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Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News,

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Speaker 1: and this is Bloomberg Crypto at Daily Bloomberg. I heard podcast.

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Speaker 1: It's Tuesday, August second. One of the most interesting conversations

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Speaker 1: in crypto right now is all about definitions and what

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Speaker 1: I mean by that is is crypto security, what's the

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Speaker 1: security and what does that mean in practice? We are

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Speaker 1: once again very fortunate to be joined by Bloomberg opinion

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Speaker 1: columnist Matt Levine. I think that like the idea of

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Speaker 1: like having a safety and Sina's regulator for like a

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Speaker 1: crypto exchange, this feels many years away. Who is, or

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Speaker 1: at least was, a practicing lawyer and someone who has

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Speaker 1: written really extensively about security, securities, law, insider trading, all

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Speaker 1: things that are very much topical in crypto right now.

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Speaker 1: Matt also interviewed Sam Bankman Free at the recent Bloomberg

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Speaker 1: Crypto suwhere in New York and SPF as he's known,

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Speaker 1: made some very interesting remarks about regulation, clarity, collateral predictability,

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Speaker 1: profitability with sort of a dirty word for a number

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Speaker 1: of years, and it is returned to investor parlance. Over

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Speaker 1: the course of this podcast, will play you some highlights

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Speaker 1: from Matt's conversation with Sam bankmun Freed. Matt, welcome back

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Speaker 1: to the podcast. Thanks for having me. I want to

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Speaker 1: talk about something right now that does feel novel in

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Speaker 1: the crypto context, which is people seem to actually be

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Speaker 1: getting regulated at the moment. Do you think let's talk

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Speaker 1: about it being reported about people considering regulating them one day? Um,

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Speaker 1: I don't think that people are getting regulated per se. Well,

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Speaker 1: they're getting arrested, yes, sure, they're getting arrested for insider trading.

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Speaker 1: Coin Base is facing a US investigation on cryptocurrency listings.

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Speaker 1: Is this connect did to the insider trading investigation that

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Speaker 1: was brought against a former coin based manage? Did any

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Speaker 1: employees inappropriately trade ahead of the announcement? Here in coin Base,

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Speaker 1: by the way, says it did nothing wrong, But of

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Speaker 1: course we have three sources telling Bloomberg there was an

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Speaker 1: ex employee of coin base who got arrested on allegations

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Speaker 1: that he was insider trading nine crypto tokens knowing that

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Speaker 1: they would be listed and kind of like that their

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Speaker 1: prices would go up once they got listed on coin Base.

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Speaker 1: The weird thing is for the sec to bring this

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Speaker 1: action against this employee, they would have to have defined

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Speaker 1: those crypto tokens and securities for the purposes of their jurisdiction.

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Speaker 1: And that seems to be the thing that has absolutely

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Speaker 1: freaked out a whole bunch of crypto lawyers and CEOs

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Speaker 1: this week. Crypto lawyers are freaking out. I don't understand

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Speaker 1: crypto lawyers, man, I just don't understand it. Like this

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Speaker 1: is a years long thing. To me. The SEC, I think,

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Speaker 1: has always thought that almost all crypto is securities. I

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Speaker 1: think they think that bitcoin is not a security. I

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Speaker 1: think they have accepted that ethereum is not a security

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Speaker 1: for sort of like historical we forgot about it reasons.

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Speaker 1: And I think like if you came to them today

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Speaker 1: with ethereum, they'd be like, that's a security um. But

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Speaker 1: I think almost everything else they think is a security.

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Speaker 1: And I think that, like you look at some of

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Speaker 1: the projects in the in the coin base case, like

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Speaker 1: these are companies that are raising money by offering a

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Speaker 1: share of their future profits in order to build a business.

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Speaker 1: Like it's just so clear that their equity security. It's

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Speaker 1: so clear, and these crypto and like and and I

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Speaker 1: don't I don't understand like the sort of legal analysis

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Speaker 1: of crypto, because like it is the case that big

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Speaker 1: law firms are giving big venture capitalists and coin base

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Speaker 1: is a public company, get the advice that like lots

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Speaker 1: of these companies that are raising money by selling equity

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Speaker 1: securities are not selling securities, and so you can list

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Speaker 1: them as as like commodity tokens on your exchange, and

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Speaker 1: if you're a venture capitalist, you can buy them and

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Speaker 1: then immediately blow them out to retail without being an

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Speaker 1: underwrit of security. And I think if you tie to

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Speaker 1: anyone at the SEC, they're like, that's nuts, man, that's

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Speaker 1: not And like they thought that forever, and they've said

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Speaker 1: it publicly forever, Like I think there's nuanced that, and

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Speaker 1: there have been there have been SEC speeches were like

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Speaker 1: there's a path to like a utility token that is

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Speaker 1: not a security. But I think like in general, the

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Speaker 1: sort of posture of the Trump SEC that J. Clayton

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Speaker 1: SEC was all these things are securities. And they brought

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Speaker 1: a lot of enforcement actions against They used to be

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Speaker 1: called I C O s. Right initially it was just

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Speaker 1: like like the term that that fell out out of

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Speaker 1: favor because like they kept getting enforcement actions for them,

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Speaker 1: and the Gary Gainsler SEC I think has like Gary

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Speaker 1: Ginsler has said publicly all of these things are securities,

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Speaker 1: and the Clayton SEC was right about all of it.

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Speaker 1: But they haven't brought a lot of enforcement cases. And

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Speaker 1: so there's been this sort of acceptance that you can

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Speaker 1: kind of do this stuff where you are issuing like

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Speaker 1: governance tokens and and I'm exaggerating a little bit as

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Speaker 1: I described this, Like clearly a lawyer has touched this, right,

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Speaker 1: Like there's like an argument that these things are not

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Speaker 1: equity securities, right. The argument is, like, these things are

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Speaker 1: governance tokens, their utility tokens. They are usable in some

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Speaker 1: app and they don't carry equity like rights to the

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Speaker 1: profits of that protocol. We've just talked a lot about

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Speaker 1: securities and the sec and tokens. If you in other

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Speaker 1: than telling people read read your newsletter and what you

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Speaker 1: write about this constantly, Um, how would you define securities

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Speaker 1: for our listeners? So securities, it's a complicated question. So,

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Speaker 1: like the main thing is like stocks and bonds, right,

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Speaker 1: Like a sheriff stock is a security, a bond is

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Speaker 1: a security. And then the SEC has this this thing

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Speaker 1: called the Howie test, which comes from a Supreme Court decision,

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Speaker 1: which which is for a thing called an investment contract,

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Speaker 1: which is another thing that's part of the definite the

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Speaker 1: statutory definition of security. An investment contract is a security,

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Speaker 1: And what makes something an investment contract is like there's

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Speaker 1: a multipart test, but it's like basically an investment of

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Speaker 1: money with the expectation of profit from the activities of

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Speaker 1: someone else. Right, So if you like give money to

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Speaker 1: a person who manages a company and she does some

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Speaker 1: stuff with your money, and then you expect a return

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Speaker 1: of your money, you know, with a profit from like

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Speaker 1: her activities, you know, that's a that's a sheriff stock

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Speaker 1: kind of But like if you don't call it a

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Speaker 1: sheriff stock and it has different bells and whistles, then

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Speaker 1: it's still an investment contract. And I think if you

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Speaker 1: look at the crypto world, I think most people would

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Speaker 1: say bitcoin is very clearly not a security because bitcoin

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Speaker 1: people buy because they expect profit. But there's not like

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Speaker 1: a there's no there's no agent acting acting to like

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Speaker 1: make a profit. Right, it's just purely um. It's like gold,

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Speaker 1: where like you can buy gold thinking the price of

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Speaker 1: gold will go up and it's not doing anything right.

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Speaker 1: You're just expecting the market to go up. But there

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Speaker 1: are these dances where like, buying something because you think

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Speaker 1: other people will buy it doesn't make it a security.

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Speaker 1: Buying something because you think it will be useful on

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Speaker 1: a protocol doesn't make it a security. Buying something because

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Speaker 1: you think like someone will build a useful business that

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Speaker 1: will make it profitable makes it, you know, more or

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Speaker 1: less a security, and tokens kind of have all those

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Speaker 1: things intertwined. So, Matt, we're going to talk about Celsius.

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Speaker 1: And before we start talking about Celsius, I wanna just

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Speaker 1: contextualize this with you know, SBF sort of riffing on

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Speaker 1: stage about the test that he had for whether he

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Speaker 1: would or would not consider bailing out a crypto company

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Speaker 1: or a crypto lender like a Celsius. Here's that, right.

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Speaker 1: The first test is not even which is bigger. The

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Speaker 1: first test is do I walk away from that first

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Speaker 1: call feeling moderately confident that I know what the numbers are,

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Speaker 1: whether or not they're good? Do I even know them right?

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Speaker 1: And like that was like sort of like the test

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Speaker 1: for us to like consider doing like just some emergency

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Speaker 1: thing while we could hear in other things. One of

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Speaker 1: the criteria was that we know what the numbers are

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Speaker 1: whether or not they're good. Um, and some failed that

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Speaker 1: test of like not just the numbers were bad, but

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Speaker 1: like we literally came away confused. We've talked about one

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Speaker 1: domain which people are clamoring for a certain type of

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Speaker 1: SEC clarity, But there's another domain in which people are

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Speaker 1: also clamoring for any type of SEC clarity, and that

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Speaker 1: is situations like what's happening with the Celsius is the

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Speaker 1: three hours capital where you once again have a bunch

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Speaker 1: of people who arguably should have been smarter about their

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Speaker 1: risk management, etcetera. And you know, in an interview that

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Speaker 1: you had with sound back when Freed, he was like,

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Speaker 1: maybe a regulator should have asked, is there any collateral

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Speaker 1: backing this? Is there is there like anything substantive to this.

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Speaker 1: I think one thing that regulation would really want to

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Speaker 1: do is like ask is there collateral? Right? Like that

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Speaker 1: that seems like a really important perspective that like there

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Speaker 1: should have been somewho out of oversight, your transparency or

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Speaker 1: like you know, enforced good risk management on but there

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Speaker 1: just wasn't an again from the outward facing perspective, no

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Speaker 1: one has any idea whether or not you actually got

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Speaker 1: that collateral. These crypto lenning protocols, I think we're very

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Speaker 1: highly leveraged and investing and weird stuff, and people may

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Speaker 1: not have realized how leveraged they were, or how much

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Speaker 1: weird stuff they had, or how concentrated it was, or

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Speaker 1: how insecured it was. You know. Sunda Can said, like,

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Speaker 1: you know, people sort of assume there's collateral, and a

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Speaker 1: lot of these things are making on secured linths. So

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Speaker 1: one thing is like you could have better disclosure, and

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Speaker 1: one way to get better disclosure is to register things

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Speaker 1: of security. And you look at like Celsius, like cells.

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Speaker 1: The product that Celsius was selling was very similar to

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Speaker 1: the product that block Fire was trying to sell that

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Speaker 1: they got find a hundred million, find a hundred million

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Speaker 1: dollars for and that the SEC said, this product, this

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Speaker 1: like crypto lending product, is a security and so you

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Speaker 1: have to register. And by the coin based tried to

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Speaker 1: similar things that got shut down before they could even

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Speaker 1: do it. So like is crypto lending and security? Well,

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Speaker 1: the SEC certainly thinks it is. And the fact that

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Speaker 1: Celsius was doing it without registering it. One suggests that

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Speaker 1: the people involved in Celsius could be liable for like

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Speaker 1: deep pockets that floated around Celsius, people who promoted Selsia's,

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Speaker 1: people who bought Selsia's you know, tokens and sold them

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Speaker 1: or whatever. Or the people involved in Celsias could be

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Speaker 1: liable for um, you know, unregistered sales of securities where

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Speaker 1: they have to get the money back. I don't know

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Speaker 1: how valuable that is because like the money is gone.

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Speaker 1: It's not like there's some other pocket of money that

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Speaker 1: has the Celsius money. But that's one thing. Another thing

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Speaker 1: is like should they have registered that. If they had

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Speaker 1: registered that, then people could have looked at their financial

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Speaker 1: statements and said, oh, this is like super levered. Right.

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Speaker 1: I don't want to put too much emphasis on that,

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Speaker 1: because Voyager is a public company that does have financial states.

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Speaker 1: It's like it's based on the yes with listened in

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Speaker 1: Canada and like you can go read the financial statements

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Speaker 1: and you can be like, oh, wow, this is lever

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Speaker 1: and like investing in crypto and people bought it anyway, right,

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Speaker 1: So it's not like transparency is not the end all. Yeah.

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Speaker 1: I mean think about like how people invest in crypto,

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Speaker 1: and people think about people invest in stocks, and like,

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Speaker 1: you know, ask how many people are going to read

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Speaker 1: a balance sheet. There's there's a assumption in the stock

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Speaker 1: market that like like super dangerous over levered companies like

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Speaker 1: want to tract a lot of institutional capital and so

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Speaker 1: like the price will below and retail investors won't. But

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Speaker 1: and I think that's less true in crypto. And it's

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Speaker 1: like less true in the stock market than people thought

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Speaker 1: it was because like you have events like games that

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Speaker 1: where the sort of institutional conventional wisdom doesn't dissuade people

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Speaker 1: from taking a flyer on the stock. Coming up more

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Speaker 1: on coin Base Securities and Sam bankman Free It's Crypto

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Speaker 1: Strategy with Bloomberg opinion columnist Matt Levine. The only thing

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Speaker 1: I'd say about Celsius and like the blow up of

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Speaker 1: crypto lenders because like when Sam mcman freed says, you know,

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Speaker 1: maybe a regulator should have asked if I if I

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Speaker 1: had collateral. That's not really an issue for the sec

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Speaker 1: that's that is an intuition around banking. These crypto shadow

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Speaker 1: banks are banks. You know. One big symptom of the

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Speaker 1: crypto winter is like there's been a blow up of

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Speaker 1: a number of platforms that I would sort of loosely

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Speaker 1: call crypto shadow banks, where they're taking in short term

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Speaker 1: demand money from customers and lending it in weird, opaque ways.

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Speaker 1: And you have touched in some form probably all of those.

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Speaker 1: You've been a lender, a borrower, a rescuer. So like

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Speaker 1: the natural segway is like how much of the rescuing

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Speaker 1: activity is about that very long run view of like

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Speaker 1: it is healthier for the crypto ecosystem that you are

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Speaker 1: levered to for depositors not to be constantly blown up.

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Speaker 1: That's a real part of it. And maybe to make

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Speaker 1: this like more concrete, the explicit sort of like working

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Speaker 1: principle we had in a number of these was like

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Speaker 1: it's okay to do a deal that is moderately bad

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Speaker 1: in bailing out a place like the bar was not

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Speaker 1: this is a good return on investment. The bar is

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Speaker 1: like this is not that bad a return on investment,

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Speaker 1: or like we are incinerating a relatively small issue amount

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Speaker 1: of money in doing this. Actual banks, you know, get

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Speaker 1: collateral for their loans and like you know, don't concentrate

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Speaker 1: all their loan portfolio and tests yeah, Like they have

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Speaker 1: a lot of stuff that regulators impose on them that

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Speaker 1: are not about you know, the like the SEC is

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Speaker 1: essentially a disclosure regulator, right, and like banking regulation is

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Speaker 1: not essentially about disclosure. It's essentially about safety and soundness.

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Speaker 1: And there is a system of regulation based on safety

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Speaker 1: and soundness for banks. And one sort of stress point

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Speaker 1: in the traditional financial industry is about like what sorts

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Speaker 1: of shadow banks should get swept up into what sort

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Speaker 1: of like quasi banking type regulation where you have like,

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Speaker 1: you know, money market funds are just like, oh, their

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Speaker 1: SEC regulator, they just do whatever they want. And then

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Speaker 1: like people are you know, that's bad because they're kind

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Speaker 1: of a bank, and so like it's driven by the SEC.

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Speaker 1: There's some you know amount of like capital and safety

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Speaker 1: and sundence regulation that that effectively applies to money market

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Speaker 1: funds because they're like and then in crypto banks, it's like, ah,

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Speaker 1: we'll see what we can get away with, you know.

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Speaker 1: And like you could say, well they should have they

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Speaker 1: should have to register securities and disclose their financials, but

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Speaker 1: like you look at page you're like that doesn't help.

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Speaker 1: I think that like the idea of like having a

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Speaker 1: safety and sinus regulator for like a crypto exchange. This

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Speaker 1: feels many years away, right, and very like antithetical to

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Speaker 1: like the philosophy of the whole, the whole, the whole thing, right,

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Speaker 1: Like like the FED is going to set up a

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Speaker 1: new regulator who will tell crypto exchanges what they can

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Speaker 1: invest in. It just doesn't seem like that's gonna happen.

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Speaker 1: But it's also one way to prevent the exchanges from

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Speaker 1: losing all their customers money. I think that like a

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Speaker 1: thing that happens here is that people, you know, it's

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Speaker 1: a bull market. It was a bull It was a

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Speaker 1: bull market for crypto. People are used to like things

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Speaker 1: working the way they're supposed to work. You know, people

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Speaker 1: got like cuddled by like financial exchanges and banks like

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Speaker 1: just kind of working, and so when they put their

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Speaker 1: money into celsus, they're like, well, that's my money, I'll

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Speaker 1: get that back, even if you know, they sort of

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Speaker 1: expect things to work in a nice way and then

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Speaker 1: like they work in a terrible way, and maybe like

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Speaker 1: in the future, people will ask better questions. I love

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Speaker 1: your optimism. I'm not that optimistic. I'm saying this for completeness.

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Speaker 1: Um but like you know, I would separate like will

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Speaker 1: people like learn substantive lessons from like will people be

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Speaker 1: less enthusiastic I've putting their money into crypto schemes when

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Speaker 1: the crypto schemes go down, right, Like, I don't know,

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Speaker 1: we shall see. I've been fascinated, you know. We we

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Speaker 1: had an interview with the founders of Three Arrows Capital

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Speaker 1: in which they kind of told us on the record

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Speaker 1: that the biggest mistake was expecting that markets would continue

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Speaker 1: to rise and that credit would continue to be available henceforth.

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Speaker 1: And sure, but it does. It does strike me. And

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Speaker 1: this is also something that SPF said. And when you

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Speaker 1: look at the companies in crypto and frankly across the space,

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Speaker 1: I think profitability with sort of a dirty word for

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Speaker 1: a number of years, and it is returned to investor

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Speaker 1: parlance right like last year if he saw a typical

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Speaker 1: funding round from vcs, like, was that valuation related to

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Speaker 1: the profit of the company, probably not, like revenue was

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Speaker 1: sort of like like they're sort of without saying so explicitly,

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Speaker 1: everyone just subtly slipped from like you know, even though

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Speaker 1: our profit or something to just purely revenue as like

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Speaker 1: the driver of value and like no thought towards like

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Speaker 1: how profit would eventually catch up to that. And I

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Speaker 1: think that there's been a substantial rerating towards looking for

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Speaker 1: at least likely or at least flaws will pathway towards

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Speaker 1: profitability being a core component of an investment thesis in

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Speaker 1: a company, which feels a little strange to say, but

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Speaker 1: but I think was something that was kind of missing.

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Speaker 1: Do you think any of this is going to change

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Speaker 1: for institutional lenders and investors and players at all? Or

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Speaker 1: are we just going to be like having another conversation

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Speaker 1: in five years being like, huh, remember when I don't know,

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Speaker 1: I don't know what I mean? So what does institutional

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Speaker 1: I mean? I mean, like, one thing it means is

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Speaker 1: like the most cynical possible view is like you're putting

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Speaker 1: money into protocols that you can blow out to retail, right,

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Speaker 1: where like as institutional is doing an arbitrage between you know,

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Speaker 1: lots of money. Yeah, and I think that you know,

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Speaker 1: one would hope a retail pullback sort of eliminates that.

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Speaker 1: And then you have institutional investors who are thinking, you know,

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Speaker 1: about investing in building some sort of long term viable

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Speaker 1: business different skills set, right, I mean, I mean, yeah,

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Speaker 1: the skill set disconnect. It is really like what are

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Speaker 1: you doing is an institutional player in crypto? Like one

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Speaker 1: thing you could be doing is you're a tech venture capitalist,

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Speaker 1: where you're like picking teams and businesses that will build

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Speaker 1: long term, viable, valuable products. Right. Another thing you could

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Speaker 1: be doing is like your a hedge fund or like

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Speaker 1: electronic carbitage firm, and there you're like, there are a

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Speaker 1: lot of gamblers. I can look at like patterns and

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Speaker 1: that gambling and try to you know, anticipate market moves

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Speaker 1: and make money from it. And like that's a viable

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Speaker 1: institutional product. But like there needs to be some audience

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Speaker 1: that you're interacting with, right right, who's on the other

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Speaker 1: side of the because if it's just like a bunch

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Speaker 1: of abi trage heads funds, than like you know, that

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Speaker 1: business gets a lot more cut threat. And also like

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Speaker 1: that if it's just those people that goes away like

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Speaker 1: that that business exists in the stock market, right, But

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Speaker 1: the stock market is like doing something, right, it's like

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Speaker 1: funding businesses, and so like you need to have that

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Speaker 1: underlying real economic activity in order to have run an

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Speaker 1: abit trage business against it indeed, well, thank you, terrific,

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Speaker 1: thank you. You can find more of Matt Levin's work

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Speaker 1: on the Bloomberg terminal, on Bloomberg dot com or on Twitter.

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Speaker 1: He's Matt Underscore Levine. That's l E V I n E.

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Speaker 1: On the next episode of Bloomberg Crypto. Despite being one

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Speaker 1: of the leading cryptocurrency exchanges in the world, coin Base

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Speaker 1: has had, frankly a rough couple of months. They've had

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Speaker 1: to contend with speculations about bankruptcy, deal with increasing regulatory scrutiny,

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Speaker 1: and even handle internal employee dissent. So what's really going

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Speaker 1: on over there? To help us better understand what's take

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Speaker 1: for coin Base, I'll be joined by Bloomberg Business Week

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Speaker 1: columnists Max Chapkin. This is Bloomberg Crypto, a daily podcast

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Speaker 1: from Bloomberg and I Heart Radio. For more shows from

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Speaker 1: I Heart Radio, visit the I Heart Radio app, Apple Podcasts,

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Speaker 1: or wherever you get your podcasts. Send us your comments,

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Speaker 1: questions or suggestions for the show to Crypto at Bloomberg

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Speaker 1: dot net or find us on Twitter. We're at Crypto.

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Speaker 1: The supervising producer of Bloomberg Crypto is Vicky ver Galina,

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Speaker 1: our senior producer is Janet Babin. Desta wonder At is

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Speaker 1: our engineer. Original music by Leo Sidrin. I'm Stacy Marie

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Speaker 1: Schmal We'll be back tomorrow.