Mar 10, 2023

New York State Attorney General Letitia James filed suit against KuCoin on Thursday, alleging the Seychelles-based crypto exchange is violating securities laws by offering tokens, including ether (ETH), that meet the definition of a security without proper registration.

Video transcript

The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency. What happens if Ether is a security? Well, it's interesting, this is actually part of the, the uh some of the concerns from the hearing yesterday when you have at the state level and also at the federal level, different approaches to how um a a security will be defined. My understanding, I am licensed in New York, but I'm still unpacking that uh filing by uh Attorney General James to really understand how um a security is defined under state law. Obviously, it very much mimics the, how we test uh from the Supreme Court case, of course. Uh But oftentimes at the state level, um uh there's a more expansive view and definition. Uh We saw that also in some of the uh filings in the FDX case down in Florida, for example. Uh And so, uh the definition does focus however, on this third party, I was uh looking at some of the, the coverage third party efforts of others including bolic butter, which I, I find incredulous. I, I really am struggling to understand and I think it has broad ramifications. My understanding is also a stable coin is put in the mix. We talked about that at the hearing yesterday as well. How on earth, um a stable coin uh by its definition, that will always hold its value could be con considered um and determined to be a security. I I just don't see it. Uh This does, as you mentioned, have huge ramifications for the ecosystem for a number of reasons. Uh But time will tell how this all shakes out. I just don't see how it is a security and certainly not a stable coin. Well, Professor Evans, what, what happens in this situation where you have a state deem a sec a Cryptocurrency or, or any other asset a security where the federal government, the federal regulator says it's not, I, I'm not gonna say that's the situation with, with e because if Gary gets his way, everything's the security, including my baseball card collection. I mean, we're throwing that out there. I mean, that's kind of what it seems like. But uh nonetheless, it, if you have a state call something a security and the feds say it's not a security. How does it, what happens? Then? It's an interesting question because we always have uh United States is a republic, right? So any um power that was not retained by the States, the states came together and for a limited purpose, created a federal government um for the Republic. So, uh two things can be true where you can have something that may violate state law. And as long as there's no um uh preemption by federal laws as well, two things can exist, you might have something at the state level. Um I think for example, of marijuana laws, um And so you can have violations, technically speaking at the state level. And as long as there's no preemption at the federal level, those things would, would coexist that being said. Um once there is a federal proclamation, not proclamation in, in the, the specific sense, but once you have federal guidelines, rules, regulations in laws that may preempt state law, uh oftentimes you'll see things percolate up from the states and eventually make it uh before the highest court in the land to render the ultimate determination. And this is what we often see in new and emerging. Uh not only uh asset classes but also in new and emerging industry where you see a lot of action at the state level. And ultimately, that is a leading indicator for state laws to uh excuse me, federal laws to ultimately settle in. Well, coin is registered in the Seychelles and ranks fifth on coin gecko's list of crypto exchanges based on a trust score and 17th in the world based on 24 hour trading volume. So how will this lawsuit go? Given Coin isn't registered with New York per se? And uh you know what happens next there? Well, we've seen that even, you know, when you think of FTX who uh that the greatest alleged offender really was a company that was uh registered offshore in the Bahamas. And I think there was some connection to Bermuda, et cetera, et cetera. But when there are implications for United States citizens for a number of reasons, you can have the reach of the federal government, but it also requires extradition. As we saw, there's some um folks, for example, that are operating in a country that has an extradition agreement with the United States. And therefore there's a larger reach beyond our borders. Um When you are dealing with a country that is outside of that or it's not a part of an extradition um treaty, then our reach as, as a government becomes uh almost impossible. Uh And so what we will see is kind of a both end strategy of um reach with extradition. Um when there are consumers and investors who are implicated and impact in the United States, um That's always gonna be a concern. But if we're pushing this type of our ecosystem offshore, it will be more and more difficult for lawmakers and, and regulators to actually reach. That is the point of keeping this ecosystem vibrant in the United States with clear and defined rules, I guess that was the crux of uh yesterday's hearing. So uh we saw Bo Ceo Mike Behi Coin based Chief Legal Officer Paul Grawe testifying uh alongside you as well at a house hearing called Co Coincidence or coordinated the administration's attack on the digital asset ecosystem. Uh We do have a clip of a bell. She reflecting on how the last year fared for the crypto industry. Let's quickly watch here. 2022 was an undeniably miserable year for digital assets with a number of dramatic failures in the system. This has led opponents of the digital assets to wrongly proclaim, proclaim. I told you so digital assets are unsafe for banks and the financial system. But the underlying problem is not caused by including digital assets in our markets. The problem is caused by excluding digital assets from our markets. Our regulatory failure to keep pace with innovation has created a regulatory exclusion which is directly responsible for harming the very investors that we are supposed to protect. All right, so you were also a witness there, Professor Evans at yesterday's hearing, what were some of the key takeaways? Well, I actually, first of all, I congratulate the house Financial Services subcommittee for hosting its first hearing. I I I'm all, I'm constantly frustrated and I know you all are as well with some of the hearings that are highly politicized with a high on politics and low on information. And so I was honored and thrilled to have such an esteemed panel, first of all, and, and I found most of the questions to be thoughtful. Um There was some, you know, political saber rattling and I appeared of course, as a, uh, as an academic on a nonpartisan basis to really separate fact from fiction. Uh Some of the key takeaways is clear advocacy for um, clarity rules regulations. Um Also a bipartisan effort with, I think five new bills or I don't know if they're new but where they're, um, being introduced again for consideration and hopefully that will happen again on a bipartisan effort. I see uh Richie Torres and I can't remember uh who was the cosponsor of his bill, but many uh are on a partisan, a nonpartisan or bipartisan I should say basis. Um Also, I certainly leaned into uh the clarity that we need between agencies. So we talked quite a bit about uh Chairman Ginzler, the SEC, uh and the uh chair Benham over on the CFTC side and whether or not those agencies can and should act together in a coordinated fashion in order to go forward. And I personally also wanted to hear uh from Chair Ginzler at some point before Congress in order to really lean in and explain why in a piecemeal fashion. We're moving at such a critical time for the, um the, the case by case enforcement without requisite rule makings or even guidance. Um The impact that it's having on investors is actually worse. In some cases we see um and Bitcoin taking a hit for example today. And, and some of those were some of the key point in takeaways, Professor Evan. So do you think that, um that all right, let's, let's get a little bit political here if 11 minute, um, do you think that chair GSS view of this is he wants to regulate it to protect investors or he wants to push it offshore, to protect investors? It, what do you think is, is given the actions of the SEC over the past year or two? Do you think that their goal here is to make everything a security so that it makes it nearly impossible for us uh based exchanges and us based uh projects, et cetera to take off and potentially uh hurt investors? Or do you think that they, they have at least some interest in seeing this nascent industry grow uh on in some fashion so long as they can control it? That's an excellent question and it's difficult to understand the end game. So we're kind of putting the pieces together one a year ago. As of yesterday, we saw the executive order from President Biden uh calling for a coordinated effort. So we don't have to one, we don't have to guess about whether or not this was coordinated. In fact, it is um through the, even after getting the first ever comprehensive I think framework for responsible development of digital assets, um we don't have any more of a framework than we did when we started. But what we do know is the coordination seems very hostile, it seems aggressive um and intentionally focused on some of the big fish in the pond that have this clear reverberating impact, impact on the entire industry. Um and whatever the end game is, it is causing extraordinary and unnecessary pain to investors who on a good faith basis want to engage in this um emerging asset class. And the end result, regardless of what the impetus is, is if we're driving this offshore, the technology continues to be developed. The underlying technology is based on cryptography, uh the internet, peer to peer uh protocols and also consensus protocols. That technology is not going away. What will go away is people erring on the side of caution and moving to more favorable jurisdictions and final point, more favorable doesn't mean easier. There's some, I you know, there are areas where it may be very difficult, but at least it's a bright line and it's clear and the good faith actors are going to trend toward that because this is really bad for business to be sued. And after the fact have to parse it out with regulators and like and, and um and courts. Yeah. Well, one area where CC chair Gary gentler is certainly making it difficult for the crypto industry is now cutting off the on and off ramps to the financial system. So let's just turn to the banking sector here. C NBC is just reporting that Silicon Valley Bank uh financials and to sell stuff because they can't raise capital uh and shares of the bank are now falling again in the premarket. It's a partner for mostly tech and health care companies and this comes as crypto friendly bank. Silver Gate has also just announced it's going to voluntarily liquidate. Uh What's your take on the US banking sector regulation in relation to crypto when we think of prudential regulators, um you're supposed to have um a wide variety of opportunities that don't concentrate um this onboarding and off boarding, for example, in the crypto industry into one or a few silver gate was an incredibly important um uh banking bridge that would allow folks to go, as I say, from cash to crypto, right? So people have been describing this as operation choke 0.2 0.0 in the sense of cutting off the ability for people to go from fiat into the crypto space. And what ends up happening is this causes fear and prices in the market. Uh What we would call a run on banks as well. Um The banking industry um ha having a chilling impact on the banking industry who would otherwise want to provide uh products and services to customers. And I think just it for so many reasons, we could have a whole segment just on that. Maybe we should because this is one opportunity but certainly not the last opportunity to um focus on the deleterious impact on banking and banking in an emerging sector um that's causing serious concerns and, and problems. Professor Evans, do you think that uh regulators will look at as a one specific regulator will look at this issue of SVB and Silver Gate uh having issues having problems collapsing, et cetera. And you not waste this opportunity to say, see I told you so this industry is dangerous. I should be in charge or it, it should be pushed offshore or whatever. Do you think that this is it? In hindsight, it's not so much AAA symptom, it'll be viewed not so much as a symptom of uh not allowing uh more use and more regul or proper regulation so much as a sign that, oh, here, this is something really bad for consumers. We've got to crush it, right? It's like creating the problem and then identifying the problem as the problem. The government never, that never happens in the government. I know this is new to everyone. This is what we're watching in real time. I, I think we'll look back on this time and, and, and settle on precisely how you just described it. It's uh choking off and pushing offshore and then using the pain that is injected into the marketplace as the reason that the marketplace shouldn't exist. Um That's problematic and we're kind of seeing that in plain sight and that's why I'm really leaning into policy and what we can do with reasonable uh clear regulations for a country that is willing to keep business here and not push it overseas. Because if the end game is to move further behind, we are certainly doing that by leaps and bounds because uh technology and development in this area is moving at a meteor pace. Um We might look back at this time and also see how semiconductors were, were left to other countries. And now we had to bring semiconductors back to the United States realizing that we were so far behind and the impact on supply chain when we weren't able to get semiconductor chips. All right, Professor Evans, we'll leave it there with that thought. Thank you so much for joining us. That was Penn State Dickinson law, Professor Tanya Evans.

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