WEBVTT - FTX Star Witness Sentenced & Crypto Showdown

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<v Speaker 1>This is Bloomberg Law with June Brusso from Bloomberg Radio.

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<v Speaker 1>Caroline Ellison, a former top executive in Sam Bankman Freed's

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<v Speaker 1>fallen FTX cryptocurrency empire, was sentenced to two years in

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<v Speaker 1>prison today in order to forfeit eleven billion dollars for

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<v Speaker 1>her role in the collapse of FTX. Ellison was the

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

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<v Speaker 1>Prosecutors called her testimony the cornerstone of the trial. The

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<v Speaker 1>same judge Lewis Kaplan had sentenced Bankman Freed to twenty

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<v Speaker 1>five years in prison after a jury convicted him of fraud.

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<v Speaker 1>Ellison's lawyers asked the judge to let her off without

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<v Speaker 1>any prison time, citing both her testimony at the trial

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<v Speaker 1>and the trauma of her on again, off again romantic

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<v Speaker 1>relationship with Bankman Freed. And though Judge Chaplin said Ellison's

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<v Speaker 1>cooperation was quote very, very substantial, he said a prison

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<v Speaker 1>sentence was necessary because she had participated in what might

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<v Speaker 1>be the greatest financial fraud ever perpetrated in this country

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<v Speaker 1>and probably anywhere else. He said in such a serious case,

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<v Speaker 1>he couldn't let cooperation be a get out of jail

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<v Speaker 1>free card. Joining me is Bloomberg Legal reporter Christopher Domesh,

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<v Speaker 1>who covered the sentencing and the trial, tell us what

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<v Speaker 1>she said in her apology.

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<v Speaker 2>She was very contrite and apologetic during her speech to

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<v Speaker 2>the judge. She immediately apologized to everyone, FPX employees, Aloma

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<v Speaker 2>employees who had lost their jobs, people who had lost money,

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<v Speaker 2>her family, her friends. She said they abused the trust

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<v Speaker 2>that investors had placed in them in the worst possible way,

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<v Speaker 2>and she was deeply ashamed of what she had done.

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<v Speaker 2>She said she had gradually found herself drifting away from

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<v Speaker 2>the person that she wanted to be, and that the

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<v Speaker 2>culture that you know, promoted positivity and discouraged dissent kind

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<v Speaker 2>of helped that along. She said, it felt harder and

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<v Speaker 2>harder to extricate myself and do the right thing, and

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

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<v Speaker 2>something that came naturally to her, and it's been a

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<v Speaker 2>relief to be completely honest about things. She said she

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<v Speaker 2>found that meeting and just trying to be a good

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<v Speaker 2>person in small and noble ways, talking about, you know,

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<v Speaker 2>working for the soup kitchen and some of the other

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<v Speaker 2>things that she's done.

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

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

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<v Speaker 2>sentence at all. You know, depending on the case, prosecutors

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<v Speaker 2>often you know, asked to set someone in light up

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<v Speaker 2>their cooperation. They don't really go and ask for a

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<v Speaker 2>specific sentence like they are with most defendants. So they

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<v Speaker 2>at no point did they really ask for anything other

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<v Speaker 2>than you know, substantial departure downward from the guidelines, which

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<v Speaker 2>were admittedly draconian and you know, basically one hundred and

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<v Speaker 2>ten years in prison, which is most driven by the loss.

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<v Speaker 1>And it seemed like the prosecution's statement at the sentencing

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<v Speaker 1>was almost similar to the defenses.

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<v Speaker 2>Yes, it was very similar. You know, they acknowledged Daniel Festoon,

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<v Speaker 2>who is the assistant US attorney who did the sentencing today.

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<v Speaker 2>You know, she she made it clear that this was

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<v Speaker 2>you know, one of the most extraordinary cooperators she has

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<v Speaker 2>dealt with. You know, she said she came clean immediately.

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<v Speaker 2>You know that the person that they saw on the

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<v Speaker 2>stand is the exact same person who came and talked

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<v Speaker 2>to them. You know, they noted the difference between Sam

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<v Speaker 2>bankmin Freed's testimony in hers when he continually deflected and

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<v Speaker 2>essentially said that, you know that he might have succeeded

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<v Speaker 2>in getting away with it without her cooperation.

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<v Speaker 1>Yeah, it's sort of like she's in the cooperators Hall

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<v Speaker 1>of Fame, because the judge said, I've seen a lot

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<v Speaker 1>of cooperators in thirty years, I've never seen one quite

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<v Speaker 1>like miss Ellison.

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

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<v Speaker 2>lot to say in terms of praise of what she said,

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<v Speaker 2>most notably pointing out her testimony about the seven spreadsheets

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

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<v Speaker 2>lenders started asking questions that essentially masked the size of

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<v Speaker 2>the fraud, and he called that really like one of

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<v Speaker 2>the key pieces of evidence, if not the main piece

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<v Speaker 2>of evidence, which she revealed to the prosecutors during her

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<v Speaker 2>proper session. So he was very you know, specific about

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<v Speaker 2>praising her for what she had said on the stand.

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<v Speaker 2>But you know, once he got around and he didn't

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<v Speaker 2>think that she needed to be specifically you know, prevented

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<v Speaker 2>from doing anything else. He certainly made a point that

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<v Speaker 2>she would never do it again. But then he kind

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<v Speaker 2>of turned a little bit and basically started talking about

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<v Speaker 2>how Sam Bankman freed had her kryptonite and that she

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<v Speaker 2>should have known better. And while he said he didn't

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<v Speaker 2>really think she needed to be deterred from future crimes,

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<v Speaker 2>he said, this is one of the most serious financial

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<v Speaker 2>frauds ever, you know, perpetrated in this country or elsewhere,

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<v Speaker 2>and didn't think that her cooperation could get out of

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<v Speaker 2>jail free car And at that point he pronounced sentence.

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<v Speaker 1>Was there any reaction from Ellison when you did that?

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<v Speaker 2>Allison hardly reacted. I think she had kind of realized

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<v Speaker 2>where he was going with some of the signals he

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<v Speaker 2>had said. In the moments before he pronounced sentence. Her parents,

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<v Speaker 2>you know, looked shocked, and her mother closed her eyes,

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<v Speaker 2>her sisters closed their eyes, and after the proceeding was over,

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<v Speaker 2>they clearly were in tears, wiping it their eyes with tissue.

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<v Speaker 1>And so, Chris, she gets to serve this in a

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<v Speaker 1>minimum security prison.

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

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<v Speaker 2>Bureau of Prisons as to where she'll serve her sentence,

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<v Speaker 2>but he did grant emotion that he would recommend him

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<v Speaker 2>in of security and close to Boston.

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<v Speaker 1>And in federal prison, you serve eighty five percent of

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<v Speaker 1>your prison sentence and then become eligible for release if

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<v Speaker 1>you have had good time.

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<v Speaker 2>Something like that. You know, generally people serve about seventy

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<v Speaker 2>five eighty five percent as long as they they have

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

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<v Speaker 2>be a model prisoner, right.

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<v Speaker 1>I can see how though her family might have thought

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<v Speaker 1>that it was going to end up in no prison time,

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<v Speaker 1>since the Probation Department recommended no prison time and the

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<v Speaker 1>judge's remarks seemed to be heading towards no prison time

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<v Speaker 1>and then boom.

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<v Speaker 2>Yeah. I mean, I think a lot of people, just

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<v Speaker 2>given you know, what we see with cooperators in general,

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<v Speaker 2>didn't really think that she would get prison time. But

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<v Speaker 2>there are plenty of people who thought it was a

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<v Speaker 2>decent possibility. And you know, Lewis Kaplan is a very

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<v Speaker 2>serious judge. He intends to punish people and he does.

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<v Speaker 2>And in the end of the day, I guess he

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<v Speaker 2>felt that this was just too large of a fraud

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<v Speaker 2>to keep her out of prison.

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<v Speaker 1>Now, what about the eleven billion dollars in restitution?

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<v Speaker 2>Yeah, so a lot of that is the government intend

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<v Speaker 2>basically said it's it's intending to seek forfeiture through the

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<v Speaker 2>bankruptcy process withouts that have already been forfeited.

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<v Speaker 1>So now there are two other cooperators who are going

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<v Speaker 1>to be sentenced FTX co founder Gary Wang and former

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<v Speaker 1>engineering chief Mashad Singh later this fall. But their cooperation

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<v Speaker 1>was not as great as hers, was it.

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<v Speaker 2>I mean, I don't think anybody cooperation possibly in the

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<v Speaker 2>history of cooperation, maybe as serious as hers. But it's

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<v Speaker 2>certainly not a good sign for them that he sent

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<v Speaker 2>her to prison. I mean, she gave up the ghost,

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<v Speaker 2>you know, and she told prosecutors more than they already knew,

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<v Speaker 2>So it would be hard to believe that he wouldn't

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<v Speaker 2>find some way to sentence them to prison time as well.

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<v Speaker 1>So this closes another chapter in the collapse of FTX,

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<v Speaker 1>with many more chapters to come, and that includes Sam

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

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<v Speaker 1>That's Bloomberg Legal reporter Chris Domesh coming up next on

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<v Speaker 1>the Bloomberg Law Show. Coinbase and the Securities and Exchange

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<v Speaker 1>Commission fased off in a Philadelphia appellate court over rule making.

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

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<v Speaker 1>Coinbase and the Securities and Exchange Commission fased off in

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<v Speaker 1>a Philadelphia appellate court, with Coinbase trying to force the

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<v Speaker 1>SEC to create new rules that would govern digital assets

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<v Speaker 1>and help end a long legal fight between the industry

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<v Speaker 1>and regulators. Judges Thomas Ambro and Stefanos Biebis questioned the

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<v Speaker 1>SEC's refusal to engage in rule making and its approach

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<v Speaker 1>of regulation by enforcement.

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<v Speaker 3>Usually you can do things sucrementally, and maybe that's the

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

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<v Speaker 4>It almost looks as if to an outside observer, as

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<v Speaker 4>if you're going after the platforms in a way that

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<v Speaker 4>will crush the industry without really getting into rule made.

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<v Speaker 5>It is true that this case is not directly about

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<v Speaker 5>due process, but there are some serious notice concerns with

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<v Speaker 5>we might hit you with serious civil penalties, but we

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<v Speaker 5>won't tell you what will trigger the civil penalties.

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<v Speaker 1>Although Judge Ambro did acknowledge the newness of digital assets.

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<v Speaker 3>In this area, which is you know, since two thousand

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<v Speaker 3>and eight, two thousand and nine, it is so new

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<v Speaker 3>I can see why a lot of regulators or people

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<v Speaker 3>considering regulation are saying we better go slow on this one.

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<v Speaker 4>This is a new world.

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<v Speaker 1>And Judge Bieba's asked Coinbase, as attorney Eugene Scalia, the

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<v Speaker 1>big question, what's the endgame?

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<v Speaker 3>Eran or we are asking now that they be ordered

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<v Speaker 3>to proceed directly to a rule making. We think they

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<v Speaker 3>have had more than enough opportunity to answer coinbasis, workability, concerns.

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<v Speaker 5>Extraordinary remedy. What would we say has to be in

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<v Speaker 5>such a.

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<v Speaker 1>Rule joining me? Is security law expert James Park, a

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<v Speaker 1>professor at UCLA Law School, Jim tell us how this

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<v Speaker 1>ended up before the Third Circuit Court of Appeals.

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<v Speaker 6>Coinbase filed a petition with the SEC asking it to

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<v Speaker 6>write rules relating to crypto, and the SEC denied that petition,

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<v Speaker 6>and so Coinbase filed the lawsuit, thing that the denial

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<v Speaker 6>was arbitrary and capricious. That's a standard that's typically applied

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<v Speaker 6>in administrative law. And the district court initially denied that petition,

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<v Speaker 6>and now it was appealed to the Third Circuit Court

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<v Speaker 6>of Appeals and they heard the oral argument on it.

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<v Speaker 1>The lawyer for Coinbase, Eugene Scalia, and I have to

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<v Speaker 1>say he does sound a little like his father, so

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<v Speaker 1>it was sort of deja vu all over again.

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<v Speaker 2>That right.

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<v Speaker 1>Wow. So he told the three judge panel that the

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<v Speaker 1>SEC had provided no explanation for denying the request for

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<v Speaker 1>rule making, and coinbase is complaining about the SEC's regulation

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<v Speaker 1>by enforcement. Tell us more about its arguments.

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<v Speaker 6>I think their main argument is that the SEC has

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<v Speaker 6>publicly said to various crypto organizations, come in and register,

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<v Speaker 6>and their argument is that this is disingenuous because there

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<v Speaker 6>is no real practical, pragmatic way for these associations to

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<v Speaker 6>register and provide disclosure. And this reflects the decentralized nature

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<v Speaker 6>of blockchain projects, where you are essentially creating a network

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<v Speaker 6>community that runs itself without any central manager that is

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<v Speaker 6>in charge. And unlike a corporation where you have a

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<v Speaker 6>corporate entity and a centralized management team that can collect

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<v Speaker 6>disclosure about the corporation, put it into SEC filings and file

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<v Speaker 6>it in theory, you do not have that with crypto projects.

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<v Speaker 6>And their argument is that you know, these crypto projects

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<v Speaker 6>associations cannot come in and register because there is no

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<v Speaker 6>central issuer that can provide disclosure. And until we have

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<v Speaker 6>a set of rules that tells us how this works,

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<v Speaker 6>we simply cannot move forward. I think that's the basic

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<v Speaker 6>crux of their argument.

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<v Speaker 1>Is it often that agencies are asked, you know, in

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<v Speaker 1>quarter anywhere, to make rules about things, because usually you

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<v Speaker 1>think the less rules, the better for those who are

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<v Speaker 1>being regulated.

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<v Speaker 6>It's true, and it's just an interesting example where the

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<v Speaker 6>industry is demanding a certain amount of certainty, and because

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<v Speaker 6>this is a industry that is still emerging, is on

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<v Speaker 6>the border in terms of legality. I think that Coinbase

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<v Speaker 6>others in the industry believe that a set of rules

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<v Speaker 6>or a statute would confer a certain amount of legitimacy

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<v Speaker 6>on crypto, because if you regulate it, it must be

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<v Speaker 6>permissible in some instances. And I think that there are

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<v Speaker 6>certainly cases where you see corporations in the industry asking

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<v Speaker 6>for more specificity with respect to administrative rules. That is

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<v Speaker 6>something that we do see from time to time. Whether

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<v Speaker 6>or not that happens in a formal petition for rulemaking,

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<v Speaker 6>I think that is less common. I think that is

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<v Speaker 6>much less common, and that this is an unusual case

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<v Speaker 6>based just on my knowledge of the SEC.

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<v Speaker 1>So explain the SEC's position and maybe you should start

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

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<v Speaker 1>need to make rules here, we have enough rules.

0:13:49.600 --> 0:13:53.080
<v Speaker 6>That's their argument is that we have an established legal framework.

0:13:53.160 --> 0:13:56.440
<v Speaker 6>We have the securities active nineteen thirty three. We have

0:13:56.880 --> 0:14:01.280
<v Speaker 6>Howie tests that says that investment tracks the securities in

0:14:01.320 --> 0:14:06.800
<v Speaker 6>certain circumstances. We have shown you through various administrative releases

0:14:06.840 --> 0:14:09.800
<v Speaker 6>and enforcement actions how we think to how we test

0:14:09.880 --> 0:14:14.240
<v Speaker 6>applies to crypto, and in some circumstances they are securities.

0:14:14.600 --> 0:14:18.319
<v Speaker 6>When something is a security, we have a set procedure

0:14:18.360 --> 0:14:21.320
<v Speaker 6>where you have to file a registration statement if you

0:14:21.320 --> 0:14:24.480
<v Speaker 6>want to sell those securities to the general public. If

0:14:24.520 --> 0:14:27.400
<v Speaker 6>you are in exchange that has securities trading on it,

0:14:27.480 --> 0:14:31.200
<v Speaker 6>you also have to register with us as well. And

0:14:31.280 --> 0:14:33.120
<v Speaker 6>I think they would say, you know, you want this

0:14:33.280 --> 0:14:36.760
<v Speaker 6>to be this centralized organization where no one is in charge.

0:14:36.840 --> 0:14:40.480
<v Speaker 6>But the reality is that there is usually a central

0:14:40.960 --> 0:14:45.960
<v Speaker 6>group of individuals who basically start these crypto projects. They

0:14:46.040 --> 0:14:50.800
<v Speaker 6>are developing the code, they develop the applications, They reach

0:14:50.880 --> 0:14:55.359
<v Speaker 6>out to investors, they promote it, they promise high returns.

0:14:55.760 --> 0:14:59.040
<v Speaker 6>They keep, you know, a lot of crypto for themselves

0:14:59.080 --> 0:15:00.920
<v Speaker 6>of the price of the crit that goes up, they

0:15:00.920 --> 0:15:04.280
<v Speaker 6>make a lot of money, almost like a kind of

0:15:04.320 --> 0:15:08.360
<v Speaker 6>like a controlling shareholder or insider of the organization. You know,

0:15:08.440 --> 0:15:12.720
<v Speaker 6>those organizers could certainly provide disclosure. They could, you know,

0:15:12.800 --> 0:15:17.240
<v Speaker 6>certainly be responsible for filing a registration statement, and that

0:15:17.720 --> 0:15:20.600
<v Speaker 6>has not happened. I think that's what they would argue

0:15:20.600 --> 0:15:21.200
<v Speaker 6>in response.

0:15:21.480 --> 0:15:23.320
<v Speaker 1>So you know that it's often hard to tell from

0:15:23.400 --> 0:15:26.800
<v Speaker 1>the oral arguments how the judges are going to rule.

0:15:27.360 --> 0:15:30.200
<v Speaker 1>So a couple of the judges did acknowledge that this

0:15:30.360 --> 0:15:33.440
<v Speaker 1>was a new area and maybe you'd want to proceed slowly,

0:15:34.000 --> 0:15:37.760
<v Speaker 1>But then you had some sort of accusations against the SEC.

0:15:38.360 --> 0:15:41.360
<v Speaker 1>One judge said that it looks like you're going after

0:15:41.440 --> 0:15:44.200
<v Speaker 1>platforms in a way that would crush the industry without

0:15:44.240 --> 0:15:48.080
<v Speaker 1>getting into rulemaking, and another said, it's not that you're

0:15:48.120 --> 0:15:51.080
<v Speaker 1>not interested in the area, it's just that you're interested

0:15:51.080 --> 0:15:54.720
<v Speaker 1>in picking off wrongs without giving higher level guidance. It's

0:15:54.760 --> 0:15:57.320
<v Speaker 1>hard to measure which way it's going, But it did

0:15:57.320 --> 0:15:58.960
<v Speaker 1>seem like they had a lot of hard questions for

0:15:59.040 --> 0:15:59.600
<v Speaker 1>the SEC.

0:16:00.480 --> 0:16:03.760
<v Speaker 6>Judges are going to ask hard questions aboth sides, and

0:16:04.560 --> 0:16:08.120
<v Speaker 6>it's hard to know if they're playing devil's advocate or

0:16:09.040 --> 0:16:12.200
<v Speaker 6>these are arguments that they're grappling with. But I suspect

0:16:12.240 --> 0:16:16.520
<v Speaker 6>it's very possible, and it's maybe probable that these questions

0:16:16.560 --> 0:16:22.200
<v Speaker 6>reflect a certain skepticism about the SEC's position. And you know,

0:16:22.280 --> 0:16:26.080
<v Speaker 6>the idea that the SEC is crushing the crypto industry

0:16:26.200 --> 0:16:30.320
<v Speaker 6>is probably accurate to some extent. Now, the SEC would say, well,

0:16:30.680 --> 0:16:34.920
<v Speaker 6>the reason we are closely regulating this industry and preventing

0:16:35.360 --> 0:16:38.840
<v Speaker 6>the schemes from flourishing and selling and distributing crypto to

0:16:39.120 --> 0:16:41.240
<v Speaker 6>a lot of members of the public is because we're

0:16:41.240 --> 0:16:45.000
<v Speaker 6>concerned that a lot of these projects are fraught and

0:16:45.080 --> 0:16:47.320
<v Speaker 6>that investors are going to lose a lot of money,

0:16:47.680 --> 0:16:49.520
<v Speaker 6>and if we don't keep an eye on it, we're

0:16:49.560 --> 0:16:51.880
<v Speaker 6>going to be blamed. People are going to ask us,

0:16:52.120 --> 0:16:56.280
<v Speaker 6>you know, what were you doing, And given past experience

0:16:56.400 --> 0:17:00.280
<v Speaker 6>with you know, FTX, for example, and some of the

0:17:00.440 --> 0:17:04.800
<v Speaker 6>other scandals that we've seen, there is probably good reason

0:17:04.880 --> 0:17:10.400
<v Speaker 6>to be very careful about allowing wide scale distributions of

0:17:10.480 --> 0:17:15.600
<v Speaker 6>crypto to public investors in the United States. So I

0:17:15.640 --> 0:17:19.080
<v Speaker 6>think that the judges, though, are you know, I think

0:17:19.119 --> 0:17:22.720
<v Speaker 6>that probably reflects the sincere questioning of the SEC and

0:17:22.720 --> 0:17:28.440
<v Speaker 6>its regulatory approach. It has moved sometimes in contradictory ways,

0:17:28.680 --> 0:17:33.200
<v Speaker 6>in ways that are ambiguous, and you've seen some shifts

0:17:33.200 --> 0:17:37.280
<v Speaker 6>in their policy where sometimes they are open to passing rules,

0:17:37.320 --> 0:17:40.240
<v Speaker 6>other times, you know, they seem to not be open

0:17:40.280 --> 0:17:42.800
<v Speaker 6>to that, and so they have kind of shifted their

0:17:42.840 --> 0:17:45.639
<v Speaker 6>position here and there. The SEC would say, well, this

0:17:45.720 --> 0:17:50.240
<v Speaker 6>reflects the difficulty of keeping up with this innovative technology

0:17:50.320 --> 0:17:53.600
<v Speaker 6>and understanding exactly what's going on. And we were very

0:17:53.600 --> 0:17:56.000
<v Speaker 6>careful at first. We didn't crush it right from the

0:17:56.040 --> 0:17:59.000
<v Speaker 6>beginning because we just wanted to see how it would evolve,

0:17:59.200 --> 0:18:02.439
<v Speaker 6>and over time, with experience, we now understand there are

0:18:02.480 --> 0:18:05.800
<v Speaker 6>some real problems in dangers. There have not been a

0:18:05.800 --> 0:18:10.000
<v Speaker 6>whole lot of useful applications of crypto that we know of,

0:18:10.119 --> 0:18:13.879
<v Speaker 6>other than its use as a currency to you know,

0:18:14.160 --> 0:18:17.760
<v Speaker 6>make transfers of money that would not be permitted under

0:18:17.960 --> 0:18:20.880
<v Speaker 6>other federal regulations like banking law, and that's that's sort

0:18:20.920 --> 0:18:23.080
<v Speaker 6>of the main thing that it has been used for.

0:18:23.200 --> 0:18:26.400
<v Speaker 6>So I think that, you know, the questions, I think

0:18:26.440 --> 0:18:31.199
<v Speaker 6>do reflect a general frustration at the SEC, and maybe

0:18:31.440 --> 0:18:34.960
<v Speaker 6>you know the reality. I think that the SEC is

0:18:35.000 --> 0:18:39.240
<v Speaker 6>not interested in creating an easy path for these crypto

0:18:39.280 --> 0:18:42.600
<v Speaker 6>firms to flourish. I think that is probably accurate.

0:18:42.800 --> 0:18:44.840
<v Speaker 1>So do you think that that's the reason why they're

0:18:44.880 --> 0:18:48.840
<v Speaker 1>not making rules, because it seems pretty clear under Gary

0:18:48.880 --> 0:18:52.720
<v Speaker 1>Gensler that they consider digital assets as securities.

0:18:53.280 --> 0:18:56.720
<v Speaker 6>I think so. I think that it's it's complicated. I

0:18:56.720 --> 0:18:59.520
<v Speaker 6>think that there are a lot of really difficult issues here,

0:19:00.400 --> 0:19:04.320
<v Speaker 6>and there are no clear answers as to what sorts

0:19:04.320 --> 0:19:07.399
<v Speaker 6>of regulations you would pass, and a lot of the

0:19:07.920 --> 0:19:10.040
<v Speaker 6>sort of issue of whether a digital asset is a

0:19:10.080 --> 0:19:13.520
<v Speaker 6>security or not is very fact intensive. So you know,

0:19:13.560 --> 0:19:19.360
<v Speaker 6>to give an example, sometimes crypto is purchased for consumptive reasons.

0:19:19.480 --> 0:19:22.400
<v Speaker 6>I want this digital coin because it gives me access

0:19:22.440 --> 0:19:25.920
<v Speaker 6>to this service. Sometimes it's purchased because I want to

0:19:25.960 --> 0:19:30.000
<v Speaker 6>make money, because I'm speculating, I'm investing in this network.

0:19:30.320 --> 0:19:32.959
<v Speaker 6>And if it's investment, it's more likely to be a security.

0:19:33.040 --> 0:19:36.280
<v Speaker 6>If it's more for consumptive means, then that's less likely

0:19:36.320 --> 0:19:38.639
<v Speaker 6>to be a security. How do you write a rule

0:19:39.240 --> 0:19:42.760
<v Speaker 6>that tells us when something is more of a consumptive

0:19:42.800 --> 0:19:45.680
<v Speaker 6>purchase than something that is for investment. It is very

0:19:45.720 --> 0:19:49.840
<v Speaker 6>difficult to do so, and you know that I think

0:19:50.000 --> 0:19:53.920
<v Speaker 6>is part of the reason why the SEC is wary

0:19:54.280 --> 0:19:58.320
<v Speaker 6>about getting into this process of trying to draw these distinctions.

0:19:58.400 --> 0:20:02.800
<v Speaker 6>It would much rather look at these situations case by

0:20:02.920 --> 0:20:06.199
<v Speaker 6>case and bring an enforcement action and maybe litigate it

0:20:06.240 --> 0:20:10.160
<v Speaker 6>before a judge, as opposed to trying to answer some

0:20:10.720 --> 0:20:13.440
<v Speaker 6>questions that may not be answerable. And I think that's

0:20:13.520 --> 0:20:17.480
<v Speaker 6>a reason why they are not essentially writing these rules.

0:20:17.480 --> 0:20:20.199
<v Speaker 6>And I do think that FTX is still you know,

0:20:20.240 --> 0:20:23.440
<v Speaker 6>and the crypto winter, as they say, is something that

0:20:23.680 --> 0:20:27.720
<v Speaker 6>has really affected the SEC's view of crypto. And if

0:20:27.760 --> 0:20:31.520
<v Speaker 6>you write rules that permit crypto firms to sell widely

0:20:31.560 --> 0:20:34.520
<v Speaker 6>to the public and there are significant frauds, then the

0:20:34.560 --> 0:20:36.880
<v Speaker 6>SEC will get blamed for that too, So it may

0:20:36.880 --> 0:20:41.000
<v Speaker 6>not be in their interest to go forward with extensive

0:20:41.280 --> 0:20:42.240
<v Speaker 6>specific rules.

0:20:42.560 --> 0:20:44.800
<v Speaker 1>Coming up next on the Bloomberg Lawn Show, I'll continue

0:20:44.840 --> 0:20:48.760
<v Speaker 1>this conversation with Professor James Park of UCLA Law School.

0:20:49.000 --> 0:20:51.840
<v Speaker 1>What's the most likely way the Third Circuit will rule.

0:20:51.960 --> 0:20:57.720
<v Speaker 1>I'm June Grosso, and you're listening to Bloomberg Cryptocurrency Exchange,

0:20:57.800 --> 0:21:02.000
<v Speaker 1>Coinbase and the SEC face staff. On Monday, before the

0:21:02.040 --> 0:21:06.679
<v Speaker 1>Third Circuit Court of Appeals in Philadelphia, Coinbase was urging

0:21:06.720 --> 0:21:10.479
<v Speaker 1>the Federal Appeals Court to force the SEC to create

0:21:10.600 --> 0:21:14.920
<v Speaker 1>new rules that would govern digital assets. The SEC contends

0:21:14.920 --> 0:21:19.639
<v Speaker 1>that current rules and existing laws governing securities are adequate

0:21:19.680 --> 0:21:23.320
<v Speaker 1>for the regulation of digital assets. I've been talking to

0:21:23.359 --> 0:21:27.240
<v Speaker 1>securities law expert James Park, a professor at UCLA Law School.

0:21:27.760 --> 0:21:30.159
<v Speaker 1>So at one point, one of the judges said to

0:21:30.760 --> 0:21:34.320
<v Speaker 1>Coinbase's attorney, well, what rule would we tell them to make?

0:21:34.800 --> 0:21:36.760
<v Speaker 1>I mean, do they have to say specifically or just

0:21:36.800 --> 0:21:40.640
<v Speaker 1>say SEC engage in rule making on crypto?

0:21:41.119 --> 0:21:44.000
<v Speaker 6>Well, I don't think the Third Circuit at this stage

0:21:44.520 --> 0:21:49.320
<v Speaker 6>would say or order the SEC to engage in rule making.

0:21:49.440 --> 0:21:53.760
<v Speaker 6>I think probably the best possible result for Coinbase, which

0:21:53.760 --> 0:21:56.000
<v Speaker 6>I think is feasible, is that the Third Circuit will

0:21:56.040 --> 0:21:59.760
<v Speaker 6>say that your denial was arbitrary and capricious because it

0:21:59.760 --> 0:22:04.159
<v Speaker 6>did explain enough as to why you are not making rules.

0:22:04.400 --> 0:22:07.040
<v Speaker 6>And so I think the SEC will still get a chance,

0:22:07.160 --> 0:22:12.640
<v Speaker 6>even if it loses this case to articulate the reasons

0:22:12.720 --> 0:22:17.680
<v Speaker 6>for denying coinbasis petition. Now, in the course of that exercise,

0:22:17.720 --> 0:22:22.919
<v Speaker 6>the SEC could essentially conclude, hey, maybe we should be

0:22:22.960 --> 0:22:25.880
<v Speaker 6>writing rules, and the NABE you could voluntarily do that.

0:22:26.520 --> 0:22:30.320
<v Speaker 6>But I think just the procedural setting of this particular

0:22:30.400 --> 0:22:34.640
<v Speaker 6>appeal is not one where even if the SEC loses,

0:22:34.640 --> 0:22:38.239
<v Speaker 6>they're going to be writing rules on crypto, you know,

0:22:38.280 --> 0:22:40.800
<v Speaker 6>a month after the decision comes out. I think what

0:22:40.960 --> 0:22:43.879
<v Speaker 6>happened is that they would look at the petition again

0:22:44.200 --> 0:22:48.639
<v Speaker 6>and they might deny it again but give more extensive reasons.

0:22:48.800 --> 0:22:51.600
<v Speaker 6>That's one one possibility. On the other hand, maybe they

0:22:51.640 --> 0:22:54.120
<v Speaker 6>will change their mind. It's certainly possible that they could

0:22:54.200 --> 0:22:57.000
<v Speaker 6>change their mind and say, hey, we will write right rules.

0:22:57.000 --> 0:22:59.760
<v Speaker 6>But I would be surprised if they did that. So

0:23:00.080 --> 0:23:04.880
<v Speaker 6>for long ways from the SEC being required to write

0:23:05.200 --> 0:23:08.880
<v Speaker 6>rules relating to crypto, I think that, you know, even

0:23:08.880 --> 0:23:13.080
<v Speaker 6>if Coinbase wins this appeal, the process will still continue

0:23:13.119 --> 0:23:15.520
<v Speaker 6>and take some time to work its way out.

0:23:15.960 --> 0:23:19.520
<v Speaker 1>So Coinbase wants the SEC to write rules. But do

0:23:19.680 --> 0:23:23.680
<v Speaker 1>other players in the cryptocurrency space also want the SEC

0:23:23.840 --> 0:23:24.560
<v Speaker 1>to write rules.

0:23:24.800 --> 0:23:27.800
<v Speaker 6>It's a really good question, you know. Coinbase, I think,

0:23:27.880 --> 0:23:33.280
<v Speaker 6>is any unique position. They are the exchange where these

0:23:33.400 --> 0:23:38.000
<v Speaker 6>various crypto digital currencies are going to trade, and their

0:23:38.440 --> 0:23:41.000
<v Speaker 6>incentive is for there to be a lot of these

0:23:41.040 --> 0:23:44.919
<v Speaker 6>projects coming up, a lot of these digital assets flourishing

0:23:45.000 --> 0:23:48.360
<v Speaker 6>and trading on their platform. And so I think that

0:23:48.400 --> 0:23:52.280
<v Speaker 6>they would like a set of rules that these digital

0:23:52.760 --> 0:23:55.880
<v Speaker 6>asset creators can comply with. So more of them are

0:23:56.200 --> 0:24:01.480
<v Speaker 6>creating digital assets that can trade. And I think that,

0:24:01.960 --> 0:24:04.680
<v Speaker 6>you know, because Coinbase is sort of in a position

0:24:04.720 --> 0:24:07.640
<v Speaker 6>where it is, you know, it's part of the establishment

0:24:07.800 --> 0:24:10.160
<v Speaker 6>of crypto and in some ways that they have one

0:24:10.200 --> 0:24:12.560
<v Speaker 6>set of us that I think are probably shared by

0:24:12.600 --> 0:24:16.879
<v Speaker 6>most investors and other players in the crypto industry that

0:24:16.880 --> 0:24:18.920
<v Speaker 6>they would like a set of rules. Now, is there

0:24:18.960 --> 0:24:24.399
<v Speaker 6>a set of more entrepreneurial, smaller organizations that may feel like,

0:24:24.680 --> 0:24:27.679
<v Speaker 6>you know, hey, maybe we can exploit this ambiguity in

0:24:27.800 --> 0:24:30.520
<v Speaker 6>order to get our projects up and going and that

0:24:30.640 --> 0:24:34.520
<v Speaker 6>we can avoid SEC enforcement. Maybe we don't want a

0:24:34.520 --> 0:24:36.959
<v Speaker 6>lot of rules that we'd have to comply with. It's

0:24:37.000 --> 0:24:39.760
<v Speaker 6>certainly possible there is a group like that, but I

0:24:39.800 --> 0:24:44.080
<v Speaker 6>think the dominant establishment voices in the crypto industry I

0:24:44.080 --> 0:24:47.879
<v Speaker 6>think would probably be with Coinbase on this issue.

0:24:48.040 --> 0:24:50.480
<v Speaker 1>Well, I'm wondering if it's better for the crypto industry

0:24:50.920 --> 0:24:53.600
<v Speaker 1>if the SEC sues them and then in some of

0:24:53.640 --> 0:24:57.280
<v Speaker 1>those lawsuits, you know, the court says, you know, this

0:24:57.440 --> 0:25:00.480
<v Speaker 1>is not a security and then they might go up

0:25:00.520 --> 0:25:03.840
<v Speaker 1>to the Supreme Court, maybe they'll do some revisions of

0:25:03.880 --> 0:25:04.680
<v Speaker 1>the Howie test.

0:25:05.200 --> 0:25:07.720
<v Speaker 6>It's a good point, and that's certainly something coinbas is

0:25:07.800 --> 0:25:11.119
<v Speaker 6>litigating right now, and the cases are working their way

0:25:11.200 --> 0:25:14.959
<v Speaker 6>up through the system. You know, is the best result

0:25:15.000 --> 0:25:18.280
<v Speaker 6>for the industry that we have a ruling that they're

0:25:18.320 --> 0:25:21.560
<v Speaker 6>not securities? One view is maybe that that would be

0:25:21.560 --> 0:25:24.720
<v Speaker 6>a good thing, because then the SEC could not bring

0:25:24.840 --> 0:25:28.800
<v Speaker 6>enforcement or regulate crypto. On the other hand, if it's

0:25:28.840 --> 0:25:34.160
<v Speaker 6>not the SCC and they're not securities and people are

0:25:34.160 --> 0:25:38.920
<v Speaker 6>losing a bunch of money on digital assets, then Congress

0:25:38.960 --> 0:25:41.439
<v Speaker 6>will have to step in and there'll be a different

0:25:41.440 --> 0:25:45.359
<v Speaker 6>regulatory regime, I think, one way or the other. If

0:25:45.640 --> 0:25:50.840
<v Speaker 6>we have crypto frauds and they are widespread, then somebody

0:25:50.880 --> 0:25:55.439
<v Speaker 6>will have to regulate crypto industry. Whether it's the SEC,

0:25:55.840 --> 0:25:59.480
<v Speaker 6>whether it's somebody else, I'm not exactly sure. And you know,

0:25:59.520 --> 0:26:03.840
<v Speaker 6>maybe the hope of the crypto industry in litigating whether

0:26:03.920 --> 0:26:06.400
<v Speaker 6>or not crypto can be a security is maybe their

0:26:06.440 --> 0:26:09.040
<v Speaker 6>hope is that if the court say it is not

0:26:09.160 --> 0:26:12.960
<v Speaker 6>a security, then that will spur Congress to act and

0:26:13.119 --> 0:26:16.080
<v Speaker 6>pass a statue, and then they would have the sort

0:26:16.080 --> 0:26:19.720
<v Speaker 6>of regulation that might confer some legitimacy on them. That

0:26:19.840 --> 0:26:21.640
<v Speaker 6>might be their ultimate hope.

0:26:22.280 --> 0:26:25.239
<v Speaker 1>I mean, the best result for crypto is it that

0:26:25.400 --> 0:26:30.119
<v Speaker 1>Congress passes legislation no identifying these things and it's not

0:26:30.320 --> 0:26:31.440
<v Speaker 1>left up to the courts.

0:26:32.320 --> 0:26:34.840
<v Speaker 6>I think it depends on the type of legislation that

0:26:35.000 --> 0:26:39.480
<v Speaker 6>is that is passed, where you have a clear set

0:26:39.520 --> 0:26:44.400
<v Speaker 6>of rules that may say that we don't need disclosure

0:26:44.560 --> 0:26:48.000
<v Speaker 6>for digital assets, that we will allow them to simply

0:26:48.480 --> 0:26:51.640
<v Speaker 6>run by themselves and not be regulated. I think that's

0:26:51.680 --> 0:26:53.680
<v Speaker 6>what they are hoping for. I don't know if that's

0:26:53.720 --> 0:26:55.920
<v Speaker 6>what is good for society. I don't know if that's

0:26:55.960 --> 0:26:59.720
<v Speaker 6>what will happen. I am skeptical that, you know, we

0:26:59.800 --> 0:27:05.879
<v Speaker 6>have totally decentralized associations where we are trusting that the

0:27:06.000 --> 0:27:09.879
<v Speaker 6>incentives will work and will not be used to exploit

0:27:10.400 --> 0:27:15.359
<v Speaker 6>smaller players and individuals. I'm skeptical that that is possible.

0:27:15.640 --> 0:27:19.120
<v Speaker 6>And you know, the crypto or coinbases argue that when

0:27:19.160 --> 0:27:22.119
<v Speaker 6>you you know, have found a crypto project, you have

0:27:22.280 --> 0:27:26.400
<v Speaker 6>no obligation to the people who buy the crypto. There

0:27:26.440 --> 0:27:30.440
<v Speaker 6>is no contractual obligation between the founders of the crypto

0:27:30.520 --> 0:27:32.840
<v Speaker 6>project and the people who buy the crypto. That's why

0:27:32.880 --> 0:27:36.400
<v Speaker 6>they're saying it's not an investment contract. It strikes me

0:27:36.440 --> 0:27:39.679
<v Speaker 6>as problematic. You know, if I'm a shareholder in a company,

0:27:39.720 --> 0:27:44.240
<v Speaker 6>I'm protected by various fiduciary duties that prevent the managers

0:27:44.240 --> 0:27:47.120
<v Speaker 6>from from exploiting me. As a crypto purchaser, I don't

0:27:47.160 --> 0:27:50.240
<v Speaker 6>have that, and so, you know, is it a good

0:27:50.280 --> 0:27:55.040
<v Speaker 6>idea to have these decentralized associations where there are no

0:27:55.600 --> 0:27:59.840
<v Speaker 6>contractual rights that customers have that individuals who buy the

0:28:00.240 --> 0:28:03.639
<v Speaker 6>don't have. I think probably not. And I think that

0:28:03.720 --> 0:28:06.399
<v Speaker 6>there will need to be some regulation in some form

0:28:06.960 --> 0:28:10.320
<v Speaker 6>that will protect the general public when they are buying

0:28:10.760 --> 0:28:15.000
<v Speaker 6>digital assets, whether it's securities are something else, there needs

0:28:15.040 --> 0:28:19.199
<v Speaker 6>to be some regulation in order for this to work.

0:28:19.840 --> 0:28:22.639
<v Speaker 1>You know, we've talked before about agency power in the

0:28:22.680 --> 0:28:26.320
<v Speaker 1>Supreme Court, trying to reign in agency power. I didn't

0:28:26.320 --> 0:28:30.760
<v Speaker 1>hear anything from these judges against agency power. They talked

0:28:30.800 --> 0:28:35.400
<v Speaker 1>about deference to agencies. Does agency difference or the changes

0:28:35.440 --> 0:28:37.080
<v Speaker 1>in that play any part here?

0:28:37.600 --> 0:28:41.320
<v Speaker 6>I think it does. I think that one possible outcome

0:28:41.360 --> 0:28:43.680
<v Speaker 6>I think is some of the judges they will want

0:28:43.760 --> 0:28:47.560
<v Speaker 6>to sort of say sec when you deny a petition

0:28:47.680 --> 0:28:51.320
<v Speaker 6>like this, you have to give more reasons, and that

0:28:51.640 --> 0:28:56.880
<v Speaker 6>is a bit less deference to agencies and their decision making.

0:28:57.600 --> 0:29:03.040
<v Speaker 6>It may be about setting up additional expectations, procedural expectations

0:29:03.120 --> 0:29:06.520
<v Speaker 6>about explanations agencies have to give. So I think it

0:29:07.040 --> 0:29:12.400
<v Speaker 6>could this decision could have implications for administrative agencies. The

0:29:12.400 --> 0:29:17.080
<v Speaker 6>way they denied petitions and explain their reasoning, that could

0:29:17.480 --> 0:29:21.400
<v Speaker 6>have some modest impact in restraining their discretion.

0:29:22.200 --> 0:29:24.680
<v Speaker 1>Yeah, one of the judges said something to the effect of,

0:29:25.040 --> 0:29:27.479
<v Speaker 1>you don't have to give much of an explanation, but

0:29:27.520 --> 0:29:30.240
<v Speaker 1>you have to give some. And this is totally vacuous,

0:29:30.360 --> 0:29:34.680
<v Speaker 1>was the word that he used about the SEC's explanations

0:29:34.720 --> 0:29:38.440
<v Speaker 1>for this. So, now, as far as the presidential candidates,

0:29:38.680 --> 0:29:42.120
<v Speaker 1>is one more than the other, you know crypto friendly?

0:29:42.520 --> 0:29:45.520
<v Speaker 1>Is Trump more crypto friendly than Harris? Or they both

0:29:45.520 --> 0:29:48.280
<v Speaker 1>seem to be trying to court the crypto industry.

0:29:49.160 --> 0:29:51.560
<v Speaker 6>It's what it seems like. Whether or not they will

0:29:51.600 --> 0:29:57.800
<v Speaker 6>follow through on sort of their campaign promises, I think

0:29:57.920 --> 0:30:01.440
<v Speaker 6>is another matter. I think because of the amount of

0:30:02.080 --> 0:30:05.240
<v Speaker 6>money that has been invested in crypto, the industry has

0:30:05.280 --> 0:30:10.120
<v Speaker 6>a lot to spend, and the presidential candidates are responding

0:30:10.360 --> 0:30:13.880
<v Speaker 6>to this. Whether or not they will actually want to

0:30:14.200 --> 0:30:18.479
<v Speaker 6>pass the sort of legislation that the crypto industry really wants,

0:30:18.600 --> 0:30:21.120
<v Speaker 6>I think is another matter, because they do not want

0:30:21.160 --> 0:30:24.560
<v Speaker 6>to be blamed if the public loses a lot of money,

0:30:24.920 --> 0:30:29.840
<v Speaker 6>and so I think that they're both basically remaining somewhat

0:30:29.920 --> 0:30:33.840
<v Speaker 6>vague as to what exactly they would do while trying

0:30:33.880 --> 0:30:37.960
<v Speaker 6>to appear like they're sympathetic to the crypto industry.

0:30:38.480 --> 0:30:41.080
<v Speaker 1>I did want to ask you about the FTX collapse

0:30:41.400 --> 0:30:44.280
<v Speaker 1>for a moment, because you mentioned the concerns about it.

0:30:44.480 --> 0:30:47.640
<v Speaker 1>Are the FTX customers though getting all their money back?

0:30:48.360 --> 0:30:51.440
<v Speaker 6>They are, they're certainly getting more back than we expect it,

0:30:52.120 --> 0:30:57.280
<v Speaker 6>and I think that reflects the rebound in crypto that

0:30:58.000 --> 0:31:00.880
<v Speaker 6>has happened over the last you know, last few years

0:31:00.960 --> 0:31:06.240
<v Speaker 6>after the collapse of FTX. This is a wildly speculative market,

0:31:06.520 --> 0:31:11.760
<v Speaker 6>and we will probably see other fluctuations as well. I

0:31:11.760 --> 0:31:15.480
<v Speaker 6>would be surprised if crypto never sees a major correction.

0:31:16.320 --> 0:31:19.880
<v Speaker 6>You know the fact that the market rallied for various reasons,

0:31:20.280 --> 0:31:24.320
<v Speaker 6>you know, and that resulted in the FTX customers getting

0:31:24.560 --> 0:31:28.640
<v Speaker 6>you know, substantial amounts back. I think that does notily

0:31:28.640 --> 0:31:31.720
<v Speaker 6>mean they're not dangerous to crypto and we'll see what

0:31:31.760 --> 0:31:34.600
<v Speaker 6>happens in the future. I don't know, but certainly that

0:31:34.720 --> 0:31:38.160
<v Speaker 6>is something that you can make an argument that, hey,

0:31:38.240 --> 0:31:40.880
<v Speaker 6>you know, the problem is not so great as we thought.

0:31:41.400 --> 0:31:43.720
<v Speaker 6>But I think there may be have been a little

0:31:43.720 --> 0:31:46.400
<v Speaker 6>bit of luck in that, and there's a lot of

0:31:46.760 --> 0:31:51.720
<v Speaker 6>money that is flowing around our system in speculative ways,

0:31:52.400 --> 0:31:56.040
<v Speaker 6>and if that reverses, though, that could have some disastrous

0:31:56.040 --> 0:31:57.800
<v Speaker 6>consequences for investors.

0:31:58.240 --> 0:32:01.480
<v Speaker 1>It's certainly a lot to think about. Thanks so much, Jim.

0:32:01.520 --> 0:32:05.280
<v Speaker 1>That's Professor James Park of UCLA Law School, and that's

0:32:05.320 --> 0:32:08.280
<v Speaker 1>it for this edition of the Bloomberg Law Podcast. Remember

0:32:08.320 --> 0:32:11.040
<v Speaker 1>you can always get the latest legal news by subscribing

0:32:11.080 --> 0:32:14.520
<v Speaker 1>and listening to the show on Apple Podcasts, Spotify, and

0:32:14.600 --> 0:32:18.640
<v Speaker 1>at Bloomberg dot com, slash podcast, Slash Law. I'm June

0:32:18.640 --> 0:32:20.800
<v Speaker 1>Grosso and this is Bloomberg