Securities law professor analyzes the SEC’s crypto crackdown: Part 2
Tue Jun 20 2023
J.W. Verrett joins the show
00:15 - 06:13
- 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.
House Financial Services Subcommittee meeting
00:15 - 06:13
- 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.
Impact of ongoing litigation on Coinbase
00:15 - 06:13
- Coinbase may be impacted from a business perspective due to ongoing litigation with the SEC.
Potential changes under new SEC chairman
05:44 - 11:04
- 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
10:36 - 16:34
- 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
Ripple's chances in fair notice and Howey test
10:36 - 16:34
- 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 and administrative law
10:36 - 16:34
- Supreme Court may reshape administrative law and enforcement under administrative law with major questions doctrine
Impact of Coinbase suit on the market
16:14 - 21:54
- 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.
Challenges faced by DeFi
21:27 - 27:23
- 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.
SEC's filing of Coinbase suit and its implications
27:06 - 33:04
- 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.
Concerns about regulatory actions and potential legislation
32:50 - 37:55
- 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.