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Speaker 1: This is Bloomberg Law with June Brusso from Bloomberg Radio.

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Speaker 1: Caroline Ellison, a former top executive in Sam Bankman Freed's

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Speaker 1: fallen FTX cryptocurrency empire, was sentenced to two years in

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Speaker 1: prison today in order to forfeit eleven billion dollars for

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Speaker 1: her role in the collapse of FTX. Ellison was the

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Speaker 1: prosecution's star witness against Bankman Freed, her former boss and boyfriend.

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Speaker 1: Prosecutors called her testimony the cornerstone of the trial. The

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Speaker 1: same judge Lewis Kaplan had sentenced Bankman Freed to twenty

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Speaker 1: five years in prison after a jury convicted him of fraud.

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Speaker 1: Ellison's lawyers asked the judge to let her off without

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Speaker 1: any prison time, citing both her testimony at the trial

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Speaker 1: and the trauma of her on again, off again romantic

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Speaker 1: relationship with Bankman Freed. And though Judge Chaplin said Ellison's

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Speaker 1: cooperation was quote very, very substantial, he said a prison

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Speaker 1: sentence was necessary because she had participated in what might

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Speaker 1: be the greatest financial fraud ever perpetrated in this country

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Speaker 1: and probably anywhere else. He said in such a serious case,

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Speaker 1: he couldn't let cooperation be a get out of jail

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Speaker 1: free card. Joining me is Bloomberg Legal reporter Christopher Domesh,

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Speaker 1: who covered the sentencing and the trial, tell us what

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Speaker 1: she said in her apology.

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Speaker 2: She was very contrite and apologetic during her speech to

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Speaker 2: the judge. She immediately apologized to everyone, FPX employees, Aloma

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Speaker 2: employees who had lost their jobs, people who had lost money,

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Speaker 2: her family, her friends. She said they abused the trust

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Speaker 2: that investors had placed in them in the worst possible way,

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Speaker 2: and she was deeply ashamed of what she had done.

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Speaker 2: She said she had gradually found herself drifting away from

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Speaker 2: the person that she wanted to be, and that the

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Speaker 2: culture that you know, promoted positivity and discouraged dissent kind

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Speaker 2: of helped that along. She said, it felt harder and

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Speaker 2: harder to extricate myself and do the right thing, and

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Speaker 2: she apologized for not being brave. She said, lying isn't

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Speaker 2: something that came naturally to her, and it's been a

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Speaker 2: relief to be completely honest about things. She said she

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Speaker 2: found that meeting and just trying to be a good

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Speaker 2: person in small and noble ways, talking about, you know,

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Speaker 2: working for the soup kitchen and some of the other

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Speaker 2: things that she's done.

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Speaker 1: The prosecution here didn't ask for any jail time at all.

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Speaker 2: Yes, that's correct. They actually didn't ask for a specific

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Speaker 2: sentence at all. You know, depending on the case, prosecutors

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Speaker 2: often you know, asked to set someone in light up

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Speaker 2: their cooperation. They don't really go and ask for a

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Speaker 2: specific sentence like they are with most defendants. So they

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Speaker 2: at no point did they really ask for anything other

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Speaker 2: than you know, substantial departure downward from the guidelines, which

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Speaker 2: were admittedly draconian and you know, basically one hundred and

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Speaker 2: ten years in prison, which is most driven by the loss.

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Speaker 1: And it seemed like the prosecution's statement at the sentencing

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Speaker 1: was almost similar to the defenses.

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Speaker 2: Yes, it was very similar. You know, they acknowledged Daniel Festoon,

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Speaker 2: who is the assistant US attorney who did the sentencing today.

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Speaker 2: You know, she she made it clear that this was

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Speaker 2: you know, one of the most extraordinary cooperators she has

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Speaker 2: dealt with. You know, she said she came clean immediately.

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Speaker 2: You know that the person that they saw on the

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Speaker 2: stand is the exact same person who came and talked

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Speaker 2: to them. You know, they noted the difference between Sam

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Speaker 2: bankmin Freed's testimony in hers when he continually deflected and

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Speaker 2: essentially said that, you know that he might have succeeded

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Speaker 2: in getting away with it without her cooperation.

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Speaker 1: Yeah, it's sort of like she's in the cooperators Hall

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Speaker 1: of Fame, because the judge said, I've seen a lot

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Speaker 1: of cooperators in thirty years, I've never seen one quite

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Speaker 1: like miss Ellison.

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Speaker 2: Yes, that's the quote. You know. He he had a

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Speaker 2: lot to say in terms of praise of what she said,

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Speaker 2: most notably pointing out her testimony about the seven spreadsheets

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Speaker 2: that she had created at bankman Freed's behest when you know,

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Speaker 2: lenders started asking questions that essentially masked the size of

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Speaker 2: the fraud, and he called that really like one of

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Speaker 2: the key pieces of evidence, if not the main piece

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Speaker 2: of evidence, which she revealed to the prosecutors during her

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Speaker 2: proper session. So he was very you know, specific about

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Speaker 2: praising her for what she had said on the stand.

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Speaker 2: But you know, once he got around and he didn't

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Speaker 2: think that she needed to be specifically you know, prevented

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Speaker 2: from doing anything else. He certainly made a point that

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Speaker 2: she would never do it again. But then he kind

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Speaker 2: of turned a little bit and basically started talking about

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Speaker 2: how Sam Bankman freed had her kryptonite and that she

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Speaker 2: should have known better. And while he said he didn't

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Speaker 2: really think she needed to be deterred from future crimes,

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Speaker 2: he said, this is one of the most serious financial

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Speaker 2: frauds ever, you know, perpetrated in this country or elsewhere,

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Speaker 2: and didn't think that her cooperation could get out of

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Speaker 2: jail free car And at that point he pronounced sentence.

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Speaker 1: Was there any reaction from Ellison when you did that?

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Speaker 2: Allison hardly reacted. I think she had kind of realized

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Speaker 2: where he was going with some of the signals he

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Speaker 2: had said. In the moments before he pronounced sentence. Her parents,

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Speaker 2: you know, looked shocked, and her mother closed her eyes,

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Speaker 2: her sisters closed their eyes, and after the proceeding was over,

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Speaker 2: they clearly were in tears, wiping it their eyes with tissue.

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Speaker 1: And so, Chris, she gets to serve this in a

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Speaker 1: minimum security prison.

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Speaker 2: Yeah, that's what he recommended. It's obviously up to the

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Speaker 2: Bureau of Prisons as to where she'll serve her sentence,

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Speaker 2: but he did grant emotion that he would recommend him

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Speaker 2: in of security and close to Boston.

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Speaker 1: And in federal prison, you serve eighty five percent of

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Speaker 1: your prison sentence and then become eligible for release if

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Speaker 1: you have had good time.

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Speaker 2: Something like that. You know, generally people serve about seventy

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Speaker 2: five eighty five percent as long as they they have

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Speaker 2: good behavior. And it's hard to believe that she wouldn't

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Speaker 2: be a model prisoner, right.

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Speaker 1: I can see how though her family might have thought

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Speaker 1: that it was going to end up in no prison time,

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Speaker 1: since the Probation Department recommended no prison time and the

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Speaker 1: judge's remarks seemed to be heading towards no prison time

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Speaker 1: and then boom.

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Speaker 2: Yeah. I mean, I think a lot of people, just

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Speaker 2: given you know, what we see with cooperators in general,

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Speaker 2: didn't really think that she would get prison time. But

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Speaker 2: there are plenty of people who thought it was a

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Speaker 2: decent possibility. And you know, Lewis Kaplan is a very

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Speaker 2: serious judge. He intends to punish people and he does.

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Speaker 2: And in the end of the day, I guess he

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Speaker 2: felt that this was just too large of a fraud

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Speaker 2: to keep her out of prison.

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Speaker 1: Now, what about the eleven billion dollars in restitution?

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Speaker 2: Yeah, so a lot of that is the government intend

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Speaker 2: basically said it's it's intending to seek forfeiture through the

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Speaker 2: bankruptcy process withouts that have already been forfeited.

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Speaker 1: So now there are two other cooperators who are going

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Speaker 1: to be sentenced FTX co founder Gary Wang and former

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Speaker 1: engineering chief Mashad Singh later this fall. But their cooperation

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Speaker 1: was not as great as hers, was it.

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Speaker 2: I mean, I don't think anybody cooperation possibly in the

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Speaker 2: history of cooperation, maybe as serious as hers. But it's

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Speaker 2: certainly not a good sign for them that he sent

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Speaker 2: her to prison. I mean, she gave up the ghost,

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Speaker 2: you know, and she told prosecutors more than they already knew,

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Speaker 2: So it would be hard to believe that he wouldn't

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Speaker 2: find some way to sentence them to prison time as well.

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Speaker 1: So this closes another chapter in the collapse of FTX,

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Speaker 1: with many more chapters to come, and that includes Sam

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Speaker 1: Bankmanfried's appeal, which we've discussed before. Thanks so much, Chris.

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Speaker 1: That's Bloomberg Legal reporter Chris Domesh coming up next on

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Speaker 1: the Bloomberg Law Show. Coinbase and the Securities and Exchange

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Speaker 1: Commission fased off in a Philadelphia appellate court over rule making.

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Speaker 1: I'm Juian Grossow and you're listening to Bloomberg. Cryptocurrency exchange

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Speaker 1: Coinbase and the Securities and Exchange Commission fased off in

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Speaker 1: a Philadelphia appellate court, with Coinbase trying to force the

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Speaker 1: SEC to create new rules that would govern digital assets

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Speaker 1: and help end a long legal fight between the industry

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Speaker 1: and regulators. Judges Thomas Ambro and Stefanos Biebis questioned the

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Speaker 1: SEC's refusal to engage in rule making and its approach

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Speaker 1: of regulation by enforcement.

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Speaker 3: Usually you can do things sucrementally, and maybe that's the

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Speaker 3: argument against what rulemaking. We've got to proceed step by step, but.

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Speaker 4: It almost looks as if to an outside observer, as

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Speaker 4: if you're going after the platforms in a way that

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Speaker 4: will crush the industry without really getting into rule made.

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Speaker 5: It is true that this case is not directly about

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Speaker 5: due process, but there are some serious notice concerns with

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Speaker 5: we might hit you with serious civil penalties, but we

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Speaker 5: won't tell you what will trigger the civil penalties.

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Speaker 1: Although Judge Ambro did acknowledge the newness of digital assets.

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Speaker 3: In this area, which is you know, since two thousand

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Speaker 3: and eight, two thousand and nine, it is so new

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Speaker 3: I can see why a lot of regulators or people

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Speaker 3: considering regulation are saying we better go slow on this one.

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Speaker 4: This is a new world.

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Speaker 1: And Judge Bieba's asked Coinbase, as attorney Eugene Scalia, the

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Speaker 1: big question, what's the endgame?

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Speaker 3: Eran or we are asking now that they be ordered

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Speaker 3: to proceed directly to a rule making. We think they

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Speaker 3: have had more than enough opportunity to answer coinbasis, workability, concerns.

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Speaker 5: Extraordinary remedy. What would we say has to be in

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Speaker 5: such a.

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Speaker 1: Rule joining me? Is security law expert James Park, a

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Speaker 1: professor at UCLA Law School, Jim tell us how this

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Speaker 1: ended up before the Third Circuit Court of Appeals.

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Speaker 6: Coinbase filed a petition with the SEC asking it to

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Speaker 6: write rules relating to crypto, and the SEC denied that petition,

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Speaker 6: and so Coinbase filed the lawsuit, thing that the denial

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Speaker 6: was arbitrary and capricious. That's a standard that's typically applied

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Speaker 6: in administrative law. And the district court initially denied that petition,

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Speaker 6: and now it was appealed to the Third Circuit Court

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Speaker 6: of Appeals and they heard the oral argument on it.

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Speaker 1: The lawyer for Coinbase, Eugene Scalia, and I have to

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Speaker 1: say he does sound a little like his father, so

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Speaker 1: it was sort of deja vu all over again.

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Speaker 2: That right.

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Speaker 1: Wow. So he told the three judge panel that the

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Speaker 1: SEC had provided no explanation for denying the request for

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Speaker 1: rule making, and coinbase is complaining about the SEC's regulation

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Speaker 1: by enforcement. Tell us more about its arguments.

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Speaker 6: I think their main argument is that the SEC has

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Speaker 6: publicly said to various crypto organizations, come in and register,

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Speaker 6: and their argument is that this is disingenuous because there

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Speaker 6: is no real practical, pragmatic way for these associations to

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Speaker 6: register and provide disclosure. And this reflects the decentralized nature

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Speaker 6: of blockchain projects, where you are essentially creating a network

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Speaker 6: community that runs itself without any central manager that is

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Speaker 6: in charge. And unlike a corporation where you have a

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Speaker 6: corporate entity and a centralized management team that can collect

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Speaker 6: disclosure about the corporation, put it into SEC filings and file

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Speaker 6: it in theory, you do not have that with crypto projects.

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Speaker 6: And their argument is that you know, these crypto projects

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Speaker 6: associations cannot come in and register because there is no

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Speaker 6: central issuer that can provide disclosure. And until we have

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Speaker 6: a set of rules that tells us how this works,

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Speaker 6: we simply cannot move forward. I think that's the basic

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Speaker 6: crux of their argument.

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Speaker 1: Is it often that agencies are asked, you know, in

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Speaker 1: quarter anywhere, to make rules about things, because usually you

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Speaker 1: think the less rules, the better for those who are

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Speaker 1: being regulated.

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Speaker 6: It's true, and it's just an interesting example where the

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Speaker 6: industry is demanding a certain amount of certainty, and because

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Speaker 6: this is a industry that is still emerging, is on

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Speaker 6: the border in terms of legality. I think that Coinbase

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Speaker 6: others in the industry believe that a set of rules

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Speaker 6: or a statute would confer a certain amount of legitimacy

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Speaker 6: on crypto, because if you regulate it, it must be

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Speaker 6: permissible in some instances. And I think that there are

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Speaker 6: certainly cases where you see corporations in the industry asking

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Speaker 6: for more specificity with respect to administrative rules. That is

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Speaker 6: something that we do see from time to time. Whether

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Speaker 6: or not that happens in a formal petition for rulemaking,

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Speaker 6: I think that is less common. I think that is

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Speaker 6: much less common, and that this is an unusual case

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Speaker 6: based just on my knowledge of the SEC.

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Speaker 1: So explain the SEC's position and maybe you should start

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Speaker 1: by the Howie jest. They say, you know, we don't

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Speaker 1: need to make rules here, we have enough rules.

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Speaker 6: That's their argument is that we have an established legal framework.

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Speaker 6: We have the securities active nineteen thirty three. We have

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Speaker 6: Howie tests that says that investment tracks the securities in

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Speaker 6: certain circumstances. We have shown you through various administrative releases

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Speaker 6: and enforcement actions how we think to how we test

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Speaker 6: applies to crypto, and in some circumstances they are securities.

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Speaker 6: When something is a security, we have a set procedure

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Speaker 6: where you have to file a registration statement if you

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Speaker 6: want to sell those securities to the general public. If

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Speaker 6: you are in exchange that has securities trading on it,

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Speaker 6: you also have to register with us as well. And

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Speaker 6: I think they would say, you know, you want this

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Speaker 6: to be this centralized organization where no one is in charge.

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Speaker 6: But the reality is that there is usually a central

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Speaker 6: group of individuals who basically start these crypto projects. They

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Speaker 6: are developing the code, they develop the applications, They reach

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Speaker 6: out to investors, they promote it, they promise high returns.

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Speaker 6: They keep, you know, a lot of crypto for themselves

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Speaker 6: of the price of the crit that goes up, they

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Speaker 6: make a lot of money, almost like a kind of

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Speaker 6: like a controlling shareholder or insider of the organization. You know,

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Speaker 6: those organizers could certainly provide disclosure. They could, you know,

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Speaker 6: certainly be responsible for filing a registration statement, and that

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Speaker 6: has not happened. I think that's what they would argue

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Speaker 6: in response.

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Speaker 1: So you know that it's often hard to tell from

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Speaker 1: the oral arguments how the judges are going to rule.

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Speaker 1: So a couple of the judges did acknowledge that this

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Speaker 1: was a new area and maybe you'd want to proceed slowly,

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Speaker 1: But then you had some sort of accusations against the SEC.

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Speaker 1: One judge said that it looks like you're going after

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Speaker 1: platforms in a way that would crush the industry without

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Speaker 1: getting into rulemaking, and another said, it's not that you're

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Speaker 1: not interested in the area, it's just that you're interested

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Speaker 1: in picking off wrongs without giving higher level guidance. It's

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Speaker 1: hard to measure which way it's going, But it did

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Speaker 1: seem like they had a lot of hard questions for

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Speaker 1: the SEC.

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Speaker 6: Judges are going to ask hard questions aboth sides, and

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Speaker 6: it's hard to know if they're playing devil's advocate or

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Speaker 6: these are arguments that they're grappling with. But I suspect

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Speaker 6: it's very possible, and it's maybe probable that these questions

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Speaker 6: reflect a certain skepticism about the SEC's position. And you know,

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Speaker 6: the idea that the SEC is crushing the crypto industry

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Speaker 6: is probably accurate to some extent. Now, the SEC would say, well,

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Speaker 6: the reason we are closely regulating this industry and preventing

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Speaker 6: the schemes from flourishing and selling and distributing crypto to

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Speaker 6: a lot of members of the public is because we're

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Speaker 6: concerned that a lot of these projects are fraught and

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Speaker 6: that investors are going to lose a lot of money,

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Speaker 6: and if we don't keep an eye on it, we're

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Speaker 6: going to be blamed. People are going to ask us,

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Speaker 6: you know, what were you doing, And given past experience

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Speaker 6: with you know, FTX, for example, and some of the

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Speaker 6: other scandals that we've seen, there is probably good reason

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Speaker 6: to be very careful about allowing wide scale distributions of

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Speaker 6: crypto to public investors in the United States. So I

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Speaker 6: think that the judges, though, are you know, I think

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Speaker 6: that probably reflects the sincere questioning of the SEC and

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Speaker 6: its regulatory approach. It has moved sometimes in contradictory ways,

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Speaker 6: in ways that are ambiguous, and you've seen some shifts

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Speaker 6: in their policy where sometimes they are open to passing rules,

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Speaker 6: other times, you know, they seem to not be open

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Speaker 6: to that, and so they have kind of shifted their

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Speaker 6: position here and there. The SEC would say, well, this

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Speaker 6: reflects the difficulty of keeping up with this innovative technology

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Speaker 6: and understanding exactly what's going on. And we were very

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Speaker 6: careful at first. We didn't crush it right from the

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Speaker 6: beginning because we just wanted to see how it would evolve,

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Speaker 6: and over time, with experience, we now understand there are

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Speaker 6: some real problems in dangers. There have not been a

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Speaker 6: whole lot of useful applications of crypto that we know of,

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Speaker 6: other than its use as a currency to you know,

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Speaker 6: make transfers of money that would not be permitted under

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Speaker 6: other federal regulations like banking law, and that's that's sort

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Speaker 6: of the main thing that it has been used for.

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Speaker 6: So I think that, you know, the questions, I think

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Speaker 6: do reflect a general frustration at the SEC, and maybe

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Speaker 6: you know the reality. I think that the SEC is

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Speaker 6: not interested in creating an easy path for these crypto

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Speaker 6: firms to flourish. I think that is probably accurate.

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Speaker 1: So do you think that that's the reason why they're

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Speaker 1: not making rules, because it seems pretty clear under Gary

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Speaker 1: Gensler that they consider digital assets as securities.

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Speaker 6: I think so. I think that it's it's complicated. I

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Speaker 6: think that there are a lot of really difficult issues here,

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Speaker 6: and there are no clear answers as to what sorts

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Speaker 6: of regulations you would pass, and a lot of the

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Speaker 6: sort of issue of whether a digital asset is a

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Speaker 6: security or not is very fact intensive. So you know,

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Speaker 6: to give an example, sometimes crypto is purchased for consumptive reasons.

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Speaker 6: I want this digital coin because it gives me access

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Speaker 6: to this service. Sometimes it's purchased because I want to

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Speaker 6: make money, because I'm speculating, I'm investing in this network.

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Speaker 6: And if it's investment, it's more likely to be a security.

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Speaker 6: If it's more for consumptive means, then that's less likely

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Speaker 6: to be a security. How do you write a rule

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Speaker 6: that tells us when something is more of a consumptive

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Speaker 6: purchase than something that is for investment. It is very

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Speaker 6: difficult to do so, and you know that I think

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Speaker 6: is part of the reason why the SEC is wary

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Speaker 6: about getting into this process of trying to draw these distinctions.

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Speaker 6: It would much rather look at these situations case by

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Speaker 6: case and bring an enforcement action and maybe litigate it

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Speaker 6: before a judge, as opposed to trying to answer some

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Speaker 6: questions that may not be answerable. And I think that's

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Speaker 6: a reason why they are not essentially writing these rules.

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Speaker 6: And I do think that FTX is still you know,

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Speaker 6: and the crypto winter, as they say, is something that

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Speaker 6: has really affected the SEC's view of crypto. And if

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Speaker 6: you write rules that permit crypto firms to sell widely

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Speaker 6: to the public and there are significant frauds, then the

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Speaker 6: SEC will get blamed for that too, So it may

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Speaker 6: not be in their interest to go forward with extensive

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Speaker 6: specific rules.

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Speaker 1: Coming up next on the Bloomberg Lawn Show, I'll continue

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Speaker 1: this conversation with Professor James Park of UCLA Law School.

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Speaker 1: What's the most likely way the Third Circuit will rule.

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Speaker 1: I'm June Grosso, and you're listening to Bloomberg Cryptocurrency Exchange,

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Speaker 1: Coinbase and the SEC face staff. On Monday, before the

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Speaker 1: Third Circuit Court of Appeals in Philadelphia, Coinbase was urging

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Speaker 1: the Federal Appeals Court to force the SEC to create

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Speaker 1: new rules that would govern digital assets. The SEC contends

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Speaker 1: that current rules and existing laws governing securities are adequate

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Speaker 1: for the regulation of digital assets. I've been talking to

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Speaker 1: securities law expert James Park, a professor at UCLA Law School.

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Speaker 1: So at one point, one of the judges said to

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Speaker 1: Coinbase's attorney, well, what rule would we tell them to make?

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Speaker 1: I mean, do they have to say specifically or just

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Speaker 1: say SEC engage in rule making on crypto?

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Speaker 6: Well, I don't think the Third Circuit at this stage

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Speaker 6: would say or order the SEC to engage in rule making.

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Speaker 6: I think probably the best possible result for Coinbase, which

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Speaker 6: I think is feasible, is that the Third Circuit will

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Speaker 6: say that your denial was arbitrary and capricious because it

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Speaker 6: did explain enough as to why you are not making rules.

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Speaker 6: And so I think the SEC will still get a chance,

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Speaker 6: even if it loses this case to articulate the reasons

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Speaker 6: for denying coinbasis petition. Now, in the course of that exercise,

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Speaker 6: the SEC could essentially conclude, hey, maybe we should be

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Speaker 6: writing rules, and the NABE you could voluntarily do that.

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Speaker 6: But I think just the procedural setting of this particular

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Speaker 6: appeal is not one where even if the SEC loses,

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Speaker 6: they're going to be writing rules on crypto, you know,

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Speaker 6: a month after the decision comes out. I think what

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Speaker 6: happened is that they would look at the petition again

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Speaker 6: and they might deny it again but give more extensive reasons.

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Speaker 6: That's one one possibility. On the other hand, maybe they

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Speaker 6: will change their mind. It's certainly possible that they could

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Speaker 6: change their mind and say, hey, we will write right rules.

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Speaker 6: But I would be surprised if they did that. So

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Speaker 6: for long ways from the SEC being required to write

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Speaker 6: rules relating to crypto, I think that, you know, even

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Speaker 6: if Coinbase wins this appeal, the process will still continue

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Speaker 6: and take some time to work its way out.

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Speaker 1: So Coinbase wants the SEC to write rules. But do

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Speaker 1: other players in the cryptocurrency space also want the SEC

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Speaker 1: to write rules.

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Speaker 6: It's a really good question, you know. Coinbase, I think,

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Speaker 6: is any unique position. They are the exchange where these

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Speaker 6: various crypto digital currencies are going to trade, and their

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Speaker 6: incentive is for there to be a lot of these

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Speaker 6: projects coming up, a lot of these digital assets flourishing

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Speaker 6: and trading on their platform. And so I think that

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Speaker 6: they would like a set of rules that these digital

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Speaker 6: asset creators can comply with. So more of them are

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Speaker 6: creating digital assets that can trade. And I think that,

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Speaker 6: you know, because Coinbase is sort of in a position

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Speaker 6: where it is, you know, it's part of the establishment

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Speaker 6: of crypto and in some ways that they have one

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Speaker 6: set of us that I think are probably shared by

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Speaker 6: most investors and other players in the crypto industry that

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Speaker 6: they would like a set of rules. Now, is there

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Speaker 6: a set of more entrepreneurial, smaller organizations that may feel like,

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Speaker 6: you know, hey, maybe we can exploit this ambiguity in

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Speaker 6: order to get our projects up and going and that

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Speaker 6: we can avoid SEC enforcement. Maybe we don't want a

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Speaker 6: lot of rules that we'd have to comply with. It's

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Speaker 6: certainly possible there is a group like that, but I

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Speaker 6: think the dominant establishment voices in the crypto industry I

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Speaker 6: think would probably be with Coinbase on this issue.

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Speaker 1: Well, I'm wondering if it's better for the crypto industry

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Speaker 1: if the SEC sues them and then in some of

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Speaker 1: those lawsuits, you know, the court says, you know, this

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Speaker 1: is not a security and then they might go up

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Speaker 1: to the Supreme Court, maybe they'll do some revisions of

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Speaker 1: the Howie test.

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Speaker 6: It's a good point, and that's certainly something coinbas is

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Speaker 6: litigating right now, and the cases are working their way

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Speaker 6: up through the system. You know, is the best result

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Speaker 6: for the industry that we have a ruling that they're

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Speaker 6: not securities? One view is maybe that that would be

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Speaker 6: a good thing, because then the SEC could not bring

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Speaker 6: enforcement or regulate crypto. On the other hand, if it's

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Speaker 6: not the SCC and they're not securities and people are

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Speaker 6: losing a bunch of money on digital assets, then Congress

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Speaker 6: will have to step in and there'll be a different

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Speaker 6: regulatory regime, I think, one way or the other. If

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Speaker 6: we have crypto frauds and they are widespread, then somebody

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Speaker 6: will have to regulate crypto industry. Whether it's the SEC,

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Speaker 6: whether it's somebody else, I'm not exactly sure. And you know,

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Speaker 6: maybe the hope of the crypto industry in litigating whether

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Speaker 6: or not crypto can be a security is maybe their

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Speaker 6: hope is that if the court say it is not

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Speaker 6: a security, then that will spur Congress to act and

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Speaker 6: pass a statue, and then they would have the sort

437
00:26:16,080 --> 00:26:19,720
Speaker 6: of regulation that might confer some legitimacy on them. That

438
00:26:19,840 --> 00:26:21,640
Speaker 6: might be their ultimate hope.

439
00:26:22,280 --> 00:26:25,239
Speaker 1: I mean, the best result for crypto is it that

440
00:26:25,400 --> 00:26:30,119
Speaker 1: Congress passes legislation no identifying these things and it's not

441
00:26:30,320 --> 00:26:31,440
Speaker 1: left up to the courts.

442
00:26:32,320 --> 00:26:34,840
Speaker 6: I think it depends on the type of legislation that

443
00:26:35,000 --> 00:26:39,480
Speaker 6: is that is passed, where you have a clear set

444
00:26:39,520 --> 00:26:44,400
Speaker 6: of rules that may say that we don't need disclosure

445
00:26:44,560 --> 00:26:48,000
Speaker 6: for digital assets, that we will allow them to simply

446
00:26:48,480 --> 00:26:51,640
Speaker 6: run by themselves and not be regulated. I think that's

447
00:26:51,680 --> 00:26:53,680
Speaker 6: what they are hoping for. I don't know if that's

448
00:26:53,720 --> 00:26:55,920
Speaker 6: what is good for society. I don't know if that's

449
00:26:55,960 --> 00:26:59,720
Speaker 6: what will happen. I am skeptical that, you know, we

450
00:26:59,800 --> 00:27:05,879
Speaker 6: have totally decentralized associations where we are trusting that the

451
00:27:06,000 --> 00:27:09,879
Speaker 6: incentives will work and will not be used to exploit

452
00:27:10,400 --> 00:27:15,359
Speaker 6: smaller players and individuals. I'm skeptical that that is possible.

453
00:27:15,640 --> 00:27:19,120
Speaker 6: And you know, the crypto or coinbases argue that when

454
00:27:19,160 --> 00:27:22,119
Speaker 6: you you know, have found a crypto project, you have

455
00:27:22,280 --> 00:27:26,400
Speaker 6: no obligation to the people who buy the crypto. There

456
00:27:26,440 --> 00:27:30,440
Speaker 6: is no contractual obligation between the founders of the crypto

457
00:27:30,520 --> 00:27:32,840
Speaker 6: project and the people who buy the crypto. That's why

458
00:27:32,880 --> 00:27:36,400
Speaker 6: they're saying it's not an investment contract. It strikes me

459
00:27:36,440 --> 00:27:39,679
Speaker 6: as problematic. You know, if I'm a shareholder in a company,

460
00:27:39,720 --> 00:27:44,240
Speaker 6: I'm protected by various fiduciary duties that prevent the managers

461
00:27:44,240 --> 00:27:47,120
Speaker 6: from from exploiting me. As a crypto purchaser, I don't

462
00:27:47,160 --> 00:27:50,240
Speaker 6: have that, and so, you know, is it a good

463
00:27:50,280 --> 00:27:55,040
Speaker 6: idea to have these decentralized associations where there are no

464
00:27:55,600 --> 00:27:59,840
Speaker 6: contractual rights that customers have that individuals who buy the

465
00:28:00,240 --> 00:28:03,639
Speaker 6: don't have. I think probably not. And I think that

466
00:28:03,720 --> 00:28:06,399
Speaker 6: there will need to be some regulation in some form

467
00:28:06,960 --> 00:28:10,320
Speaker 6: that will protect the general public when they are buying

468
00:28:10,760 --> 00:28:15,000
Speaker 6: digital assets, whether it's securities are something else, there needs

469
00:28:15,040 --> 00:28:19,199
Speaker 6: to be some regulation in order for this to work.

470
00:28:19,840 --> 00:28:22,639
Speaker 1: You know, we've talked before about agency power in the

471
00:28:22,680 --> 00:28:26,320
Speaker 1: Supreme Court, trying to reign in agency power. I didn't

472
00:28:26,320 --> 00:28:30,760
Speaker 1: hear anything from these judges against agency power. They talked

473
00:28:30,800 --> 00:28:35,400
Speaker 1: about deference to agencies. Does agency difference or the changes

474
00:28:35,440 --> 00:28:37,080
Speaker 1: in that play any part here?

475
00:28:37,600 --> 00:28:41,320
Speaker 6: I think it does. I think that one possible outcome

476
00:28:41,360 --> 00:28:43,680
Speaker 6: I think is some of the judges they will want

477
00:28:43,760 --> 00:28:47,560
Speaker 6: to sort of say sec when you deny a petition

478
00:28:47,680 --> 00:28:51,320
Speaker 6: like this, you have to give more reasons, and that

479
00:28:51,640 --> 00:28:56,880
Speaker 6: is a bit less deference to agencies and their decision making.

480
00:28:57,600 --> 00:29:03,040
Speaker 6: It may be about setting up additional expectations, procedural expectations

481
00:29:03,120 --> 00:29:06,520
Speaker 6: about explanations agencies have to give. So I think it

482
00:29:07,040 --> 00:29:12,400
Speaker 6: could this decision could have implications for administrative agencies. The

483
00:29:12,400 --> 00:29:17,080
Speaker 6: way they denied petitions and explain their reasoning, that could

484
00:29:17,480 --> 00:29:21,400
Speaker 6: have some modest impact in restraining their discretion.

485
00:29:22,200 --> 00:29:24,680
Speaker 1: Yeah, one of the judges said something to the effect of,

486
00:29:25,040 --> 00:29:27,479
Speaker 1: you don't have to give much of an explanation, but

487
00:29:27,520 --> 00:29:30,240
Speaker 1: you have to give some. And this is totally vacuous,

488
00:29:30,360 --> 00:29:34,680
Speaker 1: was the word that he used about the SEC's explanations

489
00:29:34,720 --> 00:29:38,440
Speaker 1: for this. So, now, as far as the presidential candidates,

490
00:29:38,680 --> 00:29:42,120
Speaker 1: is one more than the other, you know crypto friendly?

491
00:29:42,520 --> 00:29:45,520
Speaker 1: Is Trump more crypto friendly than Harris? Or they both

492
00:29:45,520 --> 00:29:48,280
Speaker 1: seem to be trying to court the crypto industry.

493
00:29:49,160 --> 00:29:51,560
Speaker 6: It's what it seems like. Whether or not they will

494
00:29:51,600 --> 00:29:57,800
Speaker 6: follow through on sort of their campaign promises, I think

495
00:29:57,920 --> 00:30:01,440
Speaker 6: is another matter. I think because of the amount of

496
00:30:02,080 --> 00:30:05,240
Speaker 6: money that has been invested in crypto, the industry has

497
00:30:05,280 --> 00:30:10,120
Speaker 6: a lot to spend, and the presidential candidates are responding

498
00:30:10,360 --> 00:30:13,880
Speaker 6: to this. Whether or not they will actually want to

499
00:30:14,200 --> 00:30:18,479
Speaker 6: pass the sort of legislation that the crypto industry really wants,

500
00:30:18,600 --> 00:30:21,120
Speaker 6: I think is another matter, because they do not want

501
00:30:21,160 --> 00:30:24,560
Speaker 6: to be blamed if the public loses a lot of money,

502
00:30:24,920 --> 00:30:29,840
Speaker 6: and so I think that they're both basically remaining somewhat

503
00:30:29,920 --> 00:30:33,840
Speaker 6: vague as to what exactly they would do while trying

504
00:30:33,880 --> 00:30:37,960
Speaker 6: to appear like they're sympathetic to the crypto industry.

505
00:30:38,480 --> 00:30:41,080
Speaker 1: I did want to ask you about the FTX collapse

506
00:30:41,400 --> 00:30:44,280
Speaker 1: for a moment, because you mentioned the concerns about it.

507
00:30:44,480 --> 00:30:47,640
Speaker 1: Are the FTX customers though getting all their money back?

508
00:30:48,360 --> 00:30:51,440
Speaker 6: They are, they're certainly getting more back than we expect it,

509
00:30:52,120 --> 00:30:57,280
Speaker 6: and I think that reflects the rebound in crypto that

510
00:30:58,000 --> 00:31:00,880
Speaker 6: has happened over the last you know, last few years

511
00:31:00,960 --> 00:31:06,240
Speaker 6: after the collapse of FTX. This is a wildly speculative market,

512
00:31:06,520 --> 00:31:11,760
Speaker 6: and we will probably see other fluctuations as well. I

513
00:31:11,760 --> 00:31:15,480
Speaker 6: would be surprised if crypto never sees a major correction.

514
00:31:16,320 --> 00:31:19,880
Speaker 6: You know the fact that the market rallied for various reasons,

515
00:31:20,280 --> 00:31:24,320
Speaker 6: you know, and that resulted in the FTX customers getting

516
00:31:24,560 --> 00:31:28,640
Speaker 6: you know, substantial amounts back. I think that does notily

517
00:31:28,640 --> 00:31:31,720
Speaker 6: mean they're not dangerous to crypto and we'll see what

518
00:31:31,760 --> 00:31:34,600
Speaker 6: happens in the future. I don't know, but certainly that

519
00:31:34,720 --> 00:31:38,160
Speaker 6: is something that you can make an argument that, hey,

520
00:31:38,240 --> 00:31:40,880
Speaker 6: you know, the problem is not so great as we thought.

521
00:31:41,400 --> 00:31:43,720
Speaker 6: But I think there may be have been a little

522
00:31:43,720 --> 00:31:46,400
Speaker 6: bit of luck in that, and there's a lot of

523
00:31:46,760 --> 00:31:51,720
Speaker 6: money that is flowing around our system in speculative ways,

524
00:31:52,400 --> 00:31:56,040
Speaker 6: and if that reverses, though, that could have some disastrous

525
00:31:56,040 --> 00:31:57,800
Speaker 6: consequences for investors.

526
00:31:58,240 --> 00:32:01,480
Speaker 1: It's certainly a lot to think about. Thanks so much, Jim.

527
00:32:01,520 --> 00:32:05,280
Speaker 1: That's Professor James Park of UCLA Law School, and that's

528
00:32:05,320 --> 00:32:08,280
Speaker 1: it for this edition of the Bloomberg Law Podcast. Remember

529
00:32:08,320 --> 00:32:11,040
Speaker 1: you can always get the latest legal news by subscribing

530
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Speaker 1: and listening to the show on Apple Podcasts, Spotify, and

531
00:32:14,600 --> 00:32:18,640
Speaker 1: at Bloomberg dot com, slash podcast, Slash Law. I'm June

532
00:32:18,640 --> 00:32:20,800
Speaker 1: Grosso and this is Bloomberg