The Wolf Of All Streets - Insider Insight Into The SEC And Crypto | Crypto Town Hall

Episode Date: October 2, 2024

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John, I'm really glad you're here today because I don't want to talk about October. Okay. And it's been a while and I want to have a more substantive conversation today. And every day it's like, what's Bitcoin price going to do? Oh, good. Good. Because I've got lots of substance today. How's my audio?

I'm going to use my AirPods if that's okay with you. Yes, I'm good. I'm in my AirPods as well at the moment. So I guess I could ask you the same question. How's my audio? Well, it's kind of, it's kind of, your audio is great. It's kind of interesting because the SEC's enforcement division is typically measured by what they call stats, which is short for statistics.

And their fiscal year ends September 30th. So typically in September, there's just a lot of SEC cases that get files because the SEC is sort of like managing their earnings. And you often just see them panicking. That's interesting. It's like that quarterly close. It's like cops on the road who need to hit their quota on speeding tickets. Exactly the same. Exactly the same. When I was chief, the director would sometimes come by and say, Hey, you got any

interesting stuff in the pipeline? We're a little light in September. And it's kind of ridiculous because suppose the SEC brings 700 cases in a year, that's their stat 700. And one count, like some small administrative proceeding where you're borrowing some broker for three years, counts the same as like a big case against Enron or WorldCom or Binance or Coinbase. They're not weighted? No. That's ridiculous. But nonetheless, so in October, there's typically an article, and you can wait for it, from somebody who says the SEC brought brought more cases than ever or an article that says the SEC brought less cases than before. And it's literally just it's how many cases.

Yeah, it's the lamest, most pathetic metric you could possibly imagine. But that's what people use. Let's go. It's like, show me, show me the like, man, I'll say the crime or whatever. Like, it's like, let's just go find some people to charge for something. Well, it's more like, can you get your case done by September 30th? And so there's a limited number of closed commission meetings where they have to approve the filings in September.

So there's really this mad rush to get on the commission calendar. And yeah, it's all very disturbing. But in the end, it's just part of the routine. So you see a September like this, where the SEC brings a lot of cases. But what's odd about this September is there are also the five blockbuster decisions that I'm going to talk about today, which have all come down in September. So that has nothing to do with the SEC stats. So you get the kind of double whammy of the SEC bringing lots of down in September. So that has nothing to do with the SEC stats. So you get the kind of double whammy of the SEC bringing lots of cases in September with this interesting phenomenon of a whole bunch of SEC cases coming handed down, whether in a motion to dismiss or a motion for

summary judgment, which are two very different stages of litigation, but have the same sort of impact in terms of these judicial decisions. So interesting, and so many things I want to ask you. So for context, for people who don't know, John luckily was popped in late. I was going to have to ask everybody what their thoughts are on price action again, and now I don't have to. So John was the former chief, correct me if I'm wrong, of the SEC Office of Internet Enforcement, correct? Right. I was with the Enforcement Division for about 20 years.

So we talk about the SEC here all the time. John was the SEC, right? And you can hear that he still is honest enough to be critical of things he doesn't like that happened there. But John, I think this is a really good time to have you on because it is October, October. We're heading into, obviously, election season. And you can tell me if I'm right or wrong. I think perception is that, at least for the crypto industry, the outcome of this election could be exceptionally meaningful for the next four years to the point where there's people I talked to who are like, I'm either going to participate in this industry,

or I'm going to go offshore or just completely quit. If we get four more years of the same, because we don't know what you can or cannot do to some degree. And I think a lot of people, obviously myself included, you say, listen, non nonpolitical, like if Trump is launching NFTs and a DeFi platform and tokens, you can be pretty sure that under Trump, you won't get in trouble for launching DeFi tokens. Right. Yeah. You know, you hit the nail on the head.

It's I worked during my time at the FCC. I might have worked under six or seven or eight different chairpersons. And it never really made much of a difference to me. I mean, actually made zero difference to me. You just kept bringing your cases and you never felt, oh, wow, this new chair has come in and things are really going to change. Or sometimes a new director of enforcement would come in, but it was always the same. We're going to bring cases, we're going to protect investors. And that was the mantra at the SEC. And we're going to work with the criminal authorities, which we did all the time. But this year's election is so, so different because you have Hester Peirce and Mark Ueda. Remember, there are five commissioners, including the chairman, and you have Hester Peirce and Mark Ueda on the Republican side.

And then you have the chair and two others on the Democratic side. And Hester, who I've known for whatever, 25 years, brilliant, a wonderful person. We differ in these views, obvious. She's just a true libertarian, but really a remarkable commissioner and devoted public servant. I can't say the same for Mark U8. I don't know him as well. I worked with him a little bit, but I worked with Hester a decent amount. I will say, though, in the recent hearings, he seemed like a really good human. He was flabbergasted by the reputation of the SEC. He seemed to deeply care about what he was doing and how

it was perceived. Yeah, yeah, maybe. You know, I don't know, but I can tell you this. So as soon as Donald Trump is elected, and this wasn't true back in 2018 or 2019, when President Trump and Secretary Clinton and Congresswoman Maxine Waters all had the same exact view about crypto, which was negative. Donald Trump, President Trump has done a complete change, a complete turnaround. And whether it's pandering to the big money that's now come in from all these big crypto firms, or whether it's the change of heart or whatever, that's not for me to say. But I can tell you this, is that he's made it clear that he doesn't like the current SEC. He's not for me to say. But I can tell you this, is that he's made it clear that he doesn't like the current SEC. He's going to deregulate considerably.

What would happen is Hester Peirce would probably, because she's the senior Republican, be made acting chair. And maybe she would become chairperson. Maybe not. Who knows? And I think that everything would come to a screeching halt when it comes to crypto, except fraud. I don't know what would happen with respect to all the ongoing litigation. It would certainly be a shift there. Yeah. So you really don't know, but it will be a dramatic shift. And if Vice President Harris is elected, I think you'll get more of the same. I think you'll get someone maybe like Brad Karp, who is a very famous securities lawyer who's big on her campaign, or Dan Gallagher, who I know very well, who's the general counsel of Robin Hood.

That could be favorable. Yeah, he's an amazing guy, brilliant guy, super spectacular leader. You couldn't get anyone better. So I think maybe maybe that would be him. If I don't know under either. I don't think Dan is at all. Dan has been typically Republican, but or maybe it'd be someone completely different. We really don't know.

Remember that a lot of these enforcement cases pertaining to crypto came during the Trump administration. Yeah, people forget that Clayton started, I mean, Ripple started on his way out the day before he left. That was like Clayton's last move on the way out the door under Trump was to go after Ripple. And now you see Jay Clayton on CNBC every morning talking about the wonderment of crypto. And right before the ETFs saying, ETFs need to be approved when he was rejecting them. Right, I mean, yeah. I mean, so it's, so yeah, you're absolutely right.

There will be a dramatic change if President Trump is elected. I think there'll be more of the same. Of course, my good friend and your good friend, Anthony Scaramucci would say, because he's working really hard with a group of people to try to sway the harris campaign uh to really be more a more accepting of crypto under the auspices of innovation and um you know anthony might be succeeding and um that's mark cuban also others. So who knows? So she sent a few signals that things might be easier. But I don't think, remember, the SEC doesn't have any real political appointees other than the commissioners. There's maybe one or two in legislative affairs or public

affairs. But everyone else is a civil servant who's there for as long as they want to be. But I think the director of enforcement will probably leave. His name is Gurbir Grewal, no relation to Paul Grewal of Coinbase. And he's been terrific. I think he's going to leave. And I think that if President Trump became was reelected, a lot of people would probably leave because they wouldn't like the shift that was coming. But I'm assuming that happens with any regime change, right? You just get a big turnover in the agencies, right? It's not as much, you know, that's true, but not as much the SEC because they're not

political. So, you know, none of my friends when I worked there were ever thinking, oh, well, there's a new president, so I'm going to leave. It just it never occurred to you to time it like that, unless you were really aligned with a chair, like if you were a counselor to the chairman, I was counselor to two different directors in addition to being chief. And sometimes you start thinking, oh, well, my director's going to go and I don't know who the new director is going to be, and that's going to be a pain. So, I'm going to leave. But, you know, you don't, so there's a lot of, everything is new here

and different. And it's just like all these cases, Scott, because historically, and I've been a law professor, an adjunct law professor at Georgetown and Duke for 20 years teaching securities regulation, and never in the history of securities regulation has there been such an extraordinary repository, an archive of judicial decisions. Because the SEC brings these cases against these companies that are extraordinarily well capitalized, really want to defend themselves. And they draft these motions to dismiss that are thousands of pages and exhibits and amicus curiae coming in. They become these giant cases with these big law firms. So judges,

in turn, react by writing very lengthy, very detailed opinions in the motion to dismiss phase and the motion for summary judgment phase, which are preliminary phases of litigation. Remember, motion to dismiss is the SEC files a case and you say, you know what, the SEC, even if all these facts were true, you got nothing on me. So the judge should throw this case away. That's the motion to dismiss. The motion for summary judgment comes after discovery, because suppose you lose your motion to dismiss, discovery takes place, you get interrogatories, you take depositions, you have document requests. And after all that gathering information, you say, you know what, SEC, even if all those facts that you allege were true, discovery is revealed that you got no case.

So that's what a summary judgment ruling is. And there are more motions to dismiss rulings in summary judgment rulings in the history of program area. I mean, a big insider trading case would take like two or three years to develop and be ruled on. You know, now we have, there are over 200 SEC filings now in the crypto space. And I don't know how many were litigated versus settled, but there are so many cases, including five blockbuster decisions just in the last month or in the last week. It's absolutely been crazy. I mean, listen, I'm an American who works in this industry one way or another. I haven't started a company or a project or anything.

And still to this day, I have no idea, no matter how many lawyers look at things or I get opinions, I still have no idea what I can or cannot do, which leads to me being in this industry and basically running a non-for-profit business for myself because I'm afraid to do anything. Yeah. And it's crazy.

And I'm not saying do anything. Yeah. Right. And it's, it's crazy. And I don't know, I'm not saying even a political view. I think that, uh, I'm hoping that no matter who wins, that we get at least more clarity on what we can or cannot do. Right. I mean, like you can't, uh, you can't take sponsors because you're, you could be liable for what that sponsor eventually does. Right. And we've seen problems with that. The disclosures required are vague. You can't invest in anything. for what that sponsor eventually does, right? And we've seen problems with that.

The disclosures required are vague. You can't invest in anything. It's really touchy. It is. And as far as, that's the way securities regulation is. It's an incredibly over-lawyered area. If you look at things like insider trading, muni bond fraud, insider trading is the best example because most insider trading is lawful. It's executives at companies that through a plan or some otherwise buy and sell the stock that they own in their own company. I mean, why not? Why wouldn't you have people who work at a company be invested

in that company? It's exactly what you want. But insider trading becomes unlawful when it's based on material non-public information. But there has to be a fiduciary relationship and there has to be some misappropriation. And all of that, Scott, is judge-made law. So when you call up your lawyer and you say, hey, I got this information and I overheard it at the airport, or I learned it from a friend, or I did it because I staked out a company's headquarters on a weekend and I saw some activity that makes me want to trade. And you throw the hypothetical, the lawyer, you're never going to get a straight answer. And if you throw it at two lawyers, they'll get different opinions.

Right. And it's all case law. There's no statute. There's a small statute associated with tender offers and insider trading, but that's it. So you have this tremendous area of law that's entirely judicial made. And again, that's insider trading, unibond fraud, derivatives fraud, eel farms, ostrich farms, whatever it is, that's the way securities laws is principles-based. So there's nothing that says, you know, if you steal your neighbor's lawnmower, there's no statute that says you can't steal a lawnmower, but there's a statute that says you can't steal. So when you, your defense saying, Hey, there's no statute says I can't steal that lawnmower

that it's covered under the principle of right. So, yeah, that, that, that all makes perfect sense. I'm so glad you're here. There's really interesting. I don't know if you know Gareth, but he's also a great interviewer who happens to be on the panel from Cointelegraph. Gareth, what do you have to say? Yeah, I just want to jump in here because we got John on and it's a perfect opportunity, as you said, to fire some questions. Obviously, we did some digging around yesterday and we managed to confirm with Bitwise that they had filed an XRP ETF trust in Delaware yesterday. And then we've just broken the story today with Bitwise confirming that they've put in an S1 with the SEC to launch a spot XRP ETF. What I wanted to ask you, John, is the history with the

SEC and XRP is there. Does that have any bearing on the success of this kind of application from your knowledge of what goes on in those walls? Leave it to Gareth to ask the most impossible question. Okay, so here's what I think. I told you he's good, man. Come on. Well, okay, so when the SEC does these approvals, they work through the various divisions and everybody gets a chance to opine on them. I was pretty shocked at the Bitcoin spot ETF approval, because even though there was a case disapproving the rule, disapproving the disapproval, excuse me, there was nothing that said the SEC couldn't just go back to the drawing board and disapprove the Bitcoin spot ETF again. There was nothing. In fact, after they filed their initial disapproval, they filed the Coinbase case, the Binance case. So a lot had changed in a very volatile marketplace. So I don't understand why Gary Gensler just changed and voted against the two Democrats for that Bitcoin

spot ETF so that was a very unusual situation I don't know of any time in history that a chair of the SEC has voted against the two members of their party in and approved something um so that was a little strange so now you're asking about xrp and whether you can push the limits of this ETF to something that the SEC is in litigation about. Now, the SEC, some people say they lost the Ripple case. You know, I would argue, and if you read Lee Reiner's testimony, a colleague of mine from Duke, he does a good job of explaining that that wasn't really a big loss in the sense that the judge, for example, they asked, they sought interlocutory appeal in that case.

What is that? Well, that means when the SEC got the summary judgment motion regarding secondary sales of XRP, the SEC said, hey, we need to appeal this right away because this is a big issue. People are already citing it in other cases. And we need to stop this litigation, appeal this issue, and get to the bottom of it. And Judge Rakoff, Jed Rakoff, who's a very famous, probably the most famous securities law judge, probably the most famous judge with respect to securities laws on the planet, had just a week or two after Judge Torres' decision in Ripple, completely destroyed that

decision, saying it was wrong. And it hasn't been picked up by anybody. So the judge responded, Judge Torres denied that appeal and interlocutory appeal request saying, this case has no precedential value. It's purely based on the facts and circumstances here. It can't be used as precedent. So now October 7th is going to come and the SFC has to decide whether they're going to appeal Ripple or not. So on the one hand, hey, I think we'll appeal Ripple. We don't agree with this decision and let's put resources to that. Or hey, let's not appeal Ripple because who cares? It's one decision in one district court. Nobody's listening to it. I have some quotes from Kraken that completely distinguish it. So I don't think the SEC's opinion has changed with respect to that.

And just like the Bitcoin spot ETF, I don't see the SEC, at least at this time, approving these ETFs. But on the other hand, I think I was completely wrong about the Bitcoin spot ETF. Doesn't it depend on which SEC though, again, right? Oh, it'll be approved. A month down the road. It could be an extravaganza of approvals. Everything will be approved if Trump is elected. If President Trump is reelected, everything will be approved, Garrett. So, you know, I think that the bigger question is if Vice President Harris is elected, then what happens? But for the time being, I don't see the SEC acting on that given the taint around this,

given the concerns around this firm. So, you know, we'll have to see where it goes. But great question. And there's no precise answer to it. Thank you for trying. Yeah, it's muddled. Gary Cardone cardone hey i saw you in the audience man i had to bring you up we're here talking about uh crypto and politics and you and john should know each other anyways but uh when you when you hear john kind of chatting about this gary i mean what's your take on sort of how important the next few weeks are for for this industry moving forward in the states dude i think the next few weeks by for this industry moving forward in the States?

Dude, I think the next few weeks, by the way, thanks for holding the space. Always good content. I think the next few weeks are critical. I'm still not convinced we're going to have an election, but I'm just, I know if I was the other side, I'd do everything to disrupt this, if at all possible. I don't know how it really impacts crypto. But this is why I got into Bitcoin, because this is, to me, it's a safe haven play. And the world seems to be going crazy. So I expect more insanity, man. Sadly. It's funny.

I was saying this morning, I i mean we always see this but uh you know i think bitcoiners view bitcoin obviously the same way you just said a flight to safety safe haven asset and then the minute that uh we see some sort of global conflict at least the first gut reaction for some reason is hey let me sell everything right i'm not saying that's the people here that can be funds or bots uh you know or the algorithms, but usually reverses and goes the other way. But these narratives that like, oh, my gosh, there's world conflict. I need to sell my Bitcoin doesn't align very well with the core ethos. Right.

So you'd be buying it. I've actually made the argument crypto aside. I think and John, we kind of unpacked that. But the crypto industry aside, I think it matters a lot who's president. Bitcoin itself, I think, has gotten at least the ETF approval and the stamp of approval and I think is relatively safe. And I could see an argument where Bitcoin does particularly well under either administration for different reasons, because the same people who think it's a flight to safety or afraid of a Harris administration or against money printing and stimulus and spending, they should buy it as a hedge against Harris. And those who want to see it become a reserve asset should buy it because Trump wins. Right. So Bitcoin itself, I see a kind of silver lining

in either direction. John, you're about to jump in. Sorry. Yeah, sure. I mean, I can't really tell. I have no idea about how you guys do this Bitcoin investing and whether it's good or bad. We just take we take an orange pill every morning and it gives us. But let me tell you what's going on with the courts, because the courts are going to be here before and after the election and the judges are there for life. OK, the federal judges. So here's what they're saying. Let's just go over these five cases. And I'll try to rush through them because it's going to be boring for some people. But for people who are kind of interested in these judicial developments and how they can develop, how they can influence the way the

commission thinks, it's very important. I mean, so the bottom line for all these decisions is whether the investment product is a stock token, is priced off the value of securities, operates like a derivative, is a stable value token backed by securities or any other virtual product that provides synthetic exposure to underlying securities, they have to comply with the securities laws.

And that means the 33 Act, register the offering. The 34 Act, register if you're doing transactions. And the 40 Act, register if you're bundling. And I know everybody loves to hate Gary Gensler, but he's been proven 100% right by the federal courts. And he recently said, it's not about whether you set up a legal entity as a nonprofit and funded it with tokens. It's not whether you rely on open source software or can use a token with some sort of smart contract. These are not laundromat tokens. Promoters are marketing and the investment public is buying most of these tokens touting or anticipating profits. So the SEC is now brought with about 200 or so of these cases. There were the initial coin

offering cases, the simple agreements for future tokens or SAFs, the crypto lending programs, the celebrity crypto endorsements, the crypto staking programs, and the crypto intermediaries like Kraken, Coinbase, Binance, Bixby, Bittrex, and others. I mean, this laundry list of defendants continues to grow each quarter. And it seems that we're now at the point where it's easier to list the crypto companies that aren't being sued by the SEC. Yeah, they don't even have the stamp of approval or the badge of honor of being sued. I know. And they don't read it like a scarlet letter. I spoke at the Fed and it was one of really my most proud moments when I walked in the Philadelphia Fed and I thought, wow, I've spoken a lot of places.

I've been to every government building, including the White House. There was something majestical about this. And then the first panel I'm on, there's like a big SEC defendant up there as a speaker. So things are really upside down. The Fab Five cases of the past month or so, including the past week or week and a half, are Green United, which dealt with Greenbox, ConsenSys, and Greenbox, that was a 14-page decision, ConsenSys, nine pages, Operty International, 69 pages of generally adopting every and accepting every SEC theory, the Rivets case, which was just a couple days ago or yesterday, and then Kraken,

which is a 29-page decision. So I'll just run through them. So Greenbox, the SEC alleges that investors were led to believe that the value of GREEN, green, could increase if Green United succeeded in creating a public global decentralized power grid. But the SEC alleged that the Greenboxes purchased by investors did not mine green, but rather mine Bitcoin, which was not transferred to investors. And likewise, green nodes did not mine green, but as alleged in the complaint, were a basic software that was generated by green. So they say this guy Thurston created the supply of green tokens through a smart contract

on the Ethereum blockchain, and Green United distributed those green tokens to investors' wallets at Thurston's directions to create the appearance that green was being mined, and the SEC alleges fraud. The two points to make from this, here is Judge Anne Marie McKiff of the Central District of Utah, Central Division of Utah Federal Court. She said, in short, at this stage, this action does not present any novel attempt at regulation by the SEC. Rather, the SEC, by this action, pursues the regulatory goals Congress set for it 90 years ago. Thus, defendants identify no constitutional infirmity relative to the court's analysis. And she goes on to quote a very famous Tenth Circuit case, which says, as to the defendant's third and final argument that the SEC suit violates the due process clause and separation of powers set forth in the Constitution, the court finds no constitutional violation. So SEC is right.

Yeah. SEC is right, Greenbox, wrong. Yeah, exactly. And the point is about this quote is that Congress determined that the best way to achieve its goal of protecting investors was to define the term security in sufficiently broad and general terms so as to include within that definition the many types of instruments that in our commercial world fall within the ordinary concept of a security. In furtherance to that goal, Congress did not attempt precisely to cabin the scope of the Securities Act, but instead enacted a definition of security sufficiently broad to encompass virtually any instrument that might

be sold as an investment. So this kind of throws away the whole argument that, oh, this is a new technology and these laws are antiquated. So the next one is consensus. And in consensus, a Texas federal judge, this is in Texas, dismissed a lawsuit filed by consensus software against the SEC. They had also sued the commissioners of the SEC, including the SEC chair. So what happened is consensus got what's called a Wells notice. And I know, Scott, you know what the Wells notice is. But for those of you who don't know what a Wells notice is, there was a commissioner by the name of Wells at the SEC. And he didn't like the process that the SEC used to bring cases because it's a secret meeting.

The staff, someone like myself, when I worked there would come to the secret closed commission meeting and say to the commissioners, hey, these are all the facts I found. We would like your permission to sue this company, whether it be Binance, Coinbase, Kraken, ConsenSys, or whomever. And the commission says, okay, we've listed all the facts. Yes, you have authority to do that. The secretary signs off on it, and you go file your civil lawsuit. You become a civil litigant like every other civil litigant in federal courts. There's nothing special about your lawsuit. But anyway, Wells didn't like that process because he said, we don't hear from the other side at these secret meetings. So he said, you've got to give the person who you've identified as going to be sued or the firm a chance to either in writing or in a video, tell the SEC their side of things. They can't show up at the secret meeting, but at least they can do these things called a well submission. So a well's notice is when the SEC approaches the

company and says, hey, you know what? We're about to recommend to the commission that they give us authority to sue you. And if you want the commission to hear your side of it, you can submit a well submission in X number of days. So that's a well's notice. So consensus gets a well's notice and they say, you know what? we're going to sue in Texas federal courts. And we're going to say that we're going to ask the court to declare that that ether transactions are not securities to bar the SEC from suing firms over the use of ether. And to call the way, John, sorry to interrupt, but for context, just so people remember, they did it like five minutes after they got the Wells notice. So it was well prepared, just so people know it was really astounding because it happened the same day.

Yeah. Some people call it forum shopping, right? You know, the SEC is going to sue you and say the Southern District of New York or the Eastern District of New York, where the SEC gets a lot of deference traditionally. Go to Texas and they don't like the SEC in Texas. So let traditionally go to texas and they don't they don't they don't like the sec in texas so let's go to texas but even this judge said that um that this lawsuit was ridiculous and just threw it out and just said this is it you can't launch this kind of preemptive strike there's a basic notion that you learn in the first year of law school called ripeness which means that you can't sue somebody when your claim is not ripe. So the SEC, yeah, they said they might sue, but there was no case in controversy, nothing for the court to review. So, you know, I think that eventually the

consensus did get sued by the SEC. And this idea, I mean, a claim is not ripe for a judification if it rests upon contingent future events that may not occur as anticipated, or indeed might not occur at all. I think we might be going too deep in the legalese, John. All right. So we're done with consensus. Yeah, that's it. But the point is they tried this cute move. They probably spent millions of dollars in Texas and they were shut down. Okay. OPERTEA International, which is a 69-page decision, the SEC, this would involve an ICO. And this was a very compelling decision because like every other crypto defendant, the opportunity defendants asserted this due process defense against the SEC, arguing that the SEC's guidance about crypto offerings had been vague and arbitrary.

They didn't have any warning. It failed the Howey test. But the judge in this case said unequivocally, although the application of the Howey test to new facts can raise interpretive questions, that is inherent in the application of existing law to any new technology. The fact that a body of law involves an inherently individualized and fact-specific inquiry does not render it constitutionally vague. More importantly, so blah, blah, blah. The point is, is that the SEC, if you read that decision, the court accepts just about, it's a stunning decision, because it accepts all of the SEC's views on Howey and how it applies. Remember the Howey test, it's the Supreme Court case from 1946 that essentially lays out what is an investment contract, because that's what the Securities Act says, that if you're an investment contract, you have to be registered.

Because after the crash of 29, Congress said, you know what, when it comes to securities and investing, there's too much systemic risk in the world. You have to register it with the SEC. Okay, another case that came out just yesterday, which two days ago, which is another initial coin offering, was the Rivetz case, R-I-V-E-T-Z. And they offered these tokens and had your typical ICO stuff that was going on. But in another blunt and really merciless order, that on September 30th, this time a Massachusetts judge agreed with the SEC that these securities were unregistered. The Ethereum-based Rivets or RVT tokens should have been registered because they were sold to US persons. And they gave the SEC summary judgment against the Rivets' defendants. So this means that the judge has unilaterally declared

the SEC victorious and that there's no need for a trial and ordered the SEC to confer with the Rivets' defendants. He was, I think, that one he might have represented himself. So in that case, you have this really interesting decision. We don't need a trial. This is so clear-cut. And he rejected the argument that disclaimers in the offering meant there was a lack of common enterprise or an expectation of profits derived from the efforts of the promoter. The judge wrote, quote, his argument might be meritorious were the court required to credit contractual formalities and limiting language included in documents provided to purchasers participating in the ICO.

However, the opposite is true. So again, something came up in Judge Torres' decision on Ripple where they said there needed to be some kind of contractual relationship between the secondary market purchaser and the initial issuer of the securities. And this court obviously is not buying into any of that. Okay, last one, Scott, is Kraken. And this is a big one because it was discussed a lot in the congressional hearings before the House Financial Services Committee about two weeks ago. And I had testified before that committee maybe three or four months ago, and these issues here came up as well. You know, platforms like Kraken, they allow their customers to deposit fiat into bank accounts and crypto assets into wallets controlled by Kraken

and then to purchase and sell those assets for fiat or other crypto assets. And they can be conducted on or off-chain, and it's generally an exchange for crypto tokens. And the SEC alleges that these assets needed to be registered and they also, there were securities and that Kraken was trading securities. And the symbols that they covered were ADA, ALGO, ALGO, ATOM, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, and SOL. So SOL, which you know. Why do you giggle, John?

Why do you giggle? These symbols. I love the fact that they call these things ICOs and then say they're not securities when it mimics what an IPO is. But putting that aside, the judge just focused on ALGO and SOL, Algo and Sol, held that both could be securities. So there's a bunch of excerpts that are worth reading. Here's one. Howie and his progeny require any court considering whether a secondary market transaction

constitutes an offer or sale of an investment contract to apply the same analysis that it would if that transaction were to occur on the primary market. The determinative factor does not involve the nature of the platform upon which the asset is transaction, but rather the reasonable expectations of the individual initiating the transaction. So that's a direct, that the judge has to look at the totality of the circumstances and grant a direct rebuke of Ripple. Here's another one, that there's no need for post-sale obligations to trigger the Howey test. Kraken argues that an investment contract requires post-sale obligations from the issuer to the receiver. The SEC says it does not. The weight of the authority, both recent and well-established, favors the SEC.

Kraken's argument would improperly constrain Howey. Okay, number three. Whether a crypto asset is offered in the primary market or the secondary market, the analysis is the same. And that's, again, a direct rebuke. That's a, yeah, ripple. Ripple. Quote, the parties disagree about the degree to

which Kraken's nature as a secondary market for crypto transactions changes the way the transactions are considered when determining whether the SEC has plausibly alleged that they constitute investment contracts. Ultimately, the resolution is simple. The Howey test applies wherever a court seeks to determine whether a transaction involves an investment contract, regardless of whether that transaction is on a primary or secondary market. That a transaction does not involve the asset's primary issuer does not foreclose the possibility that the primary issuers' representations follow the asset through to the secondary market. That means, once a security at the ICO stage, it's perfectly logical to say that it can be a security in the secondary market phase. So that court completely dismisses that.

Fourth of five excerpts, this is the second to last one. Why the Ripple decision? It has little, if any, legal precedent for any U.S. court. Here, the Kraken judge addresses Ripple directly. Kraken compares this case to Ripple Labs, where the court held on summary judgment that purchasers on digital asset trading platforms, including Kraken, had no reasonable expectation of profits. It determined that the economic reality showed that the third Howey prong was unsatisfied where there was no relationship between the alleged issuer and the purchasers on the digital asset platforms.

It explicitly declined to address whether secondary sales of crypto assets in question constitute an offer in sales of investment contracts because that question was not before Judge Torres. The court's opinion is carefully constrained to the facts of the case and predicated on findings from a fully developed record. Whether a secondary market sale constitutes an offer or sale of an investment contract would depend on the totality of the circumstances and the economic reality of that specific transaction. So again, it's this economic reality thing. The last excerpt is just about this silly major questions doctrine.

Yeah, that's not called water we know that every every single defendant says this is a major question and the sec is stealing congressional authority by bringing these uh by uh having these rules and bringing these cases and um the kraken just judge just hits that on the head like every other single. I have lost count as to how many times. Yeah, that one's just, that's not happening. Here's the list of his quotes, Scott. Gotta love this. While cryptocurrency itself is a relatively novel financial instrument, the principles

driving the SECs to attempt to assert regulatory authority over it are not new. So the crypto industry falls far short of being a portion of the American economy bearing vast economic and political significance. Yeah, but we think we're really important, John. I tried to be as quick as I could. Those are the five cases that have come up. I mean, so the gist that, you know, it was long-winded, but a great summary, and I appreciate it. But the gist is that right now, the courts are siding with the SEC heavily against the industry in the past month. We're not seeing the same sort of blockbuster grayscale as we viewed at Ripple decisions.

Exactly. I think that you just got to wake up to the reality that courts are – the SEC is winning like crazy in federal courts. Whether the SEC will change its approach, that's a different question. But in these federal courts, because these defendants write these, I mean, they spend millions, tens of, the real winners in all this, Scott, this has really bothered me because I don't make a nickel from crypto in any shape or form. The lawyers writing, you read these briefs and these affidavits, they're clearly spending tens of million dollars on these motions that have no chance. I mean, I remember in the Tara case, the law firm filed said that they

didn't have personal jurisdiction over Duke Kwan in New York when they served him on an escalator at a conference. Meanwhile, you could throw a rock from the SEC and hit where the Nationals play baseball and there's a Tara club. Tara spent, I think, $40 million sponsoring the Washington Nationals. And they took that all the way to the Supreme Court that the SEC doesn't have jurisdiction because Tara doesn't do business in the United States. And the general counsel of Tara actually worked out of New York. So you have arguments that don't pass a straight face test. And, but they, they have some PR appeal, you know, they, they appeal. Yeah.

And the lawyers who decide to make those arguments and convince their clients, those arguments hold water are the ones getting paid to make them. So yeah. $1,500 an hour, Scott is what they're making. Sign me, John. I got to see what day I got to see Dave and Gareth have to say. Dave, go ahead. So thank you, John, for effectively eviscerating 100% the crypto for Harris narrative. Scott, you should take John's excerpt. It was extraordinarily well presented

and understand that anybody who believes that an administration that doesn't commit to a change in policy is effectively calling for the death of the crypto industry in the United States outside anybody who believes that an administration that doesn't commit to a change in policy is effectively calling for the death of the crypto industry in the United States outside of Bitcoin and Ether. It was unbelievably well done, John, you did a great job. Because the reality that you've assessed the reality, the reality is that incredibly bad public policy is exactly what the SEC is producing. And they are going to have a very real chance of having that policy be completely implemented and shutting down Coinbase, Kraken and everybody else from trading anything other than Bitcoin and Ether, because that is

literally what they're doing. Now, keep in mind, this is a world where FanDuel, you can bet on whether or not, you know, the next batter is going to hit a home run. And you do that, you know, in the same way, but you can't buy a token that you've researched. You know, you would be hard pressed to find many people in Congress not named Warren, Brown, or Sherman, to actually, if you ask them the question, does it make sense that all Americans that aren't rich enough to be able to figure out ways to get offshore to be able to invest in a burgeoning part of the economy? But that aside, John did a great job of explaining why absent very clear change in policy, including lawmaking and changes at the SEC, you will not. There is no future for crypto in America under a continuation of this administration.

So thank you, John. I should say, yeah, you obviously popped in on the later end of the conversation, but that was sort of the first 10 to 15 minutes of the conversation that John and I had. And he certainly agreed that, you know, this election is very different than ones in the past for what we can look forward to in regulation. Well, right. I mean, I genuinely want to thank John for saying it. I mean, this is not, I know it sounds like I'm being snarky. I know John and I have our disagreements. Our disagreement is about what the law should be, not what the law is. The law is extremely, my problems with the laws are that

the SEC rule set doesn't work for token issuers that are not corporate entities. It doesn't work for tokens that do not confer equity or bond, you know, effectively, you know, loan repayment sorts of economic relationships. And they should be updated to do that, and that would be a good thing. So we don't disagree as much as most people think we do. The issue really is what should be, and what we should be doing is embracing the digital age. And sadly, the current administration does not, and that's a problem. And that's all I want to say. But I think that you should do a cut of the recording of john and make everybody who claims that well the courts are going to make this not a problem

uh that argument is is gone i thought that was extremely well that was i mean to your point the courts have to rule on the law so whether then congress is the one who's going to have to change the laws um but uh gareth here you can jump in. Go ahead. Yeah, I just wanted to jump in here because I had a really long conversation with Joe Lubin from ConsenSys and obviously one of the co-founders of Ethereum. And John, we spoke at length about ConsenSys' efforts to preempt the SEC's lawsuit and go into court. And obviously what has happened has happened. But my question to you, as someone who's worked at the SEC, is how difficult is it going to be to do what they want to do, considering the breadth of the lawsuit against players like ConsenSys? They've sued

OpenSea, now the NFT platform. But if you speak to someone like Joe Lubin, he basically said that the SEC, by doing what they're doing, would by extension have to go to every single MetaMask user and open or prosecute them for being broker-dealers. And if you understand how big the ecosystem is, and I mean, in comparison to the wider traditional finance market, it's small. It's still a huge amount of users. Like, to me, and I'm not a legal expert, it just seems like an insurmountable task that Gary Gensler and the current SEC has gotten themselves into. And I just don't understand if they actually have the capacity and resource to go after the industry like it kind of seems that they are. And then my second point to the question is, I don't know, Gary Gensler, you probably do. Does you really hate this industry? Because most of the people in the Web3 kind of crypto space think that is the case. Great questions. I don't't know Gensler. I know some people that work for him. I don't think he hates the industry. I think that the personification of Gensler is one of the biggest mistakes that the, of chair Gensler that the crypto critics, pardon me, that the crypto promoters have made to try to vilify it all in one person doesn't make any sense because, as I said, the SEC is not a political agency other than the commissioners.

And historically, you have staff members who've been there through many, many different chairs. And these decisions are made very, very carefully. You know, again, when I was chief, we brought all kinds of cases that were innovative and different. One case we brought was against a guy named Deroshko who had hacked into a computer system, stolen information, and traded on that. And it went to a district court in New York, and the case was dismissed because the judge said, hey, this is not securities fraud. This is just someone hacking into a computer and stealing information. So get out, SEC. You don't have

jurisdiction here. And we were pretty panicked over that because we thought, you know, this is ridiculous. This is a new wave crime. And ultimately, the SEC was even hacked, information stolen, and people traded on it. The Electronic Data Gathering and Retrieval Service, or the EDGAR database, was hacked because people were putting in their earnings reports, say, a half hour before four o'clock, getting hacked, stealing it and trading all that information. So this was a serious problem. So we appealed and we made this argument. We just said, look, this is a fraud because this isn't someone breaking into Microsoft's headquarters and stealing an earnings report.

This is someone dressing up like an administrator or a letter carrier and deceitfully entering the premises and stealing that information. So back to your question, when the SEC brings cases, they've got to be really thoughtful about it because that was a case that took two or three years on appeal to settle up. And initially, I got criticized so much. I was called into a commissioner's office and told, stop bringing these hack and trade cases, John. We don't have legal support for it. And I'd say, look, we have one federal district court in New York, one judge who's wrong here. And this is a big problem. And most people would think it's insider trading. So these are big deliberations that go on with the SEC.

They brought cases, if you sort of go through the series of cases, they brought, again, ICOs, SAFs, lending programs, celebrity crypto endorsements, staking programs. And now with the intermediaries, I think that you make an excellent point because for a lot of these intermediaries, for the executives of these financial behemoths, for them, hey, let's just keep fighting the SEC for as long as possible and laugh all the way to the bank. And if we get shut down, who cares? Even if we have to go to jail for a couple months, who cares? We're going to be billionaires. So it's sort of a calculus that's very different and kind of unprecedented. Because in many ways, the SEC charges and the SEC,

I think Mark Cuban said that, and I think he's right. Because when it comes to the SEC fines, unless you're sending someone to jail, it sometimes just doesn't scare people, certainly most of these crypto people. So does the SEC have the resources to bring cases in all these situations? Maybe, maybe not. You know, I think that they always need more resources. But when you start bringing the cases and start moving, if you look at things like ICOs, those have basically stopped. SAFs stopped. Crypto lending programs stopped. Celebrity crypto endorsements stopped. Crypto staking programs stopped. So they can stop behavior. You know, when I was chief and the internet was first coming to life, there were a lot

of stock promoters who used spam and what they called message boards and chat rooms, And when I was chief and the internet was first coming to life, there were a lot of stock promoters who used spam and what they called message boards and chat rooms, which are the precursor to social media, would spread information promoting companies, but didn't disclose the nature, source, and amount of that compensation. And there's a statute called 17B of the Securities Act that says, hey, if you're promoting a company, you have to disclose the nature, source, and amount of any compensation you're receiving to do that. And we brought, I think, 30 cases in one day. It was big news, breaking news on CNBC at the time, and it pretty much stopped all that bad behavior. So, Gareth, I think we're dealing with a new

generation of risk-ters who don't care about the SEC. So maybe you're right. Everyone will just keep doing what they're doing until they get told not to and then litigate the case to death and delay it as long as they can. Or people will sit back and say, I don't want the SEC action and I'm afraid they're going to refer it criminally and I'm going to stop doing what I'm doing, like has happened with a lot of these former iterations of crypto investing. Dave?

Well, you started with something factually wrong, and then I generally agree with pretty much everything that you said. So let's talk about what's factually wrong. The cases that you brought all had one common theme, or most had a common theme, which is allegations of harm to individuals. Most of the SEC cases do not have that. They're jurisdictional in nature and technical in nature. The reality is they didn't go after, and there were hundreds of scam ICOs that they did not go after. Instead, they waited and went after years had passed, went after the exchanges,

which is where they had zero hope of getting any restitution for any of the people who were harmed. So, you know, that is a very big difference. I don't think anybody in the industry has an issue with the SEC going after Joe Kwan, except for potentially the precedent it might set. The reality is, I think most people think, yeah, go get him. And in fact, that's what they should be doing. Going after Kim Kardashian is much more of a PR gimmick. And frankly, Iguiazela is still doing what she's doing just outside the United States.

So, you know, what is bad behavior? Bad behavior is going after people who can actually harm people. Celebrities actually have deep pockets. And to the extent that they do commit fraud, they probably are going to end up paying restitution and they should be gone after. But it really boils down to that. Now, as far as it being nonpolitpolitical i mean all i gotta say is i feel like i'm joe beidling come on man i mean you know going after coinbase going after opensea going after whatever is really something designed to shut down an industry as opposed to go after

and collect individual harms and if you think that this isn't at the request or part of Elizabeth Warren, then you are in an extremely small minority. By the way, you're in a small minority of the 10 or 15 people I've talked to at the commission. Visibly, I don't know anyone in enforcement. So maybe you're right. Maybe the enforcement people all believe this, but certainly outside of the enforcement division,

they are either horrified or beleaguered about the approach. So that's kind of important. One last note, the way they've done it by going after the big people that you claim, what you're not seeing is the literally hundreds, if not thousands of entrepreneurs who have fled the country or decided not to set up shop in the country because they can't afford to deal with a lawsuit. I'm one of them. We, my firm CoinRoute, never filed to become an introducing broker and stayed a pure software company and really only serve us outside. We do some stuff in the US, but it's pure software. And it basically limited us. And we've opened up and moved into Dubai. I've talked to literally 100 entrepreneurs,

if not more, that have done the same thing. And whether it's, it doesn't have to be political, whether it's Richie Torres or Hester Peirce or Mark or whatever, there are many, many people who will tell you how horrendous it is from a jurisdictional point of view. But the real question is, why does the SEC get to or why are they focusing their money on cases where there is no allegation of harm? And that is where you and I, I think, agree that that's where cases

should be. Your example of the Hackey case, people were being harmed. And it was a good thing that you did what you did. So this is not an indictment of the method. It was an indictment of the attack vector. Well, no, you're right. And I would add to that like Celsius and BlockFi, where the states had gotten very active and charged these companies with major securities violations. And the SEC was very late to the game. And I feel bad for those investors. How about FTX? Well, FTX is similarly. And Voyager. How about Voyager? I mean, Mark Cuban,

I would vote for Mark Cuban for president if he ran for it. But I don't like the fact that he marketed Voyager to Dallas Mavericks fans. I happen to be a Washington Wizards fan. And I really, I couldn't believe I got to my seat one day we have season tickets and there's an advertisement for an NFT like on a flyer on my chair that the Wizards are sponsoring and I just can't stand any of this I don't I think that they're they they're just taking advantage of people and Voyager is a great example that because a lot of Dallas Maverick Maverick fans invested they got a free hundred dollars on the voyager platform uh to use and then they ended up with major losses so you know i i mean it's just voyager specifically steve ehrlich told people that the yield they were getting were

coming from lending out of tokens and that was that is now documented to be an absolute lie, right? That he got his yield later because he couldn't get it from tokens anymore by lending money to 3R's capital. How is that not textbook criminal fraud? It is. By the way, Steve is out trying to raise money again for another crypto project. We all know that I'm one of the bigger Voyager creditors. But yeah, he's trying to raise money again.

It's awful. That's a great question. Yeah, it's awful. In my opinion, this is just my opinion, more of these cases should be brought criminally. And look, it's just a matter of protecting investors. I think that's the mission that the SEC has. I am in contact with lots and lots of people who still work at the SEC, and I think they're strongly in favor of the SEC cases that the SEC has brought.

I've read every single brief the SEC has ever written in every single crypto case, and I'm amazed at how brilliant these briefs are. They're like poetry. They're incredibly well-written. They're great collaborative efforts. They're compelling, truly persuasive. And I can be very critical. And I look at these briefs and I think back to the briefs that I wrote or the complaints that we filed, and they were never near as good as these. And I've listened to the arguments when I could go listen to the way the SEC, and sometimes the SEC is screwed up. I'm a major SEC

critic of a lot of things. I don't like their cybersecurity rule. I think the administrative courts are like kangaroo courts at the SEC. I think that there are lots of things they do that I've written. They subpoena people's hard drives, and they're not empowered to do that. I wrote an article that was published in the New York Times criticizing the SEC for that. So I can see a lot of things they do that are wrong. In this case, I think it's pretty, for as far as the typical SEC staffer goes, these cases are very cut and dry. And as I said, the judicial decisions are so... I've never seen such decisions so weighted for the SEC. There's not a place you can go as an SEC lawyer and think, oh, this judge is just going to give me a stamp of approval for whatever I sent. You're always going to get some criticism.

I was also a federal prosecutor and a trial lawyer. I prosecuted guns, drug, and domestic violence cases in the District of Columbia. And you're going to get criticized. You're going to make mistakes, and you're going to come to court and maybe not be prepared as you should be. But in general, your reputation is everything. And aside from those who, like, you look at debt box, that was clearly a bad situation where lawyers went too far on an emergency asset freeze.

And I've done lots of those where you really, the judge is relying on you to get every fact 100% correct. And the SEC screwed that up. So I see that. I don't know if that means what Mark Ueda said, which is that somehow the staff is not as good as they once were. Because again, I read all these briefs. I've been a law professor adjunct, you know, which is Latin for not a real, but for 20 years at Georgetown and Duke. And so I read everything. And I'm very impressed with what comes out. And I know that the general counsel's office looks at these. The chief counsel's office in the enforcement division looks at these documents.

It's a very collaborative effort. And if you're doing anything market-related, the Division of Market Regulation, they have to look at if you're doing anything market related, the division of market regulation, they have to look at what you're doing. If you're doing anything involving an offering, the division of corporation finance has got to sign off on what you're doing. So it's not like you can't, when you're in a USA, you bring lots of cases and you're kind of on your own. The SEC is much, much more bureaucratic. Everything has 50,000 people signing off on it. So I wouldn't assume that there isn't a lot of support for what the SEC is doing. And also, SEC lawyers are not shy. If they really hated what the SEC was doing, you know, some of them have done this, have come out and joined private sector and done incredible things. Nick Morgan and Russ Ryan have brought these cases that have essentially shut down the administrative law courts at the SEC. And both were enforcement litigators that

I worked with frequently, and they came out, they still have a lot of respect for the SEC. But I was an expert witness in the SEC administrative proceedings in a couple of them, couple cases. And it really is, as I said, a kangaroo court. There's no due process. There's no rules of evidence don't normally apply. There's all kinds of hearsay that's allowed. And ultimately, the decision is reviewed by the commission themselves, who were the persons that authorized the initiation of the lawsuit in the first place. So, it was really a bad setup. And thanks to Russ Ryan and Nick Morgan, who were former SEC enforcement guys, they have completely shut these courts down because the Supreme Court has come about these

decisions. So there are times and avenues that SEC lawyers can use to really criticize the SEC. And I'm not seeing those in the crypto space. John, I would love to see you do a lot more sort of reviews of some of the SEC's cases and enforcements against Web3 and crypto companies in particular, because I think that that's one thing that's really lacking right now is a lot of people aren't getting a really good layman's explanation of what the legal arguments are from the SEC against all these different things. I mean, I've spoken to consensus, so I know their side of the story, but it would be great to have a legal expert that can really break this stuff down for the layman to understand. I'll try. I mean, when they do five cases in a month, I, you know, I don't think

you did it live. Come on, Gareth, you did it live. We just, literally did it live we just literally we got we like just listen yeah i know we do we're up against time here though unfortunately though john that was awesome i'm glad uh you were here today we really uh mixed up the conversation of late and i think was a lot of context that we all needed hey gary uh cardone before we go i see that we're i we're on the schedule for four o'clock today is that live or is that a recorded uh it's whatever you want it to be man oh it's up to you it's for you guys i just wanted to say if it's gonna be live or you know gary and i are gonna be doing something we'll be doing it live that should be fun how's that all right so yeah

guys tune in it's gonna be on gary's about how much Bitcoin John's been accumulating over the years. I heard he's actually an early miner. I love all you guys. What I want to know is how much Shiba Inu he owns, but I guess we can get into that in the next conversation. All right, everybody. We've got to wrap John. Thanks as always. Gary, Dave, Gareth, guys, you should be fun, but just really quickly before we go, you should be following all four of these gentlemen who are on stage right now.

Come on, just seriously. Um, you know, we work our asses off here for free on this show just to get seven followers. That's what we're here for. So, uh, follow everybody. We love these guys. Uh, great perspective. I'll see everybody tomorrow. Thank you, gentlemen. All the best.