Legal Issues Surrounding Blockchain and Cryptocurrency - Robin Nunn

Transcript

good morning everybody um we're a little bit behind schedule but i'm going to keep us on track and get us moving my name is robin nunn i am a lawyer i work at a law firm called morgan lewis i'm co-head of the banking industry group and an active member of the digital assets team i'm so excited to be with you guys today thank you first and foremost to eth denver for inviting me to speak on this compelling topic um this is an issue that i'm completely passionate about um and despite having so much fun at this conference and hanging out very very late here in denver last night i'm excited to be here with you this morning to talk about the legal issues surrounding cryptocurrency

and blockchain an issue that is really in the forefront of all things crypto right now i'm originally from the dc area i'm a dc native and sit and live very close to capitol hill and this is what is really the topic of the day as many of you all of you may have heard the biden administration is supposed to be releasing an executive order around the regulatory sort of enforcement and environment and framework any day now the word on the street is that it's supposed to come out next week and all of you should pay close attention to whatever it is that that says because that is going to impact the industry greatly and tremendously and is going to

really affect the us economies in ways that i think no one can imagine we're obviously watching the world sort of transform around cryptocurrency and really start moving in the space and the u.s is really trying to figure out exactly how we want to treat this financial asset so i have a very short amount of time and a lot of slides to cover so i'm going to jump into the deck if for some reason i don't cover anything that you want to talk to talk about please stop me i'm around all weekend and my contact information is easily researchable and findable on the internet so first and foremost i'm going to try and cover five topics today not four not three but five um the first

is going to be is cryptocurrency legal the next one is going to be how are they regulated the next one is going to be who are the regulators and the next one after that is going to be are there any significant legislative initiatives on the market right now and finally how successful is the regulation going so far so we turn to our first slide here um and i want to set the foundation first and foremost we all understand cryptocurrency and digital assets are not all the same thing there are nuances to this there's stable coins or cbdc's so if you think that you are looking for regulation in cryptocurrency make sure that that is actually the asset that

you're using because there are differences and there are nuances again i have 15 minutes can't go through the whole list but make sure you know what asset class you're in next slide um once you know that then you have to really ask yourself how are cryptocurrency and digital assets regulated in the us and that unfortunately is another one of those legal quagmires which is it depends there are a lot of ifs there's a lot of ands and there are a lot of buts um but you essentially need to understand what is the type of entity that is using the cryptocurrency and what are you trying to do with it so if you're a swap fund if you're a broker dealer if you're a bank if you're you know whatever you have to know what you are and where you

fall in the u.s in the legal framework and regulatory regime and you need to know what you're doing with it are you cussing it are you selling it are you buying it what exactly are you looking to do next slide there are a few seminal u.s legal cases that talk a lot about what is a cryptocurrency and what regulatory agency actually is the right one to opine these are two of the big decisions they talk about whether the cryptocurrency is a commodity they talk about whether the cryptocurrency is a um security and then therefore regulated by the sec when we asked the first question that i started at the top of the hour is it legal i know i saw a few smiles and

laughters because of course you can go down and get a cup of coffee and use a bitcoin or other cryptocurrency if you want and you're fine but there are illicit activities which you can't do under the u.s legal framework and some of them are obviously obvious you can't you know extort people you can't try and obtain ransom from people those are legal illegal and you clearly can't do them but there is this gray area that's begun to surface as it's become more popular in terms of what exactly is it is it a security is it a commodity and there are a lot of legal tests and legal scrutiny and and case law like like these that point you into the

direction of what exactly it is next slide so then the next question becomes you know how is it regulated and this is a whole long list of lots of regulators who are putting their names in the hat for being the primary regulator of cryptocurrency like i said at the top of the hour the biden administration is supposed to release guidance next week an executive order that will talk a little bit about how these regulatory agencies should work together and hopefully harmoniously develop a framework in which we can all have a better understanding of how crypto should be used and properly regulated i'm sure all of you have seen gary ginsler at the sec

making statements i'm sure you've seen you know chairman roseman recently did a hearing from the cftc obviously the prudential bank regulators are in there with the occ the fed the fdic the fbi with their criminal enforcement and a lot of their cyber privacy regulatory work is there and the good old irs i know all of us know the tax deadlines coming up but there has recently been um some guidance that's been issued that from the biden administration that you do need to pay taxes on this so all of these folks are in the mix and this is the federal level next slide now i'm sure you've heard about this patchwork quilt of regulations that is when we're talking about generally the

states because every state has a different law unfortunately and we have a lot of states in the u.s so not only the states but you also have to think about the self-regulating organizations like finra which were not on the previous slide so there's a lot going on so needless to say there are some states that are very crypto friendly so to speak and there are other states that are very like i don't know about this so you have to know where you're at and who you're kind of playing in the sandbox web relatively you know there are some states like new york that have kind of come out with these bit licenses and they're chartering and then there are other states that like hawaii that are like you know don't please don't come here

with that um so you really really have to understand where you are at because it does make a difference because we have federal and state regulation in the u.s cftc so i kind of mentioned at the top of the hour royceman who is the chairman he's leaving and someone else will be appointed but he's really given us some thoughts and some statements about how the cftc wants to be involved in this and you can see from the slide behind me that there are a number of not only guidance but also enforcement orders from the cftc that have come out in the last few years with respect to how they feel like some people are recklessly

delivering cryptocurrency so you need to be careful because they're putting out a lot of advisory guidance they're putting out a lot of interpretive guidance but they're also beginning to crack down and this is a cftc maybe not a regulator that you're used to hearing about but definitely one that's in this space next slide this is more i'd like to say that was one side for the cftc but i have three slides for the cftc because they have hit us with really well-known decisions like the kraken enforcement action as well as you know there were 12 i think digital asset trading platforms that were hit with this failure to register charge something that i'm sure a lot of us didn't even know existed um before 2021.

um bitmex was big enforcement action and these actions are not small potatoes these aren't parking tickets we're not talking 30 bucks here we're talking about hundreds of thousands and millions of dollars so we need to take note and unfortunately the rules haven't caught up the enforcement actions is where we're learning what their expectations are now whether you feel like that's right or wrong we can go back and forth on that but it's just the way that it is so you need to kind of whether you like law or you don't like law i like law um but you need to kind of pay attention and you know sort of get into it next slide and this goes back to what i was talking about with a testimony um i would check in um and look online at some of the senate testimony a lot of it

is on cryptocurrency right now a lot of it is on digital assets a lot of it is on stable coins or cbdc's um again they are very very very very focused on this and benham definitely made a plea that the cftc should be involved in the cryptocurrency regulatory regime next that brings us to fincen i'm sure you guys have all heard about ni money laundering and all sorts of sanctions now when i first started out i was in-house at a couple of companies american express and capital one and i used to control their money transmitter licenses and that was all that we really knew mtl go to this state go to that site sign up for a license and you were

done it's gotten a little bit more complicated since then but this is the organization that's really been in the mix um for quite a while with respect to anti-money laundering cryptocurrency was originally thought of as something that was sort of nefarious and for bad people trying to do you know naughty things so fenson was the regulator of choice in that area and that was really all you really heard um now that has obviously changed a little bit but vincent is still something that you should be very very concerned with because they still have managed to bring quite a few actions i won't read off their names in case they're here in the room but um you know that i've gotten into a little bit of trouble here next slide next ofac um that is sort of similar

along the lines of fencing another very very various serious regulator who is concerned with compliance obligations and making sure that you're facilitating financial transactions that are truthful and honest with legitimate entities and people that will no doubt with the right countries that we're allowed to have relations with and all those sorts of things you might hear the thing kyc kind of like know your client so the expectation is while obviously a lot of this is anonymous and volatile and all sorts of things there's still an expectation that you are aware of who you are doing business with and if it's

or whether you're not if you are a security that puts you in line of the sec so there are quite a few folks that are applying um to kind of be allowed to be more involved with the sec um but there are those who do not want to be and you should definitely know whether the activities and the entity that you have created falls in line with the sec because they are taking a very very very close look at this space and with that said we turn to all of the important cases and all of the enforcement actions obviously everybody probably remembers rip and kick and telegram

um there were some you know pretty large violations that were found in recent years with respect to how they offered and sold digital assets there are obviously no bad dogs but these are things that we can learn from and that we can take away from that might not necessarily be clear from the rules and regulations the u.s has not in my opinion done a really great job of writing out exactly what you can and cannot do i think that's something that they're working towards but as of right now it's just not the case so these enforcement actions these violations these decisions that they're publishing i would take a

look at and read and try and think through what similarities and differences your business has with these cases i'm i'm pretty sure having worked with some of these entities that they're they thought they were doing the right thing like all of us but you can easily get tripped up in this current environment in this current regulatory environment unfortunately so you just really have to be careful there's one of the things that i should have said at the top of the hour is one of the reasons why i i love this area is because i'm i'm passionate about helping the unbanked and the underbanked it's a personal passion of mine and i really love working with crypto clients because i feel like we are making financial inclusion for everyone

um not just a certain segment of the population um but their rules and their regulators and they want and while while they're getting up to speed and and figuring things out um we kind of have to color within the lines um and these sorts of decisions help us figure out where those lines are um so you may remember commissioner pierce they talked about a safe harbor for for digital tokens the safe harbor would provide network developers with a three-year grace period to facilitate participation in the development of a network by accepting certain actions um this has been released

and it's something that you should think about and figure out if you can sort of fit in in terms of the framework um there are also a lot of the i mentioned i'm from the dc area so i love politics and there are a number of politicians who are also getting into the fray and trying to release bills and legislations that would help with the regulatory sandbox concept designed to promote digital asset transactions so there are a number of of um political um sort of representatives who are friendly in this area and they're they're trying to figure out a way to both be safe and sound but also encourage innovation other noteworthy concepts i mentioned

gary gensler our sec chairman he's issued a lot of statements i think he's called it the wild well west even at some points um but i think that his comments to the house of representatives to the senate banking committee you know to the likes all sort of focuses on the same thing which is just wanting to make sure that cryptocurrency um is properly given guidance and is properly regulated and that you know that there is proper oversight over crypto asset platforms and that there's legislative authority to sort of deliver those requirements so i would say that there is pro shares

advisors has begun offering pro shares advisory etf um since the sec did not raise an objection and there are a few others that have come up um that the sec is also taking a review on but um we do have our first bitcoin etf um and you know hopefully more to come next so we're getting down to my last two slides and then i'll turn the stage over to someone else but i did want to sort of talk about my last point which are there significant legislative initiatives currently underway and the answer is yes um needless to say there is a lot in the works um in all directions um not just on cryptocurrency but on cbdc's on bank

crypto assets on you know the prudential bank crypto regulation with all of the bank regulators coming together um at once you may have heard about the infrastructure investment and jobs act that's what i mentioned at the top of the hour where your taxes um how the irs is now more involved with requiring digital asset brokers to report to the irs um their transactions and what they're valued at so that's just you know one example but there is a ton sort of heading in this direction next slide um you may have heard about the presidential working group or affectionately called pwg um they put out a report on the regulation of stable coins the cfpb has

also responded to that report there was a hearing on the pwg report there is a lot of sort of play right now with respect to how all of these digital assets are going to be regulated and like i said stay tuned next week we should see something from president biden with an executive order that should provide more clarity i had hoped it was going to come out before this talk but unfortunately it did not but we'll get to talk about it next year and thank you again for your time and attention really enjoyed this find me at the conference bye [Applause]