Speaker 1: This is Bloomberg Crypto, a daily Bloomberg I Heart podcast,
Speaker 1: and I'm Stacy Marie Ishmael, Managing editor of Crypto for
Speaker 1: Bloomberg News. It's Tuesday, November eighth. One of the bigger
Speaker 1: fights in crypto right now is over the definition of
Speaker 1: a security, what counsels the security, who gets to decide
Speaker 1: what counts, and of course who gets to regulate once
Speaker 1: that decision is made. This isn't just about semantics. The
Speaker 1: answer to these questions affects trillions of dollars of assets
Speaker 1: in the United States, including and increasingly crypto. In December,
Speaker 1: the SEC accused Ripple Labs, the issuers of the Ripple token,
Speaker 1: of having conducted quote an unregistered ongoing digital assets secure
Speaker 1: he's offering, and offering that raised one point three billion dollars. Ripple,
Speaker 1: of course, did not agree with the SEC's assessment, and
Speaker 1: that fight is still ongoing. Most recently, Ripple asked the
Speaker 1: courts involved to dismiss the SEC's complaint entirely, among other things,
Speaker 1: on the basis that it's token x RP does not
Speaker 1: count as a security. So who's right and what are
Speaker 1: the consequences either way? Here to explain a Bloomberg reposts
Speaker 1: as Matt Robinson and Chris Dolmac an attorney at law
Speaker 1: Liz Davis. Hey, listeners, I'm Dust the one Drett from
Speaker 1: the Bloomberg Crypto podcast team. The U S Security is
Speaker 1: an exchange commission is one case that could impact another
Speaker 1: case we mentioned in today's show involving Ripple Labs. The
Speaker 1: U S. District Court has ruled at the company in question,
Speaker 1: Library was selling its token as an unregistered security. In
Speaker 1: a response on Twitter, Library said that it's not giving up,
Speaker 1: so the ruling could be appealed. We recorded this show
Speaker 1: before the news broke, which is why it is not mentioned.
Speaker 1: For more information about the Library decision, go on over
Speaker 1: to Bloomberg Law. Now back to our show, Matt, Liz,
Speaker 1: Welcome to the show. We don't often get to talk
Speaker 1: about Florida on the show, but today we're gonna get
Speaker 1: to talk about Florida. And the reason that we're going
Speaker 1: to talk about Florida is because of this dude who
Speaker 1: was not exactly an international amount of mystery, but certainly
Speaker 1: quite a character, a citrus farmer, a person who attempted
Speaker 1: to run for Florida governor named William John Howe. He
Speaker 1: died in and yet we invoke his name when we're
Speaker 1: talking about assets in twenties twenty two, Matt, why is
Speaker 1: this well Bill Howie. Yeah, as you said, he got
Speaker 1: to Florida around Uh. Prior to that, he was an
Speaker 1: interesting guy. He sold life insurance that's sixteen. He actually
Speaker 1: developed land in Oklahoma tied to railroads. He also started
Speaker 1: a Howie car. I think it's about sold about seven
Speaker 1: of them, so that didn't last. And then he found
Speaker 1: his way to Florida around the nineteen tens, started buying
Speaker 1: up land, you know, planting citrus groves and starting building
Speaker 1: that out. The way he was funded that, in part
Speaker 1: was by bringing these rich investors from the North. He'd
Speaker 1: kind of schmooze them at his hotels showing these orange grows.
Speaker 1: He became very wealthy. His mansion is still there. Uh
Speaker 1: if actually it's a it's a national historic place. You
Speaker 1: can also get married there, I think, if you'd like.
Speaker 1: But why do crypto people care about him? So so
Speaker 1: part of the way he made his wealth was the
Speaker 1: way he funded this orange growth business. So the idea
Speaker 1: is that he would say, hey, I'm gonna sell you
Speaker 1: this land. But part of that is, I'm going to
Speaker 1: develop it for you. So you gave me money now,
Speaker 1: and then you know, I'll develop, I'll sell it, and
Speaker 1: then you'll get a return on that investment. Now it
Speaker 1: starts to sound more like you know, a security something
Speaker 1: that like you give someone money and then there's an
Speaker 1: expectation that you're going to get some profit back. So
Speaker 1: he did this for years, and then the SEC sued
Speaker 1: him saying well, that's that's our universe, that's our world, Um,
Speaker 1: you should be registered with US. Goes all the way
Speaker 1: up to the Supreme Court, and that decision in goes
Speaker 1: through you know, sort of these steps to say, okay,
Speaker 1: when does something When does this exchange of money become
Speaker 1: a security? And Liz, it's now we're two. Why are
Speaker 1: both US regulators and cryptal lawyers of all stripes still
Speaker 1: fighting about this today? The how we test is sort
Speaker 1: of the standard that the SEC looks to uh in
Speaker 1: determining whether something constitutes an investment contract um. And if
Speaker 1: it's an investment contract, then it needs to be registered
Speaker 1: with the SEC as a security. So generally speaking, like
Speaker 1: all securities like stocks, bonds, investment contracts that are offered
Speaker 1: in the United States, must be registered with the SEC,
Speaker 1: subject to some exceptions. Um, you know, registration with the
Speaker 1: SEC is to make sure that it's for investor protection right,
Speaker 1: to make sure that investors are sold investments that include
Speaker 1: all of the appropriate disclosures and are subject to regulatory
Speaker 1: scrutiny to protect investors. So, as Matt discussed, you know,
Speaker 1: the how we test is sort of the standard test
Speaker 1: for determining whether and offering is an investment contract and
Speaker 1: therefore security and that needs to be registered. And there
Speaker 1: are just sort of parallels that the crypto industry is
Speaker 1: looking at in terms of the initial coin offerings, how
Speaker 1: they were being offered to the wide audience, the wide public,
Speaker 1: you know, who are the investors, and the parallels are
Speaker 1: being drawn from there to see whether you know, those
Speaker 1: offerings in those initial coin offerings or for a blockchain
Speaker 1: project fundraising that's done there constitutes an investment contract that
Speaker 1: would been under Howie when you say like registering with
Speaker 1: the SEC, do you just like send in the postcard
Speaker 1: to the regulators And you're like, I'm going to do
Speaker 1: a thing, Like what does that mean? In practice? Sure? No,
Speaker 1: registration means you know, you have to fill up the
Speaker 1: requisite forms there are a law of disclosures that need
Speaker 1: to be made to the SEC. And so it is
Speaker 1: a lengthy process, but one that the SEC, you know,
Speaker 1: would expect folks who are offering investment contracts, whether they
Speaker 1: are orange Grows, interest in orange Grows or cryptocurrency, for
Speaker 1: them to comply with. Now that all sounds you could
Speaker 1: argue reasonable. It might be work, it might be expensive,
Speaker 1: or is it going to get paid? Why then, do
Speaker 1: people object to having their thing be considered a security
Speaker 1: for the purposes of the how we test? I think
Speaker 1: because it's a fact and circumstances test. Right. When you
Speaker 1: say facts and circumstances, what does that mean? It depends
Speaker 1: on what the how the token was being offered, what
Speaker 1: the situation was, you know, the context in which it
Speaker 1: was distributed to the public and may be made available
Speaker 1: to the public. And I think it depends on who
Speaker 1: the promoter was or the entity was that was offering
Speaker 1: to it, what disclosures they may what comments did they
Speaker 1: make with respect to the problems that the how these tests?
Speaker 1: Was there an expectation of profit that was being made
Speaker 1: known to those potential purchasers that were going to invest
Speaker 1: in the security? And Matt why is this such a
Speaker 1: big deal right now? It's such a big deal because
Speaker 1: once something is a registered there's a lot of other
Speaker 1: things that need to take place. You're selling a security
Speaker 1: and it trades on an exchange, that exchange needs to
Speaker 1: be traded, right, and then if it's security, you know,
Speaker 1: like how do you protect inside information so that your
Speaker 1: employees don't trade against So there's just like it opens
Speaker 1: up a whole bunch of different regulatory hoops people need
Speaker 1: to jump through. And I think part of the reason
Speaker 1: there's been reluctance in the industry is that the whole
Speaker 1: ethos is to you know, we're we're against institutions where
Speaker 1: we're trying to you know, do things ourselves and not
Speaker 1: to have some sort of intermediary. So this this law
Speaker 1: or this test from you know, the forties is kind
Speaker 1: of hampered it because the way that it was written
Speaker 1: is to sort of encompass a lot of things so
Speaker 1: that the investing public has someone you know, overlooking things
Speaker 1: to make sure that people are doing the things that
Speaker 1: say they're going to do. Is there anything to the
Speaker 1: criticism that you know, these sorts of registration steps can
Speaker 1: hamper activity in some way, like have there been examples
Speaker 1: in other assets of concern about the applicability of these
Speaker 1: sorts of tests. So yeah, I mean I think if
Speaker 1: you look, you know, I used to be at the CFTC,
Speaker 1: and you know, foreign currency for X was sort of
Speaker 1: the tool of choice we used to say over there
Speaker 1: in terms of fraud, right. It was just another method
Speaker 1: in which folks who wanted to defraud people out of
Speaker 1: their money was being used. And you know, there was
Speaker 1: provisions added pursuing too, don Frank that gave the CFTC
Speaker 1: jurisdiction over certain leveraged and finance margins transactions for retail
Speaker 1: spot for X, And so you know, that's a similar
Speaker 1: parallel if you want to look at that. The concern
Speaker 1: I from the regulators is that there are bad actors
Speaker 1: that are out there, right, And I think it's fair
Speaker 1: to say that a lot of folks in the crypto
Speaker 1: industry recognize there are bad actors out there, and they
Speaker 1: don't want them, you know, in the industry because it's
Speaker 1: giving them a bad name. But unfortunately, because we're in
Speaker 1: this period of regulation by enforcement where we don't have
Speaker 1: regulatory clarity, you know, a lot of the laws who
Speaker 1: are being made based upon you know, the fraud that
Speaker 1: that's out there with crypto being used as that vehicle.
Speaker 1: It's just as a sort of a final question obviously,
Speaker 1: like the question of does the how we test apply
Speaker 1: is like very large and very complicated. But are there
Speaker 1: any other kind of similar questions that folks are encountering
Speaker 1: as they try to fit crypto into existing regulatory models? Sure?
Speaker 1: I mean, I think right now, because we don't have
Speaker 1: a central you know, regulator that oversees all the financial
Speaker 1: markets and the banking systems like some other countries do,
Speaker 1: one of the biggest questions that we're seeing is, you know,
Speaker 1: is it a security under the SEC's perview or is
Speaker 1: it a commodity under the CFTCS perview. You know, hopefully
Speaker 1: some of the legislation that's pending right now, that bi
Speaker 1: partisan legislation that's pending might get to, you know, drawing
Speaker 1: some lines between the two of that. But I you know,
Speaker 1: my mind, in addition to the how we test, I
Speaker 1: think the common question that we see all the time
Speaker 1: is just like is this a security? Is this a commodity?
Speaker 1: Or you know, how do I structure my projects such
Speaker 1: that I fall within the jurisdiction of the CFTC as
Speaker 1: opposed to the SEC or vice versa. Got it. Well,
Speaker 1: thank you both, really appreciate you taking the time. Thank you.
Speaker 1: Coming up, we'll be talking to bloombergerpors Crystal Mac how
Speaker 1: one crypto firm is fighting the SEC. It's the SEC
Speaker 1: versus Ripple. We'll be right back. We just heard from
Speaker 1: Bloomberg Reports and Matt Robinson and from attorney at law
Speaker 1: Elizabeth Davis, and now I'm happy to be able to
Speaker 1: introduce Bloomberg reporter Chris Dolmetsch on how one crypto firm
Speaker 1: is fighting the SEC. Chris, welcome to the show. Thank you.
Speaker 1: So when we talk about this SEC case, we're talking
Speaker 1: about the folks at Ripple Labs, who are I would
Speaker 1: not say they're not super pleased with the SEC. What's
Speaker 1: this fight about? So, the fights about whether they should
Speaker 1: have registered x RP as a security right, which would
Speaker 1: have obviously required them to put in a lot of
Speaker 1: registration materials UM material information about their business for investors
Speaker 1: that investors can use to decide whether to invest or
Speaker 1: not UM. You know, it's a common obviously practice among
Speaker 1: public companies and things like that, who are obviously come
Speaker 1: under the purview of the SEC. But when it comes
Speaker 1: to crypto, they kind of feel I think not just Ripple,
Speaker 1: but I think a lot of these people. If you
Speaker 1: look at the Bitmax prosecution, I think you understand that
Speaker 1: they feel that they are not a traditional company that
Speaker 1: needs to bide by those rules, that that crypto is
Speaker 1: really a commodity that can be traded freely. It is
Speaker 1: determined by the market price rather than UM. You know
Speaker 1: the efforts of others. How long has this fight been
Speaker 1: going on. It's been going on since I believe the
Speaker 1: first the lawsuit was filed in September was one of
Speaker 1: the first UM one of the first big cases we
Speaker 1: saw from the SEC after the pandemic has obviously that
Speaker 1: put a big crimp in UM. The number of federal
Speaker 1: actions that were brought. The courthouse kind of shut down
Speaker 1: for an entire year. UM. So I think one of
Speaker 1: the reasons this is taken so long to get to
Speaker 1: this point is because there's robust discovery. They've exchanged a
Speaker 1: lot of documents. There's been fights over documents, UM. But
Speaker 1: the pandemics certainly hurt UM the pace of this case.
Speaker 1: Why does Ripple maintain that they are not a security like,
Speaker 1: what is the specific argument they have been trying to make.
Speaker 1: So they've been saying that x RARP was created but
Speaker 1: basically given away, it was given away to the community
Speaker 1: and therefore has no intrinsic security value. They say, what
Speaker 1: they've received, Yes, there's been x RP sales, We've sold tokens,
Speaker 1: we've given tokens to Ripple that have been distributed to
Speaker 1: the public. But they say we don't have nothing. Is
Speaker 1: there's no central person that is making money off x RP.
Speaker 1: One of the other big things about you know this
Speaker 1: particular cases. There have been so few other examples like this,
Speaker 1: and so there is a lot of speculation that whatever happens,
Speaker 1: if Ripple prevails, if the sec prevails, this could be
Speaker 1: potentially precedent setting for a lot of crypto What would
Speaker 1: those precedents look like? Would it established that yes, certain
Speaker 1: types of things are or aren't a security? Just like
Speaker 1: in non lawyer terms, what are people waiting to see?
Speaker 1: There are a number of factors that go into whether
Speaker 1: or not something is a security, but in this case,
Speaker 1: and in most crypto cases, it really depends on the
Speaker 1: individual currency itself or the crypto or whatever. The parameters
Speaker 1: of of the individual token or the issuing or what
Speaker 1: have you, you know, beyond traditional securities and what we've
Speaker 1: had concepts of that. This could kind of expand that
Speaker 1: definition a little bit and make it more so that
Speaker 1: individual tokens could be considered securities in a broader sense. Um,
Speaker 1: just given what the framework surrounding them. Um. It may not, like,
Speaker 1: you know, bring the hammer down on the entire industry,
Speaker 1: but it could severely limit what they kind of do
Speaker 1: and increase their gulatory exposure. And it may not be
Speaker 1: entirely parallel, but I kind of look at this like
Speaker 1: if you look at the early days of the airlines, Um,
Speaker 1: there was it was kind of the wild West. People
Speaker 1: were flying. You can get on a plane and might crampy, right,
Speaker 1: And in order to have the public have you know,
Speaker 1: confidence in getting on an airplane and have it be
Speaker 1: a robust industry, regulators you know, had a vested interest
Speaker 1: in kind of making it safer and making it obviously
Speaker 1: safer to the public. And I think that's what the
Speaker 1: SEC wants to do here. Cryptocurrency is obviously not going away.
Speaker 1: It is a new market and regulators are trying to
Speaker 1: figure it out. But the Howie test was really not
Speaker 1: used excited that much. It always came to whether something
Speaker 1: fell under the regulation of the SEC. Now, I think
Speaker 1: the SEC sees a little bit of and the Justice
Speaker 1: Department sees a little bit of expanding need a need
Speaker 1: to expand on that definition and at least get the
Speaker 1: courts to see if it agrees with what they're saying.
Speaker 1: And in that aspect, I think this is a big
Speaker 1: test case for them and the crypto industry in general.
Speaker 1: As a part of this being a big test, as
Speaker 1: you say, for the rest of the crypto industry, you know,
Speaker 1: we'll get a lot of emails being like coin base
Speaker 1: as filed and amicus brief and support of Ripple. What's
Speaker 1: an amicus brief? So amicas brief is a friend of
Speaker 1: the court um they file basically in support of whatever
Speaker 1: your position is. There's been a number of them with Ripple,
Speaker 1: and in fact, the whole industry seems to be behind
Speaker 1: Ripple on this. We had coin based recently, we had
Speaker 1: the Blockchain Association file last week and support. I wouldn't
Speaker 1: say it's unusual, but you have a lot of people
Speaker 1: lining up behind Ripple, and that is unusual for a
Speaker 1: n SECC. You don't usually see this amount of public
Speaker 1: engagement and industry engagement. Certainly we have that with limited cases.
Speaker 1: We had the case We're City Bank actually accidentally sent
Speaker 1: a million dollar a billion dollars to some Revlankas absolutely bonkers.
Speaker 1: But in terms of like how those cases are tried,
Speaker 1: that's the parallel that I draw here, and that you
Speaker 1: had a lot of the industry saying, hey, this could
Speaker 1: ruin the syndicated loan industry if you force people to
Speaker 1: do this. But in in this aspect, they have not
Speaker 1: brought criminal charges against Ripple Um, and many people have
Speaker 1: asked why, and that's a good indication that this may
Speaker 1: be something that they want to test the waters to
Speaker 1: see how far they can get on the civil side
Speaker 1: or what you know, the law. The judges will agree
Speaker 1: with them and maybe eventually get up to an appeals
Speaker 1: court that could further define what's the security and to
Speaker 1: find if really how he tested something shouldn't be applied here.
Speaker 1: If there's something new that probably will be the end
Speaker 1: result of this is there's gonna be need to be
Speaker 1: um you know, laws that will define clearly what the
Speaker 1: industry can do and what it can't do. Maybe in
Speaker 1: a future time, we'll be talking about the ripples has
Speaker 1: to not just the how he tought. Sure, exactly, very
Speaker 1: good point. Thank you, Chris. You can find more of
Speaker 1: Crystal Max for pausing on the Bloomberg terminal, on Bloomberg
Speaker 1: dot com and on Twitter. He's at Chris Dolmac that
Speaker 1: c H R I S D O L M E
Speaker 1: T S H on the next episode of Bloomberg Crypto.
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