Transcript of Tone's Marathon

June 20, 2018

 

Attempted Transcript from Tone Vays’s Marathon Livestream on June 15:

 

Bitcoin & Ethereum - How Will SEC Regulations Affect Crypto

 

https://youtu.be/EnUGcwBUO5I

 

 

This is the full 6-hours of the Tone Vays marathon session with Crypto Experts as they examined the implications from Mr. Hinman’s June 14 statements about Ethereum. I thoroughly enjoyed this conversation, and learned a ton from these lawyers and experts! I wanted to capture it in text to look back on in the future, and to share with anyone who missed the youtube stream, or reads faster than they listen. While I attempted to capture all of the content, there may be a few places where I missed a little bit, or paraphrased because they were speaking too fast.

 

Mr. Hinman is the Director of Corporate Finance for the SEC, and he made the statements at the Yahoo! All Markets Summit: Crypto.  Mr. Hinman said:

 

And putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions. And, as with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value. Over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required. And of course there will continue to be systems that rely on central actors whose efforts are a key to the success of the enterprise. In those cases, application of the securities laws protects the investors who purchase the tokens or coins.

 

See https://www.sec.gov/news/speech/speech-hinman-061418

 

Tone held a fantastic six-hour panel where he had several prominent guests discussing the implications of this regulation. I started this blog with the view of summarizing the comments, and providing some kind of tl;dr but quickly realized there is too many different perspectives in the conversation. I couldn’t do justice with a summary, as it would peg some people into a point of view they don’t share. The debate is what made this dialog so interesting. I tried to capture as much as I could, while balancing the time it took to go back and re-listen to parts I missed. I believe I caught about 90% of the dialogue below. This is the first two hours, and I will do two more segments until the entire six hours are documented. 

 

Charles Hoskinson: The new regulation gives us clarity. It’s hard for SEC to say that Eth is a Security because it was contaminated from the beginning. 

Tone Vays:  Disagrees – the SEC has one year to declare Eth a Security, and then the only place you could have traded it would have been a regulated exchange.

 

Charles: If it is a security, what happens to all of the many businesses building upon it?

 

Tone: I expected the SEC to do this, but I disagree with this decision. 

 

Charles: If they have a decentralization test that when you hit it, you are not a security – we have a good test. You can take Reg A, and then do everything necessary to make the asset escape into non-security status. The SEC would be comfortable with that because they created it. 

Tone: This creates an insane barrier to entry. 

 

Charles: The Jobs Act is lighter weight and it’s capped between 30-50M

 

David Silver (18 minutes in): Yesterday was not a surprise because there is a difference in what the SEC talked about compared to Tokens. They would never unwind Ether and Ethereum. It’s impossible to go back to 2014 and say it was illegal. 

 

Tone: You could unwind by declaring the people involved created an unlicensed, unregistered security. You could say they can be permanently banned from touching a computer ever again. 

 

David: They carved out the actual sale, they said “as it is today” it’s not a security. Probably Vitalik is working with anybody/everybody in the government – knows his best bet is to work with global regulators. Yesterday created an unfair platform for new people to get into the space, the old ones who got away with it have a leg up to destroy the world

 

Tone: And they got so rich they can influence regulators.

 

Charles: I don’t see how the early developers got away with anything, that hasn’t been decided. 

 

Tone: SEC is going after blatant scams, that’s not interesting to me. 

 

Charles: SEC has been very systematic. 

 

Tone: The DAO gave them a pass. 

 

Charles: I think you are following a parallel track – another group of people are going after a framework 

 

Bruce Fenton:  I agree with Charles - The SEC has been very clear about this

 

David: I disagree; they are doing judicial decree by enforcement

 

Bruce: This is new technology, the regulators need to talk, explore, and when people do something new, - look at the IRS – when people do something new they let it go, but then issue guidance. When Eth was launched, it was different, there were no exchanges. 

 

David: The law has not changed. Them speaking, someone giving an opinion yesterday, is not law. 

 

Charles: We have lots of immigration law on the books, but we don’t throw 20 million people out of the country. What is the most effective way of regulating? Market stability, compliance, global asset flow. Consumer protection. Were you spending smart money before stupid money? Insider trading? One of my biggest problems with Tezos, the people offering the sale always won. 

 

David: Tezos was a donation, not an ICO – use the right terminology

 

Charles: Plenty of ways to use the channel or mechanism in a productive way to  help those who did not win the geographic lottery. 

 

David: This conclusion yesterday – Eth foundation platform  has to go forward as not being a security. This was inevitable. 

 

Bruce: It would kill this industry if they came out any other way. You don’t think if Coinbase and overall crypto markets lose half their revenue, and all American investors are blocked from Ethereum, and hundreds of coins are delisted, that it will impact Bitcoin? 

 

Tone: That will make Bitcoin go up 

 

Bruce: That’s a bubble, it’s not the real world. Why don’t you purpose a law... we can preach to the high church of maximalism. 

 

Tone: Ethereum was designed in such a way that people can profit, its being used to speculate like a security.

 

Bruce: People use shells and teapots for money. Aren’t I allowed to have a cryptokitty. 

 

Tone: It can work just as well on a centralized database. An ICO separates unqualified people from their money. You sound like you enjoyed the 2008 financial bubble because you don’t want any regulation in the space

 

Charles: Go back to pre-ICO – Ethereum was running like LTC 

 

Tone I would have a technological problem but not a regulatory problem with it. 

Charles: Would you have an existential problem with it and say it doesn’t have the right to exist? 

 

Tone: If Ethereum was launched like LTC and had every intention to stay decentralized, and did not have the Ethereum foundation pushing it to ICO, I would not have a problem with it. I do not have a regulatory problem with Litecoin., Monero, or even with dogecoin. The ICO and Proof of Stake -I don’t think they can actually go proof of stake technologically- but the plan to go proof of stake. This is dangerous, and centralized, and it’s what makes it a security.  

 

Charles: What if my buddies mine a new currency and mine out 10% of the supply, and it was real cheap. Then we decide to sell 10% of the tokens we mined. People start buying them like crazy. Is that a scam? 

 

Tone: It’s a scam, but they could get a pass. 

 

Charles: What is Satoshi did that, by divesting?  Is he a scammer?

 

Tone: It wasn’t worth that much? 

 

Bruce: It was worth 1 million dollars

 

Tone: It would – that’s the most borderline issue you could have gotten for me. At the time, it would have been seen as normal – if Satoshi did it, it wasn’t premeditated. But your friends mining, quietly, then promoting the shit out of it, it’s different. The pre-meditation of it.

 

Bruce: people trying to make money doesn’t make it a security.  The definition of a security doesn’t make it a security.

 

Tone; Was your token 

 

Bruce: Right now – we’ve got to look at the status of Eth right now.  Of course something can change status. 

 

David: Oh if you yell loud and insult

 

Bruce: Tell us why you can’t unwind (and a bunch about getting disbarred) 

 

David: It was 100% a security on the sale. All we keep saying is the SEC was always going to come out this way, because if they said Eth was a security yesterday, it would have gone down and crashed. They predetermined their answer and result.  The bad guys got away, and the conclusion is that a lot of people got rich, got to hire lobbyists, and what regulators want to do on any given day is what they want to do. 

 

Charles: Would you be OK doing a sale through the Jobs act? 

 

David: I think the SEC wants you to use Accredited Investors, they don’t want crypto to use the exemptions. The low hanging fruit has not done it correctly. The government wants to find a happy medium. I’m not going to tell you what exemptions. I did a CNBC a few months ago, me, Draper, and Ver. I told Draper that you couldn’t say BTC is going to 200K. You can’t say that. The SEC’s mantra is to protect investors. That’s the big distinction they carved out with the difference between when it was started and what it is today.  The inside of their legs hurt, they split the fence. 

 

Charles: Do you think the 18 M ICO four years ago is a good use of SEC’s time – where the outcome was actually positive? Should they go after EOS? 

 

David: Theranos- this should be the crystal ball – SEC and regulators are blunt instruments, going to go after a genre, they have 5 years to go after. Theranos took 3 years to get to a guilty plea. My guess is that in 2020, we see them go after – my guess- Tezos, because they are making a bad legal distinction calling it a donation. People who work with the regulators – like Vitalik, will be ok. My presumption when Arthur Briteman said, “It was not my call to use AML/KYC and I think it’s wrong that we are...” Those are the people the Regulators will go after. Jesse Powell from Kraken got really lucky that the AG started smacking around his GF after the subpoena. 

 

(Simon Dixon joined in) 

 

Tone: Charles asked – should the SEC go after Ethereum for something they did in 2014, or focus more on Eos. I’m going to say Ethereum because things like EOS can fail on their own and guys like David Silver can go after them with a class action lawsuit just like he’s doing with Tezos. Now the reason you go after Ethereum from 4 years ago is to set a precedent. There won’t be any new Eos coming out if you show some teeth to Ethereum. If EOS sees negative going to Eth now, they can get out of it completely broke, but out of it. By only focusing on future competitors, you are removing all future competition to Ethereum. Maybe Eos is better. I think Eth is completely horrible. If they don’t go after Ethereum, I want the other competitors to come out and take their smart contracts and set the Etherum security to zero. But by going after the competition – 

 

Charles: How would going after the founders have any impact on Ethereum? At this point, if they fined or jailed the founders, the Ethereum ecosystem will still go forward. 

 

Tone: I don’t think so, because every single ICO built on top of Ethereum is – by default – the replication of Ethereum itself. By going after the founders – no offence, I know you are a founder  - is like they are going after every single ICO, which I would personally love. 

 

Simon Dixon: What they did say is that it’s decentralized enough – Just like when BTC was looked at by the Chinese exchanges – it doesn’t take down the network. The regulators cannot take down the network at this stage. They now said, anyone building these tokens in the future, they must follow securities laws. The market is big and liquid enough - when Eth started, they could only raise 50 million. Now companies are rising more (telegram). There is ways of investing in these things,  with dollars, and that is good for the crypto and bitcoin market because it’s bringing money in. It feeds back into the whole ecosystem. I don’t hink it’s a statement that Eth got away with it. 

 

Tone: That part we are speculating on – on what the SEC will or won’t do to the history of Eth

 

Simon: I don’t see how they would be protecting consumers in any way by going after founders. 

 

David: One of my biggest lawsuits is against Coinbase, but I agree with Catherine Hobbs. Anyone doing a victory dance, well, he who laughs last laughs loudest. Nobody has a clue what they will do about the initial sale. I don’t think yesterday was a free pass to anyone. The SEC was not going to step in today and undo everything. It would have killed the ecosystem. 

 

Charles: I have a question about Insider trading – if Eth is not a security today, would it have any bearing on an insider trading question from the earlier days? 

 

David: This is not my usual stich of agreeing with Tone – I think market manipulation, insider trading, what the government is going to focus on – raising of securities under wraps right now – lets make sure they raise money in a manner we are ok with. Next, look at exchanges. More important to government is tax collection. They needed to step in for the explosion of raising money, next control the conversion of the conversion to fiat, then regulate exchanges for price manipulation. Tax probably will be the next wave of regulation. 

 

Tone: I think the amount of money you have is  - get people on the crime, not on the taxes. That part bothers me. 

 

David: Use Coinbase – I believe in good marketing. It’s all about marketing. They said they got rid of 99.9% of the requested information in the subpoena. We are only turning over information on people with more than 20K, Great. My info got turned over. So at that point in time, you know, I always laugh, and Charles will disagree, I don’t agree in a utopian version of decentralization in crypto. Despite claiming to be decentralized, they are centralized. I think the next regulatory path will be the conversion to USD because the centralization of information on the exchanges. 

 

Charles: If they are too harsh with that information, wouldn’t that crackdown actually promote the development of decentralized exchanges? And we run into the problem of the RIAA in the military? 

 

Simon: It will do two things; it will take all the innovation over to the jurisdictions that see this as an opportunity to take all the jobs. Because all the ultra high growth is happening in this industry.  all the job growth happening in this industry. It will make America the worst place in the world for financial innovation. Bad for Silicone Valley, bad for Wall Street, and bad for America. 

 

Charles: DOJ was very vigilant in shutting down US gambling. Gambling flourished abroad. Even if you crack down, you can’t crack down globally, all you would do is put it offshore, with less protection. 

 

David: God I sound like an old capitalist. The 17 Trillion dollar US security market is thriving. People that say things will leave the US and history has taught us that is just not true. 

 

Bruce: Data matters, and says you are completely wrong. When I started as a stock broker the US had 77%. Now they have 22%. 

 

Simon: I am grateful for not being born in America; I can participate in this industry

 

Tone: Your example that the US is only 25% maybe its because other countries have gotten their shit together and created good regulations? 

 

1:00/6:05

 

Bruce: It’s because economics flows towards freedom. The world you want is like a Venezuela world where fed agents are asking for 10K and 8K filings. 

 

Charles: I deal with heavy and light regulation, and there is a trend with international business, and the more American you are, the less they want to bank with you. For a US citizen to bank in Switzerland, they spend more money on the US citizen because there are so many regulations you have to comply with. The guy I set up Ethereum with in Zug,

 

Tone: That’s a different regulatory ragime. We are not saying all regulation is good. What David and I are saying is regulation in solicitation of other people’s money is good. 

 

Charles: What regulatory body tells me iPhone is bad, Samsung is good. I as a consumer am free to make that decision.  If it turns out it’s a bad product, you file a complaint, or hire a guy like David. 

 

Tone: That’s a product, not solicitation of money to start a business. The reason airline miles are not securities is because people aren’t buying them on speculation and reslelling at a higher price. 

 

Bruce: Beanie babies are not securities – you should really read the definition of a security, and so should you David – read the 1933 act. What makes Eth a security, now, today, under Section 2(a)1. You have said Eth today is a security, why? 

 

Tone: It’s a combination of the way it was created

 

Bruce: The law doesn’t say the way it was created – Tone – you say today it’s a security – because of how it was offered. How it was offered is not part of the definition. 

 

Tone: I really need Jason Seibert here. We all agree it was a Security. 

 

Bruce: You have been wrong for 3 years ago. I predicted this 3 years ago. 

 

David & Bruce fight for a minute

 

Bruce: Didn’t they teach you to look at the actual law?

 

David: You can’t remove the fundraiser

 

Simon: Correct me if I’m wrong – that’s what the gentleman was stating – that it can be a security in the beginning, and once it becomes more decentralized, it can not be a security. 

 

David: Nobody is disagreeing about the conclusion, but that doesn’t take away

 

Tone: Unlike the SEC, I have been calling Eth a Security 

 

Bruce: You won’t say why under the law

 

Tone: Ok fine, the SEC said as of today, Eth is not a security. But when it started trading on Polo, it was. 


Bruce: They haven’t said that. 

 

Tone: Bruce, is there a point between 2009-today that it was a security? 

 

Bruce: it didn’t come out in 2009

 

Tone: I know, I just wanted to be all –encompassing. 

 

Bruce: It could have been a security, I haven’t said that, but it also could have been a legal offering. 

 

Tone: I want the SEC to give me quantifiable metrics of which day, which minute, it went from being a security to not. 

 

Charles: It doesn’t work like that. There’s a big difference – the sale was a voucher. Now it’s a decentralized utility. No one actor is critical where if they died it would...

 

Bruce: Centralization is not the definition. I could fork a Bruce coin, and it wouldn’t make it a security. 

 

Tone: Please do that, a good test case. 

 

Charles: Would anyone listen to me if I said 

 

Simon: Maybe we should change the direction, if Eth was classified a Security today, would that be good for the ecosystem? Why would this be good tone? 

 

Tone: All the creators of Ethereum would now be classified as creatures of unregistered securities and they would be banned from working at other companies. 

 

Bruce: You are just making things up. Those are completely incorrect. If it was a security, that doesn’t automatically mean it was illegal. It also doesn’t automatically ban everyone from the industry. It could have

 

Simon: If eth was a security, it was illegal

 

Bruce: There are all kinds of exemptions it could fall under. 

 

Charles: Were you an accredited investor when you bought it. 

 

Simon: This is where the US is not the center of the universe, I was a sophisticated. But I never self-certified. They did not KYC me. 

 

Charles: This is not up to us. But I think it would be catastrophic for the industry. 

 

Tone: What industry? 

 

Charles: The whole innovation would be destroyed. The organization responsible to decide whether you get money or not is owned by a god damn bank. I don’t want Goldman making the decision of who gets capital. 

 

Tone: I want Goldman making 

 

Bruce: Tone, you want it all controlled, you have this weird world of feds kicking down the doors of the competition. 

 

Tone: I don’t want regulation on tech; I want regulation on solicitation of 

 

Bruce: (gets mad) 

 

Simon: The SEC has clearly stated securities laws imply. You got what you want Tone. What is important is not taking away the decentralized thing. Disrupting the centralized Wall Street is important. Now Eth participates on a global scale. The clearing and transferability of that is taking down the monopoly of Wall Street. If we want Wall Street, we try and make Eth a security today. Say everyone has to do what we’re doing; all exchanges have to apply to become wall street. 

 

Bruce: Tone, do you realize you are saying you want reports of transactions of insiders, you want 

 

Tone: Eth was an ICO, I don’t give it any respect- it doesn’t have any values of crypto that I respect. 

 

Bruce: But why do you want federal agents going in asking for transaction lists? 

 

Tone: For the same reason I don’t want you running a ponzi scheme – it’s the same concept

 

Bruce: IT’s not the same concept- you have no right to know the owners of Ethereum. I’m amazed you would support federal agents and advocate a world where- just give me a few seconds to explain the world of Tone had the regulators come out yesterday and said Eth is a Security: Today, markets down 80% Someone at eth is being identified as insider. All statements of ownership have to be listed. Every coin on ERC 20 is delisted. All exchanges have revenue drop. Tone thinks this is good because he thinks if he has federal agents enforce against the bad coins, it will only leave his coin. Why not make a law saying Bitcoin is only coin allowed. And you want me banned from the industry. Is Charles allowed to write code in this world? Can anyone? How about poems? Can he write a poem? 

 

Charles: You are a criminal now, under his regime

 

Bruce: You need the government to expand and – do we wear uniforms? Do we salute, do we say “all hale maximalism?” 

 

Tone: So you take all the federal agents policing massage parlors? 

 

Charles: You want to brutalize one industry, and make massage parlors ok. 

 

Tone: That’s not solicitation of money

 

Bruce: Gym memberships are a solicitation of money

 

Tone” all you have to do is go after 10 people

 

Charles: Why is Bitcoin not gone? 

 

Tone: Bitcoin is actually decentralized

 

Charles: The SEC says Eth is decentralized. 10 mining control bitcoin. Only a small group of tight knit

 

Tone: For me it’s very simple – when Eth reversed the Dao screw up – they proved to the world they were not decentralized. 

 

Charles – no – theres classic and 

 

Bruce – that’s not part f the definition of what’s decentralized. The law is the same from 1933. 

 

Tone: The interpretation that Eth is decentralized enough – so decentralization is about to enter the decision

 

David: Marco was your former lawyer Bruce?  Marco has come out and said – Eth was a security. 

Bruce: That’s not what he said 

(David yelling over Bruce) 

 

David: I’m asking you. 

 

Bruce: I’m not here to discuss what Marco said. 

(More yelling by David) 

 

David: I think they are wrong

 

Bruce: I don’t know if you have read the Act

 

David: I always said what the conclusion would be. There was always going to be this inevitable conclusion. 

 

Charles: It could have gone either way, the politics have moved so it makes more sense because this is the best outcome for the industry. 

 

Tone: It’s not necessarily the best outcome 

 

Charles: Allowing innovation

 

Tone: There is no innovation here. The government allowing the growing of a bubble is not a good thing. 

 

Charles: All the CDOs and Mtg. backed securities were fully regulated

 

Bruce: Everything you mentioned with the 80% crash. Would you rather have it now, or later when it’s 80 Trillion. That is going to happen. The sooner it happens

 

Simon: It’s going to happen – everyone is going to build on Ethereum, the cat is out of the bag. Every financial institution, regulated or unregulated... lets people launch a new network in compliance with sec laws and later it becomes decentralized, and then compete with Ethereum, and every asset is in cryptocurrency. If said it’s a security, all the regulated investment banks would create exchanges. 

 

Charles: and we destroy the economy again

 

Simon: Btc is the only store of value. Comparing to Eth is comparing apples and pears. Blockchains that are optimized need to go to the deflationary currency when they exit. This is going to be good for maximalists. 

 

David: What that guy said

 

Tone: I’m trying ... (gets cut off)

 

David: Marco [Santori] has gone negative on what was said yesterday, he’s on his tenth tweet in ten minutes. I disagree with 98% of what he says. While yesterday’s announcement was hopeful  ... issuers can use Reg A, Jobs Act, the problem is the limitation... 

 

Tone: The big argument I have with Bruce and you Charles, I’m not talking regulation of tech, I’m talking regulation of solicitation of money. The laws on raising money should be the same regardless. Bitcoin, LTC not securities.  Eth is obviously a security, BTC is obviously not. Monero and LTC are very close to BTC. 

 

Simon: How do you pay gas for a smart contract if you have to be an AI

 

Tone: Why does gas have to be traded by twelve year olds. 

 

Simon: These exchanges have done AML/KYC – everyone is above 18

 

Tone: When I was cashing out my Btrash, I was not KYCing myself. 

 

Charles: You want regulation, except when it impacts you? 

 

Tone: If things are there, I’m not going to go to the – again there is no solicitation of money here. I don’t want exchanges to be regulated. I think if you have a security 

 

Simon: The only way to comply with securities laws is to KYC AML, the only way to achieve that is the ....

 

(Drew Hinkes and Stephen Palley join the conversation)

 

Tone: We have two more lawyers. Drew Hinkes and Stepen Palley. How much time do you have?

 

Stephen Palley: I have 15 minutes

 

Tone – So Palley, I heard you speak live – it was excellent. You said everything other than BTC is a security. Do a brief intro and tell us your thoughts on the articles yesterday, and share your opinion of if they got it right or not. 

 

Stephen Palley – Thanks for having me on ... I’m a DC/NY lawyer – trial lawyer. Spent the last 20 years suing insurance companies. I’ve been at the beach this week, any time I go away something interesting happens. I did look at Santori’s latest tweets. I’m not surprised there is an indication Eth will not be treated as a security. I would have been surprised to see the SEC do something that would have had the impact of hurting retail investors. Clear indication the sale was unregistered sale. Pretty clear most token sales would be treated as unregistered securities offerings. I’ve had some input from regulators. There are dozens of enforcement actions in the works. There is skepticism that the SEC will do anything. Agencies have long time horizons. Regulators take their time; time is on their side. That was the case with the Coinbase investigation when the IRS was looking for information. In 2017 they focused on 2013-15. I think we will see FinCEN action. If you look at token sales closely, you see money transmission and failure to comply with MSB requirements. That’s an area we haven’t seen focused on a lot. Nothing that happened yesterday was incredibly surprising. For people who see this as an indication that there will not be enforcement – I don’t have a crystal ball, but ...

 

Charles: By the way, those FinCEN enforcements are much worse. 

 

Palley: Federal crimes. 

 

Tone: I’d love to have another one of these when FinCEN is in the news, lets stick with the securities side. I am not surprised either with the way they went Palley, in your opinion, do you think Eth was a security and is no longer? 

 

Palley: Ether is like oranges in the Howey case. I’m a lawyer, I can read the law, it looks like that crowd sale was a securities offering. While it may have failed to satisfy registration requirements. It did require a fair amount of technical expertise. Four years ago, there were not as many retail investors. The SEC can say nobody understood what was going on, so I could see it being given a pass. It may be long enough ago that it gets a limitations pass. There was no rule issued. There are 50 states in the US with their own securities laws. You have federal judges that may reach different conclusions. This is not binding on the SEC. The lawyers may laugh if I use the word regulatory estoppel. It’s an important statement, but a Federal judge in Wichita could say it’s wrong. This is not the end of the game. I want to say this neutrally. There was good lobbying, and it was one-sided. Whether you like Coin Center, they have consistently presented a strong case, and there is no anti-coin center out there lobbying the opposite. It’s not surprising to see an agency falling in line with that position. If you had other stakeholders taking other positions, you may see other views. 

 

Tone: Great point! I wanted to add to that, it was just Coin center’s lobbying, it was perceived experts, and the Ethereum early investors. They are very rich. This is my view on the illegal solicitation of money. This is how XRP just hired Mary Joe White to represent them in the case they are not a security. 

 

Simon: The people in BTC were the ones funding Eth. 

 

Drew Hinkes: Tone, there is a very interesting implication about Ripple if you read between the lines of the statement. The entire argument to be made that Eth is sufficiently decentralized is predicated on a reliance that there is no longer any identifiable group of people to conduct managerial or entrepreneruaial things to support the network. So there is an implication there that if there is a group of people centrally managing or operating a crypto asset, that this decentralized category doesn’t apply to them. And you can reach your own conclusion about XRP. 

 

Simon:  Surely, whoever has Github repo access... 

 

Drew: ... by this statement by an employee of the regulator. We have this term, sufficiently decentralized, and we don’t know what that means. As Pally was nice enough to explain, what this gentlemen said, was impactful but not precedential and a lot of people can read it a bunch of different ways. We need to understand what was meant by sufficiently decentralized and if this is going to become the actual policy of the SEC or not. 

 

Tone: I want to know what day Eth became decentralized, from SEC’s standpoint 

 

Drew: A couple things to look at: (1) what point do they measure and (2) what are those metrics? The only guidance we got was a statement saying sufficiently decentralized when purchasers – so buyer’s standpoint- would no longer reasonably expect a person or group to carry out the managerial efforts. Does that mean development has been thrown to wolves? Nodes have to be decentralized? Mining pools can’t exist? 10 pools? What if there are four? 

 

Simon: If you read the article, they also gave seven points – how much pre-mine is to the founders? These are further things that puts the original offering of Ethereum into a security. Proof of work, POS, some interesting debates. 

 

Palley: Silver, do you think we will see fewer securities class action work because of what one guy said? 

 

David: The conclusion drove the analysis. This always had to be the conclusion, there was no way they were going to say Ethereum was bad and Ethereum was going away. There is so many enforcement actions going to be announced, I guess 2020. They are slow and methodical. I am the most hated person by coincenter. The fact I went up against a lobbyist... I don’t disagree with – the SEC is going to come out with enforcement actions. Not as bad as Tone wants. Going to do something. Tone sounding pro-regulation. 

 

Charles: There is space for sensible regulation.

 

David: Conclusion drove analysis. I am all about AML/KYC. Marco is mad tweeting about that. I didn’t see the connection. 

 

Simon: I thought this was good for exchanges, it was trying to maintain the nature of the exchange, they can still trade. 

 

Silver: The exchanges operating in the US – will require sophisticated AML/KYC. Anyone that thinks that’s not where we are headed, don’t understand where governments are going. 

 

Simon: AML/KYC is global

 

Tone: I think AML/KYC laws are the worst we have. However, I want them applied to those soliciting money. I don’t want them on the people putting the money in. 

 

Palley: Tone, you need to bankroll a lobbyist. 

 

Tone: That’s not going to happen, I have nothing to gain from this. So much money went into lobbying because they wanted to stay rich. 

 

Bruce: The outcome was driven by the law. If you look at the actual law, which talks about what makes something a security, it’s been said to broadly interpret it by the Supreme Court. I would go to the lobbyist, and I would have made a case, this is not a security, because what matters is the 1933 Act. 

 

Tone: I have the same qualifications as you minus ten years, you were a little earlier. I would have made the opposite case as you with the same resume coming in. 

 

Bruce: Can you say why 

 

Palley: are you saying crowdsale is not a security? Or today it’s not? 

 

Silver: Bruce wants to take the crowdsale out. 

 

Bruce: Holdon lets have a legitimate conversation, you are laughing at me, back it up. Are you saying that once it’s offered as a security, it can never decouple from that? 

 

Silver: We can all agree the SEC has said securities can overt at a later time. You refuse to acknowledge that they said the crowdsale was a security. 

 

Charles: Reasonable people can disagree. There were extensive conversations with ...

 

Simon: Back then they were debating whether BTC was money or not in the Shavers case. 

 

Bruce: It was offered by a nonprofit organization. Maybe it wasn’t maybe it was. Assuming it was at the time doesn’t mean it is now. 

 

Tone: If Ethereum is no longer deemed a security today, here’s what I want Bruce. If the  SEC acknowledges that in the first year, it was an unlicensed unregistered security, I want punishment.

 

Bruce – if I can sue them for damages – what I can owe them money and get a refund? 

 

Simon – the only people who requested a refund, 

 

Charles – I have never owned a single Ether, I left in June – before the July crowd sale. 

 

David – I agree what everyone is saying. I can’t find clients for certain cases, nobody wants recession, they want to keep holding. It won’t matter till it explodes. Bruce, regardless, whether you are legally correct or wrong – what Tone says, money doesn’t dictate what is right or wrong. A lot of money has been made and if it was illegal, they should be punished. 

 

Drew: This regulator is not going to seek to punish people where no one has been harmed. They have other things to do on their agenda. The reason they got involved in crypto was from the Dao debacle, people started to complain. They are trying to fare it out and they will try to provide guidance to help people, they want to facilitate capital formation, and protect consumers. Without a lot of victims crying for help, there isn’t a lot of reason for the regulator to go out and spend your tax money. 

 

Palley: Go out and follow Titanium – do folks follow that?  Some of the flat out obvious frauds. Trying to put myself in the regulators shoes, and  try to look back four years, which is an eternity in this industry, and I‘m going to say not exactly no harm no foul, but ... technically sophisticated buyers. Not going to act purely out of principle with limited resources. There is a ton of low hanging fruit out there. 

 

(Jimmy Song joins the conversation)

 

Tone: Hey guys, I want to bring Jimmy on, but I just want to say, everything you say reminds me so much of the 2008 financial crisis. I was at Bear Sternes. No harm, nobody was getting hurt, everyone was happy to buy CDO’s and after everyone was harm, they blamed the SEC. 

 

Charles: What’s your point, we shouldn’t have allowed amazon or google to exist because there was a dot com bubble. 

 

Jimmy Song: Revenue and Profit are not the same thing. 

 

Charles: What’s BTC’s revenue? 

 

Tone: BTC isn’t a security, thanks to Jason Seibert. Also, Drew, give an introduction. 

 

Drew: My name is Andrew Hinkes, It’s good to see everyone. I’m recently GC for Athena Capital and in my spare time, I co-teach at NYU to JD and MBA Students. Tone, thanks for having me one. 

 

Tone: Jimmy, the SEC said Eth is decentralized enough. Can you explain to Bruce and Charles why it’s not decentralized enough and the SEC got it wrong. 


Jimmy: What’s decentralized enough? It has several points of failure, which makes it centralized. They’ve done hard forks. From a technical perspective, it is centralized. 

 

Charles: How would you take Eth down? 

 

 

Jimmy: From a technical perspective, it’s centralized. They’ve had hard forks, they’ve had upgrades. 

 

Simon: Jimmy, how would you take Ethereum down as a central point of failure? 

 

Jimmy: If I were Vitalik, I’d release new code that destroys everything. 

 

Simon: But Bitcoin is the same thing, you’ve got GitHub Repo access

 

Jimmy: No, you’ve got multiple implementations

 

Charles: Well there are multiple levels of Ethereum

 

Jimmy: But none of them actually sync. They do whatever they want, you can reset the ledger. It’s a centralized system. You could do a hard fork and force everyone to upgrade. 

 

Simon: Explain what BTC has that ETH doesn’t have. If you wanted to take down ETH tomorrow, what would you do? 

 

Jimmy: Kidnap Vitalik and have him reset the ledger to zero. 

 

Simon: Could that be done in BTC? 

 

Jimmy: NO, there’s no central point of failure. 

 

Charles: I have a client, I could just run Eth on my client. 

 

Jimmy: Well, that’s very dubious. If Vitalik says he’s going to do something, it’s dubious you would have a successful way to continue ETH. You would be an alt coin compared to them. 

 

Charles: If someone owned the trademark of BTC, or a core patent. Would that make it centralized? Like Adam Back owned the patent for mining. 

 

Palley: Someone does have a trademark for BTC.

 

Drew: The IP rights don’t touch upon the system. Notwithstanding that these systems are inherently decentralized, there have been natural market forces that have caused some centralization. You can look at mining pools, influential core devs, clusters of node operators. You can infer that they have some level of control. Now, how do you take a system down? Well if you take out the six biggest mining pools in a given platform, you may cause a serious interruption. If you bribe them it may change the way it behaves. These systems are robust. If you take out the top six, the next four will come in their place. I tend to lean towards Jimmy’s answer. 

 

Jimmy: How do you take ETH down is a red herring. The fact it’s centralized means it’s controlled by somebody, Vitalik and co. If you wanted to regulate them, you could say they have to do X, Y, and Z. Say Germany has some privacy law, they can say any person in the ETH foundation who doesn’t conform to what we say, you will get arrested the moment you set foot in Germany. It becomes a choke point. 

 

Simon: Does ETH have less Github repo devs than Bitcoin? 

 

Jimmy: No, it has a creator that everyone follows. He said we are going to bale out people on the DAO, and they did. 

 

Tone: Jimmy, also he says we want to go POS –

 

Jimmy – Yup, and Sharding, they are even talking about a tax. They are acting just like a central government. How is that not centralized? If he can say the amount of data you can put in our system we can charge you – that’s about as centralized as it gets. You can levy taxes guys. 

 

(Adella Toulon Foerster aka Bitcoin Khaleesi joined the Conversation!!!!!!!!!)

 

Simon: Essentially what the SEC is saying is that there is a level of decentralization

 

Jimmy: What they said makes no sense, you either have a single point of failure, or you don’t. 

 

Simon: Some would argue that with BTC you’ve got decentralization with pockets of centralization – as in there’s a slight degree of development centralization – some developers have more influence than others. 

 

Jimmy – Well, ya but they’ve earned it. Which developers are you arguing here? 

 

Simon – I’m not really arguing it, I’m a Bitcoiner. But Eth has definitely changed over time. 

 

Jimmy – if you aren’t going to make the case I can’t argue with you. If you are arguing for it, than make the case. 

 

Charles: Jimmy, how many developers is the threshold for decentralization? If Vitalik is a God, and King of ETH, well what if Joe Lubin and Gab – say they all share power and it’s 2/3. How far do we have to go to be decentralized? 

 

Drew: Charles, it’s simple. The regulators are going to have to give us some sort of guidance or clarity. This phrase where “purchasers would no longer reasonably expect a person or group to carry out essential managerial efforts”  ... Me, Palley and Silver can make that mean a thousand different things if we want to. If this is going to be our official policy and we are expected to govern ourselves based on this speech, we are going to need a rule, a reg, something 

Charles: Drew, isn’t it entirely possible that the SEC is waiting for the Industry to come up with this on our own? 

 

Drew: Sure, we could come up with it, we can walk in with our lobbyists and make suggestions, and they can feel free to follow it or not. 

 

Charles: Well say this panel, who does have a fair amount of experience in the industry, was asked to write that definition, what would it look like? Is it 3 to be decentralized, is it 5? 

 

Palley: It depends on the individual facts and circumstances, that’s the way – I don’t think you’re going to find – the difference between writing laws, regulations, and code – a regulation can’t be static, it has to be dynamic. We may be able to define “sufficiently decentralized” but ultimately it’s going to turn of facts and circumstances. It’s going to be case specific. Not every country uses a common law precedent driven approach to law. I would say one of the strengths to the American legal system and common law is how cases are decided. We have regulations that are promulgated by statutory authority. And then we have judges who interpret those regulations, and may reach their own decisions. Every case may be different. Every case is different. 

 

Tone: I want to get Adella in here, but I want to touch on Charles – if there was three of them – my question is are the three of them debating and independent, or are they under one enterprise? 

 

Charles: Look at the example. Consensys did not get along with Ming. 

 

Jimmy: If you say five is enough, you could have five sock puppets. That was Drew’s point, you can’t do that. The statement you made is too broad. You can make five sock puppets. It’s too broad a brush. If you say five, you put Vitalik and four yes men. 

 

Tone: Adella – tell people your back ground, and your opinion. 

 

Adella: My name is Adella Toulon-Foerester, aka Bitcoin Khaleesi. I used to run a gold exchange in 2001, built that out, sold it in 2004. Was in Cryptography, super old school. Got into BTC in 2010, wrote my legal thesis on it. Thought someone has got to look at this stuff, BSA is my specialty.  I am a partner at a Law Firm in DC. I’ve done a lot of things in the BTC space spanning the last 8 years. That is who I am in a nutshell. I deal with these issues all the time. Tone, as far as your questions go, I think it’s a yes and a no. As the laws are written currently, I just don’t think they speak to what is going on right now. Jimmy got it correct when he said the laws are written very broadly. They are broad for a reason, and that is because the regulators never want to corner themselves with narrow language. As far as things are right now, these laws need to be reviewed. The very fact that we are dealing with a case from, when is it Drew, 1930 something?  We are dealing with an antiquated case talking about orange groves, and we’re up here in 2018 dealing with securitized or utility tokens on blockchains that might also be issuing unregistered securities. The main point is that we need more clarity on the laws as they are written, they just don’t address the technology. We spend all day massaging the Howey Test to make it fit all these utility definitions. Come on, just go out there and read a couple legal memos. Interestingly, the very first reaction to this statement, is the disclaimer that the SEC doesn’t take any responsibility for the statements of its agents. It’s nice they gave us a few pointers and guildelines, but if you want to be a regulating body, your job is to start streamlining the law as it is. 

 

Tone: So what’s your opinion? You have been in the space as long as anyone on this panel. What’s your opinion? I have always caused ETH a Security, the law could disagree with me, but what is your opinion on ETH and Tokens like ETH? 

 

Adella: Well, Tone, you, and I have argued about this a lot in the past. I think in my living room right there a few months ago. I think ETH can be, it probably is, the fact they could roll back the DAO, it’s very securities like – you know, efforts of others. I think it kind of fulfills that. I deal with securities a lot. I asked this very question to one of our clients earlier this week. What happens when a thing is offered like a security, but ends up on a market and has to deal with all this external issues outside their control like volatility. So I’m not going lose any friends today Tone. 

 

Tone: Or Clients probably, right

 

Drew: We are ignoring the implications here. We’ve got reference to the case called Gary Plastic in the speech here, which says you can take something that by itself isn’t a security and wrap it in a contract between buyer and seller and make it a security. That case was cited for the prospect that there are really two things happening here.  You have a contract between issuer and purchaser, then you have a thing gets transferred that indicates the existence of the contract. And what this gentleman said you could sever the two. You have the indicia of the agreement, and terms of the Agreement. So it seems to indicate that you can take the indicia and then sell it, that is the token, can be sold to someone else for value. So what happens to the contract rights? You might see a world where if someone had a colorable claim against the issuers of the Ethereum token... If someone was in direct privity to the issuer, you might be able to initiate a claim against them, even if you sold the token. Because the Token is now severable ... just like in the speech they said in the Howey test, the Agreement in question was a servicing contract for the orange groves, but the orange groves were just real estate that could be sold and had independent utility. That also suggests that the trading of this asset may exist in a world where it’s decoupled from the contract agreement that was created, so you might see a world where the tokens are sold pursuant to securities laws, but traded on exchanges that are regulated by CFTC not the SEC. 

 

Simon: And that’s what we got, now we have a very clear notice on how to sell these things in the initial offering

 

Drew: There is nothing clear about this. 

 

Simon: It’s either Reg D, Reg S or Reg A+ or comply with international regulations. 

 

Charles: What is that interpretation is correct? It favors consumer protection because you have a regulatory capture of the supply chain and recourse if people are defrauded

 

Palley: Either it’s a security, or commodity, or its money. Regulators are going to jam you one way or another. There’s going to be a bucket that it fits into. 

 

Simon: There’s a fourth bucket, the decentralized exchange. 

 

Tone: The last thing you want to be is money, right. 

 

Palley: What’s your goal, it might be that’s the most profitable. 

 

Adella: If you are creating money, you have to be able to take back all the coins you put into circulation. That would make you a MSB right off the bat, and there’s no way in hell you can maintain – you would have to do KYC on everyone. How is that even possible? It’s probably the easiest thing, you have have to download Internet Explorer and become a MSB on Fincen.gov. Then you have no power over the adoption in the secondary market. 

 

Tone: If ETH was a security when it started and it’s not a security now because it’s pretty decentralized. What is the possibility of the Pandora’s box. What if Jeff Bezos decides to convert Amazon stock a decentralized proof of stake – what does this mean for companies that currently have securities? 

 

Charles: The point is they have utility

 

Tone: They don’t have utility. You shouldn’t be forced ... you should be able to pay for your smart contract in any security. 

 

Simon: So enterprises might do traditional stock or bond offerings and launch a decentralized network, and people will have securities traded on securities token exchange, and will have the ability to use the utility in a different network. We have that already, there can be two forces, driving in two different directions. 

 

Drew: It was covered in the speech Tone, he said that equities and traditional investment products offered this way will continue to be treated as investment products. 

 

Tone: So everyone who went public in the last two years fucked up. They should have done this. 

 

Bruce: You can’t just change Amazon, because under 33 Act, Amazon is not decentralized. The fact that, and maybe the lawyers will have an opinion, maybe the way the SEC will interpret it, they don’t know about nodes, they don’t mean decentralized like Jimmy does, they are talking about investment contracts, and people in a contract with you to issue annual reports. It’s a mistake to focus overly on the decentralization because as crypto people we have a very different idea of decentralization than the general public. 

 

Simon: And you’ve got to keep in mind in other countries the definition of a security is – for instance, in Hong Kong – a Security is your average debenture, collective investment scheme, there is still an opportunity for all of this to move outside the US. 

 

Bruce: Wait, other countries have laws? 

 

Tone: Let me throw something else – we don’t have a European perspective

 

Charles: Simon is British

 

Tone: Last night Craig Wright was at a dinner, and he was talking about how the Securities Laws in Europe are significantly more important and the SEC will follow what the European laws do. 

 

Simon: Different regulators do – over 10 regulators have contacted us – there are so many nuances. A sophisticated investor can be someone whose made a purchase in two transactions. A lot of ICOs are not looking at this stuff. Is the SEC the most important regulator? Yes. That’s crazy to think the SEC is following Europe. A lot of regulators that don’t have the resources that the SEC does will look to the SEC for guidance, but here’s the difference. Blockchain, I’m here near the UK, and many jurisdictions see this as their opportunity to have an impact by supporting things like utility tokens, or security tokens. The international players see this as their opportunity. It’s where the jobs are, its’s where the growth is. We now have competition in Wall Street, Silicone Valley, USD, and Gov’t and countries need to move to a more competitive regulatory environment. SEC is the one that people are looking to as leadership. 

 

Charles: I couldn’t agree with Simon more. I was just in Rwanda, and the government wanted to do crypto project. They could give a damn about the SEC. same with Barbados. There are a lot of countries going their own way. In terms of the EU vs. the USA, this gov’t under Trump is USA first, they don’t give a shit they pulled out of the Paris treaty. I couldn’t imagine the SEC waiting to see what the Europeans do before making a decision. 

 

Drew: The only real boundaries that could effect is if they fall out of compatibility with the international MSB (money services business) regime. There is some startling consistency with global MSB regulation, there is relative uniformity. 

 

Charles: And that’s where it makes sense, the Waldorf principles. There is 120 nations reporting each other accounts for catching tax evaders. Nationalisms. 

 

Simon: The other place is privacy – GDPR – everyone getting e-mails. Europe has taken the lead on that side. 

 

Tone: We have talked about this a lot. Any other thoughts. 

 

Bruce: One thing, you were regulated by these folks, they are not your friends, I’m an anarchist, but not the kind who wants to go to jail to prove a point. You have to follow these regulations, but they are pretty onerous. The idea the government knows better than citizens is wrong. We don’t need you to go in there, or federal agents – if you believe in free markets 

 

Tone: So no government body should have ever done anything to Bitconnect? And let the market decide, and let chips fall where they may? 

 

Bruce: I’m an anarchist, in reality, we need at least a minimal government, and a legitimate government prevents assaults on life, liberty, property. That would encompass fraud. That’s a very loose apparatus for you to move from that to Securities Laws. 

 

Tone: When did Bitconnect commit fraud? 

 

Charles: I was in the Ron Paul movement in 07/08. Anyone remember the liberty dollar? Those people went to jail. 

 

Adella: I worked with Bernard. 

 

Charles: Satoshi had no idea if what he was doing was legal or not. 

 

Tone: And that is probably why he was invisible. 

 

Drew: No problem with US dollars as long as not marketed like USD

 

Charles: What happens if Satoshi came out? 

 

Adella: That is horseshit Drew. 

 

Drew: Tell me more. 

 

Adella: Guess what they don’t look like, they don’t look like USD. I think I showed you a bunch

 

Drew: My point is 

 

Charles Satoshi would have never been given the opportunity to do what they did. So are you saying Eth should have been anonymous? 

 

Tone: Satoshi wasn’t on TV claiming he was the smartest guy soliciting money from unqualified investors. If they were anonymous...

 

Bruce: People should have the choice. What if someone you like – what if Vladimir woke up and said – I’ve seen the light, I know how to make a better BTC, it’s going to cost $18 Million and I’m going to do a NFP foundation, an salary of 100K per year. Do you think he should be put in jail for hat? 

Tone: If he’s soliciting money from unqualified investors... yes. If doing it under certain conditions like Simon, than yes. 

 

Bruce: What if he does a crowdfrund?  What if Greg Maxwell wants to take donations? 

 

Tone: He can take donations and not money. 

 

Palley: There’s a difference of donations and an expectation of profits

 

Bruce: When I donated to the crowd sale, I thought it was a donation. 

 

Tone: I don’t believe that. 

 

Bruce: It was a different time. Do you remember how risky it was when I put money in a project of a 19 year old kid? 

 

David: Bruce is 100% right, it was a ridiculous bet. I love Bruce making these arguments – with Scrooge and Batman. The anarchist has both. Anyone who put money in Tezos were doing it for an expectation of profit. The original EETH crowd sale is different. 

 

Adella: I agree, I was at TNABC in 2014 when I bought ETH, Vitalik rented a yacht. I remember buying ETH and getting a JSON file and not knowing . I remember asking him about this thing and not fully understanding it. I never expected anything was going to come up from this skinny bag who was carrying a pony bag – to something that was going to take over the planet. 

 

Simon: Everyone was talking about inflationary assets, and colored coins, we were all drinking the coolaide. Smart contracts were the talk of the town. 

 

Tone: I could be convinced that the majority of people who bought the ETH ICO in 2014 were contributing to technology. I’m also with David  that the later coins were for an expectation of profit. Let me ask, after ETH went live a year later and the gas was openly traded by people, and they found a use case of ICOing stuff. In 2016/17 how many were buying ETH with an expectation of profit? 

 

Drew: After the DAO, it’s clear that people were buying it for investment purposes. Tge big thing that caused the price to run up was the DAO. The DAO gave people holding ETH with something to do with their ETH. That told everyone to use it as a manufacturing platform. It was expressly marketed to make money. 

 

Adella: But not from the effort of the promoters. Through the effort of the investors

 

Drew: That’s a really interesting question. Is it the base layer promotion or the secondary layer on top. 

 

Bruce: The network matters. Speculation doesn’t make it a security. Comic books. Art. If that artist becomes famous. 

 

Drew: Bruce, we all agree something can go up in value and that doesn’t make it a security. 

 

Tone: In 2016 – yes – everyone speculates on BTC, when people started speculating on BTC, when the DAO implode, people were trading/investing in ETH for speculation or expectation of profit. 80% of ETH was premised through ICO. So does it have security attributes? 

 

Simon: People using ETH to buy ICO. It’s become 

 

Drew: Your q. looks at it the wrong way. If it was an equity or debt product, nothing would change. Something offered in a circumstance under US law needs to be handled under 33 act with disclosure and honest communication between buyer and seller. Now we know we have products that have to be issued in compliance with the law. The q. is how do we handle it once it leaves the nest. Does that contractual agreement get assigned to the next buyer. We have indication that we have a set of products, not debt or equity, that were offered pursuant to securities law, but regulator indicates we won’t have to handle it in accordance with the law now. For instance, if I bought ETH and sat on it, and it was a security, and I wanted to sell it to Adella, in order to sell it according to the law, I would need to register with a broker dealer, and make certain disclosures to Adella, and the suggestion here is that apparently its not. There are two prongs – the Regulator has done a great job telling us how to comply from an issuance standpoint. But where the issuance and contractual agreement are severable from the item conveyed, we have a new model to think about. 

 

Adella: Drew, here’s a Libertarian/Philosophical idea. What about the expectation of the purchaser? How do the regulator translate that into a prong test? When I bought Eth in 2014 I didn’t think about it until the DAO. What point does it become a security? Is the creator still responsible if the market changes it from a security? 

 

Drew: It was issued under contractual terms that required it to be issued in compliance with the 33 Act, however I’m not sure it’s technically an investment product in its function. People need to look at issuance, and function.  That’s what is going on under the hood. 

 

Adella: And the conduct of the issuer

 

Drew: 100% the honesty of the issuer. 

 

Adella: At no time did Vitalik say 200X. I walked away from the conversation with Vitalik with absolutely no expectation of profit, and I bought some ETH. That’s a Libertarian thing to do. And I was in control and responsible for my actions. Did I read any disclaimers? Absolutely not. But I did not expect to make a profit. And I’m pretty sure most people who bought at that time, did not expect to make a profit. 

 

Simon: Which is different from today, look at the Telegram groups. 

 

Drew: One problem with that argument Adella is that they don’t look at the individual purchaser’s expectation of profit; it’s how it was marketed. 

 

Adella: That’s why I said it was a philosophical question Drew. 

 

Drew: Ya, I just wanted to point out the distinction. We have a set of guidelines and laws that put the burden on the issuer to disclose as opposed to each individual investor. 

 

Bruce: And remember, the expectation of investors alone does not make something a security. Even if the promoter says its going to 100X that doesn’t make it a security. Saying Gold is going 100X is ok 

 

Drew: If BTC is packaged in a fund and marketed like you could make money, it could be a security

 

Tone: Bitcoin ETF is a security

 

Bruce: Expectation of profit alone

 

Drew: That’s one part of the test

 

Bruce: If I say this glasses case, comic books, bitcoin, gold, none of those are securities. 

 

Tone: David  you have been quiet, do you want to make a comment? 


David: Do I agree? I’m a capitalist, I’m doing work here, but do I agree with Bruce? The conversation about Utility Tokens – nothing the SEC said affects that argument. Those are the people where we will see enforcement actions against them. Nothing has changed. There is a lambo test. If you did an ICO and claimed it was a utility token, and the next day you bought a Lambo – you should go to jail! 

 

Drew: We should play them our panel from Wed. I find this is the most concerning part of my life right now, I keep agreeing with David and it’s really upsetting. 

 

Tone: I said the same thing. 

 

Drew: Circle your calendars, 2020 and 2021 is when the SOL starts to kick in. Will be a very busy time for the regulators looking at the 2015 and 2016 behavior. 

 

David: At some time in the next two years, I’m going to put an ad in the NY Times and put every single company that has given money to Coin Center and... whether the SEC does something. I am going to love going through different statements of different people who have sold utility tokens pre-functionality and your lawyer took the utility token as a form of payment – this is a time where a lot of you are anarchists for 2008 and barley anyone got in trouble for 2008, and now I think a lot of people will get in a lot of trouble, and as Drew said, it’s the Theranos Test. 

 

Tone: What happens to the function of Coin Center if one of these becomes an unlicensed unregistered security. 

 

David: There is nothing wrong with a lobbyist, they have the most money behind them. Is it there that the early investors in Eth have benefited from participating in the sale of an unregistered sale of security. Did they build the next level of their success? Coinbase is the same way. If Brian Armstrong did anything wrong in 14-16 – he’s working with regulators – AML/KYC 1099 – he built that off the backs of a lot of people who did a lot of things wrong. 

 

Bruce – there’s a lot of judgment in the law. I was the messenger of a law firm in high school. There’s a lot of headlines, but it’s how it can be proved,  the public appetite, the history of the person, how the prosecutor feels, overall a pretty good system. Three felonies a day (a book) probably everyone in crypto if someone wanted to kick down the door and a regulator wanted to make life miserable. It happened to Iced T, audited by IRS, there is a lot of laws out there and there is some discretion that regulators and enforcement action have. Assume ETH was an illegal securities offering, it was the first of its kind, it was a weird and different time. I thought I was donating to Bitcoin, I liked Vitalik and I thought it was a cool project, and he was a Bitcoiner. If SEC wants to give a pass to the first one, it’s not a big nefarious thing. If a cop says – hey, too much noise, quet it down. Tone’s tactic is to come shoot you all and arrest you for every violation. Even assuming they got some kind of pass – it was a different ime. I’m all right with it. 

 

Simon: Thank god that law enforcement never caught up with Satoshi. We have this thing that was allowed to be created, and if they caught up early enough, they wouldn’t have let it happen. And BTC funded ETH, it was all sold to Bitcoiners. And that led to the ICO bubble, and the ICO bubble led to Securities Tokens and eventually the disruption of retail markets and banks, and I’m grateful it all is happening. There will probably be some casualties along the way. But it all led to us here making this podcast. 

 

David: I have lunch, it’s been great. 

 

Tone: David, I was trying to keep you on. If you want to come back, Jason Seibert is trying to join but he’s in Panama. 

 

David: Fine, I’ll stay on I will mute, eat my lunch, and fight with Kraken until 1:15

 

3:00/6:05

 

Adella: I have a philosophical question. What happens if it is victimless “crime” and nobody is harmed from this thing. What really bothered me about ETH is that after the DAO people were harmed, because people were not able to access their wallets. That was harm if you spent a significant amount of BTC on the project. I thought it was odd, shocking, when the roll back happened. Yet still, a lot of people were never able to access their wallet. What kind of redress is there for that? What do you think? 


Drew: There was a purchase and sale there, whether there was a direct K or not. You should have recourse. When you have people trying to pretend they don’t exist. If I know you are the one I’m buying from – I want to buy your hat and if you never sell it to me, I know where to find it to you. If you are buying from a smart contract from a group of people disclaiming all responsibility, you start to run into some seriously complex issues. Judges in America will blow right through the protective decentralized language out there. They will hold some people liable even if they have thei own documentation attempted to insulate themselves. Judges will say sorry, you put the code into execution, and you are responsible for that code. 

 

David: Lets use Nano for instance. The Nano lawsuit is no different than the DAO hack. The code can be rewritten and they should get their money back. It’s no different if their car was stolen out of their driveway and just because the mantra of decentralization says you shouldn’t, federal court judges may take a different perspective as to whether you should be allowed to get your property back. They should get their nano back if possible. 

 

Tone: Someone reached out to me with a substantial amount of ETH – the triple digits 

 

(Jason Siebert Joined)

 

Tone: Jason – we got you! Ok, we were talking about victimless crimes – like ETH up to this point. Someone reached out to me that they purchased a substantial amount during the presale. You are supposed to download the JSON file but they also apparently emailed you the Json file. The guy can prove that’s his ETH because he still has the public key. He doesn’t have the email anymore, but the ETH is gone. He may not know which email it was sent to. His point – he offered me a substantial cut of the ETH if I was able to get him the backup Json file. I reached out to Vitalik and said if you emailed him an email – you should be able to have a record. He still has his private keys. If they emailed it once, they should be able to email it again. They claim they are decentralized, Vitalik said he couldn’t do it. I pushed on it. I have the chat. 

 

David: More importantly, why are you trying to take my clients away? I can help them out! I’ll give an example, Poloniex. 

 

Jason: Before we go any further, I want to introduce the interns in Panama. These are some of the greatest minds in Bitcoin space. We spent the morning breaking down the comments of the SEC. 

 

Tone: Jason, the floor is yours

 

Jason: I don’t want to take away or backtrack – so what’s the current topic, so how can these brilliant minds – how can we provide a think tank on the subject

 

Simon: Can something be a Security and then not a security? 

 

Drew: Before you guys get started – I’ve got to take off. Sorry to interrupt Jason. Tone, thanks for having me, great to see everyone! 

 

Tone: Thanks, great having you Drew! 

Adella: Bye Drew

 

Tone: A high ranking SEC official has stated ETH is not a security, it’s not a law, but that’s our interpretation of the crypto space. Now that is what we all expected. I grossly disagree, I think ETH was a security and still is. Bruce is on the other side of that outlook. What do you think the SEC is saying, and do you agree with their outlook up to this point with their statements. 

 

Jason: One of the things we covered, and we have a few whiteboards where we broke down statements and analysis. One of the disturbing things was the SEC failed to grasp what is being sold, and was sold during an ICO. What needs to be broken down is the reality of what is sold. I do agree the SEC carved out the pre-launch, pre-sale activity – one sentence they carved out – where the SEC failed is they are saying companies are selling digital assets, the security. That is a fundamental mistake and ignores the reality of the transaction. They are not selling a digital asset, they sell investment contracts. Did Tezos sell a Tezie? No, they sold a separate contract, a separate instrument, a promise to give a Tezie later. That’s the investment contract, not the underlying Tezie. All an investment contract or security is is a contract with fiduciary duty. When I bought that Tezie I bought an ERC 20, I didn’t buy a Tezie. Does everyone agree with that nuance? Yes, I’m getting head nods. When the SEC says they are selling digital assets, it’s a fundamental mistake. ERC 20 are investment contracts and need to be separated from the underlying utility token. It’s only after the network has launched ... when you analyze the ETH presale, I said the presale function is an investment contract. After launched, arguably, not an investment contract. 

 

Simon: That’s what the SEC was stating. The underlying thing might not be a security once the network is launched. It starts as an investment contract and then...

Jason – the initial sale is an ERC 20 promising a return later. None of these things exist to begin with. When you have utility tokens that exist when they sell them, now you have an argument because the thing exists at the time. ETH was doing their sale July 22, 2014 and ended it Sept 2, 2014 and the Genisis block didn’t launch until July 30 2015. All those prior sales are not sales of ETH because ETH didn’t exist.  

 

Simon: So Tone, I think Jason is on the side of it’s not a security now, right? 

 

Jason: No, I’m saying an ETH token sold today is more likely not a security than the presale function. The presale foundation is an investment contract now. The explanation that ETH is not under centralized management is *(^&^ stupid. Of course there is guidance from the people in Ethereum. 

 

Simon: They’re buying ETH on exchanges today

 

Tone: The early days of ETH, should they be ignored? Or should they factor in? I think ETH should have been a security today, yesterday, and three years from today. 

 

Bruce: If you arg. Is that it’s a Security because it was issued as a Security – Jason is saying it was launched as a Security, nto today. 

 

Jason: The SEC gets it wrong because they talk about the presale of a digital asset. It’s fundamentally or technically wrong. 

 

Bruce: It could be an asset that evolved. I had an API key and it transformed into a different API Key. I got a piece of data that was able to unlock mathematical keys using cryptography. 

 

Jason: Look at Tezoz, something near and dear to David’s heart – today I can trade my pre-sale Tezie. That’s a separate instrument redeemable later on. That ERC 20 Token Contract that I have today is a separate distinguishable token. 

 

Bruce: Does it depend on what the underlying thing is? If I issue a presale token for my presale of my poetry... in other words, if the underlying asset is not going to be a security anyway, what would make that investment contract a security? 

 

Jason: One interesting example was the whiskey case. So if you Google investment grade wine, and tell me what you find. 

 

Bruce: (found some wine) Ok, what am I looking for? 

 

Jason: You can purchase a certificate to receive the wine. The piece of paper is a negotiable instrument I can sell to you or anyone else. That’s an investment contract. That’s what ERC 20 is – I’ll gladly pay you Tuesday for my burger today. What you have with every ICo is no network, no formation documents for a corporation yet, but you can exchange your Utility tokens now for promise of delivery of a utility token in a year. That is a fundraising. That business isn’t in the business of raising other people’s money. They have a fiduciary duty. 

 

Tone: Are you saying that investment contract is not a security? 

 

Jason: No, I’m saying the ERC 20 Token can be purchased today for later delivery of some other thing. Your SAFT Agreement. 

 

Tone: Is that the same as a security? Is investment contract same as security? 


Jason: Yes, the Howey Test is used to define an investment contract. 

 

Tone: So investment contract and security are one in the same. 

 

Jason: Yes, and my frustration with the SEC statement is the fundamental misunderstanding. Selling a digital asset prior to launch is a security. What’s really being sold is an ERC 20 investment contract, not a digital asset. Does that make sense? 

 

Tone: Yes

 

Simon: I think it supports the argument, its not a conversion, it’s two instruments being sold

 

Jason: SEC failed to connect what the underlying reality of the transaction is. They failed to connect that reality – saying ERC 20 – or even if it was Counterparty asset –which is redeemable later for some form of digital asset -  that’s the instrument that needs to be regulated. After the network is launched, when it’s actually in place, now you have to look at how the market is actually treating the actual utility. Post genesis block of July 2015 – how is the market treating ETH? I think the SEC is right; it’s more of a commodity. An orange is a utility. A digital asset is a utility. 

 

David: I got to drop off, can I ask Jason a question. What should SEC do to punish the Eth foundation for their illegal offering? 

 

Jason: So a few months ago I was giving a presentation to Cali CPA board – Crypto 101 – SEC was in audience, I looked at them and said they screwed it up. They should have gone after them on Day 1. They gave a carbon copy to others without fear of ramification. Yes at the time it was unlicensed unregistered sale. Arguably, no harm. But what makes ETH immune to these things? One thing we spoke about this AM, a good government will give reliable repeatable regulation so people know how to comply. Here, the SEC opened the door to the flood of fraudulent ICOs. I thin we all agree, nobody wants them in the space. Had they done their job, we wouldn’t have this problem now with radio ads for people to take second mortgage to dump into crypto market. 

 

David: Should we punish them? 

 

Jason: From a regulatory standpoint – from class action – what remedy? Recession, no damages. I challenge you to find someone who wants to trade in his or her 500 ETH for a .50 recession? 

 

David: I’d love to sue EOS, but no damages. I’d love to sue ETH but also no damages. But its not a victimless crime. It will enable them to do other things to the hindrance of newcomers. They got away with something but its not fair, not right, and I don’t know who can address it? 

 

Jason: SEC could send a message by punishing for their initial unregistered, unlicensed sale and send a message to everyone else. 


Bruce: You guys are taking for granted that it was a Securities Sale. That’s not some easy or simple fight. There’s a lot of arguments that smart people would make that it wasn’t. 

 

Jason: The students and I could make a prima facie case that it was an unlicensed sale from the internet in 30 minutes. 

 

Bruce: I don’t know what they will say about the offering, I feel strongly it’s not a security now. 

 

Jason: The pre-sale – give us money today, we ill give you ETH when it launches... 

 

Tone: say the SEC says that was an unlicensed sale, what should happen to the ETH issuers? What should happen to them? 

 

Bruce: I think it’s a big assumption. You would have  a lot of arguments of why it wouldn’t be the case. They’d have to prove the offering was subject to US law, and was not done by any exempting. It’s not like they did this without attorneys. They had some exemptions. You were donating money to a nonprofit foundation. Back then it was not talked about listing on an exchange. So even if you assumed all that, it’s a great time for a regulator to take a light touch. I think if the attorney’s on the line could do defense work – it’s different as the first time. There is a great degree of how Securities violations are treated. It’s a stern letter all the way up to people going to jail. I mean nobody was hurt. 

 

Jason: ETH was able to get a get out of jail free letter from former SEC general counsel that said ETH was not a security. That letter did not address the presale function. It only addressed ETHER as GAS to fuel the network. They didn’t talk about all the language they had – and go back and look at June 2014 – by the way the formation of the foundation was July 17, 2014. They were promoting and selling long before formation. They didn’t talk about it being a contribution then. So there’s enough in there to show these were sales of instruments at a minimum, they were not contributions. Nobody thought of it as a contribution then or now. When you go back to the original sale, what the promise was, how it was being marketed, Vitalik was saying it would solve the mining issues. What should be done, to say that ETH was the first person to sell an investment contract and they should only get a slap on the wrist is ridicule. The only thing that makes ETH unique is that they did it. We have 100 years of people running these types of scam. To the extent they were advised by attorneys, well 10b-5 allows the SEC to go against the attorneys that advised them on that. Slap on the wrist, no – there needs to be a clear message. The fact that SEC hasn’t done that has caused so much confusion in the market. It has fueld the fire for a continued market of fraud. I met some ETH board in Vegas; they said “the SEC hasn’t done anything so we must be ok?” That was six months – these things take time! What did they do to Voorhees with Satoshi Dice? Does anyone remember? 

 

Tone: He got a big fine. 

 

 Bruce: He got a 50K fine and he was barred from certain activities. But that was a business, it had profit and loss statement, a bank account, it existed. ETH was a protocol not a business. 

 

Jason: Bullshit

 

Bruce: You don’t see the difference? 

 

Jason: You don’t have to have a share in the company to have an investment contract. They went after Eric Voorhees but it was a victimless crime. At the Texas BTC conference in 2015 and approached the SEC and they said, because you violated the laws on the books. Well lets have consistent application. What makes ETH so special that they don’t get treated the same way as Eric? 

 

Bruce: You have that opinion, but it’s not cut and dry. You are not promised any revenue or as a business. 

 

(Tyler joined the conversation) 

 

Jason: Lets introduce Tyler. A non- lawyer – Tyler. 

 

Tone: Tyler has been a money manager – other people’s money – for 30 years. You have lots of experience with the SEC. Any comments for what you heard so far? 

 

Tyler: I’ve heard four hours worth of brilliant argument. That makes me now, one of the 10 most accomplished legal experts on this subject. I say that because anyone that concludes this is not the wild west and that every day something new is going to happen and some new regulation is going to come out has not been in the practical side of this ecosystem. I started out 40 years ago as a broker. I set up my own firm, licensed as a Principle. Then Registered Advisor, commodity pool, management of institutional money, IPAM – Institutional Pension Account Manager – then the Dept. of Labor, SEC, CFTC, FinCEN, and number of state regulators interacted the past 40 years. I got into crypto before Mt. Gox. Mining. Became disinterested because of how screwed up the ecosystem was becoming. Remember I represent clients with a fiduciary duty of what goes into their accounts. I’m proud to say in 40 years there is not any problem with any regulator. I say that because I am very aware of the practical side of handling other people’s money. With that as a background, when I heard the SEC statement yesterday, I called it groundbreaking. It’s one of the most important steps that I’ve seen in 10 years. A statement by a high employee and he talked to everyone before he made those comments, it was well thought out. It was the next step in a program that started well over a year ago. Even three years ago when the SEC approved GBTC BTC investment trust to trade on an exchange, almost four years ago. SEC has been trying to figure out how in the world they are going to put the genie back in the box. It’s been progressive. They’ve had a number of ETFs and MF”s that have attempted to get through the regulations, and none have been able to do it. We thought we got close earlier this year and the rug got pulled out. Then ignorant comments by congressman and regulators to everything being lumped together. If it was called a crypto, it fell into a basket. SEC has been parsing its words very carefully. It’s important to see what they were saying. They were trying to set up a website where you could go and set up an ICO and see how many regulators you were probably in violation of all set the stage for yesterday. No surprises here, on a practical level. Anyone that saw what was about to happen had to consider the practicality of being a major regulator that influences world regulation and finds themselves so far behind the eight ball because they ignored what was really happening over the past ten years. They are trying to come up with solutions that are as practical as possible without killing off the ecosystem. I think they walked a fine tight rope yesterday and I applaud them. I do not agree with their conclusions and they have still not shown their hands as to what is next to come. They only talked about BTC and ETH. They made implications about other ones. My guess, four months ago, carves out 10-15 cryptos. They said BTC is not a security and different than all the other cryptos. I happen to be a maximalist. I believe in BTC until nothing else, until yesterday when ETH got the nod of approval. Now I, as a fiduciary, know the SEC supports them. I could put my clients into GTBTC. I can’t comment on the others, that will be the next exciting scene, and I don’ think they are anywhere close to finding the answer. 

 

Tone: Jason – you understand the stock markets well – this is what remains making me livid. As Tyler said, he, as a money manager for other people, now feels ETH is a good investment for his clients. This is so bad because ETH is a fundamental scam. Now people like Tyler are going to be investing in this legally. 

 

Jason: First, as has been the case, memories are short in the crypto world. SEC stated in 2014 was not a security Why they had to say it again is beyond my comprehension. May work on the Shavers case established BTC was not a security. Why is that news? It’s not. The collective knowledge is running on a three month rolling time. How many remember that mining pools used to be considered securities. You ask any miner today and they say the SEC has been silent on mining. As to ETH being investment grade, any regulators would not give them the seal of approval. 

 

Jason: Maybe if you have that small percentage of speculative investments – that could be filled with ETH. I don’t know if people understand this or not, I am pro Bitcoin, and crypto. I am a protagonist to protect our industry, I want the fraud to end so people trying to do those cool things can move forward. We want legitimate markets. 

 

Bruce: Hey, I gotta run. Thanks, and just in closing... Remember when you are dealing with governments, they have a lot of downside. They killed 300 Million of their own people, police brutality – it starts with conversations like this where people wanted more. I’m all in favor of a lighter touch. It’s not a trade off. It’s an illusion to think these guys are going to save the day with centralized lists. Bernie Madoff was regulated. They did the right thing by the definition of the 33 Act. 

 

Jason: before you go, when are we going to start the self-regulatory agency?

 

Bruce – I’m big on self-regulation. I made spacesuit X – I would like to see open source, community tools. Right now, investors are better equipped to review scams. People are starting to know better. People educate themselves. Free markets are good. We as a community can regulate these things. We can demand audits. The regulators will always be behind; they might screw it up, look at BitLicense. Thanks for having me, Bye. 

 

3:58/6:05

 

Tone: Ya, Jason, I’m going to give the floor back to you, I asked Bruce earlier if he felt Bitconnect should have any regulation at any time, and he said nothing should have been done about Bitconnect, it should have been allowed to run its course. 

 

Jaosn: In 2014 I was involved in the Shavers case and the judge asked me if I was one of those guys who thought there should be zero regulation. What I told him then is what I still believe. We have regulation, Tort law, people going after other people. David’s leading the charge. People regulate themselves, go after the bad actor. The problem, these bad actors might not feel pain, they might not get to participate again, but they might not feel the harm. Look at Cryptsy, the guy went to China and started an exchange over there, the only thing is his wife got her house taken away. Then Criminal consequences, Charlie Shrem, Ross Ulbright, Shavers. They went to jail because the investment contract providing bitcoin was the bad thing. The SEC really needs to draw a fundamental line between the fundamental asset they are calling a security (which its often not in most cases) but the ERC 20 Token, which is being sold – and the investment contract. They pre-sale their They say they have their network and it’s up and running. Even the digital assets doing legitimate utility, they are sending the message that those are defacto securities and that’s just the wrong message. For someone that has the legitimate utility, there needs to be a carve out. Raadyx we are writing the Panama law and carve out a utility to allow these markets to grow. How does law change? Guys like David enforcing Tort law. And then maybe guys like me, trying to train other lawyers around the world on how to do this the right way without stifling growth, and trying to keep fraud at bay. 

 

Tone: CoinDaddy asked, “If ETH is not a security, by default, does that mean ETH Classic? And what are other forks like BCASH?” 

 

Tyler: That’s a good question, making a decision about an asset class is when to buy, when to sell, and if it should even be considered. Even though I’ve been in the crypto world for five or six years, the single part of crypto that I would take Fiduciary responsibility over is something based on BTC but not BTC itself. I needed something that had been approved by regulators, and that was GDBTC. I would not put a client in a crypto – including BTC – from a Fiduciary point of view, even today. And same with ETH. What I would do, but a security under all the regulations that was loosely related to the price of ETH and hopefully by the end of this year we will have some of these, and I can buy and sell them for clients just like I would Tesla stock or Gold Bouillon. Just because the SEC says these are not securities or they are and they are doing the right things, that simply puts those into my toolbox for the right time or place. And what about the forks? I don’t care if they are deemed a security or not a security, I want a regulatory blessing on them specifically named by the regulators, and then they can go in my toolbox. I personally would never buy them because I agree with Tone that every fork since day 1 is inferior to the Bitcoin Blockchain. I call it barnacles on a ship. Every one of them is a barnacle that has slowed down the BTC ship and now there is 2000 of them. I think the SEC has just eliminated 1700 or 1800 of them. I think we will see 10-20 of other cryptocurrencies from the SEC at a later date. Not the full wink and nod that ETH got. I don’t think they had any other choice but to do what they did, and now they will have to define how far that will go over the next few years. 

 

Tone: You (Jason) and the students went over the conflicting statements by the SEC – can you elaborate? Tyler is sure this is a green light? Is it possible everything this guy said on stage could turn out to be the opposite in three months? 

 

Jason: What was said was, and this was mind-boggling – something that starts off as a security can somehow trans modify to a utility. That completely ignores the absolute rubric of the SEC to regulate all the statements made prior to the sale. They talk about the asymmetry of information in a transaction and what that means is disclosure. They want promoters to disclose all that is happening. What does that mean, a promoter can say this might be a security now, but hold on long enough and it might become a utility and we won’t have to register and we can get away with it. The overall response that I saw on some of the back channels that I’m in = is like great, we break the law long enough and something that is illegal will become legal. That’s such a terrible message to send. That doesn’t promote people to comply – it encourages people to ignore the law. Why would anyone now launching an ICO actually bother to register, when the SEC just  gave a green light and said, “ah, fuck it, go ahead sell your security like ETH did and wait long enough.” It’s such an obtuse statement that I don’t even know where to start. As a trained lawyer, I cannot tell clients to rely on this guidance and statement. It provides zero clarity. What you can do, is say, of course the token you are selling is a security, and you need to approach it from a prudent standpoint. You can say, there are certain risks. It’s not the Wild West, we have 80 years of a regulatory environment. If anyone lawyer told their client the SEC doesn’t know how to treat cryptocurrency, they’re committing malpractice. Of course we know how to treat it. Eventually some of the things I’ve been talking about for years are starting to come to fruitarian. That’s not me saying I told you so, it’s me saying to not be a competent lawyer or IA, or Accountant or any kind of fiduciary in the space and tell people there is no regulation. And then, for some unknown reason the SEC announces it’s the Wild West. That’s mind-boggling and there was no reason for the SEC to make that statement they made yesterday. The only statement they should have made is actually launching actions against people for doing the things they have done wrong. When they launched the DAO report last year was the time. Now this is the second free pass they’ve given. 

 

Tone: That DAO report was ridiculous. 

 

Jason: This is the second free pass they’ve given ETH. To say there was no management in Ethereum, when clearly Vitalik, Steve Toole, had management and control and could manipulate – when you look at the proportionality of who can do what and when – it’s obvious the DAO and ETH had management and control. The SEC gave them a free fucking pass. Listen, come on, it just – do your jobs, that’s all I’m saying. It makes an attonry’s life hell when you can look at case law and it says exactly what you have, reliable, consistent regulations that prevent people’s money from getting stolen. And what do you do, people’s money gets stolen, and it’s like ya, whatever, it’s all right. We’re not going to do anything wrong. What the fuck is going on? Excuse my language, is this a free speech environment? 

 

Tone: It’s free speech, but 14 year olds watch with their parents. I’m sure they’ve heard before. And we have Adella back. 

 

(Adella joined) 

 

Adella: I’m feeling very triggered by Jason, by the way. 

 

Tone: have you been lurking in the background the whole time? 

 

Adella: I was on a work call; some of us have jobs, laughs.

 

Jason: Adella – I have a question for you, when have you not been triggered by me? 

 

Adella – Jason, I’m sure we could bore these fine gentlemen with a very long explanation of why this man is triggering, but I think we will bypass that for now, ya? 

 

Tone – we will do another podcast on that. So, I deal with this from Bruce Fenton, and in the chats. People can’t seem to separate the distinction on the regulation on the solicitation of money and regulation. How do you get people to understand that I’m for regulation that probes the guy who is selling bullshit?

 

Jason – so let’s break that down from a concept of fiduciary duties. One of the themes that the students here – students lean in and say hi – aren’t they awesome? One of the things we talk about is that securities and investment contracts have a fiduciary duty. We studied this last week. A fiduciary puts someone else interest 100% above their own. So if an investment manager is selling ETH to someone, he is doing that knowing the investor’s interest has to be held above his own. So when ETH takes someone money presale – so we are going to pay off this, develop app for this, etc. So people give money and expect it will be used to that end. But if the ETH board, a week after receiving 18 million – which at the time meant the coin was worth that before it was launched. If they took that money and spent it on hookers and blow – they just breached that fiduciary duty because they are not using the money on its intended purpose. Now let’s move to markets, exchanges that have various cryptos on them. Arguably the market owes a Fid duty to the people purchasing these cryptos, to do their due diligence and ensure what they are selling is not a scam, to ensure there is some validity. You wanted to get listed on the NYSE, what do you have to do? Tone you were a trader, what do you have to do? 

 

Tone: Well there was a lot of regulation to do that. 

 

Jason: Right, and then compare with Crypsty, who could list on cryptsy? 

 

Tone: Anyone – maybe paid Paul Vernon – it was basically anyone. There was no statement from the exchange saying the listing criteria. 

 

Jason: What does it take to get listed on Kraken or Polo a year ago? 

 

Tone: I think Kraken is a little more responsible, but I don’t think they have a set set of guidance. 

 

Jason: You gotta pay them. 

 

Tone: I don’t think you have to pay them. I don’t think Bcash paid. I think if you can pay them... Polo maybe now is more responsible because they got bought by Circle. 

 

Adella: What we have been seeing a lot of now, actually, is the creator of coins are reaching out and asking for a memo because exchanges are starting to ask for it. The exchange wants that memo and an integration fee. 

 

Jason: In the last 8-9 months we saw a lot of activity of wanting a memo stating they are or are not a security – sometimes the folks don’t like the outcome that they are a security. 

 

Tone: There is actually a fee from a traditional coin to list their coin. 

 

Jason: It’s only like 50K 

 

Tone: That’s a lot of money for an ICO

 

Jason: The NYSE fee is 35-50K. I have heard that the cost to get listed on Polo is around 350K or more. 

 

Adella – well Jason, the price is commensurate with the shittiness of the coin. Some exchanges don’t have one price. I know of one 500K incident. 

 

Tone: We are talking about the details, but the point is this goes against the Fid. Duties of the exchange. 

 

Jason: the assumption by a traditional investor, who isn’t an OG, who knows the markets are rigged, expects that if something is listed on an exchange has been vetted. If my Aunt (60 years old) would see a coin on an exchange, she may think it was vetted. 

 

Tyler: That was my point, this is the wild west and it will be for another few years. The regulators – if you believe they are the same from 20 years ago – which they are not – I would buy the arg. That they know to do. That’s the problem with this crypto ecosystem. The legal community told everyone that these were not securities 

 

Jason: That’s not true

 

Tyler: 98% were told that, they are not IPOs, they are ICOs and that’s a different category. 

 

Tone: That was the pitch and expectation of the crypto market. 

 

Tyler: That was the lawyers advising – including ETH – that they believed they got the green light from the top lawyers looking at it. I am intimately knowledgeable about a lot of blockchain projects that got the green light from some big law firms. 

 

Jason: Are those the same law firms that sponsor events. There’s a conflict of interest between law firms trying to build a market for themselves in this space. You will hedge certain statements and say the law is not clear just to get a client through the door. It’s a hustle, clients will give you money all day long if you tell them what they want to hear. I tell clients what the law actually is. 

 

David: There are lawyers who pay to sponsor events:? I’m shocked. Oh what good timing I had to join this conversation back.  

 

Tyler: My point is there’s a difference between what regulators can theoretically do, and what they can practically do. I don’t think we are anywhere near any kind of definitive answer on most of those questions other than what we heard yesterday. That one regulator has made a decision that at least 2 of the 2000 cryptos are not securities. And anyone with fiduciary responsibility dealing with non-high net worth investors – will begin to move into not only bitcoin like securities but also ETH like securities simply on the basis what was said. Tone asked, could the SEC reverse them and come out with something else in three months. Yes, but it’s not practical that they would.  That statement was fully vetted by the entire staff at every level. The SEC is attempting the best they can to make something slightly better of a horrible situation. I will not put a a client in ETH or BTC and that’s because I can’t buy them on an exchange without that exchange getting hacked or the client losing the wallet. There is no part of the ecosystem. The core developers- you and I cant tell the difference between the ones who know what they are talking about and the ones who don’t. Some left core and became wildly rich. Because of that confusing, I’m not touching anything without the full backing of the Regs and that means there is only one place I can buy – OTC – one security related to BTC. 

Tone: So you think a GBBTC will have to come for ETH? 

 

Tyler: Yes, I think they will have to back up that statement. Meanwhile, the whole tech could collapse and go to zero. Even if an ETF comes out that holds ETH like GBTC holds BTC, I would look at that security and make a risk/reward decision. Remember I’m not a broker, I get paid a fee for handling their assets, and I have the Fiduciary responsibility between the 40s and 33/34 Act. 

 

Tone: Jason – you have someone who wants to comment?

 

Jason – Yes, this is Idiam – we were live checking Tyler’s rationale that somehow there is more reliability and desirability on BTC and ETH. 

 

Idy has some information: Hi everyone – so BTC is down .84 and ETH is down more. 

 

Jason: So how does the market react to Tyler’s statement? 

 

Idy: They both lost value.

 

Jason: So is that correlated with SEC message? 

 

Idy: I do think they correlate because we lost some value in both currencies

 

Tone: I don’t know if that’s why we went down, we are in a bear market 

 

Idy: What do you mean bear market? 

 

Tone: All of cryptos have been going down because they got out of control, and we went into a short term price bubble. If this news had come out last Oct, everything would be up. I would love to see what happens over the next week or so and those conclusions would be more definitive. 

 

Idy: Thanks for letting me hop in

 

Jason: To jump in on that discussion – Tyler is saying he has confidence with the SEC’s decision, and as a result BTC and ETH are more desirably, and he will move more people into those instruments based on that green light. But we are not seeing an influx of new capital, so I don’t know if I can go along. I understand what Tyler’s saying; I understand the rubric he is bringing. 

 

Tyler: Let me try and explain it differently, I basically have been long or owning BTC related securities from last fall through December, and then I sold all of them and I sold all of my clients holdings and have been out ever since. That’s a different question than the validity of the underlying security. Until today, there was only one I could invest in that had the blessing of the SEC. Not being a good/bad/timely investment – just a 

 

Jason- the SEC didn’t say that.  And further, if you call them an investment, you are undermining what the SEC said yesterday. 

 

Tyler: They say they are not a security, but that’s different than the word investment. Gold is an investment, wine is an investment, race horses are investments. What was made clear yesterday, two of these two thousands are not securities. Prior to yesterday, only one was not a security. That’s why it was so important because it was a foot in the door to say these other ten are also not securities and the other 1990 are. I don’t know if they will do that, I’m just saying if you are in the securities market and you believed all along that these others were securities – it’s changed Now the people who determine that just told me this can be in your bag of tricks to be bought and sold. I believe BTC is going to 1000 this year. I believe ETH is going to 100-200. Terefor I would not put any client in any of those. It has nothing to do with if it’s a security or not. I can’t decide that. You can, as a lawyer, you can bring a suit. I must abide by what the regulators say I have to do. 

 

Jason – so you read the sec’s statement and the determining factor they focused on – that ETH has somehow moved to a level of decentralization to obviate the Howey Test – do we have consensus in the forum? We all agree that now it’s so decentralized.