What's the Point of Securities Laws? with Mike Selig

Transcript

welcome bankless Nation to a special live stream today on the show we are continuing the conversation down the crypto Rabbit Hole of Securities which is again a unique conversation to have but one that is very very important for the crypto space yesterday on the show on the state of the nation with Ryan we had Brian fry uh who is a Securities lawyer and also crypto native uh and we had a fantastic discussion as to what securities laws really are because I think the current understanding of the broad crypto industry is actually missing a little bit of the mark as to why we have Securities laws because Securities came before the SEC was even a thing so I've been going and researching the 20 1929 stock market crash the Securities acts of 1933 and 34

and getting back down to First principles of what it means to be a security and what securities laws are and this has been a supremely interesting exploration into this world of Securities and today on the show we're bringing on another crypto Securities lawyer Mike selig who also recently wrote an article for coindesk about the current state of Regulation as it comes to the crypto industry and so we are going to continue the same conversation we had yesterday uh but and then also get into a little bit more details as to what the crypto industry can expect expect out of The Regulators in 2023 what are the cases to watch what should we be paying attention to and how do we get out of the SEC the things that we want so I hope you stay tuned for this fantastic and hopefully very

educational conversation before we get into this conversation with Mike selig however we got to talk about our friends and sponsors at osmosis because osmosis if you guys are not familiar is the epicenter of liquidity in the cosmos ecosystem and so if you have some extra time this bear Market to go exploring some Frontiers check out osmosis it is where all assets in the cosmos ecosystem get their liquidity but it's not just a decentralized exchange there's other things you can can do on osmosis as well because of what it is as an app chain in the cosmos ecosystem so there's a link in the show notes if you want to explore the frontier of liquidity in the cosmos ecosystem and as well as seeing what the

app chain ecosystem can do so without further Ado we're going to get into the conversation with Mike selig and just again as a reminder I'm going to make the claim and we're going to have this conversation with Mike in a second in fact if we re-roll the dice of humanity over and over and over again we will come up with Securities laws over and over and over again these Securities laws are an innate fact of financial instruments and financial assets and so understanding why that is true I think is incredibly important for the crypto industry because what are we doing in crypto we are speed running the history of money and finance we are speed running the history of human coordination in Securities laws and the spirit of

Securities laws and why they are actually bullish for our financial assets understanding why this is true is deeply important for building the crypto industry the right way so that is the meta for The overarching Meta for why we are doing this episode so I'm excited to have these conversations with Mike but first before we get there a moment to talk about some fantastic sponsors to help you go bankless Kraken has been a leader in the crypto industry for the last 12 years dedicated to accelerating the global adoption of crypto Kraken puts an emphasis on security transparency and client support which is why over 9 million clients have come to love kraken's products whether you're a beginner or a pro the Kraken ux is simple intuitive and frictionless making the kraken app a great place for all to get involved and learn about crypto for

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regulation Mike welcome to the show thanks David glad to be here I want to give a quick disclaimer I'm a lawyer but I'm not your lawyer nothing that I say today should be regarded as Legal Financial or professional advice to your own research call your own lawyer and uh glad to be here thanks Mike thanks Mike I called you a Securities lawyer is that right and maybe you could also just uh give the Bank last Nation a little bit more of an illustration of your background yeah so I started off at the commodity Futures Trading commission worked for reformer um commissioner Christian Carlo also known as crypto dad uh back when he was commissioner my background is kind of a hybrid between Commodities and securities regulation um but but ever since really 20 15 16 when crypto started to take off I focused on

financial regulation as applied to crypto assets and and that's really my practice fantastic fantastic and you've watched the conversation that we had yesterday on the show and I would highly encourage all bankless listeners who are listening to this that have not heard that conversation to definitely take the time to to listen to that because uh this is a paired conversation we're we're going down we're doing the lessons of Securities today this week on the bankless nation and Mike I just kind of want to continue that conversation with you but maybe we can start at Bare Bones first principles uh and I think there's a lot of General misunderstanding in the crypto space as to what it means to be a security and why Securities laws exist so maybe you can put on your your advocate for Securities uh if you could put on that hat like why should we pitch

to the bank list Nation why we should understand what securities are why we need to uh and why do we it would behoove us to be educated on this front yeah absolutely so I mean just taking a step back and just thinking about what the term security means right it is a legal term of art that is in the uh Securities Act of 1933 as well as the 34 act and subsequent Securities laws um the idea of a security is kind of an amalgamation of a number of different types of investment instruments so stocks bonds notes and a catch-all term called investment contracts and the SEC has primarily focused on this term investment contracts in the world of crypto assets so that that's important uh table setting right because when

we're thinking about Securities we're not thinking about all types of Securities we're really focused on this term investment contracts okay investment contracts and and one of the conversations that we were having yesterday with with Brian was that we should be bullish on Securities or at least security-like properties and there's this innate relationship between security like properties and assets that have number go up properties can you can you talk a little bit about that and and kind of where you see the spirit of Securities laws coming in yeah so I mean these security like features are really investment-like features right and and they're they're reasons to be bullish by commodity investment like features uh you know certainly gold silver other commodity assets have appreciated over time and and have similar

characteristics to many investment assets um the big difference between uh what we kind of put in the Securities bucket and think of as Securities is is probably just that their their man-made or issued by some Central person right um when we look at these types of Investments like we look at Collectibles um digital Collectibles Pokemon cards I think you were talking about magic the Gathering and pongs um all these types of Collectibles and investment-like aspects assets they have some security like features they they appreciate over time that they may appreciate I think you know Pokemon cards appreciated when everyone was stuck at home during covid uh playing Pokemon on their their switch and they said you know what I've got all these Pokemon cards uh let's let's trade and sell them

um so assets can appreciate based on efforts of the issuer of that asset the seller of that asset others in the marketplace um and then based on decentralized Marketplace features right like we might appreciate value or oil might appreciate in value because there's an embargo or because there is an OPAC um action so markets are decentralized there are many things that can be produced uh using other assets using other inputs and they can have security investment-like Futures but security again term of Art and we need to really think about whether things are investment contracts whether they are notes stocks bonds other types of Securities um or are they just Commodities or other kind of collectible assets and you know

the term commodity is also a term of art under the commodity exchange act so these are all legal terms that we're thinking about here as opposed to you know is something an investment or something a commodity in the common sense and you're using this phrase term of Art and my interpretation of what you mean by that is that there's an art to it in that it's not a science it's all kind of like a Vibe is that is that what you mean yeah I think the investment contract concept that's really A vibe right um some of the other terms within the Securities act they're a bit bit more concrete so we have stocks um and there's some case law on that uh you know there's certain features of stocks that that make them stocks right there's distributions there's voting rights

there's things of that nature and case law has sorted that out and it's it's not as is kind of nebulous and Squishy as the investment contract uh definition which we'll get to in a minute um and there's notes um and notes similarly kind of have an established history uh there are certain features that a company notes and there's what's known as the Reeves tests where we look at kind of the family resemblance to notes um but the concept of investment contract this was really a catch-all prophylactic remedial term included within the definition of security in the 33 act that comes from a pretty long history of state blue sky laws where there were these investment schemes and you give your money to some promoter and

the promoter goes out pulls the money with maybe other people's money and runs some sort of profit generating scheme and you know you're you're looking for the protections of the Securities laws in that case because if they don't register that security they might disappear tomorrow uh you might have no uh recourse against them there might be uh broker dealers and investment advisors that are touting these Securities without any um you know controls over what they're doing to drive with price and you know the Securities laws really came out of England uh in like the 1700s and going back actually as early as the 1200s there were some stock related laws but the Securities laws were really a product of bubbles like the south sea bubble where you give your your money to some Enterprise and they're going out

and you know striking deals in South America and trying to drive out the price and you get these Bubbles and there's a bubble Act of 1720 that basically said there are a bunch of of investors that were giving their money uh to these schemes uh and the schemes were going nowhere they were just intending to to flip these these Securities and that's why we got the protection of the Securities laws in the United States after the the Great Depression and the the idea of broadly defining a security and include all of these different types of Arrangements um and products is to capture as much of the investment-like products that that kind of create manias and Bubbles and um lead to investor harm the the SEC is designed to protect

yeah and I think that's been really the big aha moment I've had going down the 1929 stock market bubble Rabbit Hole uh it was a it was the resonance between what we just went through in the crypto industry in 1929 stock market bubble is pretty strong but that's probably only true because all bubbles have the same properties about them more or less and so what characterized the 1929 stock market bubble credit and Consumer Credit uh perhaps that was synonymous from defy yields and also what we're seeing at Genesis and all of that contagion but then also there are these like assets perhaps they're called nfts or or pool twos or defy tokens that these teams just created and now there's this like

very now loud noisy bull market that in order to get attention in the bull market you need to be a promoter of what you are doing which is uh if that if every and then everything unwinds and then people get harmed and then the SEC comes in like oh we should have really gotten in there which is what exactly happened in the 1929 stock market bubble like Consumer Credit uh unregulated promoters of financial assets all created these these reasons that we needed to create the SEC in the first place and so this is what I want really the crypto industry to really understand is that if we keep having these bubbles we're going to attract regulators and they're going to do things that we don't necessarily want them to do and so we

need to self-manage and get ahead of this by and if we want to like keep the SEC from having overbearing and overly restrictive regulation of our industry we need to solve that problem ourselves and that begins with education which is why we're tabbing these conversations here here on on the bank of the show today and so Mike I want to throw this question to you is like you you've put some emphasis on this term investment contract but then you've also labeled a bunch of other security-like properties that might exist in an asset so but how do we know when an asset goes from just like an art you've you've talked about art of commodity art of security security like properties where do we know when the line is between just

this financial asset that has a bunch of security like properties and an and a security that needs to be regulated by the SEC how do we discover where that line is yeah absolutely so let's start just with the term commodity under the commodity exchange Act Right everything virtually is a commodity except onions and Motion Picture box office receipts so the cfdc has as the broadest definition of jurisdictional definition out there right but then the SEC regulates any commodity that's a security and so you know Securities are Commodities as well uh but if they're uh if you know the SEC gets jurisdiction over that um investment contract is just one type of security there are other types we just discussed um notes being one and the yes the SEC has said that certain crypto assets are

notes um and kind of has alluded to the idea that even ether might be if it's not an investment contract a note because of the staking um rewards uh associated with that and so really the the exercise of analyzing crypto assets under the Securities laws is one of looking at the Futures and uh the full scheme around the crypto asset and determining if it fits into any one of these buckets like stock no investment contract the SEC has focused on investment contract and virtually all of the cases and the investment contract definition is defined in the Howie case um 1946 Supreme Court opinion where the court found that investment contract is a transaction a contract or a scheme

where a person invests money in a common Enterprise with the reasonable expectation of profits to be derived uh from the efforts of others and so in every circumstance you're looking for a transaction a contract or a scheme and as the court in the telegram uh case you know a few years back said crypto assets are just computer code they're not Securities in and of themselves they don't fit within any enumerated category of a security there is a world where they might have certain security like stock like note like features and so maybe they fit within one of those enumerated categories in that sense but there's no digital asset or crypto asset category

um when you're looking at investment contracts so you're looking for a contract transaction or scheme so the token might be part of an investment contract it might be offered uh together with a broader scheme such that the scheme is kind of embodied or envelops that token so when you trade it uh the scheme trades with it right and so in the Howie case the Supreme Court was looking at an arrangement where people purchased lots of orange groves paired together with a management contract and the orange grows themselves were not Securities just like a token itself is not a security it is that pairing of the two it's this the broader scheme that makes it a security and so because the Howie company sold these management

contracts where they were going to manage the Groves for the customer and then sell the oranges to generate profits for the customer and and think you know crypto Arrangements where there's uh certain features where there's a central operator that's driving profits for the the holder those types of Arrangements fit pretty well within the investment contract world but take it a step further and say that the Howie company built some technology that was going to manage the Groves for the the holders right and the technology is kind of self operating maybe it's governed by all of the the holders of these plots of land um and they maintain it uh you're not relying on the efforts of any promoter in that case and so maybe maybe in that

situation when you transfer uh the the two you're not really relying on any of it's no longer potentially enveloped within an investment contract because there's no efforts of others or if you just transfer the Orange Groves themselves you know you're just transferring maybe a token without any sort of management or entrepreneurial efforts associated with it so that might not be a security and so we really need to think about Securities as somewhat mutable because um there's a world where these tokens get enveloped within security world for a period of time but but that might not be the case forever and you know there's a famous speech by former director of Corporation Finance the SEC Bill Hinman where you said you know ether when initially sold uh pre-sold uh was a security but over time you know I was at

Devcon several months ago there's thousands of developers packed into a massive Convention Center you know ethereum is a massive project it's decentralized it's very much like the wheat markets I mentioned where you know an action of the ethereum foundation might not even be as significant as an action by a significant defy protocol um we just saw it with Solana you know there was there was movement of certain projects uh over to polygon and that caused uh you know movement within the price of Solana and so these are decentralized ecosystems you can't really pin it down to one person and that's really what distinguishes kind of these Network like assets um from from typical Securities that are associated with a defined business

Enterprise there's a point that I really want to drill down on that that I think you made that I'll try and reiterate and correct me if I'm wrong but uh you delineated between the actual crypto asset be it an nft or erc20 token you're you're separating the asset from this scheme and what you're saying is that the asset is not the security it's the broad scheme that makes and the asset that is a security and so it's not just a token it's a token that's associated with a scheme and maybe a scheme has like a negative connotation but I don't think we mean that really we just mean like effort by a coordinated team a sort of uh system of value capture into the asset itself and so while the asset

might be the the body of the security it's really the the broader scheme that's around this asset that makes the whole entire thing a security and so to put this into more concrete terms maybe there is an nft project out there that has a collectible jpeg associated with it and there's a mint price for like .05 eth and the team that is creating this mint contract for this nft also has very large ambitious plans that these nfts can access uh in the future in the in the future time and so they have a road map and they have a financial asset and they have a collectible JPEG and there's

a coordinated team that wants to build a metaverse like where is this a scheme like where how do we think about this thing because this is a very common pattern that we see in the nft space yeah I mean the nft space has repeated a lot of the sins of the 2017-2018 Vintage Ico space right um and you know the the icos really grew out of uh the you know ethereum y paper where anybody can issue a token and so once the SEC actually ironically brought its first real enforcement action although it was done through an investigative report um against the Dow for selling Dow tokens um that that kind of kicked off The Bull Run of Ico tokens ironically but the

idea of a lot of these tokens was that let's offer a road map and let's say that we're gonna sell this token and it's going to have all sorts of utilities so it was kind of like steady Labs deploying utility like let's build this thing up and continue over time to provide new features and and functionalities and the SEC was like wait like this is exactly what we're warning against right because the idea is that you're relying on some team to continue to develop and uh bring value to the tokens and there's nothing wrong with a team working on building on some open um open source code project right and I think that's a big distinction and a lot of the nft projects have moved towards CCO which I think is is a massive move in the right direction

because the the idea behind crypto is really open source uh Community products that are permissionless and anybody can kind of use them build on them and and take them to the next level and you're not relying on some specific team the team might play an important role and contribute um but they're not the the single efforts that you're looking to to drive value and so I do like to distinguish kind of these Network assets that are really distributed and decentralized and you can't point to any single person in the middle as Gary Gensler would say uh that's driving value and they you know you might have OPAC driving value to oil uh but they're they're certainly not controlling the world's oil markets uh

many would say at least um and so I think that that's really the key distinction when you're thinking about investment contracts of course you can have other you know distributions and I think this is an issue a lot of D5 projects are dealing with now right you've got a governance token but you turn on a fee switch and now everybody's getting um distributions by holding this token and those are security-like features and maybe we embrace the Securities laws there and we can get to you later you know the the complications and doing that under the current Administration but um but that's really the distinction I think it's it's a product design choice you can say like we're going to decentralize this project as as far as it can go and we're going to open it up or we're going to go you know very much

like security ask products where you get a distribution maybe you have to make periodic disclosures and and offer prospectus and comply with the Securities laws in that world one of the arguments that we were uh going back and forth on yesterday with Brian uh was that the SEC only really wants to regulate things that it wants to regulate uh and so if it deems that it doesn't want to regulate a cat jpeg then it will deem that to not be a security and so which is like an interesting he called this the fifth prong of the Howie test right like we have the first four prongs like uh efforts of a coordinated actor investment contract all that stuff

but then we got to this unspoken fifth prong that we that Brian was saying existed which is like the fifth prong being does it feel like a security which is to in my mind like invalidates the first four prongs because if the fifth prong is just like yeah but and is it really like security like as in does the SEC want to uh regulate it and if the answer is yes then it says security if the answer is no then it's not a security like do you have a take do you have a take on that fifth prong and also do you have a take on how much the SEC actually wants to regulate some of this industry yeah the SEC regulates Capital formation raising Capital to go deploy that capital in some way uh to build an Enterprise um and the the idea of the investment

contract as I knew about it earlier right it's this remedial provision or definition within the term security and the idea is to capture these schemes with security-like features that don't neatly fit in any other category so the SEC has that Authority courts have kind of chipped away at some of that Authority I mean the Supreme Court opinion was pretty broad it's been brought in by some courts narrowed by others um but the idea really is is there there are these schemes where um people give money to somebody and that person kind of raises Capital forms Capital to go deploy it and do something like when I I've got this first edition you know Charizard card right like I don't care about the Pokemon company's success

um the idea is that I bought this collectible and maybe they they're successful maybe not but I'm not giving them cap people to go deploy it in some way I don't have a contractual business relationship with them in the same way that people giving money to the you know South Sea company uh to go explore South America did and and the Securities laws over time have focused on these types of assets there have been circumstances where the CIA or the SEC is regulated like chinchilla farming operations and cattle embryos and all sorts of you know coin collections and things like that whiskey Warehouse receipts but in every instance there's been some promoter at the middle that's really organizing the efforts and you're looking to them to

deliver profits you're not buying some collectible and I think if you're looking at some of the nft projects for example you know things like chromey squiggles they're just artwork or uh crypto punks that really have historical and cultural relevance um you know some some might say other nfts similarly have that kind of relevance the SEC is looking into some of these projects but the idea behind somewhere you're buying into a private Discord maybe to to kind of scheme to wet wash trade or do things like that like that might look a bit more like a scheme but I think you have to analyze the facts and circumstances of every offering under the investment contract definition if you're giving people

dividends maybe it's a stock but but otherwise you know you're looking at the facts and circumstances in each instance and so I think the the fifth prong of Howie concept you know it's it's a good mental model to think through this stuff but yeah the SEC is really focused on Capital formation um they're not trying to just regulate every investable asset class the art markets have been around for for centuries and they've never been regulated Securities markets their Futures contracts on you know art like you can buy uh you know future Coons painting that's going to be done in three years and sell the rights to that uh beforehand um so that there's all sorts of of kind of financial esque markets around art um you know I've been

through several of these Chris these auctions with nft artists and the the process is very similar to kind of doing a public offering or doing any any sort of financial um offering right but the the the asset itself is kind of distinctive in a certain way um even if you get certain um security like features embedded in these products yeah and one thing I want to ask about is like there's there's a world where like uh I don't know why this example came to mind but it does is like alameda's pitch deck was something along like invest in us because we have no risk returns and it goes like it goes up and up and up and that's what it does

that's what it does if that was if that pitch deck was put into like a token mint contract that would be the most security-like thing of all time because they're promising returns they have this scheme where they have this proprietary trading strategy which they claim is just a money printer and then there's a soliciting investment super duper security probably and then on the other hand of things at least in the nft world there's like hey we have these cute jpegs and also this fun community and if you own one of these jpegs you get to go to our party and to me that seems much less like a scheme and much more like a club and and so like yeah there's a difference between promising future returns and not not even promising but explicitly providing raw utility that is

not in the future because they're already doing it today and so like there's a there's a spectrum here of course and a lot of these nft projects are just just about a social club that you use the nft to put out boundaries as to who's in the club and who's not and so is that that seems to be pretty damn safe to me what about you yeah so so there's been um things like seat licenses right like you buy a you know an NFL um Team seat license and you can go to all the games get all the tickets the playoff tickets all that uh there have been golf uh Country Club memberships all sorts of kind of and also other types of you know clubs Social Club Arrangements uh the sec's looked at some of these as investment

contracts there have been no action letters that deal with some of these types of products and the the seat license for example you might get seats you can do tickets you can sell uh you might be able to sell the seat lights instead of profit but the the idea is that it has some consumptive utility and so that that's why people focused on utility over the years because it's like you deliver enough utility and it's more of a consumptive good um there's a case called Foreman that looked at uh Condominiums and and said that you know if you can use and consume the the product uh like the orange groves and Howie without the management contract you know that that's not itself a um an investment contract but uh you know if you add on other types of security like features it might become more of a scheme so if you have an

investment Club as opposed to just a social club that's a little bit different if everybody is getting together and there are plenty of these investment Club Dallas that that are done as as you know the tokens are securities like Flamingo and pleaser and others um the idea is that everybody's getting together pulling funds and going and making Investments and that's fine um but if if you're going with a social club and and doing that sort of stuff that might not be fine and so it's really drawn the line between what's the purpose why are you getting together um it's a little bit squishy you know golf country club memberships people are flipping them and view them as Investments but people were potentially just getting them to play golf right um and they can be transferable because

look like you get you get a pass to a community and and um you no longer want to use it you might as well uh have have the economic freedom to go sell it at a profit if it's if it's valuable um that's not necessarily security and you know the the SEC much of the um law around what is and it is not a an investment contract has been handed down through these no action letters and uh in one of the Commissioners has to purse is kind of commented on this it's like a secret garden right like it's very hard to navigate uh this this body of the law because it's not judge made law um and that's really the somewhat the approach the SEC is taking now but through enforcement which we can get to later um but yeah there's no action letter uh

provide a lot of the Contours that that you might look at when you're considering whether you're a community is some sort of scheme or if it's really just a community but I think there's absolutely the case we made that many of these communities are not security um you know investment Club type arrangements and you look at many of the the popular ones they've ccoed their their tokens to make clear that the artwork is is open source and can be used and a lot of the technology developed by these these um these doubts have also been kind of Open Source yeah so there's a bunch of conversations in there that I want to to one unpack with you uh one of them is like where where are the various bits of uh flags that come up on a various project

and what what they what can be doing and as they get more and more scheme like what are those lines uh but then also I kind of want to just ask you like what's your take on the sec's appetite for even coming into this world uh in a in a way that's beyond like we'll talk about like enforcement actions and and and stuff like that and like I think you're also keeping your finger on the pulse of just like the decisions to watch in 2023 so I want to get uh your takes in perspective on all of these things but first a moment to talk about some of these fantastic sponsors that make the show possible uniswap is the largest on-chain Marketplace for self-custody digital assets uniswap is of course a decentralized exchange but you know this

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one of your wallets has a new airdrop for it to make sure that you never lose an airdrop ever again you can also upgrade to earn five premium to unlock access to airdrops that are beyond the basics and are able to set reminders for more wallets and for just under 21 a month it probably pays for itself with just one airdrop so plug in your wallets at earnify and see what you get that's e-a-r-n-i dot f i and make sure you never lose another airdrop and we are back talking about Securities everyone's favorite subject and like there's a tweet that you wrote that I want I want to get your take on and unpack a little bit with you and so you tweeted out well crypto projects continue to push the boundaries of decentralization and Community governance the SEC and cftc will likely push the boundaries of their existing

authorities through novel enforcement actions and this was uh also featured in your coindesk article about the state of crypto regulation going into 2023. can you talk a little bit about what this means and what the bank location should be paying attention to as we go into 2023 as it relates to regulation absolutely so I think regulation and decentralization are kind of counterbalancing factors right there there's a great documentary about steroid use it's called bigger faster stronger and there's the scene where uh the the producer goes out and buys a bunch of ingredients and gets a bunch of guys off the street to go create a new supplement and they mix all the ingredients together and they mix a bunch of rice powder in and they sell the product it costs them about a dollar to make they sell it at 60 bucks and

they say that it's a proprietary blend um you don't know exactly what's in there um the reason we have the law that we do in the Securities world is to regulate stuff like this right you are a prospectus you require disclosure you want to people to understand what they're buying in the world of decentralization a lot of this is open it's open permissionless you can read the code uh the vast majority of the information is out there I think projects are working on trying to get as much out there as they can to the extent they're decentralizing if you look at something like big Bitcoin there's really nowhere to go find uh some proprietary information maybe if

for example you have some special information but you don't necessarily need the same regulatory uh structure around those products there's a there's a quote you know sunlight is said to be the the best disinfectant from former Supreme Court Justice uh Brandeis that's really the idea behind the Securities laws get all this information out into the open and reduce information uh asymmetries with decentralized projects that's just not that you don't have the same rationale um this the FCC is going to continue to kind of push the boundaries of its authority to find these Central promoters Central actors that are controlling projects and you know the over the past several years we've seen

the SEC bring actions against telegram against kick against Ripple against many of the token issuers that have put out coins and have engaged in efforts to drive the value of those coins put out road maps all the sorts of things that we've discussed the SEC is focused on the initial sales of those tokens and that's an important distinction at the time a token is sold like ether for example it might be involved in an investment contract scheme tomorrow it might be fully decentralized and there's no longer those promoters the SEC is generally focused on these first instances of issuance and and sales that kind of lead up to uh potentially decentralization of

the product um the future is going to be a bit different because we have so many decentralized projects today uh or at least projects that are attempting to decentralize through Dows and other types of structures so the SEC now needs to take it to the next level and try to pursue some of these more decentralized projects that is going to be an important um distinction between some of the new cases that we'll see brought by the SEC in the future we also have secondary markets that the SEC has largely disregarded in its cases to date it brought a few you know against poloniex there's a case against a decentralized exchange um early decentralized exchange uh these types of cases uh really were settled

did not really go very far but now we have cases like wahi where the SEC is pursuing um an ex-employed coinbase for insiders trading on coinbase and so now we're looking at secondary markets for tokens that were sold potentially Securities initially but the question is whether there's Securities today and there are a bunch of arguments that might be made around decentralization as to why they're no longer Securities why they're more akin to the Orange Groves being sold separately or with that technological you know method of governing the the process of selling oranges and that that's going to be something to watch and then just the general argument around there's no business relationship between a project uh and the person that purchased it in the secondary Market potentially if they

didn't purchase it in the same way that a venture capital fund goes and purchases from uh the issuer so those are going to be some key things to watch going forward and then similarly on the the cfdc side they're bringing cases with respect to their Authority in spot Market which is limited to anti-manipulation and fraud so they're looking at things like did somebody uh sell a token associated with some sort of fraudulent scheme uh and that token they would deem to be a commodity or some sort of stable coin there's a case brought against bitfinex involving tether so these types of fraudulent related claims and then also cases where there is a registration violation so a project deploys a smart contract based

Futures exchange gives it to a Dao this is what happened in the Yuki case if people are following that um and the cfdc pursues both the developers as well as the Dow itself for liability for for violating um certain Futures laws and so these are the sorts of things to watch uh in in the space as technology decentralizes and evolves The Regulators are going to need to get creative with their authorities because their authorities are primarily uh you know focused on centralized intermediaries as opposed to these decentralized protocols and platforms and yesterday on the show we I put up that Spectrum uh of assets right and on the left side I had the cftc who regulates Commodities and on the right

side I had the SEC who's regulating Securities and then I had these lines where like those regulations stop and then we have this Middle Ground which is just a lot more of a nebulous stuff and so from what I'm hearing you say right now it's kind of like we have the commodity cftc and the SEC kind of encroaching from both sides the SEC from the security side and the commodity and the cftc from the commodity side but in the middle is or or like what buffers them is the concept of decentralization as in your your I think what you're saying is that the SEC has really gone after some of the obviously and overtly centralized orgs who totally issued a security because that was the low-hanging fruit and you're saying that

the SEC is going to start to work up upwards a little bit and try and go after more and more decentralized projects and whether or not they are successful is going to be determining where that line is as to in the crypto industry as what the SEC can regulate and so uh and is that a fair take of how you think this is going to go yeah regulation of cryptos is zero-sum game between these agencies right so you've got the SEC trying to push the boundaries of its authority over uh investment-like instruments through this investment contract framework that gets applied retroactively uh versus the cftc that's saying that a bunch of these

assets are already sufficiently decentralized the trade-in markets very similar to wheat and corn and other um Commodities and so you've got this kind of encroachment of both from from various sides and trying to to figure out what fits into what bucket and nfts are a little bit different because they've not fundability and so they may not be Commodities but um but that's really the idea that you have two Regulators trying to stake their claim and the cfdc is seeking additional authority over crypto it's very likely that in the near future we'll see the cfdc regulating crypto spot markets that are non-security okay crypto spot markets and so they're they're on a mission to kind of stake their claim show that they're they're the cop on the

beat for for these non-security crypto markets and the SEC is doing the same thing except the SEC probably wants to take the vast majority of it as Gary Gensler said so is like the illustration of this like we have the cftc the SEC and then the crypto industry and we're like in this three-way Mexican standoff everyone's pointing their guns at each other and the cftc is looking at the SEC and saying hey I I want to regulate crypto SEC is looking at CS cftc is like hey we want to regulate crypto and then there's a crypto industry who's like we don't want either of you two people uh is that kind of a fair way to illustrate this I think that's right I think that the issue is that most people are okay with the cftc taking some Authority there

because CTC doesn't even have the the ability to regulate these spot markets so it's okay to have some fraud and manipulation uh protections that's that's a good thing uh as investors in the space um the SEC is is trying to take jurisdiction but they're not willing to to put out any new rules for crypto and so the market structure which we can get into later you know it doesn't really fit for crypto and so crypto's like hey back off we don't want to be under this tent because it doesn't work for the way the technology functions um if if the technology could be incorporated within the Securities structure why not I mean it it it might afford enough protections uh that makes investors uh come from all all over the world to to get into crypto markets I

mean I think there's there's definitely some hesitation uh that these markets are totally unregulated on behalf of some in the space others would prefer for it to be less regulated but certain the solution for crypto regulation under the SEC umbrella shouldn't be as comprehensive as uh other types of Securities because they're just they're different right they're decentralized there's not really the same um disclosure issues in many cases and and you know that I thought that the the example from bigger faster stronger is really helpful to think about this because you know as consumers we want we don't want a proprietary blend we want to understand what's in there that's kind of what FTX was offering like we didn't know what was happening in in Sam's box um but in this in in D5 we kind of have

an idea of what's happening in the box and so I think that that's an important distinction and something that Regulators should consider as they're developing new rules which really are required for crypto to work within the Securities umbrella and that's the point I really really want to drive home is that like all right if if listeners are fearful of this like oh like uh the power of crypto is going to be like inoculated by the SEC or cftc like they're going to take all the fun out of it they're going to take all the point out of it the solution to Securities laws and probably a seemingly large number of cftc like uh you know regulatory aspirations the way that we fight back against this is the thing that we've already been doing in the crypto space in the first place and the

whole point of this movement which is decentralization and so like the the there was that recent case against like Avery for who was manipulating markets in in defy they went after the guy not uniswap or Ave and why didn't they do that why didn't the cftc go after uh like the markets on which the market manipulation occurred on it's because they're decentralized and it's going to my take is that it's going to be the same thing with the Securities markets is that if the if the ire of the SEC comes upon us the way that we fight back with them is by being decentralized and making sure that there is no line between the private coordinators of an asset and the

public markets who are buying that asset and what does that look like that looks like a dow that looks like a decentralized organization where there is no Central party and all of a sudden the SEC has no one to go after and so they can't really find the point to Sue or to take to court and so the way that we fight back upon by this encroachment of the cfdc on one side and the SEC on the other is just by decentralizing everything is that a fair take Mike I think I think that's a fair take there's certain things that have to occur on regulated platforms as the the laws exist today so if you want to offer a national Securities Exchange you do have to register with the SEC so if you're offering tokens even if it's on a decentralized platform and those tokens

are securities your subject to SEC right regulation and registration similar on that the cftc side that's what happened with Suki Dao um and so there's decentralization up to a point um but there are many things that that don't require registration with a regulator um Dows don't necessarily you know always engage in activities that are regulated activities and so the the idea of decentralization takes a lot of these tokens out of the SEC regulation bucket but it doesn't necessarily take the platforms out of the bucket but that might might be something that that's subject to change right because if if you're looking at a D5 protocol that works exactly as designed um mango you know for all its laws worked as it was

designed um that doesn't mean that market manipulation uh is legal and so so their their issues uh potentially with kind of the tactics used to drive up the price and and engage in in that sort of behavior um but the the idea that some of these platforms require registration and comprehensive oversight um that's really an open question because the the everything's on the table you can use these at your peril um and if you enjoy using them and and it works the way you expect it to work what's the real consumer investment harm and then this one last angle I want to ask about before we wrap up is going back to that Hillman speech in 2018 that talked about the transition of a

security into a commodity and while I was doing a little bit of research for this for this like whole Rabbit Hole I'm going down uh coin Center actually when they when they they have a page about is ether a security and they argue they I think if I'm interpreting that page correctly they argue that the investment contract for ether did make that investment contract a security and then when ether is issued out on the actual blockchain in the Genesis block ether got distributed in the Genesis block of ethereum it became not a security anymore in that moment so ether the currency has never been a security but the note the investment contract that people pay their Bitcoins or wired funds to that was a security in that interim

time when payment was made and then ether was distributed that part that very small part of time was a security and there's this all also this Catch-22 out of the Gensler Administration where genser is like hey like uh token issuers come in and chat with me also register your security but it feels like a trap because once you become a registered security you can't unbecome an unregistered security there's no way out of that of that that room like you get stuck in there and there's no way to be to decentralize and become a commodity and so can you talk about like this concept of starting centralized and the need to be able to actually have viable paths towards decentralization while also being compliant by the SEC like this is

like the frontier that we need out of the SEC right yeah that's right and if we're looking at investment contracts if you don't have other security like features that put you in one of the other buckets the token isn't the security it's that investment contract it's the scheme it's a legal wrapper that that envelops the token you transfer the token the investment contract might go with it um if you've got a centralized scheme somebody that buys that token might be looking to the same person that sold it to the original purchaser so you have potentially a common Enterprise and a scheme the idea that a token can separate out from that investment contract and trade as a non-security is is not really that uh you know it's kind of

fairly simple and it should be the standard that everybody Embraces I think in this industry because the tokens themselves are just computer code and so if you you buy one of these tokens if if it has the security-like features uh it's it's should be treated like a security um but if at a later State it's no longer enveloped in that investment contract scheme then you can say look it's decentralized at this point in time and we're not going to treat it like a security um and so that that's really what the Hinman speech uh encapsulated around Easter and other crypto assets the current Administration doesn't necessarily agree with this view but it but it really embodies what the case law says the case laws focus on these contracts agreements

uh schemes transactions not on uh like any sort of chinchilla or orange or anything like that um yeah so the SEC has been uh very Broad in characterizing crypto assets as crypto asset Securities or non-security crypto assets but really it's not the crypto asset it's it's the the investment contract um and the SEC refuses under this Administration to characterize them any differently but under the Clayton Administration the prior Administration that was really the way that we looked at these uh assets and you know getting in a crypto asset offered to the public as a non-security is is also not um

impossible feat like you can offer something like a stable coin that doesn't increase in value and so it there's no expectation of profits even though it's centralized there are things that are like nft tickets uh that might not really necessarily increase in in value um they're just the right to go go participate in something or a polar app or that sort of thing and so I think there's there's really a need to distinguish between the the type of asset that you're evaluating and not lumping everything into like crypto asset Securities or or non-security crypto assets there's this kind of scheme that runs on top of a lot of these products and the scheme doesn't last forever in every case it may have a

half-life depending on when the project decentralizes yeah right and that that idea of the scheme not lasting forever is uh at the root of what crypto is right that's why Satoshi left Bitcoin is because he needed to end the scheme of his existence uh that's why the ethereum foundation has never really gone after and made it and being the client team they've supported many client teams right so that's something that's very true to the ethos of this industry is we want we need like centralized parties to come and start the thing but then not finish the thing let the community finish the thing that's always been the ethos and so that's very much aligned with what we want out of crypto like I've got one last question for you like

it kind of seems to me that we're not really going to get out of the current SEC Administration what we want out of the current SEC out of the SEC do you agree with that Taken if you do agree with that take like how do we deal with that like where do we go from here I do agree I mean when I was first at the cfdc we uh we were a new Administration coming right out of um Gary gensler's prior cftc uh and what Gensler had done under the Dodd-Frank uh act which which had been promulgated uh in in 2010 we were crafting regulations around that a lot of these regulations took what was already uh it's about designed for the Futures

markets and applied it to swap trading facilities that were new uh facilities developed under the Dodd-Frank Act rather than craft kind of tailored um regulations around how swaps trade and the swap regime Gensler chose to just take pretty much what we had for futures and apply it to swaps um he ignored a lot of the industry commentaries saying that this wouldn't work or it was not optimal for flops um pushed forward with with those regulations and so when I was at the CTC later we were evaluating a lot of that and and we noticed that it really just didn't work for a lot of the market and we'd be provided a commentary on that um but the the Gensler approach is very much let's push forward and pull

everything into the the existing regime rather than craft and tailor new regulations he has said that for crypto the only new rules we might need are kind of crap you know very tailored disclosure rules similar to how we have uh different disclosures for asset backed Securities so it's very unlikely that if we continue to have a gensler-led sec we'll see new rules New Market structure for crypto assets instead the approach is that every crypto asset or the vast majority of crypto assets uh in gensler's view are securities and so the issuers of these Securities should register them with the SEC the exchanges broker dealers investment advisors uh in

this space should all register with the SEC and we should just treat everything like the existing Securities Market what do we wind up with the same Securities Market we have today nothing new for crypto you know not taking into account the fact that you can go on to a decentralized exchange hook up your Ledger wallet or your metamask Plus off trade them um in very different ways than you can Securities um notwithstanding the fact that these aren't certificated like other Securities you don't need Clearing Houses in the same way um so the Gensler approach is not to create a new regime it's just Loop it all in the same regime get everybody to register do public offerings it doesn't work for crypto if we we get a new uh get a sec Administration possibly that will change

we don't know it really depends where things shake out the sec's approach is going to be to bring enforcement actions to define the Contours of its jurisdiction to push from these section five which is in a you know Securities offering that that was required to be registered the SEC is brought primarily section five cases over the years um as well as some some fraud and other things um to push from those cases to bring cases involving secondary markets and involving decentralized uh uh projects and that's going to be what defines the Contours so what's the security and if you wind up in that security bucket you really have no choice but to quite the Securities loss A lot of these projects

move overseas to to avoid this but if blockchain assets are freely transferable can transfer across uh wallets throughout the world it's very difficult to just push all this Innovation overseas and that that's not the right thing for this country either and so I think we're at a little bit of a an impasse with the cfdc uh being the the the I don't want to say it's an easier regulator to deal with but right now they don't even have the authority to comprehensively regulate the markets and so it gives a little bit of time for legislators to craft legislation that that appropriately regulates the markets and so a lot of crypto projects are going to be pushing the boundaries of

this decentralization narrative to get outside the the scope of the SEC jurisdiction and I expect this year we'll see some big cases uh decided like Ripple um the swahi case could resolve this year the ookie Dao case is kind of continuing to to you know go on this year so some of these cases will provide a little bit more clarity on where the boundaries lie but I do view this as a year of of decentralization versus regulation the the projects are going to push the boundaries form Dallas continue to kind of move outside of the the regulatory perimeter uh or or at least try to do so where The Regulators are just going to continue to kind of March

forward into that territory and it's it's really hard to say where it winds uh winds up but I think the FTX implosion has really ticked off a lot of the The Regulators and a lot of folks on the hill and we're seeing um banking Regulators kind of warning uh Banks against investing in crypto assets and just a lot of negativity but the crypto industry is really strong and resilient and we've gone through these periods before I mean I remember 2013 when everybody on the on the hill basically was it was anti-crypto and um I think we'll pull through so it's just going to be a little bit of a a battle this year yeah well the crypto industry's

certainly not known for backing down from battles that's for sure and definitely one thing that's kind of uh stands out to me it's maybe ironic is that like the actions of the SEC are pushing the crypto industry to be more and more decentralized and the more and more the decentralized the crypto industry becomes literally the that's the solution towards Securities laws like why do security laws exist it's because there's information asymmetries between centralized parties in the public market and if they're if everything just becomes decentralized then that's all that problem is solved but the ironic thing is that I don't think the SEC is going to see it that way they're going to only view it as decentralization theater or fake decentralization and not accept that

things are actually becoming decentralized and they're going to continue to March and try and go after more and more decentralized projects and not accept that the decentralization that does exist in these projects is actually real do you have any thoughts on that I think that's right meaningful true decentralization is going to be critical it's not about decentralization theater projects need to move towards Bitcoin towards ethereum really build out the value proposition to a distributed network of users and focus on that ethos as opposed to an ethos of let's just create a centralized team that runs the Dow and controls everything and you know

one guy is going to hold the admin multi-sig and and that's going to control the the smart contracts and and we'll call it a Dao because people vote on that like we really will need to see meaningful decentralization to to see these projects Escape FCC scrutiny um and enforcement actions but there are many projects that are moving in that direction and I do see it as a viable uh way to to escape the regulatory perimeter but that's that's just not to say that every project will meet that stringent criteria and um the SEC is going to be pursuing everybody I I think they're not necessarily going to back down from taking harder cases because they view their jurisdiction pretty

broadly but even Gary Gensler has admitted that she does not view certain crypto assets that look like digital gold to be Securities and so there is a at least a sliver of assets that fit within this security crypto assets yeah there is a line and ether you know there's pretty good arguments that either fits in that bucket the cfdc currently regulates uh ether Futures they've also reviewed assets like tether to be non-securities um so there's a bucket I mean there's a world where uh at least some of these more and the key feature right that the Gary Gensler is looking at is

decentralization because what else I mean the utility of digital gold is not so so encompassing that it's like a condominium unit uh it really is this it really is this decentralization aspect that drives the analysis and that's where course and and the SEC is going to to push to to kind of sniff out the the projects that are less decentralized well Mike I have turned I learned a ton on this show so thank you for joining me while I'm going down this uh Securities rabbit hole and being an excellent guide uh if people want to learn more about you and what you do and read some of your stuff where should they go yeah I'm on Twitter so Mike see like Esq I'm also on LinkedIn and you can Google

me I write for coin toesque uh from time to time and and uh yeah love to uh chat if anyone wants to reach out we'll put all those links in the show notes and more Mike thank you so much uh for coming on the show today thank you appreciate it Bank location you know the deal risks and disgamers uh crypto is risky Defy is risky you can lose what you put in some of these assets might try and be regulated by Gary Gensler but if they do we will fight them back if that is uh what is deemed Justified uh but you can lose what you put in uh we are headed west this is the frontier it's not for everyone but we are glad you are with us on the bankless journey thanks a lot