Unchained - Unconfirmed: SXSW Episode: Former DOJ Prosecutor Kathryn Haun on What the SEC Subpoenas and FinCen Letter Likely Mean

Episode Date: March 14, 2018

As a former government official, current board member of Coinbase and professor at the Stanford University Graduate School of Business, Kathryn Haun has a unique and varied view of the crypto space. She doesn't necessarily see the SEC subpoenas as a reason to be alarmed and compares it to her work as a federal prosecutor. We also discuss the FinCen letter and why her take is different from the fear we've seen in the marketplace. SEC issues 80 subpoeast: https://www.wsj.com/articles/sec-launches-cryptocurrency-probe-1519856266?mod=searchresults&page=1&pos=1 The FinCen letter: https://coincenter.org/link/fincen-raises-major-licensing-problem-for-icos-in-new-letter-to-congress Thank you to our sponsors: Preciate https://preciate.org/ which is seeking suggestions for who to appreciate at https://preciate.org/recognize/ and Quantstamp: https://quantstamp.com/  Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey everyone, here is a special South by Southwest episode from my new podcast, Unconfirmed, insights and analysis from the top minds in crypto. If you haven't had a chance to listen or subscribe already, you can check it out here on the Unchained feed. My guest for this special South by Southwest episode is Catherine Hahn, who teaches at the Stanford University Graduate School of Business, is a former DOJ prosecutor who did some of the earliest cases in crypto and is on the board of directors at Coinbase. We discussed the SEC subpoenas, the FinC-Send letter, self-regulation, whether or not we need to create a crypto-specific regulatory agency or industry-specific regulations. It's a meaty episode with a lot of insight into how regulators work. If you like the episode,

be sure to go to the feed for Unconfirmed Insights and Analysis for the Topmines in Crypto and subscribe today. Hi, everyone. Welcome to Unconfirmed, the podcast that reveals how the marquey names in crypto are reacting to the week's top headlines and gets the inside scoop on what they see on the horizon. I'm your host, Laura Shin. This special South by Southwest episode of Unconfirmed is brought to you Appreciate. Founded by Ed Stevens, Preciate is building the most valuable relationships on earth. Today, Preciate is recognizing an individual for their achievements in the crypto space. Who will be recognized today? Stay tuned to find out. This special South by Southwest episode is also brought to you by Quad Stamp.

Quad Stamp is the first smart contract security auditing protocol designed to secure all smart contracts in a cost-effective and scalable manner. Their team is composed of blockchain and software testing experts who collectively have over 500 Google Scholar citations. To Learn more or request an audit, visit QuantStamp.com. My guest today is Catherine Hahn, who teaches at the Stanford University Graduate School of Business, is a former DOJ prosecutor who did some of the earliest cases in crypto, and who was on the board of directors at Coinbase. Welcome, Katie. Hi, Laura. Thanks for having me. So I heard you're teaching a class at the Stanford Graduate School of Business. Yes, we're

teaching this spring, a class on cryptocurrency. And I think one of the really exciting things from that class is how many students we have. There's just such an appetite on behalf of the student body for this topic. And I think you also mentioned, is there a long waiting list? There is a long waiting list. And again, I think that's just reflective of the topic and how energized people are about that. We're having some great guest lectures also, people like Bala Gis front of Anson, Fred Ersham, and I think I just was able to talk to Louvin from consensus into guest lecturing on Ethereum and smart contracts. Great. And you just ran into him at the Ethereum Lounge?

I did. And I think that same kind of display of the interest in the topic was there at the Ethereum Clubhouse. It was full of young developers and entrepreneurs who were just so excited about everything that's going on. And it's really energizing. I think my plane reading back from Austin just got extra loaded up with more reading on air drops and relays. Great. And so what else has been on your mind recently? I know you have this background in government. And obviously, we've heard that the SEC has been issuing subpoenas to token issuers. What is your take on what's going on? Well, amidst all this excitement I mentioned, I've still continued to see the need for more bridges to be built between the way that government regulators are thinking about this technology or these technologies and the way technologists are thinking about them and developers and entrepreneurs. And in terms of the SEC, are you asking about the SEC inquiries in particular?

Yeah. Like the subpoenas that went out? Yeah. What do you make of that? Well, so first of all, I think it's important to put this into context, because of course, that makes a lot of news in the space. And it should, because subpoenas are something to take seriously. That said, I think it is important to step back and realize that subpoenas are just the government's way of gathering information. So you feel like this isn't saying anything beyond

just the fact that they want to learn more about the space? Well, right now, in the context of the, was it 80 subpoenas that went out to, in the ICO context, there I think, again, it's It's not like the SEC can just go and get people to voluntarily hand over documents and talk to the SEC, right? So a subpoena is the way by which the government requests and gathers information. And that doesn't mean that 80 cases or even 80 investigations are going to come out of this. That means this is just the subpoena is how they decide which cases to investigate. Oh, okay. This is sort of like my work as a journalist, I guess, where I interview a bunch of people,

but I don't always write articles about everything that I do research on. So I sort of like, you know, choose amongst that background which cases or which stories might be worth pursuing. Right. You choose the most interesting, right? Right. And is this similar to what you would do at DOJ? No, DOJ is quite different. So getting back to the subpoena, at DOJ, actually, a little known fact is at DOJ, there's a policy actually against issuing targets, subpoenas at all. Oh, interesting. So, for example, if you're the target of a criminal investigation at the Justice Department, our policy, or not our anymore, because I'm no longer at the government, but the DOJ's policy is that prosecutors should not be issuing subpoenas to entities they view as targets of investigations. Now, the SEC doesn't have that same restriction, but still, I do want to emphasize that a subpoena is just a way for the government to get information.

So when I was a federal prosecutor, I issued hundreds, if not thousands of subpoenas. my time. And, you know, very, very few of those actually turned into investigations or cases. And so you feel like maybe the panic that we're seeing in the crypto space is a little bit more like FUD for your uncertainty and doubt? I think there's a little of that, Laura, but I mean, again, not to minimize the impact that an SEC subpoena does have on an entity or an individual, particularly for individuals or entities that aren't familiar with interacting with enforcement bodies or regulators. I don't want to minimize the seriousness or, you know, what, they might be feeling, but I really doubt what we're going to see is 80 different ICO actions

just because of that number of subpoenas being reported as having gone out. That's my only point. So another action that we saw recently from the government was a letter from FinCEN. And I know also some people in the community were freaking out about that because apparently it has some implications with the Bank Secrecy Act where the penalties can be quite severe if you violate that. So what was your take on that FinCEN letter? Yeah, you're right. The penalties. Penalties for violating the Bank Secrecy Act, or BSA, as it's called, can be even criminal. And they can be really stiff monetary penalties.

You're talking about $25,000 a day per violation, so they can really add up. But that said, my take on the recent FinCEN letter was, I think that it's not a biggest deal as some people are making in the space. And I'll tell you why. I mean, I recently heard a few different people, including this weekend at South by Southwest, on some of the cryptocurrency panels. People were describing it as FinCEN enforcement. or FinCEN guidance. And it's actually neither of those things. I mean, what it was was responding to a letter from Senator Ron Wyden. And so routinely agencies get letters from congressmen or senators asking, do you have sufficient authorities to deal with these new technologies or these new kind of creations?

And FinCEN here was merely responding to that letter saying, yes, we have sufficient authorities. We have our Bank Secrecy Act authority. And here are all these. authorities we have. So in some way, I would take some comfort in that FinCent is not asking for new statutory authorities. They're not saying they need new laws to go after people in the cryptocurrency space. Oh, interesting. Well, that actually relates to an op-ed that came out recently, saying that there should be a new regulatory body or maybe even new regulation. What do you make of that proposal? With MX Platinum, $400 in annual credits for travel and dining means you not only satisfy your travel bug, but your taste buds too.

That's the powerful backing of Amex. Conditions apply. When McDonald's partnered with Frank's Redhot, they said they could put that shit on everything. So that's exactly what McDonald's did. They put it on your McChrispy. They put it in your hot honey McNuggets dip. They even put it in the creamy garlic sauce on your McMuffin.

The McDonald's Frank's Red Hot menu. They put that shit on everything. Breakfast available until 11 a.m. At participating Canadian restaurants for a limited time. Franks Redhot is a registered trademark of the French's food company LLC. Well, I think for the regulatory body, I think you're talking about the New York Times op-ed that came out where there was a call, I believe, to ask for a new regulator for cryptocurrency.

And I actually just don't think that solves anything. I actually think that makes the situation worse. And I think, again, there is a feeling in this space that the community is shying away from regulation. I don't think that's correct at all. I don't think the community shying away from regulation. I think what's harmful is regulatory uncertainty. So I do think that large parts of the community want to know what the state of regulatory affairs is. But I don't think that a new cryptocurrency regulator would help.

And I actually think it would hurt for a couple reasons. I mean, one, I don't think that you would see other entities standing back and letting this new cryptocurrency regulator do everything. So I think then it's just adding another. it's adding another regulatory body into the mix. And then there's also questions about, well, is this, for example, particular case, a case of white collar or pure fraud, or is it cryptocurrency, which regulatory body gets it? I think that still exists, even if you have a new cryptocurrency regulator. Right.

So it might be something like the Internet where everybody needs to learn about it and the areas where that applies, then, you know, you would still stick with the traditional agency. Well, that's exactly right. I mean, when the internet came out, we didn't have an internet, you know, regulatory body being stood up. Instead, what we had is kind of what we're seeing now. We had different enforcement and regulatory bodies, whether you're talking about DOJ, SEC, CFTC, and all the myriad agencies trying to figure out what their piece was, the FCC, the FTC. And in the end, we didn't see those agencies all kind of trying to vie for the same cases. They were all able to figure that out. And that happens a lot, Laura, in the regulatory enforcement space. I mean, I used to prosecute example as murders. I prosecuted a lot of murders. You know, murders can be state crime. They could be a crime in one state or another.

If there was transportation across state lines, they could also be federal. So, you know, this is nothing new in the legal or regulatory context to have different kinds of regulatory or enforcement bodies able to do the same type of topic. So before we get to our next topics, well, one. to circle back to your work at DOJ and also talk about self-regulation. A quick word from one of our fabulous sponsors, Appreciate. Founded by Ed Stevens, Appreciate is building the most valuable relationships on Earth. Today, Appreciate is recognizing an individual for his achievements in the crypto space. Jimmy Song, a respected crypto innovator, announced a new initiative, Platipus Labs. Platipus is focused on funding residencies and fellowships for developers in the blockchain space,

many of whom are not paid when contributing to core protocols like Bitcoin. Jimmy Song gets the visionary award. Way to go, Jimmy. Listeners, if you know someone in crypto who should be recognized, take action and go to appreciate.org slash recognize. That's appreciate.org slash recognize. This special South by Southwest episode of Unconfirmed is also brought to you by Kwanstamp. Founded in the aftermath of the Dow hack, Kwanstamp is the first smart contract security auditing protocol, designed to secure all smart contracts in a cost-effective and scalable manner. Relying on humans to audit smart contracts is expensive and error-prone, and with the exploding growth, that solution won't scale. The team at Quant Stamp has built a solution to audit smart contracts on the Ethereum network

in an automated and decentralized way that can scale with growing demand. With a team composed of blockchain and software testing experts who collectively have over 500 Google Scholar citations, Quant Stamp is paving the way for safer and more reliable smart contracts that will power the decentralized world. To learn more or request in audit, visit Quantstamp.com. I'm talking with Catherine Hahn, former prosecutor and professor at Stanford University. So I wanted to ask you to bring us back to that original topic of the SEC when you see that they're maybe wanting to talk to 80 different issuers. How do you think they'll go through the process of selecting which ones to bring enforcement actions against? Well, I can really only speak to what, for example, Justice Department would be thinking because I know people that are working on these types of things in the Justice Department.

I'm not as familiar with what the SEC process is, but I can just tell you from a general perspective of a former government attorney looking at the cryptocurrency field, one of the things you have is you have lots of different opportunities for investigations or cases, but you actually have few resources. I mean, and I know everyone always thinks the government has unlimited resources. And I think when you're talking about people who actually understand this technology or have the appetite to kind of do these cases, you you are talking about a more finite number of people. And so what ends up happening is you really can't go after every single potential regulatory infraction or, you know, law being broken, nor would you want to. I mean, I don't think any of us want to live in a world where anyone who breaks the law or regulation at any time is punished. And there aren't the resources to do that anyway. So one of the things I used to think about when I was in the government is really what are the worst of the worst. Sure, we have, you know, I'm just making up these numbers here. Let's say that we had 10,000 different infractions or laws being broken.

Maybe the FBI would investigate a thousand of those. And maybe of those they would bring me, the prosecutor at that time, the 100 best ones. Well, I wasn't going to do 100 cases. Maybe I need to pick 10 for my own resources. I'm just, again, making these numbers up. So I'm going to focus on the 10 really worst of the worst. The ones where there's really no question that there's been some clear wrongdoing. under the clearly, under law that was kind of clearly established.

And I know there's a lot of murky areas out there now, but as a prosecutor, as a former prosecutor, what you want to do is, you know, you have to assume before you bring an action, before you bring an indictment, that the person or the entity on the other side is going to say, I'm taking you to trial. That's their right to do that. And in that case, you want to be absolutely sure that you're going to be able to convince a jury of 12 randomly selected folks that there is no question that what was done was wrong and illegal. And that's no easy feat, Laura, especially in some jurisdictions, to get 12 people to agree on that. So I think that, you know, that was DOJ's process.

Is there any question we could get 12 people to agree this was the worst or the worst? And I think that's how DOJ will approach, for example, the ICO space, because I do think that it's only a matter of time before they start prosecuting some of the ICO projects. But I think, again, I think they're really going to focus on the worst of the worst. They're not going to go to the gray areas. And I largely think the SEC is going to do the same. I think they'll also look to, you know, how much money was raised, where were the victims? We're money lost.

So are their victims? These are important questions. Interesting. Okay. So maybe a lot of the commentary I've seen on Twitter really is fud because it's very sobering to hear your perspective. We're not sobering, but just it is a contrast. I'm sorry, Laura, I was just going to say.

I recently heard Jake Clayton speak, and he pointed out that the SEC has 4,000 people. Now, that might sound like a lot, but it's actually, that's not a ton of personnel. If you think about DOJ, there are 110,000 personnel there. And with Department of Homeland Security, 240,000. So if you think about the size, the massive size of some of these agencies, SEC, 4,000 people, it's actually not a ton. And keep in mind, they're not only around to enforce the cryptocurrency. space or the ICO projects, right? They have a lot of other priorities that they're supposed to be

focused on. And so if you think of that, they really need to come up with some of the worst of the worst. Like, there are lots of pure fraud in this space in terms of some of the ICO projects we've seen. Like, think of the Ryan Gosling recent episode. And others like that, where people have really lost a lot of money and there were a lot of U.S. victims and this really was a security and there's really no question about it, not these gray areas. I could be wrong, of course. Maybe the SEC will surprise us and come out in the gray areas, but I don't think so, because ultimately the person on the other end or the entity on the other end could put them to the challenge and take them to court and fight it. And then that's not going to be a case. The first SEC ICO action, I mean,

I know there have already been some, of course, but the first one that gets fought out in court, the SEC's not going to want to lose that. Oh, that's, That is true. I could definitely see that. Well, one thing I wanted to ask you about was there's been a lot of talk of self-regulation using what's called token curated registries or really just any form of self-regulation. What do you think of that idea? I think self-regulation is great in this space. You mentioned a new regulator, and I'm pretty opposed to having a new regulator, or even new laws, by the way, and we can come back to that. I'm not at all opposed to self-regulation. I think that's great. And here's why. I think the community knows the space the best. regulators, they're still catching up, right? And I remember this being in DOJ. It was like as soon as we thought we had figured out Bitcoin, along comes Ethereum. And now we're in the land of relays and airdrops. And it's just getting more and more complex. And so I don't favor new laws because laws are meant to endure for a few years, at least. And in this space, things are changing so rapidly and the tech is changing so rapidly. Just think about if they had passed a cryptocurrency specific law last year or two years ago. Well, New York State did with a pit license. Exactly. And look right now, people are already saying some of that is outdated, and law is meant to answer a question, not create many more questions. Unfortunately, sometimes it does both. But in the case of the bit license, it created a whole host of new questions. And that's even more true as the technology has developed further. So I think that it's really premature to be having new laws just because of the rapid pace that things are changing. And this was the same in the internet, right? We didn't have a specific law just for the internet. Instead, we had a very similar pattern here. Now, eventually, we did get the Communications Decency Act Section 230 for the Internet, but that was many years into the making.

So I think it's pretty premature for new laws, but not to your question for self-regulation. I think especially if you have large parts of the community coming together and coming up with best practices and best principles, I really think that's important. I think if they're sound, there's something that are really convincing for regulatory bodies. and enforcement bodies. And I can tell you firsthand, having been in the shoes of those individuals, that we look to stuff like that. If there is certainly an industry standard that develops and it's not followed by a certain actor, that's something that the government takes into account.

And I think principles for self-regulation are also so important in this space because, again, the technology is changing so rapidly that it's also just educational, frankly, for regulators. I don't mean to make it sound like they don't have any clue about what's going on. I'm not saying that at all. And certain of these agencies have really dedicated small, but dedicated task forces that are really charged with keeping up to date on the technology, but it's hard. And I think that where the community comes up with some best practices, I think that's really persuasive and it's very powerful. Yeah, and it sounds like such a body would be more nimble to keep up with new trends in the crypto space. So that seems like another

benefit. That's exactly right. And I think we saw a little bit this in some of the modern, I'm sorry, the uniform state law that got proposed and then I guess enacted last summer for some of the money state transmitting licenses. Yeah, but then only some states signed on or something like that. Right. But the point being that, you know, you had an advocacy or lobbying group like Coin Center really active and who really is so knowledgeable in this space and then the Chamber of Digital Commerce and things like entities like those. But I think it's also imperative that it's not just those groups, but it's also leading companies in the space and projects also. Great. Well, it's been so fantastic having you go on the show. Thanks for coming on.

Thanks for having me, Laura. Thanks so much for joining us today. To learn more about the topics we discuss, be sure to check out the links in the show notes of your podcast episode. New episodes of Unconfirmed come out every Friday. If you haven't already, rate review and subscribe on Apple podcasts. If you liked this episode, share it with your friends on Facebook, Twitter, or link in. Unconfirmed is produced by me, Laura Shin, with help from Fractal recording and Elaine Zelby. Thanks for listening.