WEBVTT 0 00:00:00.319 --> 00:00:02.009 The state of crypto is presented by 1 00:00:02.170 --> 00:00:05.929 Ron connecting the world to the power of Cryptocurrency. 2 00:00:09.260 --> 00:00:13.750 All right. Joining us more with legal advice on all this. Crack in news is 3 00:00:14.109 --> 00:00:15.810 partner and former sec attorney 4 00:00:16.129 --> 00:00:16.809 Fallon 5 00:00:17.059 --> 00:00:18.909 Zachary. Great to have you this morning. 6 00:00:18.920 --> 00:00:22.299 So Crackin is closing its us taking program and will 7 00:00:22.309 --> 00:00:25.090 pay a $30 million fine to settle the charges. 8 00:00:25.184 --> 00:00:26.075 Just learned from 9 00:00:26.584 --> 00:00:29.004 managing editor Nick Day but did not, 10 00:00:29.135 --> 00:00:32.215 they did not admit to or deny the allegations 11 00:00:32.223 --> 00:00:35.595 and will keep in place its international staking services. 12 00:00:35.604 --> 00:00:41.055 So what new limits do you think the SEC may seek to impose on the industry? 13 00:00:42.549 --> 00:00:44.229 Um As far as new limits? 14 00:00:44.240 --> 00:00:47.409 I think what they're, I'm not so sure about new limits is I I would look, 15 00:00:47.419 --> 00:00:48.979 look at it as continued, 16 00:00:49.150 --> 00:00:52.360 continued um dogged pursuit of what they perceive to 17 00:00:52.369 --> 00:00:55.520 be securities laws violations in the crypto space. 18 00:00:55.529 --> 00:00:57.259 Um continued reliance on, 19 00:00:57.270 --> 00:01:02.060 on the concept of an investment contract really as a regulatory catch all to oversee 20 00:01:02.069 --> 00:01:04.290 novel financial arrangements in the crypto industry 21 00:01:04.300 --> 00:01:06.260 in this case staking as a service. 22 00:01:06.425 --> 00:01:06.904 So, 23 00:01:07.044 --> 00:01:08.055 um again, 24 00:01:08.065 --> 00:01:09.915 along the lines of what Nick said that this 25 00:01:09.925 --> 00:01:12.745 is not a condemnation of staking writ large as 26 00:01:12.754 --> 00:01:15.025 a as a means by which people can independently 27 00:01:15.035 --> 00:01:17.694 validate transactions on a proof of stake Blockchain. 28 00:01:17.724 --> 00:01:19.595 This is limited to uh this is 29 00:01:19.605 --> 00:01:22.955 a condemnation of crackin staking program specifically. 30 00:01:22.964 --> 00:01:26.735 Now, of course, it is also an obvious shot across the bow to others, 31 00:01:26.745 --> 00:01:30.055 offering similar services to retail persons within the US. 32 00:01:31.459 --> 00:01:34.949 So Zachary it it that as we discussed with Nick earlier, 33 00:01:34.959 --> 00:01:38.069 I if this had been a situation where 34 00:01:38.209 --> 00:01:41.589 users could stake a portion of, let's say their 35 00:01:41.970 --> 00:01:42.750 um 36 00:01:43.199 --> 00:01:47.690 and get AAA return that matched 37 00:01:47.849 --> 00:01:53.569 the a variable rate based on whatever whatever was going to be rewarded 38 00:01:53.769 --> 00:01:55.209 uh for staking. 39 00:01:55.660 --> 00:01:59.529 Um would it have been different or would it have required 40 00:01:59.540 --> 00:02:04.970 them to directly have some sort of uh some sort of exact 41 00:02:05.349 --> 00:02:08.899 uh a connection if you will? In other words, that, 42 00:02:09.080 --> 00:02:13.279 that all, all that cracking would have to do is be a facilitator rather than 43 00:02:13.429 --> 00:02:15.910 the entity that did the staking for them. 44 00:02:15.919 --> 00:02:18.190 Is there a way that this could have happened? 45 00:02:18.199 --> 00:02:20.929 And they could have avoided that as a staking as a service? 46 00:02:21.270 --> 00:02:21.940 Um 47 00:02:22.059 --> 00:02:24.880 A as, as providing that service or 48 00:02:25.070 --> 00:02:30.500 um is this sort of like that's it any even facilitating it is a problem? 49 00:02:31.339 --> 00:02:31.669 No. 50 00:02:31.679 --> 00:02:33.970 Well, I mean, the order doesn't get at uh the order again, 51 00:02:33.979 --> 00:02:36.630 the order is limited to what crackin the facts surrounding 52 00:02:36.809 --> 00:02:38.649 Crain's program and, and to your point, 53 00:02:38.860 --> 00:02:42.110 you know, if, if crackin taking as a service program was, 54 00:02:42.149 --> 00:02:46.330 was merely a technological connective tissue to an underlying protocol. 55 00:02:46.440 --> 00:02:48.630 Um that might have been a very different result. 56 00:02:48.649 --> 00:02:49.380 But instead, 57 00:02:49.389 --> 00:02:52.770 what it uh crackin appears to have done is is essentially run a 58 00:02:52.779 --> 00:02:57.250 program on top of what the underlying protocol itself um spits out. 59 00:02:57.259 --> 00:03:01.386 And so it provided assurances or guarantees or mitigated risks on 60 00:03:01.395 --> 00:03:05.205 the behalf on behalf of their customers in a way that, 61 00:03:05.216 --> 00:03:08.656 that suggests reliance on them separate. 62 00:03:08.666 --> 00:03:10.886 And apart from what the underlying protocol itself, 63 00:03:10.895 --> 00:03:12.746 the risks inherent in the protocol, 64 00:03:12.755 --> 00:03:16.826 we're talking about risks inherent to a program built upon the protocol. 65 00:03:16.835 --> 00:03:20.106 That crack was, was, was, was, you know, 66 00:03:20.115 --> 00:03:23.925 pitching to retail investors with reported returns, 67 00:03:23.936 --> 00:03:26.615 not that weren't really tied to 68 00:03:26.746 --> 00:03:30.822 the underlying protocol itself, mitigating risks allowing for mid 69 00:03:31.132 --> 00:03:31.171 epoch 70 00:03:31.292 --> 00:03:34.201 withdrawals and those types of things I think 71 00:03:34.212 --> 00:03:38.361 do cause do suggest a potentially different result under 72 00:03:38.371 --> 00:03:41.322 under say an investment contract analysis than you would 73 00:03:41.332 --> 00:03:42.951 if it was really just a connective tissue, 74 00:03:42.962 --> 00:03:46.212 you know, an internet service provider allowing you to connect to the internet. 75 00:03:46.222 --> 00:03:50.042 Not problematic where in between that and cracking is the is the right mix. 76 00:03:50.052 --> 00:03:55.111 Stay tuned, I'd say, but at least now we have some guidance as to what we know the sec 77 00:03:55.412 --> 00:03:57.451 is would say is per se, at 78 00:03:57.582 --> 00:03:59.921 least from their perspective anyway, per se problematic. 79 00:04:00.889 --> 00:04:04.899 Yeah, the sec alleges crack and sold unregistered investment contracts and 80 00:04:05.080 --> 00:04:08.699 since staking customers are promised regular returns and payouts, 81 00:04:08.710 --> 00:04:10.990 uh we did hear from sec chair, 82 00:04:11.000 --> 00:04:16.339 Gary Genser talking about staking as a service uh for providers from 83 00:04:16.350 --> 00:04:20.238 providers rather in this video posted to Twitter after the announcement, 84 00:04:20.250 --> 00:04:21.440 let's have a listen. 85 00:04:22.309 --> 00:04:23.429 Here's the rub 86 00:04:23.640 --> 00:04:26.570 when a company or platform offers you 87 00:04:26.809 --> 00:04:31.109 these kinds of returns, whether they call their services, lending, 88 00:04:31.730 --> 00:04:36.149 earn rewards, a py or staking 89 00:04:36.790 --> 00:04:39.269 that relationship should come 90 00:04:39.739 --> 00:04:42.859 with the protections of the federal securities laws. 91 00:04:43.130 --> 00:04:44.320 That means you 92 00:04:44.700 --> 00:04:46.100 the investor 93 00:04:46.209 --> 00:04:50.220 should receive important disclosures. For example, 94 00:04:50.970 --> 00:04:55.369 what do they actually do with your tokens? Are they really staking them? 95 00:04:55.380 --> 00:04:58.730 Are they lending, borrowing or trading with them? 96 00:05:01.679 --> 00:05:06.690 So, is this consumer protection or is it, you know, according to some critics, 97 00:05:06.700 --> 00:05:11.089 uh just keeping retail investors away from investment opportunities that 98 00:05:11.279 --> 00:05:12.929 might be beneficial for 99 00:05:13.320 --> 00:05:15.149 the larger population. 100 00:05:17.239 --> 00:05:17.690 Um 101 00:05:17.890 --> 00:05:18.649 Well, 102 00:05:18.959 --> 00:05:19.829 I, I, you know, 103 00:05:19.839 --> 00:05:21.790 whether it's consumer protection or 104 00:05:21.799 --> 00:05:23.750 protection against commercial arrangements, 105 00:05:23.899 --> 00:05:26.410 um I guess that that's sort of an argument for the courts. 106 00:05:26.420 --> 00:05:28.570 What, what I would say is that, 107 00:05:28.579 --> 00:05:33.000 um certainly as it relates to cracks Us based customers, there's no more risk. 108 00:05:33.070 --> 00:05:34.929 Um Of course, there's no more reward. 109 00:05:34.959 --> 00:05:39.649 So, um I don't know, you know, I don't know if that's a net positive or net negative. 110 00:05:39.660 --> 00:05:43.010 Um I, I think I know how most folks in the crypto industry feel about it, 111 00:05:43.190 --> 00:05:44.160 but certainly 112 00:05:45.140 --> 00:05:48.279 those opportunities offshore doesn't benefit anyone in the US. 113 00:05:48.579 --> 00:05:50.130 Um You know, at the same time, 114 00:05:50.140 --> 00:05:52.869 it doesn't really say anything as with respect to 115 00:05:52.880 --> 00:05:56.750 existing staking as a service programs offered elsewhere. 116 00:05:56.920 --> 00:05:59.070 Um But I do think, as I said before, 117 00:05:59.089 --> 00:06:03.489 there is more guidance as to how folks can navigate these issues. 118 00:06:03.500 --> 00:06:05.640 Um And in that sense, there is, 119 00:06:05.649 --> 00:06:08.380 there's something there and it's not the ideal way you'd get it right. 120 00:06:08.390 --> 00:06:08.750 But 121 00:06:08.929 --> 00:06:11.309 there is something, some something to be gleaned from, 122 00:06:11.320 --> 00:06:12.790 from the facts of the cracking case. 123 00:06:14.059 --> 00:06:19.809 I correct me if I'm wrong, but it sounds almost as if Gensler in all of this, 124 00:06:20.369 --> 00:06:20.809 he, 125 00:06:20.820 --> 00:06:25.070 he kind of gives off the impression that maybe he's ok with 126 00:06:25.079 --> 00:06:31.190 peer to peer lending and peer to peer stake and staking for individual 127 00:06:31.459 --> 00:06:32.850 investors just doing 128 00:06:32.989 --> 00:06:37.739 staking as they would on, on the, on the East Blockchain as, as they would in um 129 00:06:37.910 --> 00:06:41.410 as if they were a large uh uh institution doing it 130 00:06:41.640 --> 00:06:44.130 as long as to the individual doing it themselves 131 00:06:44.230 --> 00:06:48.519 and likewise borrowing and lending one to another. 132 00:06:48.799 --> 00:06:53.160 Um And, and it seems almost as if he's a hardcore 133 00:06:53.399 --> 00:06:58.415 uh uh like a, an old school hardcore crypto guy, like not one, not like the, 134 00:06:58.554 --> 00:06:58.964 the, 135 00:06:59.144 --> 00:07:03.734 the centralized exchanges getting involved in it. It is, is that what I'm 136 00:07:04.065 --> 00:07:07.244 II I know that's counterintuitive and definitely not the, 137 00:07:07.255 --> 00:07:08.454 the narrative going around. 138 00:07:08.464 --> 00:07:09.515 But it, it almost 139 00:07:09.725 --> 00:07:12.984 after watching that, that's the kind of impression I got is that, 140 00:07:12.994 --> 00:07:14.945 is that the kind of impression you got here? 141 00:07:15.480 --> 00:07:20.579 Well, there's, there's two things, one is, is what you're seeing is uh the s ECs 142 00:07:21.010 --> 00:07:25.450 um increasing focus on intermediaries in the space that is people 143 00:07:25.649 --> 00:07:27.910 between the coins and the network. 144 00:07:27.920 --> 00:07:31.720 Um whether that is a service being provided on top of um in between, 145 00:07:31.730 --> 00:07:34.570 in between the protocol and, and its, and its customers and, and, 146 00:07:34.579 --> 00:07:38.649 and it's um and its participants or um potentially, as you said, 147 00:07:38.660 --> 00:07:42.390 centralized exchanges and maybe some of those are doing both, both activities. 148 00:07:42.399 --> 00:07:42.613 But the 149 00:07:42.852 --> 00:07:47.002 the interactions of the actions of intermediaries has always 150 00:07:47.013 --> 00:07:50.233 been a huge focus of the securities laws. 151 00:07:50.243 --> 00:07:53.513 And that's why we have the Securities Exchange Act of 1934. 152 00:07:53.523 --> 00:07:55.653 It is all about regulating intermediaries. 153 00:07:55.662 --> 00:07:57.393 And in addition to say investment, 154 00:07:57.403 --> 00:08:01.532 investment company and investment advisor type of rules and regulations, 155 00:08:01.542 --> 00:08:04.683 I do think peer to peer is not 156 00:08:04.692 --> 00:08:07.722 necessarily problematic because it's not necessarily even, 157 00:08:07.963 --> 00:08:08.513 um, 158 00:08:08.643 --> 00:08:11.726 the securities laws don't necessarily even cover that other than, you know, 159 00:08:11.735 --> 00:08:15.156 straight up anti fraud and, and some various provisions. 160 00:08:15.276 --> 00:08:19.605 So the fact that he, you know, may appear to be ok with peer to peer is, is, um, 161 00:08:19.615 --> 00:08:22.705 that's great, but it's also sort of kind of the law you don't. 162 00:08:22.716 --> 00:08:27.596 There's no requirement for example, to use a broker to, to transact insecurities. 163 00:08:27.605 --> 00:08:31.395 That's just the convenience and, and sort of the cost of convenience is always, um, 164 00:08:31.406 --> 00:08:32.815 well, what is this intermediary? 165 00:08:32.825 --> 00:08:34.096 How are they regulated and how, 166 00:08:34.106 --> 00:08:36.716 how can you be relying on them or what are their duties to you 167 00:08:36.929 --> 00:08:38.039 um in the space? 168 00:08:38.049 --> 00:08:42.058 And so I think that's kind of where we get to, yeah, more comfort from peer to peer, 169 00:08:42.068 --> 00:08:43.299 less likely to happen. 170 00:08:43.308 --> 00:08:45.338 Like I can take my securities to my neighbor 171 00:08:45.638 --> 00:08:47.098 but, you know, they may not buy it. 172 00:08:47.109 --> 00:08:50.379 But if I have a broker, then, then I'm likely to find a buyer. 173 00:08:50.398 --> 00:08:52.039 But what's the broker's obligation to me? 174 00:08:52.049 --> 00:08:54.530 So, you have a lot of these, these traditional securities laws, 175 00:08:54.539 --> 00:08:56.969 questions keep coming up, peer to peer generally. 176 00:08:56.979 --> 00:08:57.570 Ok? 177 00:08:57.679 --> 00:09:00.630 If there's anyone between you and the and the ultimate money, 178 00:09:00.640 --> 00:09:01.739 what are their obligations? 179 00:09:01.750 --> 00:09:04.179 How are they interacting? What should you know about it? Whether that's 180 00:09:04.289 --> 00:09:07.099 an issue or of an investment contract or 181 00:09:07.109 --> 00:09:10.039 a regulated intermediary providing a meaningful service? 182 00:09:11.159 --> 00:09:11.789 Well, 183 00:09:11.929 --> 00:09:14.729 speaking of intermediaries that they're speaking out Coin Bank, 184 00:09:14.739 --> 00:09:17.849 Ceo Brian Armstrong had just tweeted in part that 185 00:09:17.859 --> 00:09:20.349 it would be a terrible path for the US. 186 00:09:20.359 --> 00:09:23.280 If the SEC bans taking for retail investors, 187 00:09:23.580 --> 00:09:27.130 could this lead to a wider crackdown in the industry? 188 00:09:29.000 --> 00:09:33.849 Um It, it certainly could, but I don't know, you know, at some point 189 00:09:34.039 --> 00:09:37.320 there are diminished returns on the regulatory side by 190 00:09:37.330 --> 00:09:40.159 continuing to emphasize the same facts over and over. 191 00:09:40.239 --> 00:09:44.979 I think you've seen that over the years with um the IC, with the IC O crackdown. 192 00:09:45.099 --> 00:09:50.479 Um at some point, the SEC makes its, makes its points and, and the rest is up to um 193 00:09:50.950 --> 00:09:56.640 to the private markets to sort of fall into, into compliance or to, you know, 194 00:09:56.650 --> 00:09:58.159 to frankly rely on, 195 00:09:58.169 --> 00:10:00.229 on different facts and circumstances to have a 196 00:10:00.239 --> 00:10:01.940 different result and to take a different position. 197 00:10:01.950 --> 00:10:03.599 And I think you see that a lot 198 00:10:04.049 --> 00:10:07.119 in, in the, in the crypto space in particular, 199 00:10:07.130 --> 00:10:11.830 where the sec relies on a facts and circumstances based test to, 200 00:10:11.840 --> 00:10:14.859 to assert its oversight at the same time, 201 00:10:14.869 --> 00:10:17.900 sort of the downside of it doing that is that it, 202 00:10:18.260 --> 00:10:20.450 it's limited and every particular action is 203 00:10:20.460 --> 00:10:22.090 limited to those facts and circumstances. 204 00:10:22.099 --> 00:10:25.469 And so to the extent that there are different facts, different circumstances, 205 00:10:25.520 --> 00:10:26.809 you might have a different result. 206 00:10:26.820 --> 00:10:29.989 And I think so, you know, other programs 207 00:10:30.109 --> 00:10:32.299 are not necessarily crackings program. 208 00:10:32.309 --> 00:10:35.849 And so they, they have their own legs to stand on and their own base for, 209 00:10:35.859 --> 00:10:37.890 for reasons why they, they may, may or may not, 210 00:10:38.200 --> 00:10:39.450 they may not be problematic. 211 00:10:39.760 --> 00:10:44.000 And now they have the benefit of this order which highlights for everyone 212 00:10:44.109 --> 00:10:45.940 what the SEC is looking at and cares about. 213 00:10:45.950 --> 00:10:48.530 And so I think that having something to break against is really important 214 00:10:49.320 --> 00:10:51.289 perspectives can also be subjective. 215 00:10:51.299 --> 00:10:53.130 I'll just also note that SEC Commissioner 216 00:10:53.140 --> 00:10:55.429 Hester Purse shared her dissent yesterday to 217 00:10:55.570 --> 00:10:57.049 the S ECs crackdown, 218 00:10:57.349 --> 00:11:01.179 but one there, Zachary, thank you so much for joining us. That was K 219 00:11:01.429 --> 00:11:04.150 partner and former SCC attorney Zachary Fallon.