So anytime they're moving into new space that moves quickly, the sec falls short.
That's just the way it's always been. So you know, I can
follow the agency for not having moved quicker, both under the prior administration of
the current administration and letting some of these technologies, some of these tokens grow
to a point where it became harder to step in with enforcement. I tend
to think the enforcement actions they file have been legally sound. Again, with
the exchange cases, I think those are a little trickier. This content is
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description. Welcome to the Thinking Crypto Podcast. I'm your host, Tony Edward
and with me today is Mark Fagel, who is a former SEC Regional director,
a current lecturer at Stanford Law School and author. Mark. Great to
have you on, Thanks Tony. Good, great to be here. Mark.
I appreciate you taking the time to do this. I know you don't
do many interviews and I follow you on Twitter or what Elon calls X and
appreciate your insights on the crypto acid class. So I have a lot of
questions for you, but let's start with your background. Where are you from?
Where'd you grow up? Sure, I'm an old fashioned midwesterner. I
grew up in Chicago and then after finishing law school, moved out to San
Francisco. My wife was getting her MBA, so we thought we'd try out
California and it's been about thirty something years. Once we got here, like,
we're never leaving. And how did you end up at the SEC?
So fairly traditional way. I spent about six years at a large law firm,
as a lot of us do after law school, mainly doing defense work,
a lot of SEC investigation, securities class actions, and then after about
six years of that, I decided I was ready to make a move.
I had some friends at the SEC sounded like a great job, which it
was, so I moved over. How long were you there and were there
any interesting cases that you worked on? Sure? I went there thinking I
would do it for a few years to try it out and learn a little
bit more about SEC enforcement. Ended up spending sixteen years there. So I
started as an enforcement staff attorney and then every few years worked my way up
through the ranks until I was in charge of the regional office. So I
was overseeing all of the investigations in the San Francisco region and a lot of
fantastic cases. I did a little of everything. I did Foreign corrent practices,
Act financial fraud, a lot of Silicon Valley fraud cases, obviously a
public company insider trading outright Ponzi schemes. So I had a really good mix
of a little of everything. Wow. Now it's funny because you don't really
hear too much about what may have happened in Silicon value with fraud, and
maybe I was insulate from that, you know, and now I'm hearing more
of it because of crypto. But was there a good amount of fraud in
the Silicon Valley? You know? Dot Com one, dot Com two,
a web one point Web two point zero. Yeah, I mean there are
a few things going on. One was traditional financial reporting frauds. So a
lot of public companies, especially when they're starting out, may not have their
internal controls in place. So we would repeatedly see public companies, a lot
of tech companies which would be reporting financial results which were not accurate. One
might say we had a big scandal out here that well, it was national
stock option backdating, which was a big phenomenon nationwide, but a lot of
that here at tech and tech companies in Silicon Valley where public companies were rewarding
their executives with stock options, and in order to avoid having to report the
cost of doing so to their shareholders, were basically changing the dates on those
options. So that was a huge scandal a lot of companies. Beyond financial
fraud, I think in the initial Internet era, there was a lot of
more traditional fraud, just outright scams when the Internet was new and people didn't
really know what to expect. One of the first cases I worked on,
I think it was the first online Ponzi scheme ever. It was someone out
here in Silicon Valley who created an online company and was selling shares in the
company, a complete scam. He had no product. It was just some
guy in his living room stealing the money. But at the time it was
novel. No one really you know. He was one of the first to
realize, oh, I can use the Internet to steal and that those cases
grew and there were international Ponzi schemes done entirely online. But at the time
it was pretty novel to have a scam that was run entirely over the internet.
Wow. Yeah, And once again, maybe I was too young and
I wasn't paying attention. But I think we're seeing some of that now in
crypto, and it seems it's just human behavior playing out in different technology NASA
classes, right, Bad actors will try to exploit new technology, take advantage
of people, and maybe there's a bit more now with crypto because of the
nature of tokens and you know, being decentra well spread across the world.
I should say now before we go further, I have to ask you about
your book. And I see that you're very much into music. I am
too, so I want to ask you about your book and what what do
you you know? Do you play music? Do you just listen? You
know? What are you doing on that front? Yeah? I don't play
well, I listen. I'm an obsessive music fan. And after the SECA,
I went back into private practice and was working on the defense side.
But after a few years ago as that I was a little burned out,
and I actually stopped practicing law about five years ago. And in the back
of my head it's like, well, I do a lot of writing in
the law that I'd never written about something that I personally find interesting, that's
not professional, and I love music, so I thought it'd be fun to
say, hey, can I actually write a book about music? And you
know, you know, I probably sold two or three copies to friends and
family, but it was it was a fun thing to do, and it
was a way of sharing my passion and to use my writing and something I
found a little bit more personally rewarding. That's awesome. Well, I'll be
sure to link to your book on Amazon in the description of a website and
all that. Thanks. Okay, So, Mark, there's a lot to
talk about as it relates to crypto and the SEC and overall government approach to
crypto with all the noise aside, I would love to get your thoughts on
this technology. How how do you see it? Do you see the potential
applications? Do you see what cons maybe that you may see on your end?
Sure, and to be fair and in full disclosure. Being at the
SECA, I believe in full disclosure, I'm what you would call it cryptoskeptic.
I know that's probably atypical for your show, but I'm careful to delineate
the technology from the investment the technology. I'm agnostic. I'm not a tech
person. I'm any use tech. I'm familiar with tech. I've done a
lot of investigating tech and representing tech on the outside. But I'm not an
engineer. I'm not a computer software programmer, so I don't think I have
any business evaluating the tech anymore than developers have a lot of say on security
slaw. It's just it's not my expertise. So when I talk about crypto
and think about crypto, it may very well be that there are use cases
that there's a basis for the blockchain to be the next great thing. I
tend not to think so much about that that's great. Let people develop that.
I tend to look at it more from an investment perspective, and that's
when I put on both my sec HAD and my defense counsel HAD. I
represented some crypto firms when I went back into private preser So I try to
look at it kind of object to the extent one can be objective about anything
fairly objectively. And that's where my skepticism and the alarm bells go off.
In crypto as an asset class, as an investment class, as opposed to
as a technology got it so to confirm your agnostic when it comes to the
technology itself. Blockchain applications YadA YadA, right. But when it comes to
the investment piece, that's where you are more concerned about or have an opinion
on exactly. And one way to make it concrete. Take a company,
say Rebel, and I have no personal stake in that or you know bias.
There's one thing to say, Okay, we're starting a company in this
space, and we will go public and sell stock and people can buy that
stock if they believe in the company based on the disclosures, and that's fine.
That's that's the sort of decision one can make. Then you get to
okay, rather than selling stock in a company subject to all the existing regulatory
framework. Instead, we're going to have tokens out there, and people can
invest in tokens. That's different. You know, you're not investing in it
subject to all the usual disclosures. That's where you have a whole new asset
class where I do not think we have the sort of protections and I think
there's an awful lot of speculation and outright fraud, not saying any particular company.
So that's the delineation investing in a company and their software versus investing in
tokens, which I see as a very high risk proposition, so I don't
want to make sure I phrase this correctly. So is your concern more on
there is the lack of guardrails and disclosures in place, or is it you
don't believe the tokens as an asset have value or is it a combination of
both. To be fair, I think it's a little both. I tend
to think most tokens, you know, if there's a developed use case,
maybe bitcoin has a developed use case, you can actually use it as a
currency. In some spheres where there's a use case, that's a little bit
different. But I think for the most part, most tokens really operate akin
to a pyramid scheme, where the only actual value to that token is finding
another person who will then buy it from you. You can't exchange it for
anything, you can't use it for anything. It doesn't have an inferent,
any inherent value. The only reason to buy it is you think you can
sell it to someone for more money. That's not necessarily illegal, there's legal
pyramid schemes, but I think it operates like that. So that's my skepticism
as to tokens as an asset. Beyond that, there's also the disclosure aspect.
Even if you take some legitimacy to investing in tokens, what do you
know about them? What do you know about the issue, or what do
you know about the basis to speculate on them? And that's where I think
there's more of a disclosure issue, right And I agree with you when with
the disclosure, I think that absolutely needs to be in place. I think
the guardrails. You know, Congress is working on some bills to help resolve
some of these issues. But with the token standpoint, I wonder if we
could we could talk a bit about that. Look, we've seen technology,
disruptive technology appear over time, right throughout history, and at times it can
be hard to accept that technology and say, well, how is this going
to work? What is it going to what about these problems? And it
opens up a bunch of challenges. But what are your thoughts on these tokens
exist to essentially grease the blockchains to allow especially like public blockchains, to allow
them to operate in the underlying movement of value based on what use cases are
in place, whether it's the tokenization of assets or moving payments or whatever it
may be. What are your thoughts on that that you know that's while looks
gonna be wrong. Mark. There are tons of scams, a lot of
blockchains that have no use cases, of coins that have no use cases,
but there are legit blockchains. Let's say we take e theorem right, and
proof of stake and the ability to tokenize and do DeFi and all that.
What are your thoughts on that. Let's say we ignore the scans, say
ether and with the ether token sure, And that's where it comes down to
more of the disclosure issues. So if we accept there are some sub category
of tokens that have some legitimacy, have some use, then we're falling back
on more of a disclosure and that's where again I look at that stock versus
tokens issue you can have. We've always had disruptive technology. So when I
grew up at the SEC was the beginnings of the Internet age. You were
investing in highly speculative companies. Most of the companies that went in public at
the time have failed, but still you were investing in a security, you
were investing in stock. You had companies that had disclosures, and you,
as an investor could decide do I want to take the risk? Do I
understand the value proposition, Do I understand what the financial model is and then
you can evaluate that decide do I want to invest in this disruptive technology that's
missing in crypto. You don't have crypto companies that are registering these tokens,
and the SEC takes the position that they are securities that need to be registered.
So if you are buying ABC token, whether or not you believe in
that technology and disruptive technology and so forth, you really have no basis to
evaluate what is the fair price for this token and how do I think it
fits into my investment strategy. There's no disclosures. You don't have any the
same sort of information about the issue of that token, the market, the
business plan, So it's just pure gambling and that's where the disclosure prop What
are your thoughts on and I think you know Bill Hinman had spoken about this
when he gave his speech about e theorem. Hester person her safe harbor or
proposal gave some thoughts on this that unlike stocks and there are some attributes similar
to stocks, these tokens are on the blockchain but distributed globally, and initially
they could start off in that securities bucket, right because of the issuer,
but over time evolve into being fully decentralized. What the tokens are in different
parts of the world, different developers are building outside of the initial issuer.
What are your thoughts on that? And is that maybe the middle ground that
the set will find with this technology to say, hey, you need to
come register. We need to have the disclosures, but I need to we
need that updated quarterly, monthly report on where these tokens are going, who's
using, what's happening, so that we can see that you are not specifically
pulling the strings here to centralized matter. Yeah, and your is what I
think is the fundamental problem with crypto from a regulatory standpoint. From the SEC
standpoint, I think the SEC is on pretty solid footing with the initial offerings.
It's one most of its enforcement actions. Ripple was a mixed result,
but for the most part it has yet to lose a crypto enforcement action on
the merits because I think the initial offerings it's pretty clear, at least to
me legally that these are securities offerings. Where it becomes much trickier and where
I think the SEC may not get where it wants to get is with the
ongoing resale of these. So once something is in the marketplace, if it's
truly decentralized, who's going to file a ten Q, who's going to file
a ten K? There's no issuer in charge? And that's where the existing
securities law structure may not work. So we may see with some of the
cases, some of the exchange cases in particular, where the current law may
not be a good fit. And that's where I think the SEC it seems
optimistic it's filing these cases. I think it may run into some trouble,
and that's where I think there's going to be a greater need, if not
for SEC rulemaking, then for Congress to intervene, because that's where the law
is a little trickier. What grade, what letter grade would you give the
current SEC under chair Gencer as far as how they've been handling the look some
people are saying they've gotten too political, right, and there's ties so Elizabeth
Warren Vigery Gencer, But what grade would you give the agency? Yeah,
and I try to avoid some of the criticism. When I was there,
we were criticized by a lot of people who didn't understand just how the agency
works. I'm sympathetic to the uphill battles they fight. It is a large
slow bureaucracy, so anytime they're moving into new space that moves quickly, the
SEC fall short. That's just the way it's always been, So you know,
I can fault the agency for not having moved quicker, both under the
prior administration at the current administration and letting some of these technologies, some of
these tokens grow to a point where it became harder to step in with enforcement.
I tend to think the enforcement actions they file have been legally sound.
Again, with the exchange cases, I think those are a little trickier,
but there's a basis for it. And if Congress is not going to step
in and regulate, then I as long as the SEC has a basis to
say front laws being broken, they need to step in and bring enforcement actions.
So I don't fault them for that. I think, you know,
how they've actually managed some of this litigation has been problematic. I pure anecdotally,
both from some of the companies have been targeted by Wells notices and just
friends who are still in the industry. That the way that the currentman istration
has gone about its enforcement actions has not been necessarily as fair as I liked
to run things when I was in charge of an office. So I think
some of the tactics they're using I challenge. But I do think at root,
the enforcement actions have been sound to date. You know again, I
think that might change pretty soon. Yeah, And I'm sympathetic to the SEC
because I understand being in the industry for a long time seen scammers and I'm
like, this is where I need the SEC to come in and, you
know, stop these guys and so forth. But to your point, I
don't know where the SEC kind of lost its way here with crypto and it's
become this kind of pseudo political thing and attacking a lot of good actors if
you want to call them that. And it's just let me, let me,
let me jump in there on something, because that's something we hear a
lot of. It's like, why aren't they going after the frauds and the
scams. Why are they going after the good actors? And that's where one
of the core issues is what do you do about companies that have not committed
fraud but aren't registering And the whole purpose of registration, one of the fundamental
concepts behind the securities laws that we've had since nineteen thirty three. Is registering,
is disclosure, is audits. These are prophylactic measures. I mean,
let's face it, if the SEC waits for fraud, it will always be
too late. The SEC is slow. Most people, when they are committing
fraud do not take the money from investors and save it for a college education.
They blow it. It's gone. So if the SEC were just to
wait until there are reports of fraud, do an investigation, which is always
going to be agonizingly slow. The SEC is slow by design, that's not
going to help people know. They have to bring fraud enforcement actions after the
fact so they can go after bad actors, put them out of business,
try to recover money where it's available, but usually that's too late. Registration
is more of a profile active measures, like before a company is in a
position to raise money and commit fraud, we are going to require them to
bring in lawyers, auditors, make disclosure to investors. That's why those laws
exist. That's why the SEC, I think, more recently, has focused
on registration violations. So yeah, we can fault them and say, why
aren't you suing these obvious frauds instead of going after legitimate actors. But we're
assuming these are legitimate actors. The whole point of registration is to ferret that
out. So Mark. But here's the thing. A lot of people are
going to say, well, why do they greenlight coinbase to go public and
have Coinbase go through the whole process, jump through the hoops, and then
come back and say, hey, what are you doing? Here's a weald
notice. Yeah. There's a couple answer to that. One is, when
the SEC allows a company to go public, the SEC does not investigate the
company. The SEC is not endorsing their business or anything. The role of
the SEC and companies go public is basically employees in their corporation finance group are
making sure you have made the required disclosures. They're not evaluating is this a
good company or bad company? And obviously there's a lot of examples of bad
companies that go public. So, you know, simply as a legal matter,
when the SEC says yeah, you can go public, and then later
investigates and finds violations of the law, they can sue the company they've allowed
to go public. That happens all the time, so there's nothing wrong with
that. It's a little bit different for Coinbase, because you know, their
business is something that the SEC has more visibility into or could because they're regulating
the space. Some of that's going to be let's step back and be a
little more cynical about it. I think at the time Coinbase when public,
the SEC was not in the same position. It's taken since of a more
aggressive crackdown, So some of that is just it's changed over time their view.
We're now in a post FTX world. The SEC is taking a more
aggressive position. Coinbase got caught in the cross fire. But I still think
you have to realize when companies go public, that's not an endorsement. The
SEC did not conduct an investigation like it has since, So Mark stepping back
from crypto, is that a fault in the system that regardless of the crypto
company or not, that probably they should do some investigation because in hindsight,
it just looks like, what are you guys doing? Right? The perception,
which is often reality for many people, is like, you guys dropped
the ball here, right, But maybe it's not baked into the process right
now, but that needs to be moving forward. What do you think about
that? Well, if I were to put on my defense counsel hat.
I don't think any of my clients who are in the industry, even outside
of crypto, would have welcomed an SEC that would conduct an investigation every time
they wanted to public offer securities. No company going public is going to say
we are going to wait for a two year SEC investigation of go public.
So no, I think that's not the way the system works. The system
is designed so that there are certain disclosures that are required, and those require
the companies to bring in lawyers, bring in auditors and accountants who will do
that sort of vetting that the government doesn't have the resources to do. And
as long as those disclosures are made, then the company can go public.
And then you know, you can't prevent all the fraud in advance, you
can at least have enough of the disclosures there that investors and especially institutional investors,
can then do their due diligence and decide whether or not to invest in
that company. I don't think it would work to have a full SEC enforcement
investigation of every company that wanted to go public. There are not the resources
for it, and the industry would go the listing. No I would love
to get your thoughts on the previous administration Jake cla and Bill Hindman and how
they handle crypto and specifically ETHEROREM. Obviously, Bill Hinman gave a speech about
ETHEROREM being sufficiently decentualized and not being a security Now, obviously things have changed
since then. ETHEROREM has moved from proof of work to proof of steak and
share. AGAINCER is not echoing those statements at all. There's reports of consensus,
the Ethereum Foundation getting notices from the SEC and so forth. What are
your thoughts on how that played out? And is this just, you know,
something that has to be resolved by Congress because even the SEC and different
administrations are viewing this differently. Yeah, and again I try not to be
outwardly critical of the agency because I know what they're up against. I think
at the time the SEC was focused on icos outright fraud, and you know,
if I were to fault them in anything, I think they were fairly
slow to respond to the large actors out there who had large volume, but
not necessarily the outward indis of fraud. They let that go for a while,
with various repercussions in terms of not doing something with Ethereum. I don't
know the facts and whether or not what the original offering involved was a violation
of the law. I'm a little dubious that there was complete compliance there,
and I question why the SEC didn't take a more aggressive stand. I get
a little frustrated at the fact that Ethereum was carved out as not being non
compliant. That's not generally what the SEC does. You know, maybe you
can say about Bitcoin because it's it was different, it was more advanced of
the time. So it's a little frustrating that the SEC was publicly making statements
of a company it had not yet, to our knowledge, investigated. That's
not generally how it's done. So that now there is the caveat whenever there
are public statements like that, and people in cryptos say, oh, it's
personal opinion, that's nonsense, But that's how it works. I used to
give speeches all the time at the SEC, and I would give the same
caveat. I would explain, here's what's going on enforcement, here's some trends
and priorities. But I always had the caveat. I don't represent the Commission
until by presidentially appointing commissioners have voted. This is just me as a senior
officer speaking and you had that same caveat there. So there's only so much
you can do with that particular speech that was made. That doesn't prevent the
current SEC from diving in taking a more focused investigate investigation and say, oh,
now we're potentially finding violations and taking action. They're not precluded from that.
I realize it's frustrating when there's sort of an inconsistency at the time.
Yeah, and look, I didn't agree with everything Jay Clayton did or said
as it relates to crypto, but it seemed they were him and Bill him
and they were a bit more open minded to try to work with the industry,
to meet in the middle of the road, so to speak, versus
now. I mean, and once again, I'm not trying to you know,
get a quota a highlight that you're bashing against her or whatever, but
I'm just calling out how things have been, you know, progressing over the
timeline and now it seems like the hammer is coming down on the industry and
there's no room to even have a discussion. And people have been complaining.
They go into the SEC. They've been trying to meet with them and then
they get stabbed in the back. So it's it's frustrating, I guess,
and I hear from a lot of entrepreneurs and innovators because who have been trying
to work with the SEC. And even Commissioner has the purse. I spoke
to her last week in DC, and I know her and Marque Wada have
had a very different stance than Gary Gainster and the Democrat commissioners. So there's
some clear political party lines here as well. And maybe this is a bigger
symptomatic problem with government, right. I don't know what your thoughts are on
that. Yeah, I get the frustration. So when I mentioned my discomfort
with some of the tactical approaches, that's that's part of it. Again.
I know people who are still practicing in the space, and certainly my practice
when I was running an office is if we're doing an investigation, you have
those conversations, at least in the wells phase, and you know it's supposed
to be a give and take. And I do understand that the current commission
is really putting the hammer down and there's much less room for that sort of
discussion now. At the same time the SEC has been badly burned. FTX
is a good example. Now I step back and say, that's one of
those examples of crypto trying to have it both ways. That you know,
Crypto did not want to have exchanges regulated or the assets regulated. So if
you're an investor and saying I'm going to buy tokens that are not registered with
the SEC, and I'm going to do so on an unregistered exchange in the
Bahamas, and then if you circle back and say why didn't the SEC protect
me, I don't have a lot of sympathies like you made a decision to
avoid the SEC. But still the reality is everyone then blames the SEC.
Why didn't you do something about this behaman company that's not your jurisdiction. So
I think that's kind of forced the SEC to say, fine, we're going
to take a more aggressive approach. If we're going to get blamed for everything
anyway, let's put the hammer down. But yeah, I appreciate the frustration,
you know, I think if the SEC were being totally honest, here's
my read on it. I think the fact is they see and I agree
with this what I was saying when we first got started today. I think
a lot of crypto is, if not a scam, it's designed like a
pyramid scheme. There is no basis to make a reason decision to buy a
particular token. The disclosures aren't there, the business model isn't there. So
to tell the SEC you need to be more open and create a way to
register and a way to come in and do this legitimately. It may just
be the SEC saying we don't want to create that path because people are going
to lose their money. Why make it easier. If Congress wants to make
a path to have people put all their money into doge coin, great,
let Congress do that and deal with the backlash. I think that's a lot
of what's going on. They just don't come out and say that. But
Mark, I know. So here's the thing. You made some comments like,
Okay, a lot of this is pyramid scheme and so forth. But
then you got black Rock tokenizing on etherorem, youve got City Bank and JP
Morgan tokenizing on Avalanche. So let's say you put it inside the doge coin
and the cat coin and all that nonsense. But like the actual enterprise layer
one block chains out there, they are getting real world adoption from institutions.
Are you categorizing those into the pyramid scheme and broad bucket or I want to
make sure we delineating between doge coin and etherorem for example, right, Yeah,
I mean the fact that institutions are getting into cryptos, well, there's
money to be made, so that's not surprising. That doesn't necessarily legitimize it.
Let's face it, those same institutions were propping up FTX, right,
so I don't know that they necessarily you know, there's money to be made,
but yeah, I don't think it changes the fact that when I say
pyramid scheme, I'm thinking more of the mechanics. That doesn't matter who's backing
it. If the only way to evaluate a particular token that you're investing in
is I think somebody there's gonna be a market for someone else to buy it.
I don't know anything about its value, I don't know anything about its
current use, about the financials backing it, then yeah, you really are
relying on sort of that. Well, at least there are people out there
I can find to sell this to in the future, so I don't think
that's what prevents it from being pyramid like, I think it gives legitimacy to
the technology. And that's why I start this by saying I see the value
in the technology. I don't dispute that, and let people develop that.
I think the problem is right now, the only way to invest in it,
at least for ordinary retail investors, is to buy tokens where there is
no basis to evaluate the value of that tech. So Mark, I'm going
to ask a very rookie question because I want to. I know there's going
to be a lot of people who are still not clear about the security versus
not security aspect and what that means. What are the implications. So let's
say moving forward, everything outside of bitcoin gets declared as a security. What
does that mean for the tokens? And what does that mean for retail investors
who are buying these tokens, even institutions that are buying the tokens. A
few things. If you are buying as part of the initial issuance, then
you are going to have visibility into the issuer of that point, what are
their plans for the future, so you can assess do I think think this
token will have some value I can quantify down the road because they'll have financial
disclosures, they'll have business disclosures, So some of it is up what do
you know about the initial issuance. The second part is if these are in
fact securities, what does it mean for the secondary market. And that's where,
like I said, it gets a little flaky. You know, in
the abstract, it also means you have protection because any exchange is going to
be registered because they're trading securities, which means there are going to be safeguards
that we have for current exchanges. The SEC and other regulators go and get
to review their books and their practices to make sure that their practices are sound,
that you're not sending your money to the Bahamas, and it goes into
Samuel Bateman Freed's condom. So you know, the secondary market, you'll get
those protections. Now, where it gets a little tricky is we've never really
had a secondary market in this sort of security. We've had secondary market and
stocks so forth, where you have an issue or with continued engagement. How
do you have a secondary market of a decentralized token where there is nobody to
have those ongoing disclosures. Perhaps that's where it's going to be a little bit
different. That's where I think there might need to be rulemaking or changes in
the WAW and correct me if I'm wrong here? Does that if something is
ruled a security in certain aspects, like for example, the initial issue once
do you have? Does it put up the accreditation laws? Where as a
retail investor cannot go by five of those tokens. I have to be an
accredit investor if there were if it were a private offering, yes, So
if there's a private placement, then there would need to be accreditation or some
other exemption from the current securities laws. But there could also be a registered
offering. So that's the point of registration. So the equivalent of an IPO
for a token. And again that's that's where retail investors, through their advisors
would have access to financial information where they can make an informed decision. What
are your thoughts on And we touched a bit on it before. Where the
blockchain is global, right, Anyone from almost any part of the world they
have Internet connection, can access these tokens. Unlike stock markets and securities in
certain markets where for example, India may not be able to touch in your
stock exchange and whatever's listed there. The United States. Let's say it categorizes
all coins outside of everything outside of big cooin in securities. But in the
EU, in the UK, and Singapore, Japan they see them as virtual
currencies. How does that you know, how does that on fold? And
this is a hard question, but what are your thoughts on that? And
that dynamic? And only the United States is viewing them as securities. Yeah,
and that's where I have the luxury of falling back on being an enforcement
lawyer, so I don't have to deal with these sort of regulatory schemes.
I mean, that's obviously much more complicated, and that's why maybe what you
need is congressional intervention to decide how are we going to deal with this.
I still think if you are a foreign issuer and you want to tap into
the US markets, you comply with US law. And I know that's frustrating
for US investors who say, we want access to things that are being sold
offshore, but we can't because of US law. But that's you know,
we live in a democracy. The law is the law. And I know
cryptoics say, well, we don't want protection, this isn't protecting us,
but you have laws in place for that purpose. I look at it this
way. When I used to investigate Ponzi schemes, the investors didn't want me
protecting them either because they thought they'd all get rich and then the sec came
in and broke up. They're a gravy train, which was nonsense because I
had the financials and I knew their money was being stolen. But still a
lot of people don't want this sort of protection. Well, the way we
deal with it is you change the law. But right now we have a
legal regime in place that provides for registration upfront of securities, that provides for
an anti fraud compliance, and that should apply to anything that is deemed to
be a security, whether it's crypto or stock. Question about the how we
tests and what took place with Howie that it was not so much the orange
grows or the oranges, but was the scheme to how we put together.
We've had Chair Ganser and some folks state that the tokens themselves are securities.
Are you of that same mindset or are you of the mindset of, Hey,
it's not the oranges on that specific tree on that grow, but rather
it's the packaging. What are you doing what type of product are you putting
together What are your thoughts on that. Yeah, I'm not sure if they've
come out and said that, because that's not the way the law is set
up. It's the investment contract for some underlying asset where it gets really good.
And this is one of those areas where I think crypto is a little
bit different from historical securities is we can have that delineation that when you are
buying a token, or more specifically, when you're selling a token, the
securities you are selling the contract around that, the securities nature of that,
even if the token itself is something different. We've never had investment contracts that
had this sort of use basis. Okay, if you are investing in the
orange growth, there's no secondary market for that investment contract. That's what's different
about tokens. Right in theory, you are buying a security, you are
investing in whatever is being issued by this issuer, but at the same time
you also have something that you could go and trade. There's actually a market
for that token, and the securities laws haven't grappled with that before. So
that is novel, and that's why I think the secondary market cases are going
to be tougher. For the courts, and that's where you might need some
congressional intervention because we've never had Again, most investment contracts historically have been scams.
There's legitimate investment contracts, but most of those that get to court are
scams. There is no secondary market for an investment contract in a posi scheme,
right, there's not like, oh, I want to keep trading that.
Tokens are different. There is a secondary market for tokens. You can
use them on the blockchain. That's the securities law hasn't dealt with that scenario.
So that's I think going to be that's the novel twisters. Let's jump
to this topic. And I don't know if you've so tooken if you've taken
a look at this, but air drops the SEC has been saying free air
drops could potentially be into securities bucket. What are your thoughts on that,
even though I may not buy it, but I get air dropped it.
Yeah, I'm not sure legally where air drops stand because generally there has to
be an investment of money that's part of the test for security. One can
look at some sort of exchange that we're by taking these through an air drop.
There is an expectation that I will then create a market for it,
So there is some sort of quid pro quolt. So some legal argument could
be made for that. It's hard to bring a case against someone who's issuing
exclusive exclusively through air drops because there's no money to recover for the SEC.
But if you're using that as a mechanism for creating a market and then money
is flowing in and out, I could see why the SEC would want to
take some action. Where it stands legally, I'm not clear. Yeah,
there's so many complications here. So Mark, do you do you think that
there's a new well, I should say, an amendment that needs to be
added to the how we test for digital assets in crypto or an entirely new
test for crypto and digital assets. Well, it can be done in two
ways. One is through the courts so to the extent, and I don't
think the original cases that we're dealing with specific issue is we're going to grapple
with that, but through crack in coinbase unit swap. As you've got more
exchange cases, the courts may develop a test, you know, completely separate
from how we They can say here's how we are going to look at secondary
market trading of digital assets. They can come up with a new legal test
based on existing law. That's one way that it will develop. That takes
time, That will happen over case after case case. Law takes forever to
develop. The other way is for Congress or the SEC to pass a ruleral
law. The current SEC administration has not shown a whole lot of enthusiasm about
promulgating regulations, so I don't think it'll happen that way, and there's good
reason for that. So ultimately, I think it is going to fall on
Congress. If Congress is feeling politically that they need to support a crypto friendly
system, then they will come up with a different legal treatment of tokens in
the secondary market then we currently have when we deal with them as securities.
What we see though with the different court rulings right, for example, in
the Ripple case, who so some of the other judges have disagreed with Judge
Taurus is ruling. Yeah, When you have this dichotomy and thoughts and rulings
up with the different circuits, do you think, well, I guess Congress
could resolve this, but do you think any of this makes it up to
the Supreme Court. It could it'll be some time, you know. Historically,
obviously, after the initial trial ruling goes up to a Court of Appeals,
the Supreme Court doesn't necessarily take that first case up. You know,
even if you get a second circuit ruling in Ripple, if that's the first
one to hit the Court of Appeals the Supreme Court, I don't know if
they would find this the sort of thing that's worth their attention. They take
a very small number of cases each year. Generally, the law develops because
you'll have two Court of a Field decisions and they're in conflict, and then
the Supreme Court might step in and say, okay, now we've got inconsistent
appellate rulings we need to resolve, and that can take years to happen.
Now, because this is something new and novel, maybe this court gets interested
sooner, but likely it's going to take some time, and that's frustrating,
especially when you have new technology that's evolving quickly. A lot of dollars are
out there in the interim. So that's where I think there's some incentive for
Congress. Not that this Congress is able to do anything terribly effectively, but
there is some incentive for Congress to step in because waiting for the courts and
certainly it's Supreme Court to develop the law is something that could take a great
deal of time. I want to circle back to the SEC and how they've
been handling things, and I want to get your perspective as you work at
the SEC. And I want to make sure I preface this question by saying,
well, human beings do bad things, good things, and nobody's perfect
right. We can't control every situation or scenario. However, the SEC has
been getting dinged in court recently. They got called arbitrary and capricious with the
bigcoins body TF situation in a debt box case. They were lying to the
courts, they got sanctioned. What are your thoughts on this? And is
that just part of the course in any company, in any agency, just
there's going to be people doing bad things and who may now follow Chairgainther's orders
or whatever it may be. Or is this an outlier? Is this unique?
Have you seen something like this before? Let's put it this way,
that you're going to have good and bad lawyers on both sides all the time.
When I was at the SEC, I thought I had an amazing office
follow really tremendously talented people, but there'd be some things that happen at the
agency that I wasn't I don't think across ethical lines or legal lines, but
some practices that I wouldn't have necessarily done. When I pivoted back into the
private sector and I spent another half dozen years representing companies who are under SEC
investigation, I faced SEC lawyers, so I thought, we're upstanding and ethical,
and even if they were going after my clients, I understood why in
the basis for doing so. And I saw some who I found frustrating,
whose practices I disagreed with and I didn't think were appropriate. That's that's going
to happen. It's a large entity. There's thousands of lawyers, political leadership
that can be disconnected. So I don't know that there's anything unique. I
do think in the current environment, I think there's been a high pressure valve
from the top down. You know, again, some of these tactical issues
in the way that the current administration is running things may contribute to some carelessness
at the staff level, at the enforcement staff level that I find frustrating.
I think it's been you mentioned politicized. I'm not sure if i'd say politicized,
because I don't really understand the politics of crypto. I don't think it
falls down traditional political lines. I don't know that there's necessarily political gain to
anybody in being particularly aggressive in crypto. I'm not sure that's politically even a
good idea. I think for the agency and certainly for Gary Gosseler, seeing
the problems that are arising in the crypto industry, making a decision we need
to clamp down. If we don't, and that we continue to have Celsius
and FTX and Luna and so forth, we will get the blame. Congress
isn't stepping in the CFTC isn't necessarily stepping in. We need to do something.
I understand that. I don't think that's political so much as pragmatic.
But I do think that sort of top down we are going to take a
more aggressive approach has filtered down to the staff level in a few cases.
I don't think that's the norm. I don't see the SEC, you know,
being unethical as some people claim, or crossing these legal lines. I
think, unfortunately, there have been some outlier incidents well I'm going to disagree
with you on the political aspect because I don't know and this this is not
sometimes it's the narrative carried by someone with a loud voice like Elizabeth Warren.
I'm gonna create the anti crypto army and working closely togainst her and sending against
her questions and answers ahead of hearing and just all these things. And it's
like, wait, what's going on here? And then you see with the
bitcoin spotty TF after the courts rule, the SEC acted arbitrary and capricious,
hester Purse marcu Wade at both the Republicans, Gainscer sided with them. He
was the third vote to get this through, but two Democratic commissioners said no.
So it just seems like and not necessarily that they're like, I'm a
Democrat and I hate crypto, but oh, I'm gonna side with Elizabeth Warren
because she got the lawyer, she has the power on the Biden administration and
the loudest voice right now. And then the game of politics, I'm trying
to get re elected. I want campaign donations. I want to side against
someone who has such a loud voice. I think this bit of that and
I know. I spoken to Congressman Tom Emmer, and he introduced a bill
called a Restructuring SEC Act to make the set less political where there's an executive
director and there's another commissioner's seat. If I'm not mistaken, but it will
allow things to be less politically influenced. I don't know if you've seen that
or heard of that, but there just seems to be some political layer here.
Yeah, and that's not my experience, and obviously I'm not privity to
the relationships and what's going on right now. First of all, stepping back,
the SEC historically has been very rarely politicized, especially in an enforcement you
know, in my experience again, I was there sixteen years. I saw
cases all the time. Almost every case enforcement action is approved five. Oh
okay, it doesn't mean, you know, it's not a politic Investigations and
enforcement are not political. Crypto is a little bit different. Crypto is that
rare exception where you are seeing three two votes on most things. That's I'm
usual, And again I don't know so much about certain people responding to politics.
I do think historically there are people who are more pro or anti regulation
and commissioner peers I knew when she was on the staff. You know,
she was a counselor to a commissioner that I had to work with, and
she has a very different view of regulation than some of the others. Mark,
you eight, I knew as well, and I think all of these
people are respectable, very smartpath they have different views about how regulation should work.
And now that we have crypto stepping into what's arguably a less regulated space,
it's novel we don't have the lay of the law down again, especially
for secondary market trading, then it does fall back on what do you view
about how actively we should regulate? And there are political difference, is differences
about how heavily this space should be regulated. I don't know if it's so
much like, well, we're Democrats, we're anti crypto, We're Republicans were
pro crypto. I think it's more fundamentally, what do we think about an
active regulator in this space? And certainly commissioners you Ada and peers are much
more hostile to regulation. Hard question for you, Mark, if you were
the chair of the SEC today, what would be your next steps to help
figure this out and to try to work with the industry, protect investors.
You know, like you said, have the disclosures, the guardrails in places,
what would be your plan of action? Yeah, and some of it.
As we're frustrated with the tactics of the current administration. I certainly think
they need to be a little bit more open. I think it has to
be depersonalized. You know, that's one thing that frustrates me, the fact
that everybody can name this chairman. I served under probably six or seven chairs,
and I don't think anybody could name any of them who wasn't in the
securities industry. You know, the Commission acted, even where it was a
divided commission on certain things, the Commission acted. And I think this particular
leadership is much more makes videos, I think that and that allowed I think
that opens up avenues for attack. It just seems like this is one particular
individual who's vindictive, and I think that's unfortunate because it should be this is
the agency, and any enforcement action that's brought, for example, that's not
the chair. An enforcement action is two years of investigation by career staff who
are not political, who can only act if they think they've got the evidence
to bring a case. And some of the finest securities lawyers in the country
go to work for the SEC. These are smart people. Multiple bodies between
the enforcement staff and the commission vote to review what they're doing. Five commissioners
voting. This is not you know, some one person acting and a whim.
I think you need to get back to that and that gives I think
that would show the legitimacy that this is an entire agency even if you've got
divided voice votes from the top, that has done investigation, has found violations
of the law, and believes that there's a good faith lawsuit to be brought.
That's the way it should work. So I'd want to make sure that
that focus is there. But I do think there needs to be a little
bit more clarity. I do disagree with those who say the SEC there's no
clarity here. The SEC has brought countless enforcement actions. There There is no
defense lawyer out there who is saying, I don't know what the law is.
So you know what the laws, you may disagree with it, and
there's complexities when we get to the secondary market where we don't have the case
law. But to say there's no clarity here, we don't know what's going
on, the SEC neate needs to tell us more. I don't really buy
that. Okay, the cases are out there, we know where the SEC
stands, even if we disagree with the positions they're taking. It serve I
appreciate that. Do you see this being resolved maybe in the next year with
let's say the House gets something past tomorrow, Senate will need to do their
thing, and it look it's an election year. I don't know Biden's days
or he goes, but nevertheless, it seems Democrats and Republicans are working together,
you know, like recently they repealed SAB one two one that still has
to go to the President, of course, But do you think this gets
resolved by next year? I think that's optimistic because I think a lot of
the issues do have to be worked out in the courts. So whether we
forget about any legislation that's pending and just say look at what's in the courts,
that's going to take some time to work out and to come up with
new parameters for how crypto has dealt with as a security or not. If
there is legislation, I can't predict which laws pass and what they do.
I think if more of the responsibility is offloaded to the CFCC, which is
far less aggressive than the SEC, doesn't have the same resources. That's going
to cut back on what the SEC is doing. If there is an outright
carving out of crypto from securities regulation or creating a path to regulation different from
what exists, yeah, that could certainly change things. I don't know how
much of that's going to happen, how much political will there is for that
to happen. Again, circling back, and this is my skepticism. I
think we are in an area that's very high risk, that is still fraught
with fraud or non disclosure. And does Congress, does the President want to
sign a law that clears a path when in the future then people can blame
them for the next blow up rather than the SEC. I don't know if
the political will is there for that. If so, sure we can have
a whole new regulatory system framework set up for crypto. The other thing to
think about is historically Congress has not really done much to that. Congress creates
the broad law and then it still has to be handled by the SEC or
the CFTC at a regulatory level. Congress is not going to create a registration
framework. It could say here's the general, but it's going to rely on
on agency rule making. That's going to be litigated because anytime the SEC or
the CFTC passes a rule, they'll get sued by the industry that'll take laws
and the courtbvill appeals and say yeah, they're arbitrary and capricious and throw it
all out and they start out. Congress doesn't end things by passing a law.
So I think this is a long haul, by which time, hopefully
a lot of the bad players in crypto are out and maybe then we're dealing
with a smaller market where it works a little bit more collaboratively, for sure.
Appreciate your insights, Mark, I got some wrap up questions here.
First, if you could create your own metaverse, will the theme be you
know, I thought about that. There are a lot of things I would
change, but that would get me to a very big political discussion here,
so setting that aside, you know, I've got you know, I would
have a much more musical world. I would like to DJ for the world
and get people exposed to the sort of music I love. That that's my
universe. I think, you know, there's a lot of really serious issues
in the world. There's financial issues and social issues, but music makes it
all a little bit better. Hmmm. I agree with you on that rapid
fire questions. Favorite food I have. I'm not a healthy eater, tries
my wife crazy. I would eat pizza every meal, and I grew up
in Chicago. I could do pizza and burgers, and I feel very guilty
about it, but I I like the unhealthy stuff. Favorite. Well,
this will be a good one to ask you a favorite musician or band.
Uh. You know, I always say favorite band other than the Beatles because
the Beatles. Nothing is like the Beatles, and that changes day to day.
I'm I I like to evangelized for Big Star, which is the greatest
power pop outfit ever and one of the great loss bands that were around for
just a few years. No one ever heard of them until decades later,
and I think Big Star is the band that everyone should be listening to all
the time. I'll have to check them out because I have not heard about
them before, but I'll check them out of if it is favorite movie.
I like gangster movies. You know. I don't know what that says about
me, but I tend to look at Chicago. Maybe in Chicago, but
you know, the Godfather, Goodfellas in pulp fiction, that's sort of the
holy Triumviria for me. Yeah, I've watched Godfather and good Fellows too many
times, and I would admit my wife said, why are you watching it?
Haven't seen this a thousand times? And you know it's just if it
comes on cable, I'm out for the next three hours. I'm nothing I
can do. I'm going to watch it. Yeah, favorite book, favorite
book. I don't read as much fiction as I used to. I wish
I did. I tend to like strange and creative fiction that goes in weird
directions. I'm a big fan of Cloud Antlast by David Mitchell, which kind
of really plays with the whole model of what a novel could or couldn't look
like. Pallid Fire by nabokovs another one. I like things that play with
the structure. Now, I think I know the answer to this question,
but'll just confirm. What are you doing when you're not teaching? What are
you doing for fun? Well? My wife and I are are suburban middle
aged retirees, which means we play pickleball because where we leve, pickleball is
mandatory. If you're in your fifties or sixties. That's what we play a
lot of pickleball. We've got the luxury of living in the most beautiful part
of the country, so I take my bike out. We go on a
lot of hikes. Between our kids growing up and moving out and COVID,
we discovered the San Francisco Bay Area in a way that we never had a
chance to see when we were working all the time. And our kids are
growing up, so you know, that's a big part of our lives is
just being outdoors these days. Mark absolute pleasure chatting with you. I really
appreciate your insights, even though I don't agree with everything. Yeah, it's
no fun if we agree and and and you know my metaverse people I think
would have reasonable disagreements. It's you know, being a law school instructor as
well. That's that's how we learn, is to have disagreements. And I've
I've learned a lot from from crypto folks. I I have never bought crypto.
I have a lot of concerns about it, but I've learned about it
from from people I disagree with the family. That's vehemently that's how discussions should
work. Should work, so thanks to absolutely thank you Mark