chinese government's pervasive censorship regime overall it was a fantastic week as always full of inspiring stories and innovative ideas on how to use technology to further the cause of human rights time for fun bits seth green's nft will not make prime time seth green an american actor and producer suffered a phishing scam and was robbed of several nfts among those

was aboard ape which was set to star in its own animated show by the way that nft had his own name fred simeon however as green no longer has the commercial rights to this nft he is not able to make the show the new holder of the digital asset an anonymous collector who goes by dark wing 84 owns the commercial usage rights according to daniel dubin a tax and litigation attorney at allston byrd llp in an interview with crypto entrepreneur gary vaynerchuk green said i bought that eighth in july 2021 and have spent the last several months developing and exploiting the ipe to make it into the star of this show the news caught the attention of preston

byrne a tech lawyer who said the rules are not clear and that nft platforms slash art sellers should know better and owe their users better terms than ukulele has done with the byc collection thanks so much for joining us today to learn more about koi and the sec's regulation of crypto check out the show notes for this episode if you're not yet subscribed to the unchained daily newsletter which comes out monday through friday go to unchainedpodcast.com and sign up right on the home page unchained is produced by me laura shin well done from anthony yoon daniel ness mark murdoch shashank and clk transcription thanks for listening [Music] you