Welcome back everyone. I am Cass PNC.
I'm joined as usual by my partner in crime, Mr. Bennett
Tomlin. How are you today?
Don't answer, don't answer. How are you guys?
I'm here. Yeah, we're, we're alive.
We're alive and breathing. But I think it's really cool
'cause we're we're joined by a super special guest today.
Corey Frayer was like the senior advisor for crypto oversight for
the SEC and now is working for the Consumer Federation of
America as the new director of Investor protection.
Corey, welcome to CCC. How are you?
Thank you. It's a it's a rough time right
now. So, you know, not great, but
excited about this new job. I'm excited about the chance to,
you know, continue the work. I've been committed to my
career. So they're ups and downs.
And we should just say at the top here, Corey is here in his
personal capacity. These are Corey's personal
things. They are not the opinions of his
employer. Right, correct.
And on that note, I, you know, I mean, it might be easy, easiest
if we got started by by talking about what your role at the SEC
was and what it looked like, you know, trying to regulate
cryptocurrency. Yeah.
So there was obviously a lot going on and the SEC is a large
organization with a lot of different divisions, a lot of
different policy areas. So my main jobs were essentially
advising on strategy and tactics and then making sure that all of
the disparate parts of the agency, we're consistent in how
we address crypto assets. So on the rulemaking side,
making sure we're using the same language there as we did in
court filings. Just making sure we're sort of
unified in that approach and not in any places where we were
addressing crypto, sort of especially creating litigation
risk for ourselves, saying things that could be used
against us in these, you know, big cases we were developing.
So do you think you could talk a little bit about what the SC CS
mandate is and how that affected the strategy the agency took
when it came to crypto currencies and crypto assets?
Yeah, I think that's one of the big issues that we, we have a
very different mandate. I, I'm going to keep saying we
even though I'm not there anymore.
So the SC CS mandate is very different from like a banking
regulator, which has what's called prudential authority or
essentially safety and soundness authority and they get to look
at a product and say this is bad for the banking system, this is
bad for consumers. You're not allowed to do that.
The SE CS mandate is one of disclosure.
So I think we would often say inside the agency is you can do
a Ponzi if you disclose it. If you say in your registration
like we're a Ponzi scheme, you can do illegal things and
disclose that in your business plan and that's it.
Like that's. We're letting so many bad people
know this right now. You.
Still may violate federal. Laws.
You still may you still may violate federal and state laws
in the. Process you got, you got fraud
you got yeah, yeah, yeah. But it's just, yeah.
But the SC CS goal is to make sure that the investors have all
the information they're supposed to have.
That's correct. That's correct.
The mandate is investor protection, fair and orderly
markets, capital formation. Yeah.
And so how did that, like, interface with or affect how the
agency came up with its cryptocurrency strategy?
So I mean, it, it was actually pretty simple because the issue
with crypto is the vast majority of these tokens meet the Howie
test. They are securities, but they
weren't registered. And so they weren't meeting that
basic disclosure requirement. That's kind of step one is
addressing the fact that they are securities.
They do have an obligation to register and disclose and they
weren't doing that. So that's like a pretty
straightforward step one. And even, you know, to their
credit, Clayton's administration before us took on a lot of those
kinds of cases. You know, obviously we took on a
little bit different strategy, which hopefully we'll talk about
later. But yeah, the first barrier to
everything was demonstrating that these were investment
contracts, securities. OK.
And for our audiences benefit, we've talked about it a couple
times on here before, but could you tell them what the Howie
test is and how that relates to like these being securities?
Absolutely. So there's actually a big
misconception about what we were saying about crypto assets,
which is that the crypto asset itself was a security.
And what we allege is that the crypto asset is part of a scheme
that makes it a security. And so the concept of investment
contract is a long standing concept from the blue sky laws.
And the reason it was included in the act and the reason the
the Supreme Court decision, the Howie decision came down was
because Congress was aware when they passed the law that people
would try to evade it. And so the investment contract
test is a purely economic analysis and it says basically
no matter what you call yourself, if you are
economically the same as security, you're a security.
And so that test is an investment of money and a common
enterprise with the expectation of profits based on the efforts
of others. And quite frankly, like many
securities meet that test regardless of whether that, you
know, they're enumerated in the 33 and 34 Act.
But the Howie test was really meant to sort of capture the
evasion and all the ways that securities could be introduced
in the market as sort of that, you know, something by any other
name. Was the SC, CS goal to get these
cryptocurrencies to come in and try to find a way to register
these things as securities? Because the refrain we've heard
from the cryptocurrency industry over the last several years is
that their tokens were incompatible with existing.
Registration documents so yeah, getting them to come in and and
register was certainly the beginning of the strategy under
under Clayton's term. A thing that kind of morphed
there is that under Clayton's term most of them were calling
themselves IC OS our initial coin offerings.
And so when you walk out into the world and you say we're an
IC O, it's very hard to go in front of a judge having named
yourself after sort of like the most famous layperson
understanding of securities and equities and be like, well, we
didn't really know this was a security.
It's kind of like an absurd argument to try and make.
So those cases were, you know, pretty easy.
And I think that there was a conception at the time that that
market wasn't really gonna get a foothold and expand in the way
that it did. So, yeah, I think that's sort of
that was like sort of the first step.
Well, I guess part of the refrain we, Cass and I have
heard from the crypto industry that these things can't be
registered. The types of questions asked in
these forms are fundamentally incompatible with the types of
things these issuers are doing. To tag on to the back of that
really quick, they also were saying a lot.
And we're, you know, we're still hearing this from like Coinbase
and, you know, major operators in, in the cryptocurrency
industry that like even if they did go in there and try to work
with the SEC on stuff, that ultimately they would just get
bogged down in a mess and told off by the SEC or charged with
something. Or, you know that that
regardless of how they were trying to play nice, the SEC
would come after them no matter what.
In my experience at the time while I was there, absolutely
untrue. No one has ever demonstrated to
me what is fundamentally incompatible about a crypto
asset and the current set of securities regulations.
We went in there very open to hearing that argument and be in
being given detail around that. And we spoke both to crypto
asset issuers and crypto asset platforms and traditional
platforms that we're thinking about getting into the crypto
asset business. And none of them could
demonstrate for us what the technological issue was that
made them unable to register and operate like any other
securities market. The argument essentially boiled
down to, we set up these platforms with these huge
conflicts of interest. If you make us look like the
traditional securities markets, this business is not going to be
economical. So essentially, by making us
follow the law, you're going to shut us down.
That was like, I think that was like really what was going on.
And I also think that has to be taken in the context like
whether those were good faith or bad faith arguments.
The initial idea behind crypto is this is going to be something
that's not subject to government regulation.
Like, no matter like how you look at this, the the underlying
ethos is that they didn't think our regulation was ever going to
be legitimate. The original intent of Bitcoin
was to undermine the existing banking.
So it it wasn't to necessarily like destroy the banking system.
It wasn't to ruin governments or anything like it.
It was just to have a completely different and unregulated form
of yeah, money. Right.
And I guess this comes to the question of like, at what point
does the SEC feel like a asset like Bitcoin or Ethereum or
Ripple? At what point are they quote
sufficiently decentralized at they are no longer a security.
I don't. Think decentralization other
than the concepts of, for example, a, a common enterprise,
right and sort of the organized efforts of others.
I don't think decentralization, decentralization was ever sort
of the right way to look at economic analysis.
And like very unfortunately, before we got there, a former
director of corporation finance, which is sort of like they are
the experts on what is and is not a security.
That's their lane said a lot of things about crypto in its
nascent state that create a lot of problems for the agency.
And I think one thing, you know, getting into the constraints the
agency has is that the courts don't look at the SEC as like a
thing that changes administration to
administration. The court looks the SEC like a
90 year project that is supposed to be consistent with itself.
So we're held accountable to things that have happened before
us. So, like, those statements
carried on, and we're used to challenge Ripple as we continue
to litigate it. That was an enormous challenge
for us. And the other thing is, like,
the fact that this market was allowed to grow so large was a
big challenge because you got to go in front of court and
explain, like, if this was so illegal, if this was obviously
securities, why didn't the SEC do anything about it?
Why'd you let it get so big before telling him this was an
illegal business? And during that era, you had
interesting messages coming out of the SEC with like Clayton
saying basically every IC O I've seen is obviously a security and
then Hinman going, I don't know, some of these seem like they're
sufficiently decentralized and aren't securities anymore.
Plus you had the Dow report coming out in that era, which
was like, this is very clearly a security and things that look
like this are also securities. And so there was a bit of
difficulty in getting everyone unified in the same message
during that period, which seems to have had cost going forward
for years to come. I would just add, you are
absolutely correct that I think prior to US things had been
pretty inconsistent. And I would add one other thing
that that is not well known, which is that there were a
couple of tokens that were issued, they were not
registered, but they were issued legitimately in an exemption to
the registration. So there's a handful of
exemptions registration. Yeah, exactly.
Stacks Maple where they were trading on exchanges.
And the moment you're a platform that facilitates trading of a
security, you're a Securities Exchange.
And even though those securities were on platforms that meet the
definition of exchange, our administration didn't go after
those exchanges. So that was another sort of
inconsistency and interpretation of the law that was challenged.
Well, and I think even since then, one of the stacks like
founders has come out and said they've regretted using that
exemption because it made it harder for them to convince some
cryptocurrency exchanges to list them because they were worried
it would end up drawing SEC attention to them.
That was an enormous hurdle to actually getting someone to come
and register. And I'm, I'm sure you guys have
heard, heard Gary a million times say, hey, just talk to us.
Just come in and register and even people who wanted to come
in and legitimately work with us and we met with a lot of people,
we met with anyone who would, who would come talk to us.
An issue that we also like the an economic issue you couldn't
get around was that if you became a legitimate exchange, it
was really hard to find a token that was willing to register and
join your exchange. And the tokens didn't want to
register because there was no exchange for them to trade on
once they were registered. So you had this like chicken and
egg problem of trying to get both sides of this market to
come together and have one legitimate exchange and
registration process. Which results in like people
like Promethean declaring other tokens securities without those
tokens agreeing to register do anything.
To try to. Solve that chicken and egg
problem. Is there any additional context
you can bring it give it to us here and like what seemed to be
one of the biggest cryptocurrency cases that like
the Clayton SCC brought that ended up being continued on the
Ripple case and like what the strategy and thoughts were
behind that one and. Quickly, just to to jump in here
like if you can, I, I think Bennett and I have like hardly
ever talked about the ripple case at all.
I. Think actually pointless.
Well, not only because it's pointless, I actually think we
largely felt like it once it had become, once you guys went after
them, we were like, OK, well, this is a slam dunk.
Like, I think we genuinely thought that that it was like,
OK, well this is over. We don't really even need to
talk about Ripple anymore. This is done and then years
later it just feels like we really lost the plot on that
one. So if you can help, help our
audience and us understand it a little better.
I will start with the most controversial thing I'm going to
say about this, which is like despite the press and despite
what Crypto said about it, Ripple was a win for the SEC.
It established that at at the very least those first contracts
that went out were in fact securities.
The second part of that decision of the Torres decision was a
pretty wild interpretation of the securities laws that took
this crazy argument about investment contract and gave it
a life that it it shouldn't have had.
The investment contract concept can't be split up into the idea
of an investment in the idea of a contract.
It's like the point isn't literally about a contract.
It's like saying a skyscraper isn't a building because it it's
not in the sky and it doesn't scrape anything.
The fundamental thing you're representing there is a broader
concept, and what crypto was arguing is that you needed
privity because it's a contract. You needed a direct relationship
between the issuer and the buyer in order for it to be an actual
contract. It would be like saying in an
IPO, the first buyer of a share, it's a security, but once it
trades on the secondary market, the securities laws don't apply
anymore. So it's a wild interpretation of
the law. And shortly after it was issued,
Jed Rakoff, who is seen as like the Dean of securities law on
SDN, the the Southern District of New York, where that case was
decided, and the, the the district that Torres is in,
ruled in Terraform on a lot of similar issues that it was they
were obviously securities and it was the way that was phrased.
And, and some of the things that he said after that made it very
clear that he thought the Torres interpretation was really wild.
And so one of those issues is that like we have a very
different court system. A lot of judges have been
appointed and like, you know, this was an Obama appointee, but
a lot of judges have been appointed that that make that
have upset the traditional interpretation of the securities
laws. And that's been an enormous
challenge as well. Sorry, and just to like
backtrack even a little bit more, what exactly is Ripple and
what is XRP? And like what?
Like what what, what was their goal?
Why were they coming to you guys?
Like why? Why were you guys going after
them? Yeah.
So I mean, I'll start by saying that if I were in the position
at the time, I'm not sure Ripple is the case, I would have
chosen. That said, they did pretty
straightforwardly raise capital that they, you know, ask people
to invest money in them, creating an ecosystem that
essentially was first and foremost going to be sort of
like an intra bank payment system and then like eventually,
I guess a world currency and payment system.
So yeah, I like that was the pitch, but it's like really
clear that if you're going to take someone's money to build a
project, they're relying on you and your expertise and you're
pooling a bunch of people's money to build that project.
You're you're squarely within the securities laws.
Now. We ended up running headlong
into, for example, the Hinman statement and there was a huge
fight over not just the statement itself, but getting
sort of all of the staff comments.
And the way staff comments work on those issues is like you
pressure test that stuff. There's a lot of things in those
documents that the SCC didn't necessarily believe, but staff
raised as you should think about this, you should think about
this. And that was a costly set of
facts in that case. And if I remember right, the
Hinman statement was supposed to be a statement in his personal
capacity at some event to like. It wasn't a vetted FCC speech if
I remember right, but it got covered and then he's still in
his role and so they attributed the statement to him.
Yeah. Sort of.
One of the fundamental truths about financial regulation
generally is it's a one way ratchet.
It's really easy to deregulate and it's really hard to regain
ground. You can deregulate by just not
doing something. You can deregulate by having
someone who's in a position of power, even if they're just
staff at the SEC, sending a message to markets that this
stuff is legitimate. Look, I don't I don't agree with
it. And I don't think someone, you
know, one staffer who is not appointed or confirmed by the
Senate should be able to make proclamations that have effect
in the marketplace. But it is a somewhat convincing
argument to a judge to say, hey, this guy who is in charge of
this division at the SEC said it was fine.
Like what give? I'm curious.
I like we, we briefly touched on it before.
I feel like you're you, like you said, you guys are dealing with
90, almost 100 years of history here where you're expected to be
consistent in the structure of how you regulate these markets.
I'm curious how political the SEC is now, maybe even before.
I think it's clear that now there is no like it is the same
as politics and clearly they've decided to do whatever they want
with it. I would also be curious what
your relationship was like in terms of the regulation of
crypto for you personally with I don't even know how to say her
name, but Hester Pierce, I'd like.
I don't know how to say her, her last name.
Purse. Yeah.
Hester Pierce. Yeah.
It's a really good question. I think everybody in the
independent agencies does genuinely try to operate without
political influence, generally tries to recognize that we all
have a bias and try to be consistent and fair in our
decision making. I would also say that there is
nothing in our democracy that is not political.
Like it's just fundamentally true of economics and political
economy is that everything is in fact political.
The person who's charged in charge of the SEC is is chosen
by the president. That is a political position.
So certainly there are politics involved in terms of the
efficacy of political pressure. I don't think, at least in our
administration, we were ever driven by political consequences
or political pressure. Like the closest you could
characterize us as getting that is sort of like trying to
demonstrate reasonableness in response to the fact that
although judges are, you know, supposed to be fair interpreters
of the law, there is inherently a political angle to that.
And just everybody's human. And so we did, I think, sort of
try to speak to some of those things and demonstrate
reasonableness because you kind of have to contend.
With that political issue, certainly the amount of
criticism we got from Congress and a lot of the beatings we got
were because crypto had become a pretty powerful political entity
at that point. So I think the courts really had
a lot more impact on what we were trying to do and what we
did and sort of trying to navigate around that extremely
challenging judiciary environment we were in than any
kind of political influence. One of the most like interesting
political things I observed before was the politicians who
wrote an angry letter because members of the SEC were meeting
with members of FTX and FTXUS. And then a few weeks later,
after FTX declared bankruptcy, they wrote another letter to the
SEC asking why the SEC hadn't taken more aggressive steps on
FTX. Speaking of FTX, that kind of
political things, do you have any thoughts on, oh, how all of
that went down leading up to the collapse?
After the collapse, the interaction between like the
politics and the regulation there.
Yeah. The first thing I want to say
about that is, again, just like one of those fundamental truths
about financial regulation, which is you don't get credit
for the things you prevent and you always get blamed for the
things that you didn't. And I think that's like really
well reflected in this, like the political position of it first
being like, how dare you regulate this?
And then being like, well, how on earth did you miss this?
And that's just sort of like part of being in that space.
Another thing that I think I would like, I would want to give
us lots of credit for because the FDX thing wasn't like a
total surprise. I'm not going to say we like
sort of knew the insurance and outs of what was going on inside
that business. And there are a lot of reasons
for that. Like the hook to US.
Oversight at FTX came fairly late in their development.
As far as FTXUS was concerned, they initially only offered a
handful of things that were really hard to argue were
securities, Bitcoin, Bitcoin cash, Litecoin, a stable coin or
two. I always.
Forget about like when until someone mentions it.
Fair. And it was only in 2022 that
they introduced the Nofi stock trading and that's when like we
really had a hook into that. But that's like pretty late in
the game for where they ended up.
I also tell me if I'm wrong, but like, it seems like regulators
essentially did a pretty good job because what ended up
happening is FTX International did all the fraud and as far as
from what I've heard, like there was very little crime happening
at FTXUS. And that's some I I said very
little. I said very little.
I didn't. Say none, at least most of the
money most of the time, which is vastly different than FTX
International. Exactly, exactly.
I think that's, I think I'm so my point being that you got you
guys along with other regulators kind of are told like, oh, look
at what FTX happened and that was an American company.
And it's like, well. Yeah, where were the both of me
and securities regulators? Yeah, exactly.
Really. Exactly, exactly.
I like, I don't know how you guys can stop fraud all over the
world. I I like it.
That seems like a a tough ask, you know.
Yeah. And I got put that on my list of
constraints is there's a ruling called Morrison which really
narrowed down SC CS authority to deal with foreign securities
that make it into the US market. And so the foreignness of FTC
was also a challenge. I'm sorry, I would say that you
probably don't want to separate the parent company from a
subsidiary in terms of crimes and fraud.
But more than anything, it was that inability to look into the
US entity until fairly late in the game that I think was the
more driving factor of just not knowing what was going on in
there until, you know, it's too late.
And one other thing I want to say about that is, again,
there's a conception that like the fragility of the crypto
market sort of caught us off guard.
And, you know, we weren't doing anything beforehand.
And one thing I'll say is that it takes a long time to develop
cases. As soon as we walked in the
door, we decided we're going to take a different strategy than
Clayton. Instead of playing whack a mole
with all these securities, we're going to hit them in the notes.
We're going to hit them at the intermediaries, at the exchanges
where the stuff was collecting because you have a bigger impact
on that. The other thing I want to say is
that there was an accounting interpretation we did called SAB
121. It's extremely unpopular.
But in April of 2022, working with our accountants, we'd
identified that the custody arrangements and the
safeguarding around crypto, we're actually really
unpredictable in terms of established bankruptcy law,
state treatment under the Uniform Commercial Code.
We identified that was an issue. We thought it was bad for
investors, that investors in crypto companies that they would
not be aware of the potential liability of that company to its
customers. And so we said, look, you've got
to disclose this liability you may have in the case of
bankruptcy or in the case of, you know, being resolved by the
FDIC, something of that nature. It's an example of good
financial regulation, big gets good financial regulation.
So what ended up happening is banks, which are also public
companies, also had to follow that GAP interpretation and the
banking regulators didn't. I mean, they have their own
accounting that is called regulatory accounting instead of
GAP. And they decided not to change
that accounting. And ultimately, banks would have
had to raise more capital in order to justify having those
assets on their balance sheet. And so we sort of fundamentally
kept the traditional markets separate from the crypto markets
before that crash happened. And that was a really big deal
in terms of contagion into our markets.
And I think you if you look at the 2023 regional banking crisis
and three of those banks were heavily involved in crypto.
We bailed out like $3.3 billion of USUSDC reserves.
Signet at Signature was a huge player in the crypto space.
You've walked right into my trap.
I wanted to ask you about about stable coins.
So you're bringing up stable coins.
And I think for Bennett and I, it has probably been the number
one most important systemic risk for cryptocurrency and for the
globe. In which I knew less about
stablecoins. Yeah, me too, me too.
So I I guess I wish we knew less about.
Crypto. Sorry to have you on Courtney,
but I, I think our, our, our Forte at this point is, is
stable coins. And I am curious why I, maybe
I'm wrong again, but I, I think the only stable coin you guys
have really gone after was Luna Terra.
Is that, is that right? Is the, the, the kind of the,
the feeling that the stable coin market just is not something you
guys are supposed to be regulating?
Is this like a, is this a market for different regulators?
Is it like, yeah, I guess I, I'm just curious why that's the only
stable coin you guys have gone after.
Yeah. In terms of your the question
you just asked, in terms of whose whose job it is, the
unsatisfying answer is it depends.
You know, as we talked about earlier, one of the prongs of
the Howie test is an expectation of profit.
So if you're getting a stable coin, it's hard to argue that
you're expecting that to rise in value when the selling, when the
pitch is this is gonna stay at this price.
Now, that doesn't mean there can't be arrangements that do
make a stable coin a security. And what happened in in the
Terraform case with Terra Luna is that they had created a
secondary market and the anchor protocol where they were saying,
OK, like you, you get this. And then if you deposit with us,
you're going to make a profit of the interest rate you get in
this in this account. So there you have a promoter
saying essentially you're going to make a profit off of this in
a way where at the very least, I'm not gonna say none of the
other ones are securities. But it's it takes a lot more
work and it takes a lot more fact finding to try and
demonstrate that there is a profit motive or a promise of
profits as part of that arrangement.
Not impossible, but pretty. Hard, I mean, like I, I just
like off the top of my head, I'm like, Oh yeah, I remember that
time that Tether had all their problems and started their unis
said Leo token where they basically promised like we're
going to give you a return on your money and more cash and
interest at the end of it. And it's like that's Tether
related. That's bit Fenix related.
But I guess you're saying like just the complexity of it and
them not being based in the United States and them saying
they don't serve US customers, Like, does that just throw a
wrench in all of that? Yeah.
I mean, there are lots of challenges.
And again, this gap, this gets back to some of the other
fundamental constraints of the SEC.
We had to apply our resources very, very carefully.
So the SEC has 4800 employees. We have a budget of $2 billion
that is appropriated by Congress.
They set our budget even though we get all that money back by
charging our restaurants and we have 1400 enforcement attorneys.
We oversee $125 trillion market. To sort of give it out of
comparison. There are three banking
regulators, the Fed, the FDIC, and the OCC. the Fed has 25,000
employees. 1500 of those are bank examiners.
The FDIC has about 6300 employees.
The OCC has like 3500. They oversee a $24 trillion
market. You are so.
Addition to that, it's. Like we get we're super resource
constrained and then when you think about the places where
they need to focus their energy, JPMC alone is 1/6 of the assets
in the banking space. The top 6 G Sibs are right
around like 5055% of the market. So you have a play pretty
concentrated place where you can direct your energy.
And that'll also say that even though that's the the banking
regulars issue, most of those banks have a very large broker
dealer, which again comes back to the SEC to regulate the
appropriation process. Even though we're budget
neutral, makes it really hard to plan in advance to try and
recruit. If you hire too many staff and
then you get a budget cut, it's like, well, where are we going
to find the money to run Edgar? You know, how are we going to
keep our computer systems running?
Like that's one of the constraints.
And I would say with regard to the constraints and, and to
folks who think like we didn't really put enough energy towards
crypto, our cybersecurity and crypto unit, we, we doubled that
to, to 50 attorneys. That is 3 1/2 percent of our
enforcement staff. The crypto market was under us
sort of at it's biggest before the very end of our term, maybe
like a $2 trillion market, more than half of which is Bitcoin,
which had already been decided as you know, not a security.
So you're talking about 1% of the market where we're deploying
3 1/2 percent of our enforcement folks.
And also like those things tended to go into litigation.
And as you go into litigation, that team is now committed to
showing up in court, filing briefings like they're doing.
It's harder to get them to do investigations because they have
a lot on their plate in, in terms of going to the court.
And the last thing I'll say about that is when you bring a
case like that, there's no sort of like one person who knows all
of the securities law, it's too much.
And so they work with our rulemaking divisions to to sort
of make sure they're really tightening up those arguments.
So not only is there limited enforcement staff, but those
enforcements are taking up rulemaking time in which you're
trying to, you know, get a handle on the rest of the
traditional markets. And it also leaves, you know,
there are lots of places in traditional markets where
probably we would have liked to bring more enforcement actions
in that very large space where people hadn't signed up for, you
know, the volatility of the crypto markets and just expect
the regular securities laws to protect them perfectly.
And you just have to make these really tough decisions about
where you deploy those resources.
A couple of times here you've referenced like the fundamental
constraints of the SEC. Can you talk a little bit about
what those fundamental constraints are and how that
kind of effects what investigations get started and
what investigations become enforcement actions?
The first and foremost is the limited resources overseeing
such a huge market and also the limited authority in terms of
sort of what we can do proactively.
Again, if you're a banking regulator, you can say, you
know, you, you it's sort of what we called a merit regulator.
We sort of had to take the position that we don't get to
make a judgement about the business you're doing.
Our judgement is purely about the disclosure and then
obviously, you know, fraud. So like that is having to
establish that and then being resourced and trained are two of
the, you know, two of the biggest issues.
In addition to that, unlike prior securities issues, crypto
is able to just print itself limitlessly.
So you have like having 15,000 nationally available non
compliant securities is not something that has happened in
the past. So getting a handle around that
is enormous. There's also procedural
constraints. The Commission itself can slow
down enforcement actions by once they get to the formal order
stage requesting a vote on every subpoena.
And you can only get the Commission together so many
times to vote in a month. And that can, you know, slow
those investigations in such a way that it's like pretty
frustrating for the enforcement staff.
And also just you have to go to court to fight those things.
You have to get all of your depositions and facts seeking in
line. You have to do a less discovery.
Like slowing that process down is a huge, huge drain on
resources. The other thing is every one of
our cases fundamentally starts with proving that there's a
security involved. Even if we go after a large
platform, we have to demonstrate every time that there's a
security here. And so making sure we found
cases where that was at least mostly a slam dunk issue was a
really important and where we wanted to take on cases where
that wasn't the facts. That could be pretty tough.
And then again, you know, inheriting the past positions of
the SEC, a really big problem, a really big constraint.
And there's also an issue with the CFTC where then when they
would establish futures markets in a particular crypto asset,
you know, the challenge to us becomes like we still are
ultimately the arbiter of what is and not is not a security.
That's clearly SCCS job. But going to a judge and trying
to explain why two federal regulators fundamentally
disagree about the status of a particular asset, huge
challenge. It's not a good luck.
So yeah, those are there are more constraints, but I think
those are kind of the the highlight.
And when you've raised there feels very relevant right now,
which is that it's possible for the commissioners to raise the
additional barriers and in so doing slow down a lot of this
action. And there was some reporting
recently that now lower level staff are not even going to be
able to open investigations without approval of the
commissioners that came from Reuters.
So it seems based on what you said, that is going to be a
massive barrier for investigations and enforcement
going forward. That's one of the things that I
would describe as genuinely kind of political interference
coupled with another, you know, really terrible developments
that have happened at the agency with the new leadership.
But yeah, to that end, obviously the chair would come in and
establish some enforcement priorities.
And if we, you know, we saw something that like looked
especially bad, we would we would say to enforcement staff,
hey, you like, you need to devote some resources to looking
at this. That said, most enforcement
attorneys have access, not they all have access to what are
called TCRS, tips, complaints and referrals.
That's a reform we put in post Madoff to make sure there was a
centralized repository of that kind of incoming information.
So it wasn't, you know, it wasn't just like 1 staffer, if
they, they didn't do a good job chasing something down, no one
else would have insight into that kind of complaint.
We got 45,000 of those a year. So typically what an enforcement
attorney would do would sort of be looking at the market,
looking at the news, looking at those TCRS and individually
deciding, here's what I'm going to start an informal
investigation on. And then they had to have the,
the ability, with the cooperation of, you know, the
head of the Division of enforcement to, to do a formal
order where you can actually start issuing subpoenas, taking
depositions, really, you know, get enforceable powers to
collect facts. And, and then only after you had
done that would you present the facts to the Commission for the
ability to bring that complaints into the courts.
And this change now where essentially you, you can't
really spend resources on an informal part of the the
investigation. You got to ask yourself, like,
how are they going to go out and identify the problems in the
marketplace? And then like, what is the
amount of time the commissioners are willing to spend to
authorize these? I mean, if they were, if they
wanted to do that at all, to authorize these investigations
that, you know, 1400 individual attorneys used to sort of suss
out for themselves. The other horrible
politicization that is going on is, and I can't express enough
how amazing career civil servants are.
And it's getting a little bit of attention right now because
we're seeing the interference, but they're typically thought of
as sort of like lazy, bureaucratic, couldn't compete
in the private market, so they end up here.
The SEC staff are some of the most expert and amazing people
I've ever worked with. Almost every one of them could
go to Wall Street and triple or quadruple their salary.
They often sit there. Yeah, I'll be fair.
Enough, but a lot don't. A lot don't.
But like, I mean, fair enough. But you know, a lot of them do
that job purely out of like a belief in justice, a belief in
the SE CS mandate. And the job is really
apolitical. I wouldn't have want to come
into that building and had a bunch of staff being like, we
disagree with where you're going with this.
So we're not going to execute your decisions.
Like when you go in there, Congress has said you get to be
in charge of this agency. You get to direct where it's
going within the bounds of the law.
And like the staff's job is to execute the instructions they're
given. And I'm certain like they did
that with Clayton before us, we changed a lot of direction we
were going in. They faithfully changed
direction when we asked them to. And they would have done the
same for the new leadership. So going after people for taking
on unpopular things with leadership is gonna have an
enormous, enormous impact going forward on the efficacy of these
agencies. We've kind of gone over a lot of
your like the mandate of the SEC and how you are constrained by
that. But I do want to talk about
something else, which is how close do you guys work with the
Department of Justice and other, other agencies in the FBI, you
know, whoever might be involved, like ATF, I don't know who, I
don't know which branches of the government you guys are working
with on a daily basis. But I, I think it's important
for people to understand that, I know we've kind of stated this
already, but you guys can't do criminal charges against these
people. You are a civil agency.
These are civil charges that you are bringing against these
folks. So, for instance, when Bernie
Madoff finally got taken down. You guys didn't throw him in
jail. The DOJ convicted him of 11
felonies. Like, you know, it has nothing
to do with you guys, but like, it does have a lot to do with
you guys still, right? Because you guys are talking to
them. You are passing this information
along. I'm curious if there's times
where you've handed them, you know, a booklet about a
cryptocurrency or something like, well, here's some obvious
criminality happening and then just nothing happens.
Or the opposite, like times where you've handed them
something and then immediately they do something about it.
So you're. Absolutely right.
The SEC is a purely civil enforcer, but they do a lot of
work with DOJ. And when you're going through
these investigations, you're uncovering facts that look like
they may be criminal. Absolutely.
You refer that to the DOJ, you ask them to investigate.
I couldn't tell you what the percentage of DOJ moving forward
or not moving forward is. I would say that with those
attorneys and like state AGS in general, the rest what we call
the resting foot, right? The, the sort of natural
response is I would like to take on big cases.
I would like to raise my profile.
So my general sense would be that when we worked with the
Krims is that good cases generally moved forward.
I don't have like a particular insight or number into anything
that didn't happen or did happen.
And even if I did, I couldn't talk about cases that, you know,
never came to the the public space.
But like, I think generally speaking, that was a really good
relationship. A.
Little bit unrelated, but you talked a bit about the CFTC
regulating futures markets and how that sometimes put the SEC
in a challenging position. One of the cases I saw over this
last administration where that seemed to come up was on the
approval of the ETF's and exchange traded products where
eventually the issuers were able to point towards these regulated
markets of size, these futures markets and use that to
convinced the SEC was no longer worth fighting the approval of
those ETFs. Is there any additional insight
or color on that years long ETF dispute that you can provide us
with? The first thing I would say is
that under Clayton to in order that's so that's called A19B19B4
rule change, which is essentially an exchange comes in
and says we would like to list this product and there's an
evaluation under the securities laws wherein the exchange is
responsible for monitoring and preventing fraud in their
marketplace. And So what the staff had to do
there was to figure out a way that these futures products, I'm
sorry, these the 33 act products, the commodity cool
products could be compatible with the securities laws.
And what ended up happening was called the Winklevoss test.
And that was you needed to have a surveillance sharing agreement
with a market of significant size.
And what essentially that means is, is there needs to be an
agreement with you and a in a large marketplace in the future
space where if the underlying market was being manipulated,
you would see that in the future space.
And that would give you sort of the information you needed to
track whether or not there was fraud happening.
And therefore you could demonstrate your ability to
monitor and prevent that kind of manipulation.
And so sorry just to interject quick, did the Winklevoss test
come after the settlement with Gemini where 2 related party
billionaires were like manipulating one of their
markets by wash trading or something?
I believe it came after the disapproval of an application to
list any TP that initially came from Gemini.
Again, that's that fights kind of started before we got there
and you know, we got handed it. I will say this, we litigated
that case. We like, you know, we like when
they sued us, we could have just thrown up our hands and been
like, this is too hard to do, we'll just approve it and move
on. We litigated that case and the
courts came down with a decision that was fundamentally about
economic analysis that they just got wrong.
And sort of the facts against us were really challenging because
at the SEC you distinguish between an ETF and an ETP, an
exchange traded fund, an exchange traded product.
The ETF process is essentially automatic because of a rule
called 6C11 that got installed, you know, again, years before we
were there. And essentially if you put
together A40 act product, which is an investment Company Act, it
is, you know, mostly the underlying product is
securities. So you'd have these to get a
futures product together, you have to have a bunch of
treasuries and done their securities in that product.
And so they, they came in under the 6011 the ETF rule and those,
there's not a way to kind of stop that with, without a
meeting an extremely high bar. So you have these futures
products coming into the market and then when you try to prevent
the ETP products, it's like, well, you have these like fairly
similar things that are already that are already 40 act
products. Like demonstrate why you can't
have a 33 act product. Now, there are reasons they're
distinct from each other. There are different economics.
There are lots of good fights, but judges are not typically
experts in economics. And once you get a bad decision,
the question is like, how many more resources do I want to dump
into fighting this and appealing this versus taking the L and
moving on and trying to go after things you might win?
Yeah. And I especially I think that
comes in here when you like look at it from a consumer investor
protection standpoint and like the investors in the FORTIAC
product are already paying like the contango because their
futures based. And so like you can construct an
argument that the spot based ones would end up being better
for the investors. Absolutely did.
Yeah, this also, I for me, this brings up a broader kind of
vaguer aspect of, of something that I, I would be interested in
discussing a bit. I don't know if we don't know if
I don't know how to phrase this properly, but I, I guess my, my
question for you is there we, we talked about this with Tuffy a
bit. The cases often times that you
guys were able to settle and I guess essentially win seem to be
these kind of smaller scale frauds or abuses, for instance,
Soldier Boy or the Stoner cats one right where where these
weren't like multibillion dollar frauds, These were like Soldier
Boy. I don't even know how many
securities violations Soldier Boy has probably done in his
lifetime. It's it's got to be upwards of
like 10. So, you know, one, it kind of, I
think, and, and this is coming from, I feel like both sides of
the cryptocurrency sphere where you've got the supporters and
you've got the, the people who hate it.
And both of them are kind of like, OK, we want to clean up
the industry. And on one side it's like that
means get rid of everything. And on the other side that means
there's obvious bad actors who need to be dealt with, right?
There's people like Justin Sun, who I think nobody in
cryptocurrency trusts that man. Like they, they genuinely don't
like him or Tether, who for years kind of lied and abused
their way to being the number one stablecoin forever.
And, and the question is like, is it just too resource
intensive to go after those larger scale frauds or is it
that the case isn't a slam dunk? Or is it that, like, what is
keeping you guys like, OK, let's just go after Soldier Boy and
just get him to plead guilty? So I think I'll, I would want to
talk about sort of three types of cases that I think I've heard
either you or guests sort of put in that bucket of like small fry
cases. So first of all, you've got
touting, right, which is a celebrity that doesn't disclose
their conflict of interest and essentially tries to to sell a
crypto asset into the market. And that is important because
you want to, you don't want that to proliferate.
You don't want celebrities bringing people into the
marketplace. And it's also one of those
things where you're always trying to, through your cases,
move the market, not just win one, but tell people, look,
don't do this because we'll come for you.
And so those are cases where it was helpful to keep people from
getting sort of tricked into this volatile and non compliant
space. And generally, yes, requires
fewer resources than taking on like a big exchange case, but
still important to do. The Stoner cats wasn't just
about touting, but also demonstrating that NFTS could be
securities. So it's like a precedent setting
reason to go after that. And again, it tells the
marketplace like watch yourself, these can be issued as
securities and need to be careful.
And the last thing I would say is early on we went after Block
Fi, one of the lenders, which is sort of seen as smaller.
That was part of our strategy, first of all, to hit the
intermediaries and focus on where this activity was
happening. Second of all, that was a really
good case for us because we didn't have to demonstrate
anything about the underlying crypto assets.
That arrangement is a pretty bog standard arrangement called a
note, sending them out and then paying an interest rate on that
account. It doesn't matter what the asset
inside the account is, you have created a note.
It's an easy case to win. And that was another place where
people being lured into the market by saying like, why keep
your cash in a bank when you can put in this account and get like
86% returns? It's a.
Falsely claim on its website. It's FDIC insured if you're
talking about boys. Right.
Yeah. It's like that was a channel
where we were concerned it would bring lots of people into a
dangerous marketplace where there's like a very good
argument for us with regard to the securities laws and also
where a whole lot of leverage was being created.
Like when you lend out those assets and then use other crypto
assets as collateral and run that up the chain, everybody
down the chain owes each other. And as soon as the top guy can't
pay his obligation, everything underneath him collapses.
I mean like that's what you saw in Perfil Winter Suzu.
And that's like Davies. Yeah.
That's like a standard financial regulation thing.
And so the the leverage, the sort of slam dunk nature of the
case and that aligned with our intermediary idea was why we
went there. Block block fi is one that I
forgot like that. I wish you guys had Yeah, like
that. Like that is a great case.
That's a great example, and it is one.
That I and we changed the market.
We famously got in a spat with Brian Armstrong when we told
him, hey, like you're creating a securities arrangement and, and
Coinbase didn't offer their Lynn products.
Like imagine a world in which all of that stuff had been
allowed to happen, right? Coinbase being one of the
biggest and most influential in the market.
That would have made the the crisis a lot worse.
Yeah, for sure. No, I I agree with you on that.
I think so here, here again, you've entered into it a realm
that I can push back on. So, so, so Stoner Katz, you said
like essentially set precedent that oh, NFTS can be securities.
Considering that our I don't know if you want to even call
him the president. The guy who works for Elon Musk
has done a, you know, an NFTA whole NFT product and has also
done his own coin. Now, in your personal opinion,
one, are those are either of those possibly securities?
And two, is it over? Like in terms of Oh well, now if
the president is doing it, like you might have set that
precedent with Stoner cats, but say, la fucking V, you know what
I mean? Absolutely.
Again, failing to regulate is a deregulatory action that is
really hard to overcome in the future.
So yes, absolutely with regard to mean coins, and I'm not
saying it's a meme coin. I'm just sort of like laying out
this category for the Howie test have to identify a promoter who
said you're going to get a profit off of this.
So like if you look at Dogecoin, I'm not saying it's impossible
to make the argument it's a security, but the guy who issue
it said this is a joke. Don't invest in it is like
please don't it. And so it is hard to make the
case that people, a reasonable investor would have expected
profits from a token, that it was put out as a joke.
So like the meme coin thing can be a little bit challenging.
It doesn't mean it's not. And sort of if I were gonna try
up, and I should say, and I should have said at the
beginning of this, I'm not a lawyer, but if I were gonna try
and create the colorable case around the Trump coin, it would
be, look, he's got this whole like he's got the Truth Social
thing. He has all of these business
interests that are profit making.
A reasonable investor might believe that sort of becoming
part of that ecosystem by buying into the Trump meme coin
suggests the ability to get profit from like that larger
ecosystem of things that the Trump businesses are doing.
Not a slam dunk case. I think that would probably be
pretty novel. But like if you're trying to
establish precedent, it's not exactly the thing I would first
go after. I think the other thing that's
really scary about this is that to the extent that these would
be securities or regulated by another regulator, like this is
a guy who has the power to choose who's in charge.
And you're gonna be gutting the laws that you may have broken
potentially, and also gutting the enforcement arm that would
have been able to hold you accountable.
So it's a very scary thing to have a president with these
conflicting business interests. You talked about how if you
basically say like it's a Ponzi scheme, then then the SEC might
be hamstrung. It doesn't.
It doesn't mean that to be. Clear.
A little bit of an exaggeration, that hyperbole, but sure, yeah.
But I guess I'm I'm on the get trumpmemes.com website right now
and it says Trump memes are intended to function as an
expression expression of support for an engagement with the
ideals and beliefs embodied by the symbol dollar sign Trump and
the associated artwork and are not intended to be or to be
subject of an investment opportunity, investment contract
or security of any type. So I guess like.
I mean, as long as you put those words on the page, I guess
you're saying? I guess like you said, you know,
like there, there you have it. Saying it's not a security
doesn't save you, just not financial some.
People who have lost cases tried that tactic.
I've covered some of those cases kind of on the topic of future
regulation. Tim Scott and French Hill and
Bozeman and Thompson all are very confident that they can get
basically fit 21 two point O passed signed out of both the
House and the Senate within 100 days.
I think they're wrong. I don't think they have the
majorities. I don't think they're going to
get as many Democrat defectors as they thought a week ago, but
Fit 21 largely punts a lot of cryptocurrency regulation to the
CFTC and includes a a very broad definition of decentralized in
order to do that, ignoring the rest of the context.
Right now, I'm looking just at that piece of legislation.
We can get to the rest of the context immediately after that,
that bill alone. What do you think of punting
such a large portion of crypto regulation to the CFTC?
Yeah. So, so like I said, I did 15
years in Congress before coming to the SEC.
The legislative process is hard. And so a couple observations
about that legislation, and legislation is in general is
that first and foremost, it was easy to unite the crypto
industry against the demon of Gary Gensler and what we were
doing. It is much harder to unite an
industry around the particulars of a bill.
There are a lot of competing interests.
There are a lot of people who like one thing and not another
thing or a Maxis in one space that will make that hard to
construct something that they actually want and actually has,
you know, the possibility of passing.
So that's sort of like issue #1 the second thing is that the We
want Legislation gambit was not about actually wanting the CFC
to regulate. It was about we don't want the
SEC to regulate us. When you're going to be in a
situation where the SEC is not serious about enforcing its
territory, ideally what you want is to not have the CFCC or any
other federal regulator looking at you at all.
So that because that was a dodge in the first place.
I I don't think, I don't think they're going to be nearly as
excited about pushing members to get legislation across the line
because they don't need protection from the SEC anymore.
Yeah. And the last thing you already
kind of mentioned this, if you get the definition of blockchain
or crypto asset or wherever you went, if you get that wrong or
you get the the way you're hewing in the Howie test wrong.
First of all, you like calamitous effects the rest of
the marketplace. And then second of all, everyone
is going to run like try and get into that loophole.
This always happens where people say like, it's a tiny market.
If we do a little bit of deregulation is not going to be
a big deal. But when you have deregulation
like water flows and everything is going to take that path to
get access to the less regulated market and and again going to be
disastrous. And beyond just the securities
markets, but the faith in our markets in general and whether
or not you agree that like we should be the financial center
of the world. And I certainly think that too
much of our economy is finance. It's probably not healthy, but
losing that status has a lot of consequences.
Yeah. And I'm glad you brought up that
we talked about this with Sean when he was on a couple weeks
ago. But like the crypto industry was
using legislation as kind of a wages to avoid being regulated,
period. Don't regulate us yet.
Pass this bill, but don't pass that bill yet.
We got to get the definitions right and don't focus too long
on those definitions. There's bigger things going
along. The SEC missed FTX.
How are you going to put more things under their control?
So it's all meant as kind of a delaying thing.
Is it even worth talking about, like, legislation like this,
considering the current broader context in which many of these
regulators are being very quickly disempowered and like
they're trying to eliminate broadly their ability to
regulate? Is this kind of missing the
forest for the trees? Yeah.
Like, I think the other headwind here is that when you're in the
House and Senate, you have a limited amount of floor time.
If you have a constrained amount of time to get all the things
you want done, as much as Trump made a big deal about crypto, I
don't think that's like a high priority for them.
And so even if it's a high priority in the individual
committees, having your leadership sacrifice floor time
to getting that done is a high bar.
And so like that is also going to be a challenge to get
something like this done. So I think it's, I think that's
exactly. Right.
Broadly, white collar crime enforcement and financial
regulations are being actively gutted.
The CFPB, they're attempting to like fully eliminate.
They've talked about eliminating the FDIC.
They want to cut the budgets and the funding to everything for
the individuals, the constituents, the investors, the
consumers. What is the appropriate way to
view this in like the way to react to this kind of behavior?
Well, the way to the view it is to view it is only scary like
that. There's just no way around that.
In terms of what you can do. I think like narrowly on crypto,
if the SEC does actually do regulation, there's always a
notice and comment process. And there are two things about
that that are to some degree powerful that I think not a lot
of non financial actors know. And so the APA is pretty strong.
If you don't follow the process, you make your rule vulnerable on
just a process foul. And every issue that's raised in
a comment letter has to be addressed in a final rule
making. And when you make someone say
something about why, like to justify why they're doing it,
you have created for them a litigation risk.
So it is actually valuable to write in comments about
regulation. Personalized e-mail, like
foreign emails, don't shift Congress at all.
Personalized emails actually do. There are legislative
correspondents who tally up how many genuine inquiries they got
on issue and at least on a weekly basis say like, here's
what people are yelling at us about.
Here's what should be at the top of our priority list.
Here's like what we should be politically concerned about.
So it does matter. But again, it needs to be
personalized. It it doesn't have to be a lot.
It could be, you know, just a paragraph, but it's like, it's
got to be your own words. Like the other thing you know,
here is like you need to support good journalism.
And a lot of that is independent journalism, like, you know, you
guys produce, you know, Molly White's Pro Publica, you know,
there's like there's a lot of good work being out there in the
in the independent journalism space.
And then the other thing I would say in like somewhat self
servingly is like there are a lot of good nonprofit
organizations that do this work, that collect sort of and
represent the broad set of interest from consumers and
fight on these issues and educate on these issues.
Obviously, Consumer Federation of America would love if you
supported us. There are tons of groups,
Americans for Financial Reform, the National Consumer Law
Center, the Coalition for Sensible Safeguards.
They do this work and you know, are are worthy of your support.
They are effective organizations.
And then like sort of the broader political issues, I
mean, for one, direct action showing up in the streets, it
matters. It brings attention to issues
and like, it's kind of like the last refuge of protecting
democracy. Make them like don't give up.
Make them fight for every inch of territory.
Cynicism is deadly. You can affect things.
It it seems slow, it seems ineffectual, but it does matter.
And you can slow this process by just being every bit of a
barrier you can be and like, you're gonna get run over, but
it's harder. And I think the the other thing
is like they're in addition to like consumer advocacy
organizations, there are really expert executive overreach and
government investigatory nonprofits.
One of those is Protect Democracy, who who do a lot of
amazing work. One of those is Pogo, the
progress on government oversight.
They've been around forever. They have a lot of expertise in
this space. They bring cases and it's really
worth it to, again, support those kinds of organizations
that are out there doing the work.
Totally agree with that. And I hate to do this to our
audience because I'm sure some of them were like, okay, well,
that's the end of the episode now, but I actually want to show
you just push one more question to you because you and I talked
about it and I actually found it fascinating.
And I think a lot of our listeners don't understand this
and and we'll find this fascinating as well.
So if anyone hasn't shut the podcast off yet, the President
of the United States, Elon Musk is, is, is, in my personal
opinion, the biggest fraud in the history of the world.
And I think he's done a great job of getting away with it.
He is manipulative and he's gross and he knows how to play
people against each other and stuff.
One of the things we talked about was I said one of the
things that really bothered me was after that, like whatever it
was, I don't know if it's the, IT was the four taking, taking
it private at 4:20 or whatever the whatever the hell he said.
And the SEC said, OK, you have to have a Twitter sitter.
Like your days of tweeting whatever you want and having no
repercussions. Those days are over.
And then a few months later he was just tweeting whatever the
fuck he wanted again. And I asked you, I was like, why
isn't the SEC doing something like every time this man tweets,
they should be fining him every single like, this man should
have a billion dollar bill like sent to his door.
Like, OK, here's all the illegal tweets you did.
You're tweeting 200 times a day. You owe us a lot of money.
And you said, here's the problem, We would have to open
up an investigation for every single one of those tweets.
But my push back on you again was, so why would you set that
role up then if you can't enforce the role?
So I like, I guess I'm, I'm, I'm, I'm pushing this just
'cause I'm like, there has to be a better way.
Like there has to be a better way, not just for for the
American public to have faith in regulators effectuating change
against people like Elon Musk, but also for you guys so that
you don't have to open an investigation to find this dude
every single time that he tweets, you know?
You actually, you kind of brought up something in that
question that we we didn't talk about.
It's a little bit lengthy, but I I would love to talk about it.
But to your, to your first point, with regard to Elon Musk,
look like they brought the case in the 1st place and there is
ongoing litigation, but you are spending a lot of resources
taking on the richest man in the world.
There is a cost to rulemaking. There is a cost to all the other
reforms around the market. Now you have to go after that
power when they're breaking the securities laws.
So it, you know, so it's not a free for all, but I mean, it
cost you a lot in the, the, the, the fundamental unsatisfying
part of that case is a bigger problem than the SEC.
It's like, it's a problem of democracy where like the richest
man in the world that has a lot of resources has a lot of
political influence. How did we get here in the 1st
place? Like that's not an SEC prop.
Like not to dodge, but like that fundamental part of rich people
get better representation, they can make it a lot harder on you
to enforce the law. Like the SEC is not the only
thing he has escaped. Like that's a that's a bigger
problem than disclosure and and securities fraud.
You also mentioned like sort of the the idea of faith in these
regulatory bodies. Yeah.
So the first thing I would say is that to the extent I'm
sympathetic with the crypto markets, our our traditional
markets and market regulators have not clothed themselves in
glory. There is a lot of genuine
unfairness, injustice, problems with that marketplace.
So it, it's not entirely unreasonable for me to see
investors saying like, well, that system doesn't work.
There's some people getting rich over here, like I might as well
try my luck in this other place. It's not a completely
unreasonable position. Now, that doesn't excuse the
people making the money and it doesn't excuse the fraud and it
doesn't excuse all the, the like activity that's going on that
space, but it is, it is understandable how this other
thing developed. And a lot of that comes from the
the 2008 crisis in just the abject failure to demonstrate
the the way that institutions are supposed to work for regular
working Americans. We bailed out the the largest
institutions and then a foreclosure crisis raged on, not
just to 2010, not just to 2013 through 2016.
People were losing their homes have like having the the very
basics of their lives upset, having to move their kids to new
schools, having to leave their pets behind.
Like there is correct righteous anger against institutions that
did not show up for these people.
And I would blame a lot of the current political position we're
in on like look, the Tea Party has existed existed much prior
to the crisis. But being able to say to a lot
of people like, look, you're getting taxed, we pay all the
stuff and we have to bail out, bail out the banks, that's
fundamentally unfair, is a very good recruiting tool in the face
of a political and leadership vacuum from, you know, people
with progressive economic views. And I think you could draw the
line from that straight through to the Trump administration, the
first Trump administration and the legacy that we've, you know,
acquired. Now, great answer.
Yeah, I appreciate it. Thank you.
Corey, is there anything else you wanted to address?
No. There are two big issues that I
think might be worth talking about.
One is the claim of regulation by enforcement and not doing any
regulations. And a couple things I would say
about that and sort of the accusation.
We didn't meet with market participants.
We met with everyone who would, who would come in the door.
It was a lot of people, the vast majority of them wanted those
meetings to be confidential, which is something that we'll,
we respect. And again, like nothing came
from those, but we were genuine about like come in if we need to
make some small tweaks because you can show us what doesn't
work, we'll get you registered. We will do this project.
So I think, you know, the idea that, you know, we didn't do
enough outreach and we looked kind of bad for doing that.
I, I think that's unfair. Another issue is inherently how
you go to the courts and say the rules already apply and then put
out regulations, changing those rules at the same time it judges
look very askance at, well, if the rules apply, why are you
doing new rules? That doesn't make any sense.
Like that's another challenge. Again, we offered some guidance.
We tried to be helpful, but there's a fundamental tension
between enforcing the rules that are already in place and, you
know, doing something new. And the last thing is there's
like criticism about sort of what you might call like Gary's
demeanor or bedside manner. And a couple things about that
are this like, first of all, when there's a million or even
$100,000 on the line, like being nice to the industry doesn't get
you $100,000. It doesn't get you $1,000,000.
Like it it just, there's not a good reason to sort of like it.
We didn't lose anything by being confrontational with industry.
The second thing is like, to go up against this industry, you
have to be like, if you want good regulators, they're gonna
have to be contentious. They're gonna have to be
confrontational. Like that's what it takes to
fight a very, very large financial interest.
And there's also just sort of like there's an inherent
arrogance. And this is not just true of
Gary, but like of of me myself to say of the 330 million
Americans, like I'm the one that should say how this $125
trillion market works. Like to to take that on and
think that you're sorry you have the answers and we need people
to do that. But it is like this inherently
arrogant place to start from. Like that's I think the
regulation by enforcement arguments were were pretty
unfair. I think the win record that we
had, you know, we had we we to the extent that cases got
judgments, which is not entirely within our control.
We won a lot library the terraform cases, kick kick Ken
tokens, Telegram gram tokens, you know like famously, you know
our our folks caught Doquan at that the New York like crypto
gathering lending staking as a service the Wahee issue where
they were giving away information before they listed
on Coinbase. We won Dow cases which were
unprecedented, piercing that veil of decentralization NFTS.
Dow's are like something I haven't thought about again for
so long. It's going to be an issue.
We handily won the the Coinbase motion to dismiss.
We brought a lot of cases that we unfortunately ran out of the
time to see through Ripple, like I said, big one.
I think that was actually genuinely a big win for us.
But those exchange cases that the really big ones we wanted to
do, they take a lot of time to build.
They take a lot of time to see through.
And just very unfortunately we didn't got all the all the time
we wanted. And look, we're not above
criticism, but I, I really do believe like we did a, we had a
good strategy. You can disagree with it, but I
think we had an intelligent strategy that is very
defensible. I think we had a lot of wins.
And I think, you know, our administration did a really
great job in this issue given the constraints and, and, you
know, courts that we were dealing with.
And I think we should note that like the regulation by
enforcement, criticism is very often coming from people who
would have been deeply disappointed in almost any
regulation that would have been presented.
Best case scenario, they were hoping for exemptions from
regulations to be written for them.
And so that's an important context for their criticisms
they were levying. The fundamental ask was let us
do this business with the conflicts of interest.
And that kind of points to, because it's an economic
argument, it kind of points to like the truth of crypto, which
is the inherent economic. The argument for it is the
regulatory arbitrage. And you take away that
regulatory arbitrage and all of a sudden like there's not
something profitable there. And you know, the other things
like I think we talked a little bit about this, about the
tensions of what it claims to be versus what it is.
And it is now a more centralized in conflict prone industry than
the original finance industry, which was like one of the first
complaints. There are tons of
intermediaries. It was supposed to be
peer-to-peer and without intermediaries, it was supposed
to dip disrupt Tradfi and they banged down the door getting ET
PS into the original financial system.
Like they demanded SEC rules for securities while claiming they
were not securities. So like you go down this line of
what it pretended to be and where it is now.
And it's like, look, the fact of the matter is crypto is a
machine where fraud and money laundering go in one side and
campaign donations come out the other side.
And like, that's fundamentally the challenge that is before us
now. And you know, like it just it it
was never going to live up to its claims.
It hasn't everything that was supposed to be the use case of
crypto has turned out to be vapor Ware.
But they're now in a position to sort of fundamentally undermine
the securities laws in a way that's going to be really
harmful, not just for crypto investors, but for the broader
investing public generally. Well, and you could argue that
not just undermining financial regulations, but with the types
of candidates crypto money supported, undermining the
constitutional republican democracy at a more foundational
level. Absolutely true.
And that's one of the places where and don't get me wrong,
like Sean is a great guy. We talked about this he and he's
like knowledge publicly so much to his credit and and this is
not to it's just like having the audience.
I would like to correct the record on one thing.
I worked for Sherrod Brown for five years.
There was almost he was as loud and confrontational and
challenging to the industry on crypto as anybody else.
He essentially risked his seat. And it's not just crypto is why
he lost, but it was was certainly influential.
I mean, there was a suggestion sort of like they would have had
an easier time if he had remained the Democratic head of
that committee. And I just think like that is
absolutely untrue. Like, it just incredible
integrity to continue punching those guys given the threat of,
you know, dumping hundreds of $1,000,000 in a state that Trump
won like 5543. So I just want to make sure
folks know that, like, there was almost no one with as much
integrity and as as much on the line as Sheridan.
And that's one of those places where it is truly unfortunate
that I'd like a progressive lion of the Senate representing Ohio,
by the way, is lost now. Cast.
Do you have anything? Yeah.
I mean, I guess the last thing I want to say is that you heard it
here first. Cast coin is safe, like one of
the safest investments you could possibly make.
Definitely not a security. Everybody should invest
immediately. We're golden.
So there you go.