J.W. Verret Interview - SEC Crypto Regulation Overreach, CFTC Ooki DAO, Tornado Cash, Ripple XRP Lawsuit

J.W. Verret is an Associate Professor of Law at George Mason University, Consultant at Veritas Financial Analytics LLC, Former SEC Advisory Committee Member. In this interview we discuss ZCash, Tornado Cash situation and his efforts, SEC and crypto regulations, Kim Kardashian, Jay Clayton, SEC Ripple Lawsuit, SEC NFTs, Bill Hillman Ethereum conflicts, CFTC Ooki DAO, CBDCs and more. https://www.cryptofreedomlab.com/

Transcript

Welcome back to the “Thinking Crypto” podcast, your home for a cryptocurrency news and interviews. With me today is J.W. Verret, who’s the associate professor of law at George Mason University, a consultant at Veritas Financial Analytics and a former SEC Advisory Committee member. J.W., great to have you back on the show.

• Thanks, Tony. Thanks for having me, man.
• J.W., you’ve been doing a lot, you know, on the regulatory front fighting for crypto, and I certainly want to talk to you about the different initiatives you’re working on. So the first item I wanted to cover was the Zcash Foundation, your candidacy for the Zcash Foundation. Can you tell us about that?
• Yeah, sure. The Zcash Foundation just opened up a call for nominations and, well, somebody in the community was nice enough to nominate me for a seat on the, an open seat on the board. Zcash is a project I really care about, and this is a volunteer position, but it’s one that I put my name in the head for. I care a lot about Zcash and the future of Zcash. They built something really special in that protocol, and it’s something that I use to the extent that you can, you know, you can use it. I love to help the community grow adoption, grow usability, scalability. It’s a terrific, it’s also a terrific just governance design. The Zcash blockchain has a development fund that kicks off of mining rewards and puts them into the Zcash Foundation, into the Electric Coin Company, which is run by Zooko Wilcox, our legendary founder of Zcash, one of the founders of Zcash, and also to a, something called the Zcash Grants Program. So, yeah, I hope for the opportunity to serve in that way or in some other way to help Zcash, because I think the future of crypto is private, and I think the world still has to kinda learn that. And Zcash is a great project in that space.
• Yeah, absolutely. And my next question was gonna be the privacy. I absolutely agree with you that privacy is gonna be important, especially in a world of CBDCs that are coming, which are not gonna be private, and the government can monitor everything you’re doing. But on that note, you know, do you feel the government’s gonna make a big push to try to stop privacy coins such as Zcash?
• If the technology is built correctly, it will be very hard for them to do that, just as a technical matter, and I think Zcash has always been building toward that, they’ve always done a good job of doing that. Secondly, just from a legal perspective, it will be, and it should be hard for the government to do that. I mean, we have a test case now on the government’s attack on privacy in their sanction of the Tornado Cash smart contract code.
• Yeah.
• I have a lot of hope for the Coinbase employees’ lawsuit or Coin Center’s lawsuit that was just announced this week. I’m very excited about it, it’s terrific piece of work there. So I think even in that test case, the government’s odds are not very good. It would be a lot harder for the government to try to sanction something like Bitcoin Whirlpool, and then to sanction something like Monero or Zcash would be even much more difficult than that, just from a legal perspective. So hopefully the tech is uncensorable tech if we’re doing it right, decentralized, uncensorable. But just from a legal and constitutional and statutorial authorization perspective, hopefully, there are limits on their ability to do that as well, but it is something I think about a lot and, you know, and careful to keep pay attention to. And I think in the design of Zcash, they’ve been very careful about designing that community to make it as decentralized as uncensorable as possible, while at the same time maintaining a core group of developers.
• Yeah, absolutely. And, you know, it certainly opened Pandora’s box when US Treasury went after Tornado Cash. They went after the code versus the nefarious actors, the people who did the bad things. And could you elaborate a bit on, you know, what Coin Center and those folks are doing? Are they suing the US Treasury or certain parts of the government as a result of this action they took?
• Yeah, they’re suing Janet Yellen in her capacity Secretary of the Treasury. And they are suing over a number of things, including constitutional claims and including claims that OFAC has exceeded its statutory authority in sanctioning code, which I think is right. I mean the, you know, if you read the statute and executive orders implementing the statute, they talk about sanctioning people, they talk about sanctioning entities or groups of people, that’s not smart contract code. OFAC is also a number of times sanctioned, added to the sanctions list particular account numbers. But those are just a proxy for, or even public keys, public addresses. But those are just a proxy for the individuals, the sanction individuals who are known to control that address. But it’s a whole thing all together to say Tornado Cash is sanctioned, which we all, I think interpret properly as Tornado Cash, the Tornado Cash smart contract code is sanctioned, ’cause of course, there’s no entity, there’s no DAO, there’s no developers, there’s no nothing.
• Right.
• The admin keys were burnt. It’s just a smart contract code.
• Yeah, absolutely. So, you know, is the future, or I should say the solution that the government needs to come and work with the private sector on this to figure out how do we find a balance? I understand there’s concerns on the government end, but they certainly went beyond their normal scope in sanctioning the code. So, you know, are you hearing anything of, okay, let’s have a committee or a group and government officials and a private sector to figure these things out?
• No, I, you know, I, well, I should say in the past, FinCEN, which is a different organization from OFAC, has a record of working with groups like Coin Center and listening to them and learning from them. And I think Coin Center’s very pleased with some of those interactions in the past that they were intelligent trying to get it right. And I think that, I haven’t interacted with OFAC or FinCEN myself, but I understand people in the community at the various trade associations, crypto, and such, have worked with OFAC, have worked with FinCEN, these two entities that do sanctions and do, that are the principal entities for AML/BSA compliance. But as I understand what happened this time with Tornado Cash, basically the real experts inside the halls of Treasury said, “We can’t do this.” And from on high, the Secretary of State, the White House said, “Look, it’s a, it’s North Korea, just get ’em, just do it.” And that’s why I think they were pressured to exceed the boundaries of their statutory authority, which is why ultimately because we have people like Coinbase and Coin Center brave enough to fight.
• Right.
• I think we’re gonna win.
• So it’s kind of like they had a knee-jerk reaction, right? It was North Korea. Okay, doesn’t matter. We’re not even gonna think this one through, just-
• Just kill it. Kill the whole thing. Yeah.
• Ah, okay. Well, you know, in a way it’s, I’m glad it’s, if it was to happen, you know, it was that reason, and they didn’t actually think it through and then came to the conclusion of, you know, “We’re gonna sanction code.” It was more of a knee-jerk reaction.
• Yeah. In the words of Luke Skywalker, “Your overconfidence is your weakness.”
• Hmm, yeah. Yeah.
• Yeah.
• Go ahead.
• I think that’s treasury’s problem.
• For sure. Now, in the larger picture of crypto regulations, how do you feel about what took place this year? You know, we’re, 2023 is around the corner, but this year we had the executive order, We had some bipartisan support for crypto, actually a bipartisan bill with Senator Lummis and Gillibrand. And there’s just more members of Congress on both sides of the aisle supporting crypto now. Do you feel we’ve made progress? You know, sometimes I get frustrated, it’s moving at snail’s pace, but do you feel we’ve made progress?
• Tremendous progress just compared to where we were a year ago. the, and measured in terms of just the tone, the tenor of congressional hearings in the crypto, you have a lot more members at committees like agriculture or financial services or banking who are interested at least in learning than the members that are just turned off and, “Oh, it’s all, must all be a scam. Let’s just kill the whole industry.” Those people are kind of the outliers at this point. And so I think that progress is tremendous. Now, the delta between where we are now and what it would take to pass a major comprehensive crypto bill is a wide one, and I don’t see that happening for a long time. I think that we might make some progress with the stablecoin bill.
• Sure.
• I think we might be able to take some discrete item and put it into a so-called must-pass bill unrelated to crypto, like de minimus tax for crypto transactions less than 200 or 500, or let’s make it as high as we can get it. But under that, the use of the, use of Bitcoin or any other crypto or XRP or Eth to buy something would not be treated as a taxable transaction for capital gains taxes. We can do those things if we fight hard, but I don’t think major comprehensive legislation is likely within the next couple of years.
• So you think 2023 might just be the year of the stablecoin regulations, but not the comprehensive one, we’re looking at maybe two, you know, capture or fire in all cylinders and, you know, just cover everything within crypto.
• That’s right. That’s right. The other thing I think will be helpful is if as predicted the House of Representatives flips, that means that Patrick McHenry will be the new chairman of the House Financial Services Committee. And I’m a big fan of his, I worked with him for a little bit when I was a staffer at the House Financial Services Committee. He’s a legend. He’s very good at oversight too. I, you know, I’ve testified in front of him I think about 12 years ago when I first started as a scholar in DC about some issues in the Dodd-Frank Act. And then I worked with him about five years after that as a staffer. So I’ve seen him in action, and he’s good at what he does. And let me tell you, the subpoenas are gonna fly over to Gary Gensler. So he needs to be ready for that. And hopefully, that will keep some of the excesses that we’ve seen at the SEC in check.
• Yeah, interesting point you bring up, because I’ve interviewed Congressman Tom Emmer multiple times, and, you know, he gave a kind of a famous line, I believe a month or two ago where he said, “A new day is coming,” and he was talking to the SEC Enforcement Director, and, you know, kind of looting to potentially Republicans, you know, winning the midterms. And then he said, “Having the gavel, they will have the gavel in their hands to then keep regulators like Gary Gensler in check.”
• Yeah. And you know, there’s a few things they can do. One is oversight subpoenas of emails and such. Unfortunately what we’ve heard is that there are staff at the SEC that are using apps like Signal and WhatsApp like we do to try to keep our communications private, they’re doing the same thing, to keep ’em private from congressional oversight. Now if they’re doing that from a just government ethics and oversight perspective, it’s illegal. So hopefully in that context, and I feel a lot more comfortable with you and me using Signal and WhatsApp.
• Sure.
• To maintain our privacy than I do someone in a government position who should be accountable to the public. But we might see that issue come up in oversight. But another thing that they can do on the hill is to insert appropriations riders, and we’ve already seen Mr. McHenry float an appropriations riders to limit the SEC from adopting the new rule that attacks DeFi. It would require all DeFi, all DEXs to register essentially with the SEC in a way that violates freedom of speech as Coin Center’s letter has made the case. So we might see a lot of, we will probably see a lot of that next year.
• J.W., you support a lot of different folks within the crypto industry, companies, and so forth, and many of them you’re helping to fight against the SEC, can you tell us about the work you’re doing? I don’t know how much details you can disclose, but, you know, can you tell us a bit about what you’re doing?
• Yeah, so a couple different projects. So one thing that I do is I practice as a securities lawyer, and I’m available to help crypto clients. I’m not representing any crypto clients right now, but I’m available to help crypto clients if they need help. And my practice is in securities and corporate governance litigation. So I’m there to help clients even outside of crypto as well, work through investigations and enforcement actions. I also am standing up a new think tank, the Crypto Freedom Lab to get involved in a policy fight, and we just had a GitHub round, and continuing to get the word out through the Crypto Freedom Lab. And hopefully, this will be an entity that will help to bring, there are some academics, economists and law academics and computer science academics who have some good thinking that would help inform the debate but they’re not as active in the kind of, in Washington ’cause they’re busy kind of doing their thing, writing academic work. So I’d love to harness that, all that talent knowledge, and direct it into comment letters to agencies to help guide what comes out of agencies, and guide things like the process we saw after the Biden executive order. So, and then do amicus briefs, and maybe even get involved in some litigation through the Crypto Freedom Lab ’cause we don’t have enough entities suing the government, I think the more, the more the better, from that perspective, and just from a rule of law perspective. So that’s what the Crypto Freedom Lab is all about. And yeah, I just, you know, I love getting involved in policy debates. I love to fight for innovation and freedom. And so far, I guess the last year, I’ve just been kind of doing it as a hobby ’cause I care about it. Hopefully, we can turn it into an actual career, side gig for my career.
• For sure. And you’ve rubbed shoulders with a lot of folks in DC, you know, you mentioned Patrick McHenry. I remember last time we spoke, you mentioned that you spoke to former SEC Chair Jay Clayton, and even in regards to the Ripple lawsuit, are you still in contact with him? Because, you know, it’s funny that the juxtaposition of when he was in office and the actions he took versus what he’s doing now, I find that so fascinating and interesting ’cause he’s now advising crypto companies, he’s advocating for crypto regulation. So I’m like, “Well, where, what happened when you were in office?”
• Yeah. And I should say I, if I said this, the last time I misspoke. We never talked about the Ripple lawsuit. We have talked about the SEC’s approach to crypto. So we have talked about that.
• Okay.
• And we have different, very different perspectives on that. Yeah, look, contrast where we are now with where we were then, during the ICO era, 2017, I can understand how Clayton would be, would look over the field of ICOs, right? And we have a benefit now of the projects that survive from that era, the legit projects that survived are great, and now are that these great projects that have these whole communities around them, right?
• Sure.
• But those were the diamonds in the rough back then. And that was, in 2017, there was a lot of rough.
• Yeah.
• There was a lot of junk.
• Yeah.
• And so he kind of looked over the field and didn’t know probably much about the diamonds that have emerged from that that had gone ICO, lack of hearing. And so yeah, I get that it was difficult. Along the way, you know, the Hinman speeches that had become such a controversy in the Ripple litigation, let’s set that issue aside, and it’s legitimate to talk about it, but let’s set that aside for a second. The ideas in there were somewhat helpful, or at least relative to the lack of guidance we get from Gensler. There’s some of that stuff in there that was helpful. I mean, the SEC admitted in there and in the framework guidance, they admitted that decentralization can be an antidote to the Howey Test. That’s not something that Gensler will admit.
• Yeah.
• But that’s something they admitted and that’s helpful. So no, I don’t think the Ripple case was the right thing to do, it was a bad case. And they should lose, and I hope they lose. Just on basic principles of the Howey Test, basic application of the Howey Test. But, you know, it was better than what we have now.
• Sure.
• It always could get worse, and it has, and it’s unfortunate, and hopefully, with time we can fix that.
• For sure. Yeah. You brought up a great point that I think Jay Clayton and the folks under that, you know, administration, were a bit more forward-thinking with innovation versus now it’s kind of like enforcement, enforcement, it’s like every month, right?
• Yeah.
• And on that note, we saw the SEC go after Kim Kardashian, and what seemed to be a PR stunt, the first thing, as soon as it was tweeted out, Gary went on TV and it was all these well-edited videos and so forth, and folks were like, “Well, where was all this with Celsius Network, and Voyager, and Terra Luna? Kim Kardashian is the least of our problems with what’s happening.”
• That’s right. It’s incredible that, so she did disclose that it was a paid advertisement.
• Yeah.
• In the Twitter posts or in the what social media post. It did say, “#advertisement,” right?
• Mmm-hmm.
• But the SEC rules say, “You have to disclose not only that it’s an advertisement, but also that it’s a, that the amount, the specific amount you are paid,” which is pretty incredible. And the only reason that Matt Damon didn’t have to do that in his commercial for a crypto exchange was because it was about a crypto exchange and not about a particular token. The fact that she paid a million-dollar penalty is unbelievable to me. And the only reason why it’s because she is Kim Kardashian. In a normal case like that, you see a million-dollar penalty for somebody who did something very, for somebody who stole money.
• Correct. That’s usually when you see a million-dollar penalty, somebody who lied to steal your money. The fact that Kim Kardashian paid a million-dollar penalty because she didn’t disclose, “This is an advertisement, here’s the exact amount I’m being paid,” rather than what she did, which is disclose, “This is an advertisement,” is incredible to me, and frankly, an injustice, not that she can’t afford it, but it is an injustice. And then to compound it, they went on a media tour to say, “Look, we got a reality star. Ta-da, look at me. Look at all the good I’ve done to protect investors.” Makes a joke of the agency, and I don’t like to see that.
• Yeah. And there was a lot of criticism of this. And sometimes I wonder, maybe my expectations are too high for government agencies, like, you know, especially the likes of the SEC where I’m like, “Where’s the integrity?” You know, “Where’s the core value of protecting investors? This just seems like political stunts.” And look, there’s reports of Chairman Gensler, folks are not happy with what he did here and how that went about, but who knows?
• Yeah. And look, I’ll say this too, you know, I, not everything I do is advocacy based, some of it is just real technical securities law stuff. So I hang around American Bar Association events with securities lawyers, people who worked at the SEC, who currently work at the SEC, who I probably describe as maybe Democrats who were very pro-regulation, right? Very pro agency. And their view, everyone I talked to like that, their view’s the same, “We don’t like what Gary’s doing to the agency. He’s politicizing this agency and this is not what we do here.” So that’s unfortunate.
• And in just the other day, we have information, and all the details haven’t been revealed, but it seems the SEC is looking into NFT projects, and we know Gary Gensler has also talked about potentially going after exchanges. We saw them block coin-based lending. It seems like they’re looking for low-hanging fruit wherever they can. You think we’re gonna see a ramp-up in enforcements and going after things like which they haven’t targeted before?
• The latest rumor I heard was that Yuga Labs had received a request for information from the SEC, that is something that a lot of crypto companies have received, that doesn’t necessarily mean enforcement is coming. I think everybody’s right to be concerned, but I wouldn’t go to the point of being alarmed just yet ’cause it’s still early in that. But just even focusing on Yuga Labs, focusing on NFTs as maybe a security, I mean, come on folks, it’s monkey pictures, okay? This is not, this is not the Enron case.
• Right.
• This is not where the SEC should be spending its time.
• Yeah. An example, and then like, that even has me second guessing if I should launch a NFT collection, like I wanted to launch something for my community, it would have utility where they get special perks and so forth and so much are what Starbucks is doing, right? You get the NFTs and get exclusive access to things. So now I’m like, “Do I have to worry? Do I have to hire a lawyer? Do I have to…”
• Yeah. In a way that you wouldn’t worry if you were creating art and selling it at a gallery. Why should you have to worry just ’cause you take that art and put it on chain and sell it digitally in exchange for what? Eth, right? Which Gary also says is a security, which is a little weird because you’re selling your art in exchange for Eth as the money that buys the art.
• Yeah.
• So I think in that way, if they’re going after NFTs and the Eth used to pay for the NFTs, inherently contradictory.
• Yeah. And on a node with Ethereum, they recently said that old transactions on the Ethereum blockchain fall under the jurisdiction of the SEC. And this was via the crypto influencer Ian Balina lawsuit, which is a separate issue in itself. But then, you know, it goes back to Bill Hinman gave a speech that Ethereum is not a security. Jay Clayton and Commissioner Jackson, and those folks endorsed it. Now all of a sudden Gary Gensler does not want to talk about Ethereum. He’ll talk about Bitcoin, but Ethereum and all the other coins, we can’t say anything. We can’t tell you what’s a security and what’s not. I mean, it’s kind of like madness. Like I just, I sometimes it gets me so angry, like what is going on?
• Yeah, no, I agree, I agree. And it’s, so when we use the phrase regulation by enforcement, we have to be careful about what we mean because the head of the Enforcement Division of the SEC has countered that, “What do you mean? There’s no regulation by enforcement. We’re just following the law, enforcing the law,” right? I wanna be very specific about what regulation by enforcement means. It means bringing an enforcement action and putting a novel theory that’s a real stretch for the agency into that enforcement action knowing that the defendant is likely to settle and the matter will never actually be litigated by a court. And then putting that enforcement action up and saying that settlement and saying, “You see this is the law,” when it’s not the law, and it’s not the law. That’s exactly what they did in the Balina matter. They said, “You know what? We have jurisdiction over you, not merely because you’re operating in the United States,” which would’ve been enough to get jurisdiction over him and his activities as an influencer. But they went a step further and said, “And we also have it because you know what? Everything on the Ethereum network happens in the United States and therefore we have jurisdiction over it.” They didn’t have to say that, and therefore no judge will ever rule on that because the judge will simply say, “Well, you know, because Mr. Balina operated in the US, you have jurisdiction over him.” So why did they say it in the first place? Because it’s in a court filing and now they’re gonna point to it and say, “This is true,” when it’s not true. When it’s never been adjudicated before a court, it’s never been determined by a judge, that’s what regulation by enforcement is, and it delegitimizes, it adds a certain illegitimacy to the agency itself.
• Yeah. And on a note, you know, you mentioned it hasn’t been adjudicated. With the Kim Kardashian situation, they also snuck in language there that implied EthereumMax is a security without going through the due process.
• Yeah.
• So it’s just like these very sneaky-
• Yeah.
• Trying to find all angles to put stuff out there, throw it out of the wall and see if it sticks.
• That’s right. And that’s easy for an enforcement lawyer at the SEC to do, but when it’s somebody’s life and reputation and career at stake, it can be very cost.
• On the note of the Ethereum speech with Bill Hinman, I’m sure you’re aware of all the controversy surrounding that, and there have been certain emails and notes release via FOIA request done by Empower Oversight, which is a nonprofit whistleblower organization. Look, we don’t have all the details. What we see right now doesn’t look great. What do you think happened there, you know, with this Bill Hinman thing, was there a conflict of interest? Any thoughts that you can share there?
• Well, I only know what’s been revealed through the FOIA requests. I think that party has done a great job. I think FOIA requests against the government are always appropriate, particularly given the Ripple litigation and some of the hypocritical stances the SEC has taken in the Ripple litigation about the relevance of the Hinman and emails. Look, I’m not a believer yet in any kind of a grand conspiracy. I don’t think folks at the Ethereum network did anything wrong. I think it was a, it doesn’t seem like he complied with the ethics guidelines.
• Sure.
• The ethics rule was pretty clear, “Don’t talk with your old firm where you continue to have a share in the firm’s profits that treated as a retirement plan.”
• Right.
• But he didn’t really retire and went back to the firm after. So that ethics guidance was pretty important. It doesn’t mean he broke the law, but it means that ethics guidance was very important. And his old firm was representing some folks in that community, I think the Ethereum Alliance, right?
• Mmm-hmm.
• So he should not have been having some of the communications that it seems that he did have. And so that’s unfortunate I think.
• Yeah. And I think the SEC could have put this to bed already, but it seems they keep trying to stall and not hand over 1certain dockets, so then it, that fosters peoples to speculate, “Well, they have something to hide.”
• Right.
• So it just makes it into a worse situation because the public at large are seeing this and it’s like, “Wait, what’s going on here?” Right? “There’s something wrong here”
• Yeah. That’s right. And they’ve lost some credibility with Judge Netburn, we’ve already seen that.
• Yeah.
• I don’t understand why.
• Yeah. It’s mind-blowing. Well, I should say it’s puzzling. So regards to the SEC Ripple lawsuit, what are your thoughts on the summary judgments, the judge’s orders, of course, and then we’re seeing a lot of amicus briefs coming in from some folks who are using, the different businesses that are using XRP. We saw the Chamber of Digital Commerce file the amicus brief. What are your thoughts on the entire situation?
• Yeah. Some great amicus, and some great arguments made by Ripple. Some really, really terrific lawyering in that case. I think that, a couple of things here. First, just in applying the Howey Test, it doesn’t apply to Ripple, right? It just doesn’t work for a number of reasons. XRP is used as currency, therefore it cannot be an investment of money. If it is money, the level of decentralization in the network is pretty high, therefore it doesn’t meet the efforts of others’ test horizontal or vertical commonality. And it is more like a commodity than is a security like most of the rest of crypto. So, and also, I think Ripple also makes a great argument that if there’s no actual contract, then you can’t have an investment contract.
• Right.
• Using some analysis of the blue sky laws that predated the Howey Test, and it kind of helped develop the Howey Test. So there’s a lot of great arguments in there. So let’s just say first, just in applying standard Howey doctrine, I think SEC loses, but even more than that, this doctrine is dynamic, It develops over time. I think the US Supreme Court would be hungry for an opportunity to take a fresh look at that doctrine. So even if Ripple loses, I think they have, and I don’t often say this, usually, I think when people say, “Well, I’m going to the Supreme Court,” I say, “Ah, you lost. Time to quit.” I don’t say that this time. I say, “Go all the way up.” Because I think there are a number of things the Supreme Court could do with it. They could reinterpret elements of the Howey Test in ways more consistent with the initial test in 1946, the initial case in 1946, or they could apply something called the major questions doctrine, which they just used to throw out a new EPA rule. The basic idea behind the major questions doctrine is, look, an agency can’t take some unclear kind of vague regulation and use it to suddenly regulate a major part of the economy. You can’t decide a major question of national policy using some obscure provision in the regs that was written well before this new thing happened.
• Yeah.
• That’s an awful way of describing the major questions doctrine. Boy, it sounds like they’re talking about crypto, doesn’t it? Doesn’t it sound like they’re talking about Gary Gensler’s approach to crypto? I like the chances of an argument like that, even if it’s just 10, 20%, that’s a fighting chance to me. Let’s take it, let’s go all the way.
• For sure. So just to confirm, you know, the process, and the legislator process and so forth, it’s essentially Congress that has to issue the mandate that the SEC needs to update the Howey Test, or would it be a collaboration between Congress and the SEC to form a new Howey Test or update it, or you mentioned the Supreme Court, and that’s why I just want to confirm, like what would be the next steps, you know, in the ideal world to get this right?
• Well, Congress could legislate, they have not legislated yet. And I think the odds are low that they will, even the Stabenow, Boozman bill that got some momentum at the two agriculture committees just doesn’t touch the Howey Test at all. It just says, “If it’s a security, it’s a security.” Which is one of the problems with the Bill, right? It doesn’t touch it, and therefore it leads a lot of uncertainty about what other tokens other than Ethereum and Bitcoin the bill will apply to, which is kind of uncertain ’cause it just links up with the uncertainty inherent in the Howey Test itself. So Congress could fix it, it probably won’t. So it’ll probably have to be the courts. The phrase investment contract was put into a statute, a two statutes, and there was no, the statutes didn’t say what an investment contract was. So the Supreme Court just said in 1946, “Well, let’s think about what might have been in the minds of the drafters in 1933, 1934 when they put that phrase into the statute investment contract.” And what they said was, “Well, you know, this is something that blue socks state securities regulations, so-called blue sky laws have regulated in the 1900s, 1910s, 1920s. And so we can look at those to kind of interpret what investment contract means,” and that’s how they came up with the Howey Test. So the Supreme Court can take a look and say, “You know what? Lower courts have grown this doctrine out like a weed and we’re gonna cut it back a little bit.” And they could have an opportunity to do that, and I think they might.
• Boy, I hope that’s, it happens within the next two years, and it doesn’t go beyond that, and hopefully next yeah, hopefully.
• Yeah, well, I hope it happens. If it happens the next two years, it would be because the district judge does it. If it’s a SCOTUS fight, it’ll take a long time take, it’ll take five years, but.
• The other side of aisle, the CFTC, they recently did a enforcement action against a DAO. What are your thoughts on that situation? And you know, could we start seeing enforcement actions for, and look, and I wanna back up and just state if they’re scams and people who are doing bad activities, they should be taken down, the SEC, the CFTC, do your job.
• Yeah.
• But obviously, not stifle innovation, not go after companies that are actually trying to do great things. So what are your thoughts on the CFTC going up to the DAO?
• Yeah. They not only chose to charge the individual founders and for their activity pre-DAO, right? They didn’t just do that, and they didn’t just charge people very active in the DAO who are like core devs or something, they claim in their complaint that anyone who’s voted on a governance matter for that DAO is jointly and severely liable for the whole fine, right? Anybody out there in crypto world own any governance tokens and ever vote them in a DAO? Have you ever? Don’t raise your hands. But I ask this question sometimes at defense, I say, “Don’t raise your hands,” particularly ’cause sometimes I’m, in two weeks I’m gonna be at an event with the CFTC chairman, and I’m gonna ask this question to the audience. I’m gonna say, “I probably you need to remember, don’t raise your hands, but just think inside your head, have you ever? Okay, ’cause the CFTC just said they might come after you and bring you into personal bankruptcy. So it’s a little weird that you’re all in the audience and here we have the CFTC commissioners and chairman who just voted for something for which that is the implication.” I don’t know, man. You know, you always ask the question, I think you asked me last time, “What tokens do you hold?” And I’m happy to talk about that. But you know, after that case, I’m not gonna tell you about the governance tokens in DeFi protocols anymore because, you know, you might be the next defendant, right?
• Wow.
• Yeah. It’s scary. It’s very scary.
• It is scary. Yeah.
• And I wanna give a shout-out to the work that the LeXpunK Army is doing there. So they’re the ones combating this, It’s hard for individual members of the DAO to jump in and say, “Oh, hey, here’s, let me dox myself, hold me liable,” right? Nobody’s gonna do that.
• Yeah.
• So LeXpunK Army has come in, they’re group of, and they’re properly described. The LeXpunK Army man, they are an army of very smart DeFi lawyers, and they’ve hired Steve Pally to represent them. And he’s filed motions and I think they’re already having some success in pushing back on the procedural irregularities in the Ooki DAO case. And good for them, man. Anybody in the audience wants to support LeXpunK Army. If you want to fight the good fight, I hope you support my thing too.
• Yeah.
• With the Freedom Lab, but support LeXpunK Army, they’re a part of, they’re in the foxhole with us, and they’re already taking some shots, so.
• Yeah, I’ll be sure to include links in the description of the podcast and video and website, so folks could go check those out.
• Yeah.
• Final item here I wanna ask you about, you know, despite all we just talked about, and, you know, the challenges and so forth, we’re just seeing the major financial institutions entering the crypto market.
• Yeah.
• BlackRock. Nasdaq launched crypto custody, BNY Mellon this week launched crypto custody. Google will be accepting crypto payments via Coinbase for cloud, their cloud services. And there’s many more, you know, what are your thoughts? Despite all these challenges, folks are still, you know, building and investing and innovating.
• Yeah, it’s very helpful. I, on the one hand, I love it because it, traditional institutions are gonna be the pathway by which we get mass adoption, right? That’s a granted, that’s a given.
• Yep.
• I don’t want TradFi to co-op crypto at the same time.
• Yeah. Right. I want crypto to stay crypto, stay decentralized, stay anon, stay non-KYC. If I don’t have the right… Now, some institutions like Coinbase or like whatever, are gonna be centralized KYC exchanges, and that’s where most people get their crypto, that’s fine, that’s a big part of the future. But if I don’t have the ability to go somewhere and get non-KYC coins, what’s the point? I mean, I just, if I lose that ability, I’m not interested in crypto anymore, I’m just not gonna get involved. I don’t think we will lose that because I think that if a DAO is, or if a DEX is operated non-DAO, as long as people build the right way, then they can minimize those problems using the technology. So yeah. Excited, also wanna keep crypto, you know, real, and not have it turn into JP Morgan Coin.
• Yeah.
• Which is not the future, and not anything that any of us should be interested in.
• Right.
• The increasing adoption though also points to the silliness of the SEC’s refusal to approve of Bitcoin ETF, Spot ETF. I mean, if Google’s willing to take it as payments, if they feel like it’s safe, Bitcoin safe enough, then why can’t we approve of SPOT EFT? You know, that’s an important fight. Grayscale’s bringing that fight, I hope they win.
• Yeah.
• And I think they gotta get chance.
• Yeah. It’s funny because I think we may have spoken about it before. I had interviewed former SEC Commissioner Joseph Grundfest, who served-
• Yeah.
• Under President Ronald Reagan. And I remember in the interview he said, “These applicants of the Bitcoin Spot ETF, they get denied, they can sue.” And I’m actually waiting to see who else is going to throw a hat in the ring and sue the SEC over this as well. And from a Bitcoin-
• Yeah.
• Spot ETF standpoint.
• Yeah, and they should, they should, that’s a good suit, that’s a good… And they’ve got, Davis Polk wrote an initial letter kind of outlining, “Hey, we’re gonna sue, here’s the arguments we’re gonna bring.” And I’m surprised the SEC just said, “Yeah, go ahead. Go ahead and do it.” That seems to be their philosophy is move fast and break things, and we’re gonna see how that works out.
• So J.W., I don’t wanna get conspirital, but we know that often incumbents will fight disruption in new technology and we know how the politics works with campaign donations and getting things done. Do you feel there’s a bit of like Gary Gensler, you know, being a Goldman Sachs guy, you know, he’s kind of part of the incumbent legacy folks who are like, “You know, let’s slow this down so we can take a position.” And to your point, you know, traditional finance, they’re jumping in. Is that kind of what’s happening here in the background?
• Not exactly. I think he came in with the approval and the backing of some very progressive members of the Senate who hate crypto and wanna see it destroyed. And I think that’s what motivates him to a large degree. That’s what’s motivated the skepticism so far. It works to the benefit of the big incumbent banks. And that’s what’s so unfortunate, why a lot of people in crypto kind of look at Senator Warren, Senator Brown and say, “You hate big banks? You know, we hate big banks too. That’s why we’re doing all of this, that’s the whole point is we hate big banks and don’t trust big banks. So why are you defending them by attacking us?” That’s the kind of hypocrisy of that position, unfortunately.
• Yeah. Well, Gary Gensler, Elizabeth Warren, Brad Sherman, three peas in a pods right there.
• They just don’t have an open mind, and a not willing to, they’re taking a position that ultimately helps entrench the big banks. And I think people don’t talk about that enough.
• But in a way, you know, with these folks like BlackRock coming into the market, will they start lobbying, you know, regulators and politicians to get it right with crypto, even though who are on defense or are skeptics?
• I think that might happen. And I think it’ll be, I think if people are willing to have that conversation, there’s a lot of smart lawyers in crypto willing to meet them halfway, and already trying to meet them halfway, including lawyers like those at LeXpunK that are representing DeFi protocols. If that’s a conversation, I’d be glad to have it. We gotta make sure that DeFi doesn’t get thrown under the bus in that conversation. But as long as we can make sure that I’m willing to meet anybody halfway and talk about reasonable responsible rules of the road, disclosures about tokenomics, disclosures about major holders, make sure there’s no whale dumping, make sure there’s audits of the, security audits of the smart contract code. All of it is good stuff and should be written in the rules. Let’s have that conversation rather than threatening every holder of a governance token and saying, “We might come after you,” you know?
• J.W., all is a pleasure. Thank you so much for the information and the good fight that you’re doing on behalf of the crypto industry.
• Good to talk with you, Tony. Keep up the podcast. I learn a lot from you too.