Securities law professor analyzes the SEC’s crypto crackdown: Part 2

Tue Jun 20 2023

J.W. Verrett joins the show

J.W. Verrett, an associate professor of law at George Mason and a former advisory committee member to the US Securities and Exchange Commission, joins the show.

The House Financial Services Subcommittee met yesterday to submit a framework that would remove crypto from the purview of the SEC's jurisdiction.
Democrats are more keen on stable coins than Republicans.
The bill is a messaging bill that expresses frustration with the SEC's messaging on registering crypto.

Coinbase may be impacted from a business perspective due to ongoing litigation with the SEC.

A new regime could settle outstanding litigation and make it easier for token projects who want to register as securities.
SEC can make it easier for token projects to register as securities through exemptions and guidance
Coinbase needs licenses like the special purpose broker dealer license and clarity from SEC
New SEC chairman could use existing requests for rulemaking, model disclosure suggestions, and exemptive relief to make changes
SEC thinks digital asset rules already exist and industry doesn't like them; not their job to figure it out for Coinbase
Gensler has had different approaches to crypto but SEC has adapted securities laws before to new developments

SEC's changing tone on ETH regulation is striking
Internal wrestling within SEC about how to treat Ethereum and apply securities laws to crypto shown in Hennman documents
Chair Gensler's talking points are not accurate descriptions of legal complexities in play here
Jay Clayton criticized Gensler's approach as different from his own and not right

Hennman documents won't factor into doctrinal analysis of XRP case, but could show unfairness of the action itself
Ripple has a good fighting chance on fair notice, but Howie stuff is harder

Supreme Court may reshape administrative law and enforcement under administrative law with major questions doctrine

Data center companies like Plaintspark care about the communities where their data centers are located.
They create jobs, donate to schools and community centers and revitalize aging electricity grids in rural parts of America.
Solana released a statement saying they don't think they're security.
There is no standard way for projects to come into compliance with SEC regulations.
Risk mitigation is all you can do as a token project this week.
Don't ever talk about token price ever. Just don't discuss it at any point.
Crypto needs to prepare for a world in which we have to live off the land and trade peer-to-peer on permissionless non-custodial platforms.

To survive in the current regulatory environment, DeFi needs to build a non-custodial exchange that allows for interoperability and trading.
DeFi will survive because it is impossible to kill. Anyone can fork Uniswap's code overnight.
Tokens mentioning Coinbase have underperformed the broader market by an average of 27%.
The SEC's enforcement action may be tied to its mission to protect investors, but there are likely other motives at play as well.
If the SEC showed up in good faith to a discussion with DeFi lawyers, they would show up with a list of ideas for model regulation.
It would be great if the SEC went after real scams instead of going after legitimate players like Kraken and Coinbase.
The total market cap went down by $40 billion in crypto within hours after the Coinbase suit was made public.

The SEC's filing of the Coinbase suit caused more investor harm than the Madoff Ponzi scheme.
Coinbase shareholders legitimately bought shares in a listed company that the SEC knew about and approved.
SEC Chair Gensler's statements on market cap versus number of tokens may have been referring to different things.
There are particular tokens that Gensler mentioned, such as Algorand, Avalanche, Silvio, and Zcash.
It is difficult to determine whether tokens are securities when there is a lack of clarity on the definition.
Coinbase has an aggressive listing policy which raises questions about their defense in this case.
To defend against being classified as a security, tokens need to illustrate utility and show all four elements of the Howey test.

The utility idea was overplayed in the ICO era as a get-out jail free card because it's not.
It is a hazy test to begin with, and one in which different circuit courts have different ideas.
If the primary reason why people are buying the token is to use it for something useful, they give a hard time saying that's a security.
Something that can morph between security commodity currency, just depending on how you decide to use it that day.
The worst case scenario gets worse. As you see every The worst case scenario, let's pray it doesn't happen and I'll fight to make sure it doesn't happen.
The SEC comes after DeFi and they shut down every platform they can get their hands on. And hopefully some will survive because they're decentralized and the devs are a nun.
I'm watching that. I'm worried about at some point, potentially something gets slipped into a must pass bill like was done to us with the infrastructure bill.
The most useful thing would be some kind of a fix to the cap gains recognition on every crypto transaction, right?
Maybe that would be a great candidate to slip into a must pass bill. down the crypto critics' throats here.