Colorado Securities Commissioner Addresses Crypto Projects Who Raise Capital via Tokens

Regulation is top of mind at East Denver as builders discuss how to navigate the space that is largely unregulated. Joining us now to weigh in is Colorado Securities Commissioner, Tung Chen. Hello. Hello, good morning, Chen. Good morning. How are you enjoying the conference? It's really fun. This year is uh just as lively as it always is. And it's actually really exciting to see the conference get bigger and bigger and more folks joining from a regulatory perspective. Have there been any conversations that you've had or overheard that have surprised you? I don't think conversations have surprised me because I've been in this space for uh almost a decade. So nothing surprises me. It's a really lively ecosystem, uh full of innovators. So, no, you know, it doesn't surprise me at all. Yeah, that is a mark of a veteran in the space. No more so prizes. There's no more as much going on in this industry. That's right. You were on a panel yesterday. It was called This Common Sense crypto Policy within Reach. Curious to hear your thoughts. Do you think it's within reach? Well, before I start, I have to say that I'm speaking on my own behalf. And I'm not speaking on the divisions or um the States. Uh So I do have to put in that uh uh caveat, but I, I do think it's in within reach. I think we're closer than we've ever been. As I mentioned, I've been in the space for almost 10 years and I do think in the beginning, um it was uh you know, it, it was a lot less clear, um, as more people go in, as more people become involved in crypto and it becomes more mainstream. At the same time, I think, um, there's a maturity in regulation as well. Now I want to break this down for the audience. You're a state level securities commissioner and then we have the federal level securities commissioners. How, how do the two work together if they do, um, as it pertains to this industry in particular? Well, that's a really good question. Um, I would just speak, uh to how securities works and it, it is relevant to any kind of investment that ends up being a security. So, um, we have federal re uh legislation and then we have uh state legislation and there is some overlapping jurisdiction but the thinking I think of having it this way is that we have 50 states and, you know, in Colorado, we have issues with oil and uh other areas they may have issues with coral or some kind of uh orange groves. Um So there is some thinking that the feds have this overlay. But at the state level, we know our constituents and we know what's happening here and we know it on the ground level. And if somebody loses $500,000 oftentimes that's too small for the feds. So without us, you have no one looking into that and I don't know about you, but if someone I knew lost $500,000 that would hurt, that hurt a lot. And to feel like nobody understands the securities level of that and nobody's interested in that fraud or regulating that industry. I think once you feel that loss, um, I think it becomes, um, uh clear why there are state regulators. A lot of state regulators like to say that we're the cops on the beat and in securities terms, that's kind of what it is like. I will know my neighbor and I will know and I will care if you lost $50,000 for folks who are building in this space. How, how would you recommend they navigate this? Right? Because we have state regulators on one hand, who might be saying something different than what the federal regulators are saying? How, how should folks who are maybe at East Denver who have a start up or try to navigate the space who don't want to get sued kind of, um, operate? You know, that's a really good question. And I think I have a perspective that maybe uh I haven't heard other folks uh say, say and so maybe the question is one that goes back to the developers. I am really interested in the innovation. The Blockchain is a powerful tool that I think is gonna, in my view, my personal view is going to be integrated into so many aspects of our lives in the future that it will be something that won't feel mysterious and difficult to uh the regular person just like the internet, right? We all use it now. So the question for me is why if you're doing all this innovation on the Blockchain, why do you have to meld it and mix it with a capital raise if once you go into capital raise world, right? You're trying to raise and you're trying to say, hey, if you invest in us, you're gonna be, you know, you're gonna make a lot of money and we're gonna make that happen because we're running this business. That's a security. But you're trying to do this innovation. On the other hand, why don't you just do the innovation and do the capital raise in a way that doesn't put consumers at risk? And I think that is the question for me. So I kind of throw it back to your audience or anyone else who wants to respond to that to let me know why they want to conflate capital raise with innovation. Now, I just want to get some clarity here when you say capital raise. Are you talking about a token launch? Yeah. Yeah, I understand. You need capital. Everybody needs capital. The person who's opening car dealership needs capital. The person who's opening a restaurant needs capital, they don't get to violate the laws. But for some reason in this space, if we try to hold people to regulation, a lot of them will say, well, so you're stifling innovation, we're not stifling innovation when you open a cool brewery, right? And you have to capital raise like everybody else. So I don't really know why those two issues are conflated. And I think that's something that I would love to hear an answer about. Yeah, that is really interesting. I'd love to hear an answer about that too. So then I guess, are you saying that projects who have a token, who have launched a token, who have uh retail investors who are participating in that token, whether it be for governance or uh more in a kind of capital raise realm should be more aware of securities regulations as we try and figure out um a clear path forward for regulation. So if I think one really good thing in this space as it's evolved is that uh it is becoming more mature and often times through pain. So we've seen FTX Collapse and we've seen Celsius and Voyager of Collapse and issues with Genesis. So, and, and many others, right? And I think that's just fact, I think what you're seeing is that the people in the ecos space who are builders are also people who lost coins or, you know, were involved in these, they're also people who are in the space with their own money and they're starting to realize that they don't love the feeling of losing all the crypto FTX or Celsius or Voyager. And hey, where were the regulators? Right? Like that's what we get like before they like, there should be no regulation, but then they lose money or their, or their parents lose money or, or somebody they care about loses money and then they're like, oh, so I think the evolution of the space is that they're understanding that nobody wants fraud in this ecos space and, and that fraud in terms of securities is investing under the, under the Howie Test and under the principles since the 9, 1934 Securities Act, the principle was if you are hustling to get people to buy your stuff so that they so that you can use it to, to build your business and you're telling them that this is gonna make you a millionaire. Don't worry, we're taking care of everything. That's a security. It doesn't matter if it's orange groves or crypto or anything. The whole point is, um, in 1934 the Securities Act was put in place to make sure those kind of hustles are regulated that you can't lie when you make that offering. Right. So, it's not regulated like you can't do it, you just can't lie and you have to follow some rules just like everybody else who's right. A small business or starting up. So, I think the principle behind that is, uh, sound and it's, it's still there. So, when I say capital way, yeah, I mean, if you're trying to get people to buy in and you were telling them you're gonna manage it and they're gonna be so rich, you shouldn't lie. You shouldn't omit material things. It's not fair and that's the principle behind it. I want to talk now a little bit about that clear path forward. You know, we've heard a lot of folks in the industry speak kind of negatively about the fact that there hasn't been a clear path forward with regulation and express, I guess, frustration that some of the decisions are being made on a court level, curious to get your perspective there. Well, I don't think that there, uh, uh, well, I think it's a three pronged approach on how our regulation develops. Right. So we've got legislation so that would be the Congress or the state legislatures. Um, and then there is, uh, the courts, the judiciary and then of course, there are the administrators like the SEC. So I think that I think that ultimately good re regulation comes from all of those, all of those branches working towards it and it is iterative and it does take time. So in an industry that is uh has a lot of urgency, I, I can understand that that um process which can be slow um would be really frustrating. Uh I think that what's happening now is there's a real will, there's a real push to have legislation take over in Congress. Um But at the same time, you're seeing uh really important cases happening at the court level. And I think the place to look is the second circuit district court, we have the terraform case and we have the, uh, uh, the ripple case, two different judges working trying to work out, uh, what a security is, what a security isn't. And I think that's really interesting. Um, I think the dominant case that a lot of us talk about in terms of determining whether something is a security is a Howie case and that's over 60 years old by the US Supreme Court. And so you can see that it's not, not just Congress, but it's the judiciary that also will play a big role in how this shakes out. And right now, like I said, I think the second, uh, circuit district court is where the action is happening. Commissioner. Just before we wrap, I got to ask you what is Colorado doing? Uh, that's different than other states when it comes to crypto regulation. Well, our governor is really tech forward and business friendly and so I think there's a lot of um, there's a lot of thinking and working groups to, uh, try to develop some innovative ideas. Uh, one thing that the governor announced and has that has been happening is you can pay your taxes in crypto. Uh, you can pay your, uh, DMV fees in crypto. And these are really exciting. I don't know that there's another state that's doing something like that. Uh, and, and it's, uh, I think it's a lab right now where folks are trying to think about really innovative ways of um incorporating crypto and Blockchain into the government um in a way that is also protective of consumers. So it's a really exciting place with uh with um an amazing uh ecosystem of people who are really knowledgeable and there's just a lot of energy here. So I think that um I think that puts Colorado uh at the forefront of innovation and also uh developing some good, good legislation. Do you think we're gonna see other states follow suit? I mean, I think about paying taxes in crypto and I think about if we were just all operating in crypto, how easy it would be to pay your taxes because there would be a clear ledger out there. Do you think we're going to see other uh states follow suit and see some of these new ways of operating with the government that involve crypto? I think there are a lot of interesting use cases popping up around the country. I believe that there's, um, like title, they're thinking about, um, recording your title, like if you buy a house or something like that, um, on the Blockchain, which to me just makes like, so much sense. That's not a security issue, right? Like you're recording on the Blockchain and it, it, um, leverages all the advantages of Blockchain. So it, there's transparency, it's immutable. Um, you know, and everyone can look at it and you can look at it and know that nobody else is messing around with it. So I think there are so many different, um, use cases that are developing around the country. I think that is one of the most exciting things about having a state. Um, and federal, uh you know, uh system at the state level, you can really innovate. And if it, if it's a great idea, I think more states will pick it up and, and then, you know, the fed, uh can join in. Uh one thing that we are at the state level is we're more nimble. The fed has this overreach. But if it was just Feds, it, everything would be even slower. So I do think that the, you'll see more use cases at the state level. I know, I keep saying it's the last question and this is really the last one because we're at East Denver. I know that you served as General Counsel for the Ethereum Foundation years ago and it took 10 years to get an approval for spot Bitcoin ETF. Now everyone is talking about a spot Ether ETF. Do you think we're going to get one this year? So exciting. Such a, such a hot question. I think everybody wants to know. Um I don't know. I really, I, I don't, I can't say because I think SEC has put out statements saying, hey, just because we do one doesn't mean we're doing others. And frankly, that's how it works with uh all other securities. And I don't know, but I will say just to remind people in the crypto space, you're not the, you know, you're very, very important, but you're not the only one. And so whatever they're doing in terms of other spaces, you know, where they are careful and say, you know, just because we do one, we didn't do, we're not gonna do all of them. They say that too in every kind of product and space. So they're gonna say that here and I think that is fair to say that that's each one has to be fact specific. And uh so the answer is, I don't know, but the answer is also, you know, you, you guys are really and it, you know, a very urgent space. It's very young, it's very hot and very like, let's go, let's go, let's go and you know, maybe cool your jets a little bit. Let's so just a little bit, Commissioner. Thank you so much for joining the show this morning. It was a pleasure. It's a pleasure. Thanks for having me that Colorado Securities Commissioner, Tung Chan.