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

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Speaker 2: A game changing appellate court win for the crypto industry

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Speaker 2: and a stinging defeat for the SEC. The DC Circuit

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Speaker 2: Court of Appeals overturned the SEC's decision to block Grayscale

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Speaker 2: Investments proposed spot bitcoin exchange traded fund. Grayscale's CEO, Michael Sunenshein,

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Speaker 2: called it a huge victory for the crypto industry.

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Speaker 1: A panel of three judges unanimously voted and agreed with Greyscale,

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Speaker 1: and that actually vacates the SEC denial order. Huge win

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Speaker 1: for Greyscale, huge win for our investors, and really the

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Speaker 1: crypto and investment community is as a whole.

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Speaker 2: But the decision doesn't mean that Greyscale can launch its

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Speaker 2: bitcoin ETF. It's still a long road ahead. The SEC

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Speaker 2: will likely appeal the decision and it may even reject

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Speaker 2: the ETF applications of Grayscale and other companies with a

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Speaker 2: different justification. My guest is Anthony Sabino, a professor of

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Speaker 2: law at Saint John's University's Tobin College of Business and

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Speaker 2: a partner at Sabino and Sabino. Anthony, is this a

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Speaker 2: landmark victory for the crypto industry.

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Speaker 3: It is definitely a landmark in the sense that it

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Speaker 3: now shows a clear path for future crypto products to

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Speaker 3: be registered for trading on the exchange, But in a

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Speaker 3: legal sense, it's really not all that earth shattering June

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Speaker 3: for the simple reason that the d C Circuit's opinion

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Speaker 3: in terms of the legal basis was fairly narrow. The

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Speaker 3: essence of it is that the DC Circuit stated that

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Speaker 3: the SEC, in denying Grayscale Investments proposed ETP exchange traded

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Speaker 3: product of Bitcoin, the SEC was arbitrary and capricious and

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Speaker 3: abused its discretion. That's the legal standard for agency action.

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Speaker 3: Agencies must make their decisions, regulatory decisions on a reasoned,

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Speaker 3: rational and well informed basis, and the DC Circuit basically said, no,

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Speaker 3: you did not. And the reason why they found it arbitrary, capricious,

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Speaker 3: abuse discretion again those the words of the last one

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Speaker 3: hundred years, was the fact that within the last year

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Speaker 3: or so, the Commission had approved similar products, and those

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Speaker 3: being exchange traded products ETPs for bitcoin futures, and the

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Speaker 3: DC Circuit and a very thoughtful, very extensive opinion laid

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Speaker 3: out in great detail how there was extraordinary similarities between

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Speaker 3: the markets for bitcoin futures, and while distinct from bitcoin

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Speaker 3: per se, on the spot market, there are many many similarities.

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Speaker 3: So bottom line is this, says the DC Circuit SEC.

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Speaker 3: You approved two of the bitcoin futures products to be

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Speaker 3: traded on various exchanges, but you said no to grey

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Speaker 3: scales spot market bitcoin product, and that's arbitrary, capricious, abuse discretion,

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Speaker 3: and that's how we got to this decision.

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Speaker 2: Critics have said that SEC Chair Gary Gensler has overstepped

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Speaker 2: in his attempt to clamp down on the crypto industry.

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Speaker 2: Is the Court saying that too in this decision?

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Speaker 3: No, not really, And I'll address in a moment the

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Speaker 3: critics of Chairman Gensler, But in truth, it is a

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Speaker 3: criticism that can't be denied. That's obvious, and they are

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Speaker 3: folding the Commission for in this instance making a decision

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Speaker 3: that was again arbitrary, capricious in essence, you did not

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Speaker 3: treat similar products. And again, June, those are the precise

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Speaker 3: words of the opinion, which is a wonderful read, by

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Speaker 3: the way, for this audience. Because the DC Circuit Circuit

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Speaker 3: Judge Naomi Raoul took the time to really explain to

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Speaker 3: both expert and neophytal, like what bitcoin is all about,

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Speaker 3: how it works, the difference between Bitcoin spot market bitcoin futures.

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Speaker 3: But once again, the essence of the opinion was to say, look, okay,

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Speaker 3: you took the bitcoin futures products from two other aftlets.

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Speaker 3: I think one it's called Valkyrie and Creesium. I apologize

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Speaker 3: mispronouncing that, and you'll prove that. But the similarities are

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Speaker 3: so much so, especially with respect to preventive measures to

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Speaker 3: prevent against fraud and market manipulation, that basically it's again

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Speaker 3: the circuit's words, were similar products. So if you approved

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Speaker 3: two products that were similar, then you have to approve

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Speaker 3: the third one, which is the great product. With respect

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Speaker 3: to criticism and mist a cancer, Look that's been going

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Speaker 3: on and it has to go on. It should go

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Speaker 3: on for the simple reason that he is an appointee

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Speaker 3: of the administration. He must be accountable to the American people.

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Speaker 3: He's an unelected person and again a person of great credentials,

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Speaker 3: great reputation, etc. The bottom line, the market has a

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Speaker 3: right to criticize, but the court here I do not

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Speaker 3: view in any ways criticizing Chairman Againstler's particular tactics or

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Speaker 3: policies in this regard, so he'll keep going on doing

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Speaker 3: what he's doing. But once again, to sort of fairly

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Speaker 3: exposit with both sides, the crypto market is of course

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Speaker 3: going to be critical because they're like, look, it's crypto,

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Speaker 3: we know what we're doing. Leave us alone. That's fine

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Speaker 3: to an extent, But again some people used to say

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Speaker 3: that in nineteen twenty seven, ninety twenty eight, and that's

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Speaker 3: how you have the un regulated market in the Creation

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Speaker 3: twenty nine. On the other hand, we do live in

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Speaker 3: a free enterprise, free market, and therefore or there has

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Speaker 3: to be a point where the regulators have to sort

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Speaker 3: of step back and say, all right, let the market function,

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Speaker 3: let the market weed things out, and let's experiment. And

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Speaker 3: I also think that's where we have to make the

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Speaker 3: point that regulatory authority is strictly cabined by the statutory

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Speaker 3: authority that Congress gives it. And in an indirect way. Okay,

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Speaker 3: And again the d C Circuit really not criticizing, but

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Speaker 3: by using the legal standard and also calling upon the

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Speaker 3: statute which regulates the sec process June for how new

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Speaker 3: products come to market and how they were approved by

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Speaker 3: a rule change, et cetera. Basically, the DC Circuit is saying, look,

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Speaker 3: there's rules, there are statutes, they were made by Congress,

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Speaker 3: and now SEC you have to follow them. Oh, when

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Speaker 3: in this instance you did not follow the rule, your

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Speaker 3: actions were here we go again aubitrary, capricious abuse of

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Speaker 3: discretion because essentially you didn't follow the statute, you were

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Speaker 3: inconsistent in your results on these substantially SMaL products, so

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Speaker 3: on and so forth.

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Speaker 2: The SEC has forty five days to appeal the ruling.

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Speaker 2: An agency spokesperson said it was reviewing the Court's decision

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Speaker 2: in order to determine next steps.

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Speaker 3: Right it could ask.

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Speaker 2: For their on bank hearing before the full DC Circuit

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Speaker 2: or petition the Supreme Court. Does the SEC almost have

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Speaker 2: to appeal this?

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Speaker 3: I would say yes. I would say yes for a

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Speaker 3: number of reasons. Okay, an appeal is a foregone conclusion.

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Speaker 3: Although I would say, as you've articulated the steps so correctly,

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Speaker 3: is that they'll do for an en bank. In other words,

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Speaker 3: there's the entire DC Circuit to hear this, of some

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Speaker 3: fifteen or so judges as opposed to these three. And

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Speaker 3: by the way, this is kind of a powerhouse panel

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Speaker 3: here because Judge raw was very well known. One of

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Speaker 3: the other judges there was Harry Edwards, a senior Circuit

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Speaker 3: judge from decades ago, and the chief judge of the

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Speaker 3: DC Circuit, which is Judge Trinavasan who you may remember

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Speaker 3: only a few years ago was on the short list

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Speaker 3: of mister Obama to be the next nominee to the

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Speaker 3: US Supreme Court. So that's kind of a you know,

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Speaker 3: a well credentialed supercharged panel. But that's only the three.

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Speaker 3: So they're going to ask for non bank hearing and

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Speaker 3: then whoever wins or loses, and that is probably going

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Speaker 3: to appeal to the US Supreme Court. One of the

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Speaker 3: reasons why I'm so convinced that there will be an

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Speaker 3: appeal is number one, it's the government and as we

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Speaker 3: will and as your audience knows well, the government appeals

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Speaker 3: every averge decision because heck, they're funded by our at

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Speaker 3: tax payer dollars, all right. And secondly, the government hates

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Speaker 3: to lose, all right. And the SEC has had a

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Speaker 3: few setbacks in recent years. Right now, there's the Arcas

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Speaker 3: case Penny with respect to the power of removal of

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Speaker 3: SEC administrative law judges five years ago they lost Fluccia

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Speaker 3: case that SEC admin law judges have to be appointed

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Speaker 3: by the President and so forth. So the SEC. You know,

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Speaker 3: they had a few wins, but they've had a few

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Speaker 3: losses here as well, so darn right they're not going

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Speaker 3: to take this sitting down. And also, in essence right now, June,

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Speaker 3: they've taken a black guy because it's not fun for

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Speaker 3: them to have the DC Circuit, which hears many, many

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Speaker 3: of these cases when it comes to federal regulations and

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Speaker 3: challenges there too. They're really the locust of all dis litigation.

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Speaker 3: So when the DC Circuit says, hey, Sec, you are arbitrary,

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Speaker 3: you're capricious, you abuse your discretion, they don't like that,

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Speaker 3: so they want to get that flipped around. I will

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Speaker 3: say this, though, while I am convinced that an appeal

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Speaker 3: shall be had by whatever means, the bottom line is

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Speaker 3: what are the chances of prevailing? That's a pretty good

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Speaker 3: question too, And if you don't mind, I'll answer it

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Speaker 3: by saying that's gonna be tough because basically, when you

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Speaker 3: have a decision that says the agency acted in an arbitrary,

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Speaker 3: capricious matter, that's very fact intensive and as we all

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Speaker 3: well know, the Supreme Court does not engage in fact finding.

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Speaker 3: They take the record as is, and the DC Circuit,

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Speaker 3: and again kudos to Circuit Judge Rau. There's a very

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Speaker 3: extensive factual record here, built upon the Commission's own record,

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Speaker 3: But there is extensive fact finding here where the DC Circuit,

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Speaker 3: in the Greyscale decision, explains point for points why the

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Speaker 3: Commission's decision was arbitrary and capricious.

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Speaker 2: What kind of guide posts did this decision leave that

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Speaker 2: might be helpful to other crypto firms?

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Speaker 3: And again that's the interesting point the Circuit Court. The

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Speaker 3: DC Circuit says, Okay, the SEC was arbitrary and capricious,

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Speaker 3: did not provide a rational basis for its decision, going

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Speaker 3: to make the same mistake, We're going to explain to you,

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Speaker 3: point by point, in detail why we found their actions

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Speaker 3: to be without a proper factual basis. And having put

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Speaker 3: that forth, Okay, they'll appeal to the Supreme Court eventually,

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Speaker 3: the SEC. But the Court may very well not decide

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Speaker 3: this case because once again we come back to the

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Speaker 3: fact June that it was decided on a very narrow

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Speaker 3: legal ground. There's no new legal ground to be broken. Here. Although,

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Speaker 3: as you said at the outset, and I agree completely,

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Speaker 3: this is a very game changing decision for the crypto

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Speaker 3: industry as a whole because in many respects it provides

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Speaker 3: a roadmap for other funds and a path for various

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Speaker 3: firms to create investment vehicles in crypto, because all they

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Speaker 3: really have to do is read the DC Circuit's opinion

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Speaker 3: and say, oh, okay, this is how Greyscale did it.

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Speaker 3: So guess what inimitation is the sincerest form of flattery,

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Speaker 3: So they got it right before the DC Circuit. Whatever

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Speaker 3: they did will do. And especially I think what's important

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Speaker 3: is the DC Circuit made much of the fact that

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Speaker 3: one of the reasons why the SEC the decision was

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Speaker 3: arbitrary was they basically pooh poohed the fact they overlooked

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Speaker 3: the fact that there is more than adequate surveillance to

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Speaker 3: protect more in integrity. So again I'm not giving any

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Speaker 3: advice to crypto fund managers, but read that opinion for

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Speaker 3: yourself and you'll see how important it is to demonstrate

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Speaker 3: that whatever your proposed product is going to be, you

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Speaker 3: have to show that there are safeguards, guardrails and so

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Speaker 3: forth to prevent FUDAM manipulation, and that your product is

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Speaker 3: tied to market surveillance such as that conducted by the CMME,

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Speaker 3: the Chicago Mercancy Exchange. That way, in the event of

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Speaker 3: manipulation or fraud, it can be detected and rooted out.

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Speaker 3: That was a very important guidepost, if you will, that

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Speaker 3: the DC Circuit set out of his opinion and words

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Speaker 3: that the crypto industry must take very very seriously and

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Speaker 3: follow to.

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Speaker 2: The letter Anthony. This doesn't mean that the Grayscale ETF

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Speaker 2: is automatically approved, does it.

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Speaker 3: No, not at all. Okay, what it means is the

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Speaker 3: Commission's decision is overturned as orbitr and capricious, but Greyscale

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Speaker 3: has to go back and again. As I understanding the process,

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Speaker 3: essentially they have to come back and again reapply something

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Speaker 3: along those lines. So in essence, the DC Circuit says

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Speaker 3: the Commission was wrong to say no to you. But now,

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Speaker 3: basically I would think the process would start afresh or

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Speaker 3: close to a fresh start, and then it has to

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Speaker 3: get approved. So they have to get approved, So it's

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Speaker 3: not a done deal, and thank you. That's an excellent point.

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Speaker 3: And I concurt completely is that it's not over by

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Speaker 3: any means, and the SEC may find other grounds to object.

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Speaker 3: I may say, okay, we would called arbitrary caprecients this time.

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Speaker 3: But now let's really dig in and tell a future

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Speaker 3: court of review, which would probably be the DC Circuit. Again,

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Speaker 3: this is why we said no. If indeed they say no.

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Speaker 3: But you know, Gray Scales got plenty of work to do,

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Speaker 3: so they're not there yet, but they're a big step

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Speaker 3: closer to getting that ETP out there.

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Speaker 2: ETF right.

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Speaker 3: Well, you know that's interesting because we call them ETFs

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Speaker 3: and that's correct, but the court, by the way, calls

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Speaker 3: them ETPs exchange trade of product. And you know what

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Speaker 3: you say, potato, I say, Patato. I think it's really

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Speaker 3: the same thing. But you know what, when the DC

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Speaker 3: Circuit speaks, I clam up. And what they say.

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Speaker 2: The SEC is already fired out a lower court ruling

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Speaker 2: over sales of ripples it's RP token, but it's still

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Speaker 2: moving ahead with a series of high profile enforcement actions,

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Speaker 2: including against Coinbase Global and Binance Holdings. Do you think

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Speaker 2: the SEC should take a pause? Maybe?

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Speaker 3: Well, you know what, in all honesty, no, okay, because

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Speaker 3: that's their job, that's their portfolio. They've been charged with

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Speaker 3: enforcement securities law, protecting investors and maintaining more in integrity.

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Speaker 3: So I think they should go forward the Ripple case. Certainly,

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Speaker 3: again we have that decision from the southernst of New York.

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Speaker 3: I think that was Judge Analice Torres, and again she

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Speaker 3: decided that. And we have to remember, and I haven't

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Speaker 3: digested completely, it's a big decision, but as we know,

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Speaker 3: in essence, the court said, look, some aspects of bitcoin

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Speaker 3: are commodities, and the SEC has no jurisdiction to kick

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Speaker 3: it over the CFTC. But other things do qualify as securities,

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Speaker 3: and therefore the SEC can regulate them, etc. But of

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Speaker 3: course Ripple is going to be appealed, and that probably

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Speaker 3: will get all the way up to the Spring Cord,

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Speaker 3: I would think, because it's such an important issue, not

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Speaker 3: just in terms of the law, but in terms of

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Speaker 3: the future of the American financial markets. So that's let's

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Speaker 3: call it unsettled at this time. With the other actions, again,

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Speaker 3: they're very different. The nances, I remember we talked about

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Speaker 3: this quite a while ago, and they are a host

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Speaker 3: of charges there. That's the one, if I recall, is

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Speaker 3: where they've been charged with not registering. Is the fund

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Speaker 3: that's really, really serious. So this is important work that

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Speaker 3: the Commission has to do. So I don't think they

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Speaker 3: should pause, but they should take the weekend, if you will,

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Speaker 3: to sit back, reflect and say, Okay, what's the strategy here?

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Speaker 3: Because you've got a lot of different pieces. They're fighting

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Speaker 3: a lot of different battles on different fronts, and I

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Speaker 3: think there is to an extent an overall strategy. But

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Speaker 3: I think Chairman Gensler owes it to himself and more

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Speaker 3: importantly to the American people and to the financial markets,

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Speaker 3: to say, let's have a comprehensive strategy here. To whatever

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Speaker 3: extent the rippled decision was adverse to the Commission, the

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Speaker 3: SEC has to learn from that and say, okay, we've

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Speaker 3: lost this, and again they're going to appel it. But

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Speaker 3: as things stand today, June I would say they need

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Speaker 3: to reflect upon that and take a step back and say, okay,

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Speaker 3: how do we modify a strategy from here? And once again,

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Speaker 3: there is still at the very heart of this, okay,

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Speaker 3: that the eye of the storm is that fundamental issue

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Speaker 3: when it comes to investing in bitcoin. Are you buying

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Speaker 3: a commodity which kicks it over to the CFTC and

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Speaker 3: the commodity's laws, or are you buying a security which

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Speaker 3: is purely the SEC's bailiwick and under the federal securities laws.

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Speaker 3: And that's the key distinction. And because of the newness

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Speaker 3: of crypto, because of its its flexible nature, we're really

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Speaker 3: not sure about all that, and I certainly don't want

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Speaker 3: the SEC to back off. But at the same time,

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Speaker 3: the bitcoin industry, the crypto industry, has every right to

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Speaker 3: continue to innovate, to make progress, move forward what they're doing.

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Speaker 3: But again within this the regulatory framework that's there, so

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Speaker 3: again many many unresolved issues, but I really think it

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Speaker 3: depends upon the industry itself. It can, and it should,

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Speaker 3: and it must innovate. And then as it innovates, we see, Okay,

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Speaker 3: are you selling a commodity, you're selling in security and

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Speaker 3: if so, have you complied with regulatory framework pertinent to

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Speaker 3: each And also.

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Speaker 2: Judge Raykoff came down with a different take on it

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Speaker 2: than Judge Toures, right.

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Speaker 3: Right, And you know that's again one of the interesting facets,

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Speaker 3: as you're learned, audience, I'm sure knows, is that here

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Speaker 3: you have two very prominent judges in the Southern Dutch

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Speaker 3: of New York, which really is, you know, with two

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Speaker 3: subway stops from Wall Street, and also is the primary

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Speaker 3: court for Wall Street type disputes to go to in

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Speaker 3: the first instance. And of course Jed Raykoff is absolutely

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Speaker 3: a living legend when it comes to federal securities law.

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Speaker 3: But what it demonstrates is that you can have two

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Speaker 3: judges of equal rank in the same district and disagree,

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Speaker 3: and they're allowed to do that. And there's about another

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Speaker 3: twenty five judges in Southern District and they could also

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Speaker 3: all disagree. That's why the real key is going to be,

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Speaker 3: let's see what happens when Ripple and the Raykoff decision

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Speaker 3: I don't recall which case it was, goes up to

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Speaker 3: the Second Circuit because they're there to conciliate these and

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Speaker 3: to reconcile one decisions to the other. And then they

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Speaker 3: get the next to last word. And why say next

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Speaker 3: to last word is because they could still go to

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Speaker 3: the U. Supreme Court. But let's also keep in mind,

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Speaker 3: as the Supreme Court itself said decades ago, they regard

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Speaker 3: the Second Circuit as the quote mother court close quote

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Speaker 3: of the federal securities laws. They are very deferential to

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Speaker 3: what the second Circuit says, so the battle or the

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Speaker 3: controversy is far from over June. This is just one

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Speaker 3: of many battles, and we have to see what the

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Speaker 3: second circuit says about Ripple and these related cases in

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Speaker 3: the years to come. And also as we have new

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Speaker 3: permutations and innovations by the industry, once again, okay, where

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Speaker 3: do they fall in the market, which regulatory framework would

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Speaker 3: they fall within? Etc. So I think really bottom line

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Speaker 3: is that everybody's going to go great guns. Crypto is

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Speaker 3: on a roll. It's not going to stop. Okay. Gary

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Speaker 3: Ginstler wants to make sure his agency is regulating this,

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Speaker 3: and that's consistent with his personal behavior because he regulated

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Speaker 3: it is the head of the CFTC not too long ago.

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Speaker 3: And the CFTC says, wait a minute, okay, Bitcoin, that's

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Speaker 3: a commodity. It's like, you know, the kind of future.

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Speaker 3: It's like oil and gas and pork bellies and what

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Speaker 3: have you. So guess what we want to regulate it too.

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Speaker 3: So a lot of action, a lot of controversy in

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Speaker 3: the years to come. This is just one stop, Okay.

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Speaker 3: My advice is everybody have a good Labor Day weekend

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Speaker 3: because the battle's going to start as soon as we

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Speaker 3: get back.

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Speaker 2: Okay, thanks so much. That's Professor Anthony Sabino of Saint

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Speaker 2: John's University's Tobin College of Business. And that's it for

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Speaker 2: this edition of The Bloomberg Law Show. Remember you can

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Speaker 2: always get the latest legal news on our Bloomberg Law Podcast.

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Speaker 2: www dot bloomberg dot com slash podcast Slash Law, and

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