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The Scoop

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.