Former SEC Branch Chief Lisa Braganca Interview - SEC & Crypto Regulations, Ripple XRP & Grayscale Lawsuits

Lisa Braganca is a former SEC Branch Chief & Founder of Braganca Law. In this interview we discuss the SEC’s approach to crypto regulations, Ripple XRP lawsuit, Bill Hinman Ethereum ethics violations, Grayscale lawsuit against the SEC over denial of a Bitcoin Spot ETF, Gary Gensler, Kim Kardashian, and much more. https://secdefenseattorney.com/| Follow on Twitter @LisaBraganca, Braganca Law LLC – 847-906-3460.

Transcript

Welcome to The “Thinking Crypto Podcast” your home for cryptocurrency news and interviews. With me today is Lisa Braganca who’s a former SEC branch chief and founder of Braganca Law, which can be found or you can get more details at SECdefenseattorney.com. Lisa, great to have you on the show.

• It’s great to be here, thanks Tony.
• Lisa, I have so many questions for you, about what’s happening with crypto regulations and the SEC but I would love to get to know you a bit better, tell us about your background, where you’re from and where did you grow up?
• Well, as it turns out, I grew up in New Jersey, but now I live in the Chicago suburbs and came here to Chicago land for college and met my husband, stayed. So I do identify as a Chicago person, Midwestern now. I feel like that’s formed who I am and I kept going to the University of Chicago, went there for college and then it’s almost like I have a bungee cord to the school, I went back for business school, then I went back for law school, even sent a kid there to the elementary school associated with it but, now apparently I’m out of school that I can go to, and so now I have to actually just stay out in the world of work. So, yeah, it’s a shame ’cause I love school, but I got into a little bit of finance when I was in business school, didn’t really get into securities at all and law school left, wanted to be a litigator. wanted to solve the problems of the world through litigation. Did a bunch of different kinds of litigation and finally went to work for the Securities and Exchange Commission. And it was a great fit. It was really interesting. You can delve deep into incredibly complex issues and basically, spent a lot of time learning how to lie through accounting, which I thought was great fun. I think I am a CPA wannabe. There aren’t many of us out there, but I’m one.
• What years were you there at the SEC and were there any significant items that you worked on that you can call out?
• Sure, it was a long time ago. Oh my God, I’m so embarrassed. You’re all gonna know how old I am. But I was there around 2000 the big thing that was happening when I was there was Y2K, which everyone’s gonna laugh at now because we really did think that the entire world might come crashing down because of us not having the two, zero part of the year. I mean, but who knows? Maybe all the monitoring that we did and forcing all these broker dealers and other participants to fix their systems, maybe that kept us from a disaster. Maybe not, maybe it was just craziness. But that’s the timeframe that I was in right back with Arthur Levit and RV Pit. So those are my years. It was a while ago, but I’ve been active with SEC cases ever since. I do a mix of investor protection work, whistleblower representation, and SEC defense and regular old litigation. So I like keeping my hand in all of those things. It helps me to kind of step back and always look at what the SEC is doing and try to think about it, you know. Rationally not always as we’re locking horns.
• Sure, I always ask every one of my guests what their first encounter with crypto was and what was their aha moment and everybody usually has a different story. And what was yours?
• Well, I had two that I wanna mention. The first was discovering, I mean, my husband works, worked until recently for the federal government. So he’s got all these reporting requirements and discovering that our son had invested in Bitcoin and didn’t tell us. That was kind of a big aha moment, it was like, whoa, we gotta like report that. Okay, that was before we knew what Bitcoin was and it was not a big deal once we knew it, but that was the first, Then what really did it for me was I got a call one day from somebody who was under investigation by the SEC and it was somebody in the crypto community and I had been looking into it and kind of talking about it a little bit ’cause it was really interesting. But this was my drinking from a fire hose experience because these guys were they had their own exchange. And they were under investigation, they had to produce document, I mean, I had to learn everything about so many different coins. And at the same time, they really wanted to be able to just get into compliance and I learned how impossible that was. There just wasn’t any way for them to be able to do that in a timely manner, so ultimately, we resolved the investigation and they ended up closing everything down and we got a great result for them. But it’s still really frustrating. When they wanted a path to compliance and there just wasn’t anything out there.
• Wow, yeah. Talk about drinking from the fire hose, I mean, what an exchange with so many different tokens and moving parts and it was all still new it sounds like. So that must have been–
• Well yes, and it was back around, it was 2017, very end of 2017. And one of the things in this community, we have lots and lots of smart people and people who read the Dow report, read other cases, SEC comments, cases, everything that’s out there, and then come to a conclusion and say, okay, this is how we’re gonna do things. This is not a good practice and that kind of action will lead you to having to call me at some point to represent you or someone just like me to represent you in an SEC investigation. Because what the SEC says, like in the Dow report, they say, “Oh this is limited to these facts “and circumstances” don’t believe that, that’s not really true Okay? You can’t just distinguish that, the Dow report and then say, ah, but what I’m doing is fine. No, no, no, no, no, no. So you really do need to get advice and that’s advice from a US securities lawyer. And I know that can be really hard to find, it’s super expensive and I don’t do that, but I wanna like give a shout out to all the people who do because there’s a lot of liability that goes with that. And so you gotta pay a lot for, professional liability insurance, they pay even more for that kind of insurance than I do, you know, much more and that’s why people don’t dabble in it. And they, if they do it, they do a lot of it and they’re subject to getting sued down the road by all the investors, so anyway, this is the reason that it’s tough to just find somebody and say, well, but I only need a letter and why can’t somebody do that for me for you know, 500 bucks? Well it’s because it’s not just 500 bucks, it’s 500 bucks plus the potential of being sued, by a thousand people down the road and investigated on all these various things. So that’s not work that I do specifically, but I do wanna help people to understand that it’s important and hiring, I love the people of Ukraine, but hiring a Ukrainian lawyer to give you advice on whether your crypto token is a security or not, not a good idea.
• Yeah, for sure. Well, as the crypto market has grown and we’ve seen tremendous growth over the years, has the number of crypto clients that you provide service to has that grown as well? I’m sure you’re maybe more busier than ever. I dunno if you can tell us a bit about that.
• You know, it stays fairly steady mostly because I get a lot of calls from people who have put money into crypto and have for one reason or another run into trouble. And the sad part is I can’t help them. The vast majority of them I can’t help. And here’s why, sometimes it’s that they lost the money a long time ago and they didn’t do certain things that would really be required to show that let’s say somebody Coinbase or somebody at finance, misused their account and stole their coins ’cause of course, Coinbase and finance are gonna say, “Well, yes, your coins disappeared, but it’s not us.” “We didn’t do it.” And if you don’t have an image copy of your computer so that you can show exactly how that different address got dropped in so, the contents of your wallet got hijacked, you can’t really prove it then.
• Wow So it’s a real problem. So that’s is kind of the number one thing is you gotta deal with this right up front and you can’t reach out to them and then wait for their response, which will take a long time. And then it just snowballs by the time people come to me six months later and say, “I couldn’t resolve it “with Coinbase,” it’s like, I can’t really help you out. So if it’s a big dollar amount, that’s something to consider right away. It’s that if you put in an address, if you call up Coinbase and you say, “Look, I just put in an address “and everything’s gone I tried to transfer it to Kraken, Kraken says they never got it, “it went someplace else.” Okay, but you need evidence to prove that it wasn’t you who put in the wrong address and it wasn’t some person, we know there’s all kinds of viruses on our computers and they wake up and they’re thrilled when they see those addresses show up. They’re like, “Oh, great, hijack,” there it goes. So that’s a problem. Then there’s another problem of just the amount, it’s expensive, it’s hard enough, I represent lots of investors who’ve lost money and when I can bring something, bring an arbitration in FINRA arbitration, let’s say, or if I can bring a small case in a local court that’s great then I can get some kind of relief. But when you’re talking about these crypto exchanges, you’ve got arbitration provisions that say you have to do it in San Francisco or someplace else. So that can sometimes be an obstacle, but the biggest obstacle is you just went and hopped on and did a transaction. Well, decentralized means you can’t sue Mr. Bitcoin. You can’t sue Mr. Ethereum, right? There’s nobody to go after.
• Right.
• and that means your money’s gone. So it can be really distr… I mean, I love the technology, I love the great things that are happening, but right now it’s the Wild West.
• Sure, yeah, there’s just so many infrastructure items that are needed to scale this for mass adoption. To your point, you’re off by a character or a capitalization or a lowercase and it just screws up everything and sometimes to your point, transactions get lost even between centralized exchanges. And it’s like, what do you do?
• Right.
• yeah and I look I hate banks. I complain about banks all the time. I think they’re abusive and all that. But when something goes haywire with a bank transaction, if you’re doing something via your account, you actually have, there is a Mr. JP Morgan Chase, that you can call up so there’s great things about decentralization, but there’s also like some good stuff about having things be centralized too, so we’re all figuring that out.
• For sure, yeah, there’s still a lot to your point, that needs to be figured out and I know there’s bills, there’s debates happening right now with DFI versus CFI and so forth. Let’s talk about the SEC. Obviously you were there at some point a lot has changed in markets and technology and so forth. Right now, a lot of people are not happy with the SEC. And I wanna make sure I preface my questions and my comments, I believe the SEC has a job to do, protect investors, stop scams. There are scams in the crypto. We agree on that. However, folks feel that the SEC are targeting legit companies and almost hurting innovation. And they’re scratching their heads like, what’s happening? So I would love to get your take on what do you see with the SEC right now? , could you give ’em a grade? What are they doing right and what are they doing wrong?
• Yeah, this is a really tough situation for the SEC and for the community. I’m not thrilled with how the SEC has approached this. The SEC’s initial approach was we have the, how we test everything’s a security other than Bitcoin and Ethereum. Ethereum even started off as a security, but it’s not anymore. So that’s regulation through enforcement. and that’s a problem and that’s something the SEC does regularly. I mean, but here’s the difference. The SEC regulates a very highly regulated area. The securities markets have… if you pull out the books on securities regulations, they’re super thick back when we used to look at books, now it’s all online, but there are lots of specific, very detailed regulations and laws that deal with all kinds of specific parts of the securities industry. The exchanges themselves and the products themselves. Crypto didn’t fit in anywhere specific, and doesn’t have those specific kinds of regulations yet that deal with its own idiosyncrasies. But the SEC looks at this… It’s not even a rule or regulation or a law, it’s the how we test from a case, that says, here’s how we know if something’s a security and we’re gonna apply this test and I don’t have a huge objection to the how we test. What we do need though is for the SEC to look at the specifics of what is going on with a blockchain and with tokens and be more nuanced. Right now, they’re just hitting it with a hammer.
• Yeah. And that is a real problem in the industry and it is forcing people offshore. It is having an effect on how innovative people in the US can be as opposed to offshore. And I hate to hear people say, “Well, I guess I’m gonna have to like go move “to the British Virgin Islands or move to Gibraltar “or someplace that’s a little more crypto friendly.” But they are trying to catch up. This has all happened ridiculously fast as compared to the way these things usually kind of chunk along. I mean, if you look at index funds for example, they didn’t exist back before. I think the 1970s. There wasn’t a S&P 500 index and it took a while of John Bogle and various people pushing that and explaining it and getting that to a point where it was approved by the SEC and now they’re huge big things and in the marketplace. The pace of crypto it’s so much faster than that. And it’s being done by people who are outside of the securities industry. And so there’s a real clash there in terms of move fast break things versus, hey, we’ve been doing this for years and we need to think about this before we do anything.
• Sure, and I absolutely understand the situation you’re in, it’s tough, to your point there’s so many coins, things are moving very fast. But why take a stance of enforcement? Why not put out some clear guidelines? And maybe I understand Congress makes the laws, but why can’t the SEC adopt what, for example, Commissioner Hester Peirce has been saying to sandbox, work with the projects versus going after him with a hammer, right? Like whack-a-mole or something. So it’s like the common sense approach is missing is just knee-jerk reactions happening, it seems like, And on your point of the how we test, do you feel we need a updated, how we test for digital assets given that they’re on decentralized networks globally distributed token holders could be in many countries? And how can the US just alone say, “This is a security, “but in 10 other countries it’s a virtual currency.”
• Right, this is the real problem and I think Commissioner Hester Peirce has been doing some good work and really thinking about this I might not agree with her on everything, but on this, I definitely see where she’s coming from and she’s listening and that’s really important. I think part of the problem is the government regulation overall. It’s the SEC started off before 2017 when they came out with the Dow report, they were mostly lawyers And not knowledgeable about crypto or even the physical… Not physical ’cause it’s all electronics, but the actual operations of the markets, I mean, they’re super complex and it’s overwhelming. I mean, what the SEC is trying to regulate is overwhelming. And then they got whacked upside the head with crypto. I mean, they were having enough trouble trying to keep up, with just high frequency trading and new products coming out that were at least under the umbrella of the industry that they clearly had oversight for. And then bam, crypto comes along and it’s just wildly different. So to some extent, what they did was an overreaction and I think they tried with the Dow report, from their perspective, they put the DOW report out there and they said, “Okay, we’ve told everybody “what’s going on, we’ve told everybody “that we’re gonna apply the how we test. “We told everybody how it is that this particular token “is a security and we did it without whacking Dow” Okay, since then they’ve been frustrated when they see that there hasn’t been widespread adoption of an embrace of the Dow report and the Howey test. And so there’s still a real friction there because they think that they have been clear and the industry says, “You’ve been as clear as mud.’ “It doesn’t make sense to us.” And so how do you bridge that chasm between the two?
• True.
• And that’s going to keep resulting in litigation over and over again. Now when you get to the choice of their litigation, I think that is somewhat problematic. I mean, they have limited resources. So they look for cases to send the message and that can be somewhat harsh rather than having a regulation, choosing to bring a case and make an example out of someone is that’s sort of like when mom would catch four kids, and all doing something or maybe catches two of them and they’re like, wait a minute, but the other two got a lot more candy out of the Halloween basket than I did. It’s like, yeah, but I caught you, so that’s it. You’re getting grounded for a month, that’s kind of their approach and they expect everybody else, all the other ones to watch what they did and to absorb it and to move ahead, internalizing what they did
• So this sounds like if we go to the root of it, kind of like a government failure issue versus, okay, it’s just the SEC is just lack of resources, lack of education or I don’t know, or lack of working with the industry closely. I don’t know but it seems like there’s a layer to it that’s about that.
• Well, one of the things too that crypto, and I think the crypto community is kind of getting the hang of this now, is the SEC has been very tightly connected to the securities industry. And there are people from JP Morgan Chase and UBS and Citibank in their offices all the time. There are trade associations that are in the SEC’s offices all the time, telling the SEC what they want, explaining to the SEC what they are doing. So they are very closely aligned and that’s not to say the SEC doesn’t bring enforcement actions against them, but there’s a real presence there. That did not happen with crypto because of its genesis. It kind of bubbled up from the ground. It was a grassroots sort of thing. And that meant that you had lots of people in the industry and the securities industry like Jamie Diamond who bashed crypto before he adopted it and you have a bunch of lawyers, and I’m a lawyer, I will admit, we tend to be very backward looking. we’re not in the vanguard in terms of innovation and all that because we’re always looking at precedent and we wanna say, well how does this fit in with the past? And if you’re on the business end, like from my business school days, business school people are like, “Who cares what the old law is? “I care about doing something new innovating.” And so there’s this clash there too. And I think it’s less government failure than just a you’ve seen, we have all seen the CFTC did a much better job
• Yeah of connecting with the industry, of with the crypto folks, of creating a sandbox of listening and there just was a whole different feeling. And so it can be done. It’s just that the securities industry, is old white shoe kind of big guys, it’s Wall Street and the crypto community is not Wall Street. So they were not speaking the same language and there wasn’t any commonality there. And so it’s taking a while and I think unfortunately a lot of that is happening via litigation because that’s where the action is that’s what’s going on.
• For sure and I think folks are also a bit confused and it leads to conspiracy, it leads to all types of thoughts, especially with social media. The way, for example, certain lawsuits are handled specifically like the Ripple lawsuit, former SEC chair Jay Clayton on his last days filed a lawsuit and he’s out the door and it’s like, what’s going on? That just seems shady. And then there were–
• And that was a bad practice, I do agree that I don’t think it made sense. It was bad optics and it undermines faith in the system when you do those kinds of things. There was no reason that that needed to be done that day, could have waited to be approved by the next chairman.
• For sure, so what are your thoughts on that lawsuit? There’s a lot of amicus breezer coming in on behalf of Ripple just for yesterday. Do you foresee Ripple having a victory here and what potential outcome you may see?
• This is the case to watch. This is really exciting stuff I wish was gonna come out because boy, I’d be able to trade on that basis and it wouldn’t be insider trading beat, just really smart trading. But I don’t, It is so–, I mean first of all, the usual thing, , for SEC cases is the SEC files a case and no matter what the SEC wins, I mean, let’s face it, , they, if you look at their history, , they win. They have vast resources that they can marshal to be able to crush their opponents. Here, they’ve gone up against someone who is marshaling a great deal of resources via the amicus briefs and just on their own they have the A team of litigators. And that’s definitely evening things out. And so it’s not clear that the SEC is going to prevail in this case. And that makes it very exciting for those of us in this area because usually they just kind of flatten their opponents. I mean, the best way to do it is they, even with crypto cases, , they drop in, bring it a temporary restraining order and like , you can’t even access your money an asset freeze. You can’t defend yourself because everything’s frozen. So that’s a very typical move for the SEC. Ripple, they didn’t do that. So they brought this case and now it is real. Every issue is really being briefed and the judge is going to have to is going to have a great discussion of the issues , and all of it laid out. and all of us are getting that now we get the benefit of being able to read all of that too and see it. And so I think that’s gonna feed into a regulatory agenda. And I have to give Gary Gensler credit, I mean he is trying to push a whole lot of regulation, and that’s a good thing. But it’s exhausting the staff cause it’s a lot of work. He’s a real hard task master. People say that from his CFTC days. I don’t know him personally, but all I can say is he’s got a reputation, not a surprise for a former Goldman Sachs guy, but he is also a business guy. And so he looks at things from that perspective and he knows crypto. So it is a little surprising to see them continuing to hammer along. But part of the problem here is once a case is brought, and you are right, Chairman Clayton got that filed right before he left as an institution, the SEC does not wanna be seen as dropping a case when a new chairman comes in. Now that may have been the better practice and it probably was a better practice for that, that case never to have been filed. But given that it was filed, Gary Gensler can’t be backing off of it. It be seen to, , just reverse it. It’s a mess. So.
• Yeah. Yeah, it just seems bad optics. And you also layer in that some whistleblower organizations have done foyer requests and it seems that there’s ethics violations with Bill Hinman and Ethereum. And I know that is being, that’s a layer in the Ripple lawsuit and as being brought up before the SEC enforcement director with members of Congress as well. What are your thoughts on that? That, look, we know Bitcoin is not a security. That was, I think Jay Clayton, he mentioned that and Gary Ensor echos those statements, However, all of a sudden Ethereum was mentioned that it was not a security and while the other tokens are in limbo. So what do you think happened here with Bill Hinman and that whole debacle?
• Boy, that is a tough one. I really don’t know how that shakes out in terms of ethics. I think it’s always tough when individuals work for the SEC. They can publicly make statements that they always say are only their own statements that they, they don’t speak for the but those of us in the securities law area, of course we parse their words. What else do we have to go on when there isn’t a regulation? we are constantly trying to figure out which way is the SEC going, how do we advise our clients? So it’s a real problem. I think the whole meetings that happened and, I really can’t comment on the ethics though. I don’t know. I’m glad that it’s being looked into and hopefully we will get better answers from that inquiry.
• For sure. What are your thoughts on people saying that the SEC and I know you mentioned they go after sometimes low hanging fruit to set an example, but they went after Kim Kardashian and folks are saying this seemed like a PR stunt because as soon as that news broke Chairman Gensler is on TV, they’re doing all these social media push and it’s like, come on, what is this? You have a job to do protect investors, but why the PR stunt, why the political moves and things like that?
• Well, when you think about it, the SEC remember back when they did their little game show with the meme stocks, and apparently that cost them hundreds of thousands of dollars. I heard somebody say like half a million dollars they spent on that. I mean, they are always trying to get the word out. In my humble opinion, that whole like game show thing was a waste of money and very disrespectful to investors, in Game Stop and AMC and other of those so-called meme stocks. But the SEC couldn’t buy better public outreach than the Kim Kardashian case. I mean, we had Gary Gensler on one side of the screen.
• Yeah.
• And we had Kim Kardashian on the other. When was he ever gonna be able to get that kind of exposure? Come on. That was awesome for him. So he likes to say, we’ve done this before, We went after Steven Sigal and he did, and Floyd Mayweather, DJ Khalid Yes they did. But Kim Kardashian. That’s just amazing. So, when Kim Kardashian did this, I commented on it, it was a dumb move. This is woman who’s in law school, she should have a better legal team. Right. And this was just dumb big mistake violated, an SEC statute and a rule. Yep. And that’s that, she was dead in the water. So it was, I’m sure it was not a high resource case. I think this was a pretty much of a lay down. So they didn’t waste a lot of time on it. But Gensler got a lot of play, in the public eye being able to get the point across. and so I don’t really fault them for that. I do fault them for the game show.
• Sure, and I think once again, it’s all these things, when you look at it holistically, you get lay of the land because it’s not that they fined Kim Kardashian, that’s fine, whatever. Right. DJ Khalid, if they violated the rules, they violate the rules. But why the PR stunt and then folks are, the juxtaposition of it is that, hey, were you not looking at Celsius network or Tara Luna or Voyager? Like, what I don’t care about Kim Kardashian don’t care about the millions that were lost via these platforms. Like where was the SEC?
• Right? And, and that’s where the SEC says, Well we don’t have enough resources and so we can try, we can go after lots of different, tokens that are out there, lots of different platforms, but we will never be able to go after everyone. And they’re right about that.
• Right.
• And so what they’re trying to get out there is the message to investors, investor education is a huge part of what the SEC does. And it’s unfortunate that a lot of that education has to happen through enforcement actions because, people love hearing about the interesting facts. , people don’t like hearing about a new rule or regulation that’s super boring to anyone other than Oh me. But , when you wanna get the word out there, you are trying to do it in every way possible. And, it’s not gonna help the SEC if only people like me go onto their website and read about these things or know about the cases that they bring. So this was a big opportunity for them. And I know it’s such a cheesy sort of process. And yes, everybody wanted to talk to Gary Gensler cause they got to put Gary on one side, Kim Kardashian on the other, she’s awesome looking. Yeah, of course. But that’s, I mean, that is how the sec gets the message out there. And they didn’t have to pay a half a million dollars for that. That was free press that they got. So yes, I understand that folks are frustrated when they see how the SEC is deploying its resources and part of the problem is that the SEC has non-public investigations. So a lot goes on that we don’t know about.
• Sure.
• Even those of us in the industry, , we don’t know. Now, eventually we should know. I mean, either a case goes away, in which case we never know that or an investigation is resolved and there’s no charges, in which case it just disappears. But the cc’s been taking a really, really long time to go after even the low hanging fruit. And I think that’s a little frustrating. I think it sometimes has to do with deferring to state regulators or maybe other things intervene. But one of the things that is very frustrating lately is a loss of confidence in the SEC as the officer on the beat in the investment world. And I think it’s important to get that back. Now, maybe that’s just the cycle that we go through. Maybe it’s our times that we have just a lot of loss of faith in government’s ability to regulate the marketplace, but they need to do something to sort of get people, particularly in the crypto community, to have confidence in them as the beat cop.
• Yeah. And I’ve also seen a lot of complaints from the stock side of AMC and all that. So to your point there, is a different dynamic now with social media and realtime information and being able to once again see the lay of the land. Before the internet you weren’t able to access for your requests and all these things so easily. So there’s a lot of documentation I can go pull up chairman Gensler calendar right now and look back years and all that. So there’s a different dynamic and I don’t know how the SEC’s gonna fix this, but to your point, folks are not happy and, losing confidence for sure.
• And it’s something that could be fixed if Congress sort of reached in and reorganized the SEC maybe, the CFTC has a lot of faults on its own for, I mean, it’s not perfect by any means. It’s a much smaller agency and operates differently, , in some ways from the SEC. But with respect to crypto, it’s leadership. When all this was happening in 2017, 2018, 2019, leadership at the CFTC was being responsive and was trying to figure out ways to engage with the crypto community. My sense the SEC is just much more, CFTC is kind of the Johnny come lates and, kind of the, not the cool kids, , they’re kind of the nerds doing this. Like, ooh, all this futures and stuff. But that’s not like Wall Street, like Wall Street’s, the cool kids, ? And so they can, they have to do more, to be relevant. The SEC is like, Hey, you’ll do things our way or the highway, we’ll come crush you like bugs. So, it’s frustrating to have them just so entrenched in the way that they do things. I think Chairman Gensler has come up against that. I am sure, I mean, again, I have no personal knowledge of this, but trying to get a giant agency like the SEC to change is actually Arthur Levitt, a former chairman from eons ago, said it’s like trying to turn an aircraft carrier. It doesn’t happen fast.
• Sure.
• It’s a slow process. And I think Chairman Gensler has been fighting that. I think it’s frustrating for everyone. I’m sure it’s frustrating for him and the staff, I mean, imagine you are a staff person who has a certain area of expertise and you’ve been there for decades and you really know this area. And now that’s just gonna get wiped away. , we’re gonna get rid of the regulations. Right. For example, the way that we regulate short selling, , that’s the game stop AMC complaints. Like, oh no, we’ll sweep that away. Let’s get rid of that. Let’s say that, we’re not gonna have this whole system the way it operates. You’re gonna have to actually go out and find yourself a share. Okay. And then the share that you’re borrowing gets marked so nobody else can borrow it. It gets borrowed once. So we have a one to one between shares that are out there in the world and borrows, and that’s it. You can’t short more than a hundred percent. We could have a rule like that, but there’s an entire industry out there that’s built around the current system of how shorts work, of how that whole process of borrowing works. And that would just wipe them away. So those folks are gonna be a little entrenched. Right. And it’s not just people at the SEC, it’s people at the exchanges. It’s DTCC, it’s entire large, large numbers of people outside of government, just in the industry. So they’re gonna fight to keep things the way they are.
• I wanna ask you about Bitcoin etf. So the SEC has not approved a Bitcoin spot ETF yet. They have approved of futures in a short future as etf, I believe it’s called Grayscale as a result is suing the SEC. I had interviewed former SEC Commissioner Joseph Grundfest, and in my interview with him earlier this year, he said, These applicants who get denied can sue the SEC. What are your thoughts on this whole situation? First, why has the SEC not approved a Bitcoin spot etf and what do you think about Gray Scale’s lawsuit?
• Well, I can’t keep up with a scholar like Grundfest. Oh, no. But from my perspective, I understand the difference that the SEC is making, how they’re splitting hairs here and saying, Well, we can do this. We can approve the futures based etf, but not the SPOT etf. And it is splitting hairs. But the reason is they get to insert some other regulatory agency and the CME and the cftc, they get to sort of be in there as the buffer, when you have futures as part of an etf. And this is, we’re running into these kinds of problems a lot, with what about Wyoming crypto banks, Right? We have the same sort of problem where the Fed is saying, Oh my God, we don’t wanna open the fed borrowing window to crypto. If we open it to the first one, we’re gonna have to open it to all of them. Because what will happen, they’ll get hit with a gray scale kind of case. Right. why would you say yes to one in order to have it be a sandbox and see how it works? But then you have to say no to all the other ones that come up right afterwards. This is the problem with the sandbox. They might have let this future’s etf, it might have been in their minds like, well, let’s just wait a little while and see how it goes. But then they get backed with this Grayscale case and, now do they have to open the doors? And their problem is, and I think it’s a valid one, is they don’t understand. And because we have Bitcoin is on a decentralized platform, we don’t have a way to determine, to really validate all the transactions that happen on the platform. So one of the things that in the securities industry, you cannot, doing something called wash sales is a market manipulation. It’s illegal. Right? You can’t just take the securities from this pocket, sell ’em here, and then sell ’em right back.
• Right.
• And have that be a valid transaction. That’s called a wash sale.
• Right.
• Forbes did a study, a while back where they looked at actual transactions that happened on various platforms, and they questioned whether a number of them, huge percentage actually were valid transactions. So you can’t really tell. and that is a real problem for the SEC I think when they get to sort of have things flow through the, Chicago Mercantile Exchange, it’s like, good, they can go deal with that problem. They can go figure it out. Now, it’s their problem. They’ll figure it out. And we can always, as an agency, we can say, well, we were relying on the CFTC and the Chicago Mercantile Exchange to police that. And if they didn’t do their job, shame on them. But it doesn’t mean we have political operators here, political entities, and they have to protect their own turf. They don’t wanna lead with their chin. The Federal Reserve doesn’t wanna go out there and say, Yeah, we’ll open the Fed window. What the heck? Well, let’s see what happens. they gotta protect their institution and make sure that, they’re not just creating an open door for a lot of money just to go out the door.
• Well, it sounds like what you’re saying, and I often talk about this, these government agencies are almost protecting the incumbents a bit. And it’s like, well, we’re not gonna trust Grayscale, but we’ll trust BlackRock. Is there a bit of that?
• Yes, Yes, there definitely is. When Big Wall Street players started getting involved in Bitcoin and other crypto, it changed the dynamic with the SEC. And in part that’s because, I mean, I have to be honest, crypto folks did not get into crypto in order to learn about a whole bunch of securities regulations and comply with them. That wasn’t the driving factor. Right? I mean, it didn’t come from Wall Street, it came from outside. And so there is a real sense of rebellion against the strictures of the SEC’s regulatory world. Now, when you have people coming from Wall Street, BlackRock, BlackRock knows, they’ve got more compliance people than you could shake a stick at. So they know what the rules are. They know they have systems set up to comply with the rules. The SEC regularly trots their examiners down there and observes what they do and likes the way they kind of keep their books like, Oh yes, good. That’s exactly the way we wanna see things. So to some extent that is going to help the industry because that’s gonna give the SEC more confidence that the people who are engaged in crypto transactions are actually following the rules. I’m not against, the big brokerage firms getting into crypto. I think it’s good because, those are people, those are entities that they have a system for supervising. There are people set up, they have a system for ensuring compliance. It’s gonna be hard, but they know what they’re supposed to do. And that’s a lot, it’s a lot easier for them to bring in crypto than it is for the crypto world to suddenly become a broker dealer or, become an investment advisor, to kind of adopt all that. Oh, now we gotta have a custodian. I mean, just understanding custodians, people in the crypto world, like, what the heck? Why do we have to worry about custodians? It’s there, it’s on the blockchain. It’s like, no, you gotta worry about custodian. Like people in the securities world, they get that. They understand custodian is important.
• Do you think gray scale’s gonna win?
• It’s a tough one. I don’t think so. But boy, you’re gonna come back, six months from now and I’m gonna get whacked. Cause they win. I mean, look, they’ve got a damn good argument.
• Sure – They do. But I do see that, just from an equitable standpoint, I don’t think it’s actually arbitrary and capricious the line that the SEC drew. And I think the SEC may not have been as explicit about this and may have to be more explicit about relying on the CFTC and the Chicago Mercantile Exchange. I don’t think they want to necessarily say that out loud. Like, Ooh, we’re a little nervous about this. We don’t really wanna like, stick our neck out and get whacked off. Have our heads whacked off, so we’re gonna let the CFTC and the Chicago Mercantile Exchange, like stick their necks out and, they’re less risk averse than we are. But I think that’s going to have to come out a little bit more in their response to, an excellent brief that, I mean , I was just knocked out by reading, , what Greyscale wrote. They brought in fabulous people and they wrote an incredible complaint. And so if it can be one, they will win it. But I’m not, I think if the SEC actually trots out the real practical reasons and doesn’t just rely on sort of the not very good language that they’ve used so far, I think they’ve hidden behind kind of vague language about, , preventing fraud and
• Yeah. having a stable system for monitoring. It’s vague. I think they’re gonna need to get more specific and, that’s gonna be kind of interesting to read.
• Lisa. Really great information and insights. I got some wrap up questions here for you.
• Go head
• First rapid fire, favorite food?
• Oh, Chicago Pan Pizza Pepperoni.
• Yeah.
• Favorite musician or band?
• Oh, that’s a tough one. Joanie Mitchell. I play a lot of Joanie Mitchell music. Love those alternate tunings.
• Favorite movie?
• Oh, Lately. Well, it’s gotta be the Princess Bride.
• My Amazon Alexa just went on. I forgot to mute.
• Hey. Hello. Alexa.
• It’s playing some Joanie Mitchell.
• Allright. See she’s Joanie Mitchell fan too.
• Favorite book?
• Favorite book. Suitable Boy by Vikram Seth.
• And when you’re not doing your lawyer duties and things like that. What are you doing for fun as a hobby?
• I love playing my electric guitar and electric base with various friends in various bands, so.
• Oh that’s awesome.
• Great time doing that. Little Joanie Mitchell, little like PJ Harvey, , Blondie, all kinds of great stuff.
• Aw, that’s awesome. And finally, if you could create your own metaverse, what would the theme be?
• All right. That would be. It’d have to be like Lollapalooza, I wanna be in a band. I wanna be playing in a band. That’s it. That would be, that’s like my dream.
• Very cool. Lisa, pleasure chatting with you. Thank you so much for taking the time to speak with me.
• Thank you so much. This has been really fun.