Policy Series: The Ripple Effect | Rebecca Rettig, Jake Chervinsky

Transcript

there are real winners that get significant Clarity out of this decision now Rebecca's right it's just one District Court opinion it's not necessarily the law of the land but it is a federal district judge saying the industry is right and the SEC is wrong and that is a huge deal because so many people think whatever the SEC says well that must be the law they're the experts they're The Regulators so whatever they say that's how it is and that is not true this episode is brought to you by Chain analysis the leading blockchain data platform that powers investigation compliance and risk management tools used by both businesses and government agencies around the globe you'll hear more about chain analysis later in the

show welcome back everyone for the um yet another great regulatory pod we have of course as always Rebecca and Jake welcome back uh really excited for this pod so much has happened in the regulatory sphere which I think is just a primary Topic in crypto lawyers are the the stars of crypto now um so anyways I'm gonna enjoy it until we get regulatory Clarity and we get like relegated to the back again well I think you have a couple of years ahead of using well so enjoy the fame and the and and the uh and um you know the attention congrats also Rebecca for the new role at uh polygon uh as you and Mark have always made a great team and it's great to see you both um now together so um guys so I why don't we just start

with ripple I mean a lot has happened on that front it's been over four years plus in the making so maybe we can start uh Rebecca or Jake whoever he wants to start but let's just start there um sure I'll start and just give like an overview of the case and maybe Jake wants to take you know what we can take away from it um from that I have my trusty copy of the case with me um but uh this is a district court case in the southern district of New York and the posture of the case uh or the opinion was really there were what are called cross motions for summary judgment so the SEC it was the plaintiff in this case saying that Ripple had engaged in unauthorized sales of Securities

um and thus violated the Securities laws said we've developed a factual record we took all the depositions we got all their documents um and based on the facts that we've developed alone uh we can get uh a ruling in our favor as a matter of law that Ripple violated all the Securities laws and ripple conversely said no the factual record actually shows that we did it um what you don't see in this opinion is that although they did drop a footnote to say this it sounds like the SEC put in 900 exhibits to support their case and having been a clerk in federal court twice I can tell you when one size puts in 900 the other side is putting in somewhere close to that if not something

equal so the court really had a big task in front of them to parse through all the facts as they've been developed and decide as a matter of law uh whether they could actually make a decision here interestingly and when you have a record that big sometimes you really can't do it and a court will just Punt and say like sorry there are lots of issues of fact go to trial so I do think that the court undertook this huge factual review and came out where they granted the sec's motion import part and denied it in part and then granted ripples Motion in part and denied it in part is a really big thing to take away just from all the work that went into it on the quartz part and then obviously on the part of the litigants to Def to do the rec uh develop the record

um but let's go through what it says really quickly one there were three basic types of sales uh at issue one were the institutional sales so it's like really what we think of it's like when you sell tokens to VCS or you know engage in that kind of uh um sale of tokens the second was what they called programmatic sales where Ripple sold xrp on centralized exchanges with blind bid ass transactions so Ripple didn't know who was buying the xrp and the people who bought the xrp in these programmatic sales didn't know they were buying it from Ripple uh and then there were these other distributions one of which was Distributing xrp as a form of payment and then the other was um Distributing xrp with the spring

initiative I think it said spring it starts with an X but I assume they mean spring initiative um and I think of that as like what we call a grants program sort of colloquially so uh the interesting thing is um the court found that Ripple engaged in sales of unregistered Securities with respect to the institutional sales I don't think anybody is surprised by that um it's sort of very consistent with what Kik and telegram did um also in the southern district of New York so that's important on the programmatic sales however where it was just retail users on a centralized exchange the court found that these weren't sales of unregistered Securities

um some of which is because they didn't know they were buying from Ripple uh themselves and so Ripple wasn't making these promises in a sort of contractual Arrangement and then the last thing is the judge found that giving tokens to your employees did not constitute sales of unregistered Securities because she said that there was no actual consideration no money changing hands and same with the spring initiative these grants programs also did not constitute sales of unregistered securities uh the thing she did pund on though was that um two of the executives at Ripple Brad garlinghouse and Chris Larson had sold um xrp uh and in their individual capacities and were those sales of

unregistered security so that's sort of open and up for trial and itself is a you know it's a big issue and the court just put out um you know yesterday so that Monday uh an order that said think about whether you guys want to settle that's not specific to this case that happens all the time uh after summary judgment where the the facts and the law has sort of shaken out and you have maybe a few things left for trial and the question is like can you just come to a resolution on your own so that's the high level the last thing I'll say is this is one district court in one District in the United States right it's not the Supreme Court it's not even the second circuit or one of these intermediate courts it's one court so it's the same as the court and kick and

the same intelligram same in library which was in a totally different District um so we've seen a lot of these cases come through district courts they're not binding precedent even within their own District the kick in Telegram and ripple courts maybe look to each other for guidance but it's not binding on them only these intermediate or the Supreme Court is binding so I think that's an important takeaway but Jake what should we take away from this case well Jake I want to go to you because I think you put out a great tweet uh which I retweeted so some folks read Financial journalists are still confused about the Ripple decision the key holding is that quote unquote investment contract analysis must focus on transactions not assets tokens are not Securities transactions and tokens Can Be depending

on facts and circumstances so I thought that was a great tweet but I'll let you comment on on this well yeah thanks for thanks for flagging that I guess let me um let me first give some context for how big a deal this is and then we can talk about that specific point this is a huge deal this is the biggest thing that I think has happened in crypto law since I got involved in this space in 2017. I do not think that we should underrate how important this is everyone has been waiting for the court to resolve this case for a long time no one knew how it was going to come out I don't think anyone expected Even in our sort of wildest dreams about how good this could look that it would look as good as this and I think that the key is there are real winners that

get significant Clarity out of this decision now Rebecca's right it's just one District Court opinion it's not necessarily the law of the land but it is a federal district judge saying the industry is right and the SEC is wrong and that is a huge deal because so many people think whatever the SEC says well that must be the law they're the experts they're The Regulators so whatever they say that's how it is and that is not true and having a federal district court in a case of this magnitude come out and say the sec's theory of the law at its foundation is incorrect it seriously is is the biggest deal of anything that I that I could have imagined seeing I think the the key is that tweet that you just mentioned which is the SEC has this

perspective which is tokens embody investment contracts we refer to this as the embodiment Theory so what they will say is if a token is initially sold as an investment contract the token itself represents the security and no matter how many times it trades no matter who has it no matter how many euros have gone by the token itself is still a security and we the secf jurisdiction over it and the court says that is not true the investment contract analysis which is this uh this element in the Securities definition in federal law um that is one of the types of regulated Securities the Court says the investment contract analysis does not focus on the asset it focuses on the transaction the

big winner of that decision is the exchanges who are also being targeted by the SEC right this is the essential issue in the coinbase case the SEC says all these tokens right these 13 tokens that we are listing they embody investment contracts thus they are securities thus when coinbase creates a secondary Market listing those tokens for trading coinbase is violating federal law by acting as an unregistered Securities Exchange I don't see any way to read this decision and think the SEC wins that case so I think the big winners here are coinbase and the other exchanges being targeted by the SEC by virtue of that the rest of the entire industry big winner in this decision Jake's Jake's Take is so much more

exciting than mine can we rewind let me start over but in all seriousness the SEC also had a rough time in the southern district of New York in the coinbase case last week where they okay they showed up for I think their initial conference or some uh argument um and there is a great exchange between the judge and that case and uh the SEC where she said do you really expect me to believe that when you approve that's what we've all been saying in the industry then when you approved their S1 um that you weren't looking at the legality or at least didn't give them a heads up like hey this may not last and we may take it away and it's a it seems like a very long exchange and she basically says I want you to know like you're not going to really be able to

clear this up for me because I do think it was incumbent upon you and if you think about it logically like okay if they're approving an S1 for a telecom company they can at least say like as a matter of law you're engaged in Telecom what you're doing is legal whether the technicalities of it are right we couldn't weigh in on because that's that's covered by the FTC this however is something that the SEC says they are the ones to determine the legality or illegality of it so letting the S1 go through um I do think is going to be something one that everyone said back in the day when the SCC back in the day a month ago or whatever when the SEC first brought the case of coinbase people said there was going to be a lot of skepticism um from the judge on this and it

obviously came true and I will tell you from people that I've even spoken to in Trad Phi also just don't even believe this thing in terms of they approved the S1 and now they're coming back and saying it's illegal and I think the other point on that that at least I've heard from a lot of people in traffic is their job is to protect investors and they just wiped out a lot of um sort of investor value by bringing this case um and then to go back to one thing that I think I think there are two parts um to what Jake had said and it PS Jake's tldr was we are so back um but I think this is the thing that really is like one of the key takeaways in the case where the judge writes xrp as a

digital token is not in and of itself it can't track transaction or scheme that embodies the howary requirements of an investment contract and so I do think that people are going to have to start going transaction by transaction uh and and that's what the industry's been arguing for for a long time uh Ripple said that there are these implicit uh sort of elements that you have to look at before you get to the investment contract analysis one of which was is there an actual contract and the judge said I'm not going to look at all three of those but she drops this interesting note at the end of the section saying but I will look if there's a contract she sort of says I didn't like oblique way so I do think um you know where it says investment

contract you have to take the language of the statute on its face that there really needs to be an implied or an express contract so analysis is the Premier blockchain data platform crypto businesses financial institutions government agencies regulators and policy makers all utilize chain analysis data and services to make sense of what's happening on the blockchain to analysis demystifies crypto by providing industry-leading compliance Market intelligence and investigation support for all crypto assets for organizations like square and Barclays and bny melon as regulators and policy makers work to together to pass legislation that provides Clarity for crypto businesses

and protects consumers they have the chance to do so with unparalleled data and Research into the entire crypto ecosystem gain greater visibility and insight with the leading blockchain data platform by visiting chainalysis.com forward slash Empire if you are looking to compliance and you need blockchain compliance there is no better place it is chain analysis.com forward slash Empire what are the I want to go to because my thinking was when I read that at the investment Contracting is what are the repercussions and implications for other token issuers and the industry and the way it's Finance itself of course you know you have typically the these you

know early stage financing rounds where you have a token warrant and then there are subsequent maybe fundraising Venture rounds in equity um and then you have a token issuance event usually that's kind of the sequence for most of these projects so what what is now the for all the kind of Founders out there that have been or just investors out there like what is now the sequence if you were to interpret what has happened with ripple and say okay this is kind of the blueprint for projects going forward what would that look like well okay yeah let me let me uh throw my ticket you and then tell me why I'm wrong about this um I think that this actually strongly validates what has developed into the

industry standard at this point right and the industry standard is just as you described there's sort of two different transactions that occur one transaction is with investors in the development company that is creating a blockchain based product or you know launching a new blockchain and then giving tokens or the right to tokens to the investors who are investing in that project now when you look at that transaction and you apply the investment contract analysis to that transaction I think you're going to find that there is an investment contract right there are promises made between an entrepreneur and an investor that the Entre entrepreneur will use the Investor's Capital to build something of value and their promising profit if they succeed in doing that right that is an investment contract but that investment

contract is not embodied by the tokens which can at some point in the future provided there is compliance with the Securities laws be resold on a secondary Market by that initial investor without that secondary transaction also being viewed as an investment contract because you won't have those same indicia of a security when you have that second transaction you then also have the distribution of tokens by the development company to the public and this is the other piece of the decision that I think is a huge victory for the industry which relates to air drops and the interpretation of the first prong of the Howie test which is the requirement of an investment of money and the SEC

for a very long time has basically said the Howie test is meaningless anything that has a price on a secondary Market is a security you can have an investment of money even if there is no investment and no money changes hands right what they'll say is if you're the recipient of a token and you are going to contribute some sort of intangible effort that will bring some kind of value to this scheme as a whole that is an investment of money right the SEC has said even giving an email address over to the entrepreneur who's issuing the asset that email address is something of value and that is money under under the case law this decision I think fully rejects that theory what the court says

is you only have an investment of money if you have a transfer of definable and tangible consideration from the investor to the entrepreneur now that doesn't actually mean money like cash or you know some other National currency it could be some other definable and tangible thing of value but if you receive an airdrop and you're not actually giving some asset to the Creator and distributor of that token you you are not going to have an investment of money under this decision and what that means is those airdrops that we've been seeing in the market in my opinion and of course this is not intended as legal advice my usual disclaimer but my best read of the decision is those distributions will not be viewed as Securities because there is

not an investment of money so to me major validation of how the industry has designed these types of distributions in the last few years Rebecca before I go to you on this point of airdrops could the SEC or some other regulatory agency say wait a minute here you've expended energy Capital opportunity cost to farm the airdrop because usually the criteria for a drop is hey you've been engaged in the network in some capacity you've expended time uh foregone some sort of other opportunity costs or some nature that you're being compensated and rewarded right think about D5 like yield farming as a primary example in that case could could you see the or that argument having any Merit in in court

um I mean it could have some legs the the Howie case on investment of money has developed in such a way where certain courts do say can be anything of value whatsoever I will say what's interesting is that um in this case especially with respect to the distributions to employees the Ripple judge really hued very close to the language to say there was no money that changed hands and I will say we have seen other excuse me other courts definitely say it can be anything of value so I think that's important got it um in terms of the appeal do you of course Rebecca you mentioned this is one chord if it has still obviously a big

repercussion but do you think one the SEC will contest this um and as it relates to the Ripple case I mean are we calling it a win is is this being going to be challenged some people say yeah so the people say no um I'm just kind of curious where you see like I'm really cautious to call this like a victory and say Kumbaya because then things can get reversed but like Jake you seem really on the on the cap of like this is definitive Rebecca I'm curious where you kind of stand and um yeah sure so as I sort of alluded to the what can happen right now only is theoretically the case goes to trial on the remaining issues or it settles on

the remaining issues after summary judgment if you don't uh resolve every single issue there's no final determination on every issue in the case so in theory the as neither the SEC nor Ripple can actually go up an appeal now the only way they could really do it is by doing something called an interlocutory appeal so an appeal in the midst of the case that's a very high bar to reach you usually have to get the district court judge to certify that there is an issue here so important that it merits staying the trial and goes up to the second circuit and the second circuit also has to agree to take it on that seems like a leap to do right now with these remaining issues against the individuals out there

um I think it's a toss-up on whether the SEC actually appeals I've heard people say like chair gun store is definitely going to have to do this to you know make sure he vindicates his I can't read all of Jake's uh facial expressions right now but I'm excited to hear what you have to say I've heard people go both ways on it I do have to say I I think there is um I don't know if I'm fully on the we are so back train yet but like there is a turning tide and I will say just even from a lot of my regulatory meetings or other types of meetings that I've been going to um it's not you know hugely that way on the hill with everybody but even within

some agencies and definitely within tradpy there is a big turn right now and so I think some of it may be based on where the political pressure is at the time but I'm really interested to hear what Jake has to say about whether there will be an appeal or not look I mean look everything that Rebecca says as always is accurate I just think that we've been so beaten and bruised by the last couple of years and the string of losses and the pain and suffering that we've had dealing with the SEC that we're all just afraid to celebrate what is obviously a giant win so look I I could there be an appeal yes but I think we have to listen to the SEC and take them at their word they made a statement about this decision it was very unusual they said they were pleased with the

decision and I don't know why they say that I think it's probably just them trying to spin and it being so laughable that we all know it's ridiculous but I don't see them coming out with a press statement saying they're pleased and then doing an interlocutory appeal now will they appeal when the case is over sure but that's months maybe more likely years away depending on how Ripple decides to handle uh you know pre-trial emotions practice before we actually get through a trial by the time we get to an appeal it's another months or years before there's a decision and that decision comes from a random group of three second circuit judges we have no idea what they will say at that point is Gary Gensler even still with us I just feel like there's so much uncertainty

about all of these years down the road what might happen on an appeal that it's not even worth talking about right now what we have is a decision from a federal district court that says the law is what the industry has been saying the law is for years and let's be glad about that and let's keep pushing the ball forward in other cases to make sure that that becomes the law of the land that's my so I think that's right um in terms of like we have a turning tide of sentiment I do I honestly think the judge's statements and the coinbase case um at the oral argument last week were com very compelling which is you know we've been really Jake didn't use the word but like we've been gaslit for so

long about what this industry is what it's doing how it actually works um with so much skepticism first it came from tradai now they all love us and are you know singing our song or getting theirs at least on the Bitcoin train for now um and then obviously with Regulators coming off of a lot of what they are behind the scenes and so I think that we do need to keep pushing I don't actually think anybody should take their foot off the gas right now because we do have momentum our way um not to be a Debbie Downer but apparently uh chair gun store was at the national press Institute or the national Press Club this week and even though he was pleased about the institutional sales he actually said he was disappointed uh with the decision on the

um programmatic sale so they are splitting hairs on that but I think Jake's right like there's there's a lot to be seen and I do think that this has cast a lot of Doubt when you get to the policy side of things as well which is really important to talk about during this discussion as well yeah maybe we can go there actually because you know you guys are very involved there's a lot of stuff happening in Congress you have the stable coin kind of act you have uh the coinbase case so I'm curious how much is the Ripple decision trickling down to other places in DC but also in some of the kind of other

uh kind of tracks that we have right we have the the couple bills um and acts out there that are being discussed so I'm curious what are the implications here what's the sentiment out there um I was on the hill and started meetings about 20 minutes after the Ripple decision dropped um so that was a very eventful day and sort of got to give a first preview and read out to everybody and say like this changes things uh materially it does validate a lot of what the industry has been doing a lot of which is reflected in the McHenry Thompson bill um and just to say like we're not going to be able to leave it up to the courts as people have wanted to do a lot of um you know Congress people have wanted to

do to say well Gensler and the courts will work it out I just don't think that that we can leave it to that anymore and a couple of the points they made uh were you know this is now one Court we have a patchwork we're going to have lots of different decisions and you're not going to be able to reconcile them all because they're all on different facts and don't you want to have one fabric that everybody can look at rather than trying to piece together takeaways from District Court decisions for the next three to five years while we're waiting for appeals and maybe going up to the Supreme Court um so I think that's a really important takeaway that the courts aren't going to solve all this for us because they aren't all coming out the same way and there are a number of different issues

and the other thing I said is um sort of what you guys alluded to in your last podcast which is well how is the industry going to evolve based on what is said in this uh decision and a lot of the things I said on the hill too were people are going to take things away the industry is evolving so fast there's going to be something new do you want the SEC to have to think about what they're going to do and what this means from a how the industry evolves standpoint three to five years from now and I have to bring a note a new swath of cases is that how we really want to be using resources or do we want to actually put in legislation that says once and for all how the industry is going to operate do you think this changes the sec's I

mean do you think internally the SEC thinks twice before doing more of this uh enforcement through kind of Regulation or regulation through enforcement yes and no I think um yes because this is embarrassing for them like their statements that they are pleased aside I think you know the the polished press statement says they're pleased and then you know chair Gensler says the truth when he's put on the spot in a live event and says he's not very happy about this and that matters a lot to chair Gensler right as we've discussed before a lot of the SEC strategy is in large part about the appearance of chair Gensler as the cop on the beat who's taking care of all of us non-compliant crypto companies who just refuse to follow the law even

though it's so clear and this really does damage to that to that impression and I don't think that the SEC will want to expose itself to a lot of more decisions like that I would expect that they will pull back a little bit on the litigation risk that they decide to take that said I don't think they're going to drop any of the cases that they've brought right they're not going to give up on the coinbase or binance or bittrex cases or any of the others that they've brought um and so they are also going to have to double down and I think what that leads them to do is to say exactly what Rebecca said in making the sec's argument for them which I think we should probably not do too much which is this is just one decision from one District Court Judge we think this judge

got it wrong we think that another judge in a different District or even another judge down the hall in the same district will see it our way and this you know this will just be a sort of a momentary blip and I think that's probably most likely what we will see from them on the I just want to go back to Ripple case quickly which is when I read it Jake I think you when I saw your tweet I was like okay I get it because I read it look the token itself is not a security but the nature by which you sell it can have implications so of course the programmatic element seems to be okay but not if you're doing these OTC deals with institutions what does that actually mean in practice for someone like Ripple like do you get fined

because thinking about other issuers of course that have done these OT like institutional sales and programmatic sales like it feels to me like there are a number of other projects that have done both and so one was where do you see this going for ripple and perhaps other issuers that have engaged in both type of sales I think maybe two thoughts on this one is um as I said before in a way it validates the transactions that we've seen that have become pretty common where that initial transaction uses an explicit exemption from the registration requirement under the Securities laws right if you do a regulation D private

placement meaning you only sell it to accredited investors and you apply the proper lock-ups and and you know all of what's required under the law you don't have to worry about whether your transaction was or was not a Securities transaction because you know that the law doesn't apply and I think you know this sort of confirms that that's what will need to happen one of the problems for ripple I I and correct me Rebecca if I've got this wrong but I think they could not use the regulation D exemption because they didn't have the right lockups in place right otherwise those institutional sales also would not have been a problem and so I think it sort of just reinforces that we've learned a lot in recent years and people were doing it differently at the time that Ripple did those sales I mean go ahead yeah what

I'll say is it doesn't mean that Securities laws don't apply to the sales to the institutional investors it means you don't have to file a registration statement to say we sold Securities and hear all the disclosures and things like that because you're selling to sophistic as the Ripple decision says you're selling to sophisticated investors so we're assuming you don't need all the disclosures that are required by the Securities laws when you sell in a in a wider uh venue I think what happens though here um and I don't actually know what happened on the exemption I think they didn't have the right lockups in place they certainly didn't file I mean you don't have to file a form for a reg D but they didn't um so very unclear what happened with the exemption and you could probably go back and figure it out from the record

but I will tell you it's very vast so I haven't but there will be a huge fine here um on the on the issue of the institutional sales um very very very large well in excess of probably any attorneys fees they've paid uh so so over 200 million probably I mean I do think it may be in the hundreds of millions which is probably why the Magistrate Judge said hey do you guys want to try to figure out some form of settlement but I would still be surprised if either of these parties wants to settle and so maybe for our audience let me put a hypothetical case here so so you're a a uh to be fair one of the things to important to mention here is that Ripple is sort of

this predates this new standard right because a lot of the projects like post 2017-2018 Ico boom there's a sort of new framework of a token warrant and most teams have kind of gone this path but like Ripple obviously was before that and so it didn't have maybe the lockups in place now of course Rebecca you know in my time to verify that we we and Jake as well like a lot of lawyers and projects have used the template now the post 2018 but even those projects let's hypothetically say you you went through the first couple of private rounds you had of a safe and a warrant and then you at some point issue a token

the investors that were in the private rounds have lockups typically over a year they at some point get that token invested then you have a huge airdrop to the community some of which might have a lockup other that does not and then the team also vests over time so you know investors and team are are vesting the community can get the air drop it could be immediately kind of up for sale in the you know they can do whatever it is that they want and then they can trade it on these exchanges or a D5 protocol but say at some point that team once you have a token wants to raise more money and a lot of projects find themselves in that position whether because it's a bear Market or because at some point

they get approached by a fun and they say Hey listen we'd like to buy tokens and we're we can be subject to some lock-ups typically right what is sometimes deemed as like an OT like a like a pipe if you will and in public markets you have a pipe right you have typically a fund that says goes to a public company and says hey we want to buy a bunch of stock let's structure it is that problematic because a lot of teams have done this right like some fund would approach a project and say hey we want to buy a bunch of tokens um can we do that is that okay or is that not okay or is there some Nuance here that if it has a lockup and proper structure then it can be okay say two things one

one Jake and I are not your lawyer so this is not legal advice right yeah well of course disclaiming all of those things um but um now I'm back in a fully legal role I always have to say that but um Folks by the way this would have cost you a couple thousand bucks this anyway continue um but um it depends it depends where you are in the life's like I know sorry but it does depend this is a real it depends if you have a more definitive answer then you're a better lawyer than I am but like it depends on where you are in the life cycle of things like if you sell tokens for a protocol that you have no involvement with or um that you know is fully running

autonomously and you're just selling out of your treasury it just it may be um based on the circumstances that go around all of this and one I think the other thing is like what do you promise in the transaction in these Securities um and I think that's the really important thing and you may promise different things based on the life cycle of where whatever you're developing is the one thing I want to say though that I haven't heard a lot of people say publicly yet this decision does not mean no token can ever be a security by the way most of the tokens as we know and see them today probably are not given that way that they um you know they're structured but you can structure a token

to have features that are very security-like and so those you really need to still keep thinking about whether the weight like if the token has you know a revenue stream or something like that associated with it that may be a security depending on how it's set up so you do have to think about it and I just I don't I I know I'm the Debbie Downer on this podcast and Jake is the we're so back person I can live with that but I do want to make sure we're like taking the Nuance away from this from this too but I'm very happy and emboldened by this uh this decision as well yeah I I wouldn't be so bullish if I didn't know that Rebecca would uh would keep us at least a little bit grounded in this conversation I guess maybe just two quick thoughts on that

one is really important flag that Rebecca made we're not saying no tokens or ever Securities what we're saying is under the Ripple decision tokens do not embody investment contracts under which they are sold that's all we're saying you could issue a token and have it be a stock and is going to be a security or it can be a note and that's going to be a security and there are ways that you can trip those things without meaning to so people still need to pay a lot of attention to those issues and then I guess to address your hypothetical I I think Rebecca's totally right it depends but I think that the Ripple decision helps us understand what the circumstances are where that transaction that later sale of tokens by the development company will be viewed as an investment contract right you look at

the transaction and what that means is you're looking to see is the entrepreneur raising money from the investor on the promise that it will use that money to make profit for the investor and you can imagine a circumstance where even though the token's been live for a number of years and there's an active secondary market and a functional Network underlying it that the development company still says to the later purchaser we need more money so that we can keep building this network out and if you give us that money we're going to use it in X Y and Z ways and that's going to bring a lot more value to the network and to the token that we're selling you that's very likely a Securities transaction you could also Imagine a situation where the development company is basically no longer functional and isn't doing any

more work it's kind of like a holding company for Tokens The Tokens really look like they're just Commodities as if the company was holding gold or silver or some other type of asset that it's not making any promises about and if it's sold those tokens under those circumstances where there are no promises about future efforts that will yield profit for the investor well maybe that's not a Securities transaction but the whole point is you look at the transaction not at the tokens yeah just to round out this discussion obviously the latter description looks and feels a lot like the ethereum foundation for instance where they have a bunch of Ethan they're actually going through an exchange like everyone looks at whenever they send uh uh tokens East to an exchange it also marks local tops

surprisingly um but uh yeah they go through and they sell it at coinbase or Kraken or whatever and so you know of course they're engaged in some capacity as as a as a node in the system as a developer you know they're part of the network but they don't control it and they you know um the other perhaps more interesting one that we've seen is this kind of that is is left of up to governance and this touches on an important thing that maybe you're in the Ripple case it's not relevant but this idea of decentralization and governance for instance if uh you make a proposal on chain for instance uh a protocol like Lido you know you've had or even Sushi and other protocols have had a fond or

some sort of party that says hey we want to buy tokens from Treasury this is the proposal this is Who We Are and it's then left uh for token holders to vote on that proposal and you could say hey well it's sort of like a is it sufficiently decentralized who's voting sometimes the team has a lot of say in that but other times it doesn't and it's just the token holders where is that in your mind in terms of kind of is that a contract per se is that a is that yeah I'm just kind of curious what you think that would constitute um

based on this that's a tough legal hypo um I think we should give that well we can pass but but you know this happens a lot because tokens wanted yeah like protocols want to decentralize and then like you know at some point but you know it wasn't in the Ripple decision this concept of sufficient decentralization well that's what I'm saying yeah I think that's really really that's a really important thing to think about um it really focused in on like the actual conduct the actual transactions at the time like it was it queued pretty closely to the factual record and did not pull in and interestingly right the Hinman emails were released based under this case and all the and all the discussions and that didn't even factor

into anything suggestion yeah not at all um so this concept of decentralization you know we have to think about like where it fits um not just in the regulatory or policy landscape but just where it even fits from an ethos perspective I think that's the most important thing to focus on but as far as a you know Ozil to a Dao I mean it goes to the same thing like will the Dow keep you know doing things like we're only gonna buy the tokens if Dao you do X Y and Z and it's going to be a slow release over time and there are Milestones to me you know with the Dow and things like that or they just want to buy straight from the Dow because they don't want to buy off an OTC desk and so you have to sort of consider the

proposal in real time um I do think it'll be very challenging to enforce anything as we even saw from Uki right yeah this is a bzx kind of case which is there's the corporate veal that doesn't exist and everyone's kind of well right this idea like oh we won against you know the cftc brought a case against ukidao and even if they won you know on a default judgment like what's been the win right I mean people were very up in arms about it at that time but I don't think even in an even in and of itself that case made an impact to say like oh we're all giving up Dows now or things like that because it's very hard to enforce against a Down especially a very distributed one yeah I um I do think this is one of the

limitations of the Ripple decision right it doesn't touch this issue at all and it doesn't really help clarify a bunch of of issues that we still just don't understand right so first of all like we said the decision stands for the view that the token doesn't embody an investment contract but it still could in theory represent an interest in an entity that will be viewed by a court as an unincorporated association that is liable for operating some protocol as a business right so this doesn't solve any of those kinds of issues like the the hidao issues I I think this is also where we have to look to legislation right this is a great opinion but it will take us another 20 years of opinions like this to clarify all of the various issues that we need to get

clarified so you don't have to pay a million dollars to a law firm to write you a 30 page memo that ends with we don't know best of luck to you right and this is where you know this is a really exciting time because next week there's going to be a markup in the house financial services and house agriculture committees on the McHenry Thompson bill which Rebecca mentioned earlier this bill is designed to solve these problems right to resolve all of the regulatory uncertainty by saying we are going to treat tokens sold under certain circumstances as restricted digital assets a new term defined by this bill and we're going to have the SEC regulate those restricted digital

assets and we're going to impose reasonable disclosure requirements for the creators and issuers and Affiliated and related persons of those assets and we're going to have those assets trade on SEC regulated alternative trading systems but also we are going to set out in law what is required to certify that the asset is now decentralized rather that the network underlying the asset is decentralized and once that certification is done jurisdiction moves from the SEC over to the CFT see the asset becomes a digital commodity no longer a restricted digital asset it will then trade on a cftc regulated digital commodity exchange and now we don't have to play these silly games

trying to figure out what courts are going to say about what the investment contract analysis means or when you have a security or not and this really is the way that ultimately we are going to get clarity so Rebecca and I are spending a lot of our time the reason she's on the hill and I'm on the hill is talking about that bill and I do think the Ripple decision reinforces for congress why we need legislation because these issues are not going to get resolved unless Congress speaks about how it wants this industry to be regulated yeah and one of the sponsors of the bill um Glenn Thompson who's from Pennsylvania and on the house agriculture committee came out about the Ripple decision and said this is what we've been saying all along that we do not have Clarity and exactly what Jake said these court cases alone are going

to give it to us and that's why Congress needs to act I will tell you um while it's not a one-to-one comparison I do think that the McHenry Thompson Bill looks to codify much of what we've been talking about in terms of how the industry works today and that is what Ripple does too and so when I was on the hill last week even though I'd only been able to do a very cursory read on the rebel decision before I started talking to you know staffers and things like that I said like the McHenry Thompson Bill lines up with what Ripple is saying um and that's really that's an important takeaway and as I said it's not a one-to-one comparison and there's not words like programmatic sales and stuff like this but this idea that when you sell them to an investor with a bunch of

promises before there is a you know live token live Network Live protocol whatever and then uh it has through its life cycle the ability to sort of the token comes out of it it's like a butterfly it comes out of the Cocoon of the investment contract and goes on its own just as a commodity uh is sort of what the McHenry Thompson Bill sets things up to be yeah yeah there's so much left that is unresolved in the Ripple like even is something a uniswap a programmatic sale not touched on right to my knowledge I mean D5 is sort of this only talks about exchanges look huge weigh-in and it potentially sets up coinbase to win against the SEC and um and then potentially you could see you know a lot of projects go through an

exchange for you know again consumer protection is something that is definitely need like we need to work on that as an industry I think no one can disagree on that because there's still a lot of scams and and there's still not perfect information and so if that's going to require you to go to which by the way already happens like if you want to get your token listed on coinbase or binance like any major exchange you're gonna have to produce a whole set of documents who is or the investors look I mean they're pretty not as much anymore that was that was the case a long time ago but not as much anymore I think some are different than others but but sure um and so again you talk about information disclosures and requirements and transparency well a lot of the exchanges are doing that is it public

for everyone to see no should that be public maybe yes probably yes and so disclosures are the lowest bar this industry needs to jump over and I think everyone would do it except they're afraid that that will be used against them in an enforcement actually without that everybody would be disclosing whatever because there's not much to hide which coincidentally allows for scammers to get away with stuff because other people are afraid and so in this state of fear you allow the Bad actors to to thrive and I think Congress more and more understands that I think that a lot of a lot of folks in the hill are saying this is why we need Clarity because as soon as you have Clarity then it allows the the SEC to be really just focused on going after the bad guys not everyone

out there you know and so I think if you have clear rules and you understand who's violating them if you don't have any rules then everyone's in this state of like guilty until proven innocent or unless you're and it's very frustrating and challenging actually for the industry guys anything else on the Ripple case I know we you know want to touch on the the bills and some other stuff that's going on in regulatory land but anything else to say on Ripple I before you decide that Ripple has opened the door for everyone to do programmatic sales or everyone as you sort of said like can we sell on dexes like before you extrapolate that and and come up with a new way to distribute tokens by the way the innovation in the space should keep on keeping on but talk to a

lawyer because don't just take what you hear on a podcast or you know read on Twitter or even if you read the decision yourself and think it necessarily blesses your behavior because as I said there was a huge factual record a lot of it probably wasn't necessarily discussed explicitly in the opinion and so think about where you are as a you know as a project or not everyone has 200 million dollars to like you know get this type of judgment and by the way no we're not set up to do IPOs initial programmatic offering so guys you know hold on and like just talk to a lawyer because there's there's a tried and true method that seems to be okay but you still need to talk to a lawyer unfortunately yeah so I agree no they're always yeah so yeah that's a great Point Rebecca

um should we transition to talk a little bit about what's uh I mean we we sort of alluded to and talked to a bit uh the McHenry Thompson Bill I know we touched on it in the prior episode anything else anything worth kind of updating on that front uh I know you mentioned earlier that there's a round of edits coming next week or so for discussion yeah sure so um this is sort of like how does a bill become a law and the first thing that happens right is that the bill is introduced so um I actually don't know if this bill has been introduced yet right because all we have is a discussion draft so we're still waiting for there to be actual text introduced um hopefully that will happen um pretty soon and it'll be a little bit different uh you know we know there have

been a lot of changes made and staff has been working extremely hard uh to take feedback and improve the bills so I think the discretion drafted exactly what it meant to right it created a good discussion about the issues and so next there will be text introduced that text then has to go to the command committees that have jurisdiction over the content of the bill and this bill is in the jurisdiction of both the house financial services and agriculture committees because it deals with both the SEC and the cftc which are overseen by those two committees I'm actually quite a rare thing usually bills only fit into one or another committee and this is a joint effort by the the chairman of both of those committees uh chairman McHenry and

Thompson a markup is basically the Committees looking at the text and then deciding do they want to vote up or down to report the bill to the Full House of Representatives and when they do that they can also amend the text of the bill so if they vote no the bill dies in committee if they vote Yes then the bill along with whatever amendments or changes are done in the markup right that's why we call it a markup is you're marking up the text of the bill will then get moved to the house floor and it gets a vote from the full Full House of Representatives now if this Bill gets reported out of the financial services and agriculture committees this month it will likely go to the house floor this

fall September or October where it will either have its own hearing on the house floor where they'll vote yes or no on the bill itself or it could in theory get attached to some other bill right as we know often bills just sort of get stuck into other totally unrelated bills and they get moved together as a package if that happens the bill would then move over to the Senate and it's really hard at this moment to predict what would happen in the senate in order for any Bill to become a law it has to get voted through both the house and also the Senate and then it has to get signed by the president the issue we have here of course is that we have a House of Representatives controlled by Republicans this is primarily a Republican bill right both of the chairs

of those committees are Republicans the Senate on the other hand is controlled by the Democrats historically the Dem Democrats have been much less interested in doing legislation related to crypto this is where the Ripple decision I think is quite impactful because it is sending a message to Democrats the SEC does not have jurisdiction right now if you want these markets regulated then you're going to have to move some legislation um but then we would we would see sort of weather and how the bill would move in the Senate and if it did whether or not President Biden would be willing to sign it so it's sort of a long road we're also coming up next year on the presidential election DC kind of shuts down when the election season gets started so we don't have a whole lot of

time to try to get this moved and if we don't do it this Congress then we're coming back in 2025 potentially with a whole new set of players different you know potentially different parties in control of either chamber of Congress and maybe the White House as well so it's really hard to predict but definitely something that the industry broadly is hoping that we can get done provided that the bill is workable for the industry so it's an exciting time for for legislation in Congress and a complimentary piece of legislation that's coming up at the same time is the stablecoin bill right we saw that come out um a draft of it come out previously then we saw it be re-released then we saw uh ranking member Waters put out a draft of her bill with some changes to

it but that's also coming through and likely will be put up for markup at the same time as the market structure Bill maybe a slightly on a different timeline Jake may know more exactly than um exactly the dates for that than I do but I think they're supposed to be set for markup around the same time so they'll come out together most likely for uh everyone kind of hearing for this for the first time in stablecoin Act is is this touching both uh like Central Bank digital currencies or the circle type of flavor like usdc and you know if you could just give like a one minute summary on on what it attempts to accomplish or in its current form of course in its current form I mean at least both from

uh chair McHenry and his version of it and ranking member Waters it's really focused stable coin issuers that's the tldr on it um there's like a usdc for instance yes exactly yeah it is a positive favorable to something like usdc or how would you characterize it on the scale of pro or against like these type of instruments it's creating a regulatory framework for them which is very positive and extraordinarily low hanging fruit to get done I mean it's already happened in uh Europe with Mika um the UK already has categorized stable coins as financial instruments under there

um under their financial markets Bill and are building out the regime for that now so we just shouldn't be so far behind and I do think there's an appetite to get it done yeah I think it's quite positive I think um you know the devil is always in the details with things like this but at this point the remaining issues that are being discussed are very nuanced it's things like what exactly is the path to issuance for a state chartered entity as opposed to a federally chartered entity and that that matters to some degree but I think the industry is so hungry for a framework that it knows it can comply with it's unlikely that we're going to see something in the stable coin bill that we say this is just unworkable um and so I think I think that we all

will be able to support that the other thing is the stable coin bill just like the market structure Bill focuses on centralized custodial intermediaries right and we're back on eyes so you know aside from our our full-time work we're both board members at the D5 education fund and no matter what we do in life Defy is always near and dear to our hearts and we've spent a lot of time making sure people understand now is not the moment to try to come up with a brand new regulatory regime for defy I mean we do not understand those markets well enough to come up with a way permanently in federal law in statute to regulate those types of markets and their participants but centralized players we understand that business

really well right like if you're an issuer of a stable coin and you're holding a dollar in a bank account and the token you issue is a liability on your book we know what we need to do to reduce risk in that type of environment same thing with it with a trading platform like coinbase or something like that right so that's what we want to do we want to focus on what we understand and leave the rest for another day and it's consistent with with all the regulatory regimes that have been put out around the world so far too yeah I wanted to go there just touch on briefly I know we're bumping up in the hour but like Mika I think there's a vote coming up where the EU is about to kind of vote on another round of like crypto regulations uh which of course is Mika it's this

framework designed to regulate missions trading custody of crypto Assets in the EU any developments there Mika's been passed into law already but what is is coming up are these like priorities from esma and um which is the European Securities Market Authority and EBA which is the European banking Authority Each of which have to basically do implementing regulations um so you can think of them as like the agencies that take what Congress did and put it into practice so it's like rule making almost um so that's coming up um if there's a huge vote on something else crypto-wise and maybe some of the anti-money laundering um and then the data act which had these a little smart contract mentions in it

also uh just went through the try logs as well so I mean I've talked about this a few times there's a bunch of attendant pieces of regulation in the EU that may impact um crypto and blockchain based software um separate and apart from Mika and we just need to make sure those really stay consistent with uh the tenor and the intention of Nika which is as Jake said to really regulate these centralized intermediaries but there are going to be these symptoms hunting regulations so it's going to be a long road until we know exactly how Mika is going to be implemented both on the Securities and the banking side it feels like Mika is a bit farther ahead than where the McKendree Thompson bill is how much of I don't know if you would agree with that

because it feels like Mika still I mean there's still a lot that needs to be clarified and kind of like drafted for Mecca right it's a step in the right direction it feels like yeah we're long but it's not definitive in any way shape or form still right what I'd say is a road map in in Boo and we do not have that in the U.S there's no road map at all these there are patchworks of opinions as we've talked about for most of this episode so yeah which of course is influencing the appetite of investors and teams and where they want to be domiciled and operating in yeah um how much of Mika and perhaps other regular like pieces of regulate of

legislation in Dubai and Singapore and Hong Kong do you think are going to have an impact on the markup of the acts that we talked about in the U.S I don't think the way that they're written is going to have a huge impact I do think those of us who were involved in some of the markups they're not what they're called in Europe but you know markups of Mika and who are helping other governments are talking to other governments around the globe definitely are trying to find some Harmony um in the U.S too where we can but I do think and this is I think a credit to chair McHenry and chair Thompson and their staff they have taken a long time to try to understand exactly how the industry Works they have per their discussion draft had lots of discussions

with people in the industry um lawyers developers and things like that and so I don't think they are going to be swayed necessarily by what's going on around the globe interestingly I will say I've been asked on the hill like well when you're engaging overseas how much do people care about what the US is doing not much like you know they're like well that the SEC sued coinbase you know people don't care about that in Europe I'm like nope nobody cares like no I've never heard about it um so I think that's sort of an important takeaway I agree with that I think to the extent that it matters it is it is just the fact that other countries are doing something that matters because really

the most important thing in Congress is the motivation to do something right most bills don't fail in Congress because they get voted down they fail because they just sort of sit and then expire at the end of the Congress right it's very easy uh the most common thing ever is is for members of Congress to feel like they just don't have to do anything and so they won't getting a bill made into law is very hard the way it's often described is there are 10 000 ways to kill a bill but there's only one way that it actually makes it through and becomes law and I don't want to overstate the likelihood that even with the amount of support that these bills have um that they will become law this is really challenging and the most important thing is to say to policy

makers this is really important you must take action if you don't here are the consequences and whether that's the consequence is these markets will not be regulated because the SEC is wrong when it says it already has jurisdiction or it's all this activity will move overseas to other jurisdictions that are coming up with reasonable regulatory Frameworks that the industry wants to take advantage of whatever it is we've just got to get people moving and that's I think why that matters most here in the US yeah and I'll say one thing um which is I saw a great tweet after our last regulatory episode where somebody said you know we Jake and I both said like please go call your representatives tell them you care and they went to an event of some their rep who was running some sort of election

event or something and really brought up a crypto related issue and engaged in a dialogue now is the time to call your representatives and tell them you care about this bill um at least like from the house side of things and that crypto is important to you uh and why it matters um I do not think you can call too many times you should certainly mobilize other people um to be calling too because it's really important yeah yeah political activation and energy is I think it will become a bigger Topic in the next election cycle but the question is is it enough uh of course we tend to think that Crypt is the most important thing in in our lives but then in crypto Twitter but then you

zoom out and you talk to people and they're either stuck in some narrative that is 10 years old or five years old or just you know having given crypto a second thought um and and so it's really important to get you know politicians to be thinking about this and it feels like younger Generations really care about this topic and so it's just a matter of you know them understanding that I think we've gone for an hour guys this has been a great discussion uh anything else worth talking about on the regulatory front uh which I know there's like a million things India's been trying to ban crypto now for the 15th time or whatever and you know it's not really news in my mind but uh I'm curious if there's anything else that um is top of mind for you guys that you think is worth uh discussing

all moving across the globe everywhere um and so I actually think what's kind of amazing is notwithstanding how rough the end of last year was we're I don't know nine months out and we're seeing a live crypto bill that's thoughtful and people are engaging on it and I mean I think that's extremely important and exciting um than a Real Testament to what we've all built so far and what we can keep building in the future yeah I mean the only thing I'll add is I I think we may look back at this period of time and think that June of 2023 was the bottom for the regulatory worlds in crypto right right after the coinbase and binance cases we were all feeling

like the world was falling apart and we had no idea how we were going to get out of it and I think we were talking you know on our last podcast about going on offense right and stop just sort of sitting around and getting attacked over and over again and I think the last month has been extraordinarily good and I I think it's just going to get better from here on out so I do think we are so back and I'm excited to see where we're at there we go next month let me do this again well if everyone enlisting both Jake and Rebecca play an instrumental role in making crypto top of mind and educating Regulators around the world so give them a follow show your love and appreciation uh Rebecca remind us again of the the website that you guys the initiative that you have to showcase the

use cases please because that's super important if you're an artist if you're a pro if you've used crypto and it's impact affected your life positively we need to show the world that this is not just a casino and there are so many different useful use cases for Regulators to understand why this that why this matters so can you just remind us yeah yeah each time you kept saying is there anything else you want to say or you're trying to yeah I appreciate that so um we did it's it's about a month or six weeks old it's called the value prop polygon Labs put it out but it's open it's transparent uh it's a database that is showcasing all the great use cases um for crypto and blockchain around the world it's at the value prop dot IO uh

we launched it um with a few over 300 applications listed and maybe 27 use cases it's now been updated it has 39 use cases and 430 applications from the time when we launched it we got so many applications to have um their apps listed uh that it's been overwhelmingly positive and we've gotten some great feedback where I hear from people who have their own regulatory meetings or even policy makers and other countries around the world to say we use this all the time now to show people what blockchain can be good for I've also had people say I've used it to show my mom about blockchain and I think that

I think this should be an educational tool in general and not just one for policy makers I love it we'll link it in the show notes and Mom if you're listening I always tell it's free melatonin and I've actually seen her pass out not not in the regulatory part other podcasts I've seen her be listening and just passing out uh and so anyway so uh go and check this out so because it's super important for everyone uh so anyways appreciate that Rebecca uh Jake Rebecca always a treat having you guys on um regulation is super important Jake I still think about there was an episode that we recorded God it was like almost a year ago that you said it was I think almost a year ago you said you said the fall or even Q4 of last year is going to be super important

but the agency is going to bring in a bunch of actions because they want to justify their budget and whatnot and I think we've seen that so I'm not calling Jake an oracle but he is kind of an oracle when it comes to these things so we are so back on the regulatory side of things guys we should celebrate this win cautiously go listen to the episode of why uh but anyways uh go get killer lawyer and none of this is Legal Financial or any sort of advice so anyways thanks everyone for listening and uh Jake uh and Rebecca thanks so much for coming on I appreciate it thanks so much guys awesome thank you foreign [Music]