Latest / Bloomberg Law / FTX Star Witness Sentenced & Crypto Showdown

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FTX Star Witness Sentenced & Crypto Showdown · Bloomberg Law

• 0:03
  Speaker 1: This is Bloomberg Law with June Brusso from Bloomberg Radio.
• 0:10
  Speaker 1: Caroline Ellison, a former top executive in Sam Bankman Freed's
• 0:14
  Speaker 1: fallen FTX cryptocurrency empire, was sentenced to two years in
• 0:19
  Speaker 1: prison today in order to forfeit eleven billion dollars for
• 0:23
  Speaker 1: her role in the collapse of FTX. Ellison was the
• 0:27
  Speaker 1: prosecution's star witness against Bankman Freed, her former boss and boyfriend.
• 0:33
  Speaker 1: Prosecutors called her testimony the cornerstone of the trial. The
• 0:38
  Speaker 1: same judge Lewis Kaplan had sentenced Bankman Freed to twenty
• 0:42
  Speaker 1: five years in prison after a jury convicted him of fraud.
• 0:46
  Speaker 1: Ellison's lawyers asked the judge to let her off without
• 0:49
  Speaker 1: any prison time, citing both her testimony at the trial
• 0:53
  Speaker 1: and the trauma of her on again, off again romantic
• 0:56
  Speaker 1: relationship with Bankman Freed. And though Judge Chaplin said Ellison's
• 1:01
  Speaker 1: cooperation was quote very, very substantial, he said a prison
• 1:06
  Speaker 1: sentence was necessary because she had participated in what might
• 1:10
  Speaker 1: be the greatest financial fraud ever perpetrated in this country
• 1:14
  Speaker 1: and probably anywhere else. He said in such a serious case,
• 1:19
  Speaker 1: he couldn't let cooperation be a get out of jail
• 1:22
  Speaker 1: free card. Joining me is Bloomberg Legal reporter Christopher Domesh,
• 1:26
  Speaker 1: who covered the sentencing and the trial, tell us what
• 1:29
  Speaker 1: she said in her apology.
• 1:31
  Speaker 2: She was very contrite and apologetic during her speech to
• 1:35
  Speaker 2: the judge. She immediately apologized to everyone, FPX employees, Aloma
• 1:41
  Speaker 2: employees who had lost their jobs, people who had lost money,
• 1:45
  Speaker 2: her family, her friends. She said they abused the trust
• 1:48
  Speaker 2: that investors had placed in them in the worst possible way,
• 1:51
  Speaker 2: and she was deeply ashamed of what she had done.
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  Speaker 2: She said she had gradually found herself drifting away from
• 1:56
  Speaker 2: the person that she wanted to be, and that the
• 1:59
  Speaker 2: culture that you know, promoted positivity and discouraged dissent kind
• 2:03
  Speaker 2: of helped that along. She said, it felt harder and
• 2:05
  Speaker 2: harder to extricate myself and do the right thing, and
• 2:08
  Speaker 2: she apologized for not being brave. She said, lying isn't
• 2:11
  Speaker 2: something that came naturally to her, and it's been a
• 2:13
  Speaker 2: relief to be completely honest about things. She said she
• 2:16
  Speaker 2: found that meeting and just trying to be a good
• 2:18
  Speaker 2: person in small and noble ways, talking about, you know,
• 2:21
  Speaker 2: working for the soup kitchen and some of the other
• 2:24
  Speaker 2: things that she's done.
• 2:25
  Speaker 1: The prosecution here didn't ask for any jail time at all.
• 2:31
  Speaker 2: Yes, that's correct. They actually didn't ask for a specific
• 2:33
  Speaker 2: sentence at all. You know, depending on the case, prosecutors
• 2:37
  Speaker 2: often you know, asked to set someone in light up
• 2:41
  Speaker 2: their cooperation. They don't really go and ask for a
• 2:43
  Speaker 2: specific sentence like they are with most defendants. So they
• 2:47
  Speaker 2: at no point did they really ask for anything other
• 2:50
  Speaker 2: than you know, substantial departure downward from the guidelines, which
• 2:53
  Speaker 2: were admittedly draconian and you know, basically one hundred and
• 2:58
  Speaker 2: ten years in prison, which is most driven by the loss.
• 3:01
  Speaker 1: And it seemed like the prosecution's statement at the sentencing
• 3:06
  Speaker 1: was almost similar to the defenses.
• 3:08
  Speaker 2: Yes, it was very similar. You know, they acknowledged Daniel Festoon,
• 3:13
  Speaker 2: who is the assistant US attorney who did the sentencing today.
• 3:17
  Speaker 2: You know, she she made it clear that this was
• 3:19
  Speaker 2: you know, one of the most extraordinary cooperators she has
• 3:23
  Speaker 2: dealt with. You know, she said she came clean immediately.
• 3:26
  Speaker 2: You know that the person that they saw on the
• 3:28
  Speaker 2: stand is the exact same person who came and talked
• 3:30
  Speaker 2: to them. You know, they noted the difference between Sam
• 3:34
  Speaker 2: bankmin Freed's testimony in hers when he continually deflected and
• 3:38
  Speaker 2: essentially said that, you know that he might have succeeded
• 3:42
  Speaker 2: in getting away with it without her cooperation.
• 3:44
  Speaker 1: Yeah, it's sort of like she's in the cooperators Hall
• 3:46
  Speaker 1: of Fame, because the judge said, I've seen a lot
• 3:50
  Speaker 1: of cooperators in thirty years, I've never seen one quite
• 3:53
  Speaker 1: like miss Ellison.
• 3:55
  Speaker 2: Yes, that's the quote. You know. He he had a
• 3:58
  Speaker 2: lot to say in terms of praise of what she said,
• 4:01
  Speaker 2: most notably pointing out her testimony about the seven spreadsheets
• 4:06
  Speaker 2: that she had created at bankman Freed's behest when you know,
• 4:09
  Speaker 2: lenders started asking questions that essentially masked the size of
• 4:13
  Speaker 2: the fraud, and he called that really like one of
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  Speaker 2: the key pieces of evidence, if not the main piece
• 4:19
  Speaker 2: of evidence, which she revealed to the prosecutors during her
• 4:23
  Speaker 2: proper session. So he was very you know, specific about
• 4:27
  Speaker 2: praising her for what she had said on the stand.
• 4:29
  Speaker 2: But you know, once he got around and he didn't
• 4:32
  Speaker 2: think that she needed to be specifically you know, prevented
• 4:34
  Speaker 2: from doing anything else. He certainly made a point that
• 4:36
  Speaker 2: she would never do it again. But then he kind
• 4:39
  Speaker 2: of turned a little bit and basically started talking about
• 4:42
  Speaker 2: how Sam Bankman freed had her kryptonite and that she
• 4:45
  Speaker 2: should have known better. And while he said he didn't
• 4:47
  Speaker 2: really think she needed to be deterred from future crimes,
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  Speaker 2: he said, this is one of the most serious financial
• 4:53
  Speaker 2: frauds ever, you know, perpetrated in this country or elsewhere,
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  Speaker 2: and didn't think that her cooperation could get out of
• 5:01
  Speaker 2: jail free car And at that point he pronounced sentence.
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  Speaker 1: Was there any reaction from Ellison when you did that?
• 5:07
  Speaker 2: Allison hardly reacted. I think she had kind of realized
• 5:10
  Speaker 2: where he was going with some of the signals he
• 5:12
  Speaker 2: had said. In the moments before he pronounced sentence. Her parents,
• 5:16
  Speaker 2: you know, looked shocked, and her mother closed her eyes,
• 5:20
  Speaker 2: her sisters closed their eyes, and after the proceeding was over,
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  Speaker 2: they clearly were in tears, wiping it their eyes with tissue.
• 5:28
  Speaker 1: And so, Chris, she gets to serve this in a
• 5:31
  Speaker 1: minimum security prison.
• 5:32
  Speaker 2: Yeah, that's what he recommended. It's obviously up to the
• 5:35
  Speaker 2: Bureau of Prisons as to where she'll serve her sentence,
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  Speaker 2: but he did grant emotion that he would recommend him
• 5:42
  Speaker 2: in of security and close to Boston.
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  Speaker 1: And in federal prison, you serve eighty five percent of
• 5:48
  Speaker 1: your prison sentence and then become eligible for release if
• 5:52
  Speaker 1: you have had good time.
• 5:54
  Speaker 2: Something like that. You know, generally people serve about seventy
• 5:57
  Speaker 2: five eighty five percent as long as they they have
• 6:00
  Speaker 2: good behavior. And it's hard to believe that she wouldn't
• 6:02
  Speaker 2: be a model prisoner, right.
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  Speaker 1: I can see how though her family might have thought
• 6:07
  Speaker 1: that it was going to end up in no prison time,
• 6:09
  Speaker 1: since the Probation Department recommended no prison time and the
• 6:13
  Speaker 1: judge's remarks seemed to be heading towards no prison time
• 6:17
  Speaker 1: and then boom.
• 6:18
  Speaker 2: Yeah. I mean, I think a lot of people, just
• 6:21
  Speaker 2: given you know, what we see with cooperators in general,
• 6:24
  Speaker 2: didn't really think that she would get prison time. But
• 6:27
  Speaker 2: there are plenty of people who thought it was a
• 6:30
  Speaker 2: decent possibility. And you know, Lewis Kaplan is a very
• 6:35
  Speaker 2: serious judge. He intends to punish people and he does.
• 6:39
  Speaker 2: And in the end of the day, I guess he
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  Speaker 2: felt that this was just too large of a fraud
• 6:44
  Speaker 2: to keep her out of prison.
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  Speaker 1: Now, what about the eleven billion dollars in restitution?
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  Speaker 2: Yeah, so a lot of that is the government intend
• 6:53
  Speaker 2: basically said it's it's intending to seek forfeiture through the
• 6:58
  Speaker 2: bankruptcy process withouts that have already been forfeited.
• 7:02
  Speaker 1: So now there are two other cooperators who are going
• 7:06
  Speaker 1: to be sentenced FTX co founder Gary Wang and former
• 7:10
  Speaker 1: engineering chief Mashad Singh later this fall. But their cooperation
• 7:15
  Speaker 1: was not as great as hers, was it.
• 7:18
  Speaker 2: I mean, I don't think anybody cooperation possibly in the
• 7:21
  Speaker 2: history of cooperation, maybe as serious as hers. But it's
• 7:25
  Speaker 2: certainly not a good sign for them that he sent
• 7:27
  Speaker 2: her to prison. I mean, she gave up the ghost,
• 7:30
  Speaker 2: you know, and she told prosecutors more than they already knew,
• 7:34
  Speaker 2: So it would be hard to believe that he wouldn't
• 7:37
  Speaker 2: find some way to sentence them to prison time as well.
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  Speaker 1: So this closes another chapter in the collapse of FTX,
• 7:45
  Speaker 1: with many more chapters to come, and that includes Sam
• 7:49
  Speaker 1: Bankmanfried's appeal, which we've discussed before. Thanks so much, Chris.
• 7:54
  Speaker 1: That's Bloomberg Legal reporter Chris Domesh coming up next on
• 7:58
  Speaker 1: the Bloomberg Law Show. Coinbase and the Securities and Exchange
• 8:02
  Speaker 1: Commission fased off in a Philadelphia appellate court over rule making.
• 8:07
  Speaker 1: I'm Juian Grossow and you're listening to Bloomberg. Cryptocurrency exchange
• 8:12
  Speaker 1: Coinbase and the Securities and Exchange Commission fased off in
• 8:16
  Speaker 1: a Philadelphia appellate court, with Coinbase trying to force the
• 8:21
  Speaker 1: SEC to create new rules that would govern digital assets
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  Speaker 1: and help end a long legal fight between the industry
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  Speaker 1: and regulators. Judges Thomas Ambro and Stefanos Biebis questioned the
• 8:33
  Speaker 1: SEC's refusal to engage in rule making and its approach
• 8:38
  Speaker 1: of regulation by enforcement.
• 8:40
  Speaker 3: Usually you can do things sucrementally, and maybe that's the
• 8:43
  Speaker 3: argument against what rulemaking. We've got to proceed step by step, but.
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  Speaker 4: It almost looks as if to an outside observer, as
• 8:54
  Speaker 4: if you're going after the platforms in a way that
• 8:57
  Speaker 4: will crush the industry without really getting into rule made.
• 9:01
  Speaker 5: It is true that this case is not directly about
• 9:04
  Speaker 5: due process, but there are some serious notice concerns with
• 9:08
  Speaker 5: we might hit you with serious civil penalties, but we
• 9:11
  Speaker 5: won't tell you what will trigger the civil penalties.
• 9:15
  Speaker 1: Although Judge Ambro did acknowledge the newness of digital assets.
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  Speaker 3: In this area, which is you know, since two thousand
• 9:24
  Speaker 3: and eight, two thousand and nine, it is so new
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  Speaker 3: I can see why a lot of regulators or people
• 9:30
  Speaker 3: considering regulation are saying we better go slow on this one.
• 9:34
  Speaker 4: This is a new world.
• 9:36
  Speaker 1: And Judge Bieba's asked Coinbase, as attorney Eugene Scalia, the
• 9:40
  Speaker 1: big question, what's the endgame?
• 9:44
  Speaker 3: Eran or we are asking now that they be ordered
• 9:46
  Speaker 3: to proceed directly to a rule making. We think they
• 9:48
  Speaker 3: have had more than enough opportunity to answer coinbasis, workability, concerns.
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  Speaker 5: Extraordinary remedy. What would we say has to be in
• 9:58
  Speaker 5: such a.
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  Speaker 1: Rule joining me? Is security law expert James Park, a
• 10:01
  Speaker 1: professor at UCLA Law School, Jim tell us how this
• 10:05
  Speaker 1: ended up before the Third Circuit Court of Appeals.
• 10:09
  Speaker 6: Coinbase filed a petition with the SEC asking it to
• 10:13
  Speaker 6: write rules relating to crypto, and the SEC denied that petition,
• 10:19
  Speaker 6: and so Coinbase filed the lawsuit, thing that the denial
• 10:22
  Speaker 6: was arbitrary and capricious. That's a standard that's typically applied
• 10:27
  Speaker 6: in administrative law. And the district court initially denied that petition,
• 10:33
  Speaker 6: and now it was appealed to the Third Circuit Court
• 10:36
  Speaker 6: of Appeals and they heard the oral argument on it.
• 10:41
  Speaker 1: The lawyer for Coinbase, Eugene Scalia, and I have to
• 10:44
  Speaker 1: say he does sound a little like his father, so
• 10:47
  Speaker 1: it was sort of deja vu all over again.
• 10:50
  Speaker 2: That right.
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  Speaker 1: Wow. So he told the three judge panel that the
• 10:53
  Speaker 1: SEC had provided no explanation for denying the request for
• 10:58
  Speaker 1: rule making, and coinbase is complaining about the SEC's regulation
• 11:04
  Speaker 1: by enforcement. Tell us more about its arguments.
• 11:09
  Speaker 6: I think their main argument is that the SEC has
• 11:13
  Speaker 6: publicly said to various crypto organizations, come in and register,
• 11:19
  Speaker 6: and their argument is that this is disingenuous because there
• 11:24
  Speaker 6: is no real practical, pragmatic way for these associations to
• 11:31
  Speaker 6: register and provide disclosure. And this reflects the decentralized nature
• 11:36
  Speaker 6: of blockchain projects, where you are essentially creating a network
• 11:42
  Speaker 6: community that runs itself without any central manager that is
• 11:48
  Speaker 6: in charge. And unlike a corporation where you have a
• 11:52
  Speaker 6: corporate entity and a centralized management team that can collect
• 11:57
  Speaker 6: disclosure about the corporation, put it into SEC filings and file
• 12:02
  Speaker 6: it in theory, you do not have that with crypto projects.
• 12:07
  Speaker 6: And their argument is that you know, these crypto projects
• 12:11
  Speaker 6: associations cannot come in and register because there is no
• 12:15
  Speaker 6: central issuer that can provide disclosure. And until we have
• 12:20
  Speaker 6: a set of rules that tells us how this works,
• 12:24
  Speaker 6: we simply cannot move forward. I think that's the basic
• 12:27
  Speaker 6: crux of their argument.
• 12:29
  Speaker 1: Is it often that agencies are asked, you know, in
• 12:33
  Speaker 1: quarter anywhere, to make rules about things, because usually you
• 12:37
  Speaker 1: think the less rules, the better for those who are
• 12:40
  Speaker 1: being regulated.
• 12:41
  Speaker 6: It's true, and it's just an interesting example where the
• 12:45
  Speaker 6: industry is demanding a certain amount of certainty, and because
• 12:49
  Speaker 6: this is a industry that is still emerging, is on
• 12:55
  Speaker 6: the border in terms of legality. I think that Coinbase
• 13:00
  Speaker 6: others in the industry believe that a set of rules
• 13:03
  Speaker 6: or a statute would confer a certain amount of legitimacy
• 13:07
  Speaker 6: on crypto, because if you regulate it, it must be
• 13:10
  Speaker 6: permissible in some instances. And I think that there are
• 13:15
  Speaker 6: certainly cases where you see corporations in the industry asking
• 13:21
  Speaker 6: for more specificity with respect to administrative rules. That is
• 13:25
  Speaker 6: something that we do see from time to time. Whether
• 13:29
  Speaker 6: or not that happens in a formal petition for rulemaking,
• 13:32
  Speaker 6: I think that is less common. I think that is
• 13:35
  Speaker 6: much less common, and that this is an unusual case
• 13:38
  Speaker 6: based just on my knowledge of the SEC.
• 13:40
  Speaker 1: So explain the SEC's position and maybe you should start
• 13:44
  Speaker 1: by the Howie jest. They say, you know, we don't
• 13:47
  Speaker 1: need to make rules here, we have enough rules.
• 13:49
  Speaker 6: That's their argument is that we have an established legal framework.
• 13:53
  Speaker 6: We have the securities active nineteen thirty three. We have
• 13:56
  Speaker 6: Howie tests that says that investment tracks the securities in
• 14:01
  Speaker 6: certain circumstances. We have shown you through various administrative releases
• 14:06
  Speaker 6: and enforcement actions how we think to how we test
• 14:09
  Speaker 6: applies to crypto, and in some circumstances they are securities.
• 14:14
  Speaker 6: When something is a security, we have a set procedure
• 14:18
  Speaker 6: where you have to file a registration statement if you
• 14:21
  Speaker 6: want to sell those securities to the general public. If
• 14:24
  Speaker 6: you are in exchange that has securities trading on it,
• 14:27
  Speaker 6: you also have to register with us as well. And
• 14:31
  Speaker 6: I think they would say, you know, you want this
• 14:33
  Speaker 6: to be this centralized organization where no one is in charge.
• 14:36
  Speaker 6: But the reality is that there is usually a central
• 14:40
  Speaker 6: group of individuals who basically start these crypto projects. They
• 14:46
  Speaker 6: are developing the code, they develop the applications, They reach
• 14:50
  Speaker 6: out to investors, they promote it, they promise high returns.
• 14:55
  Speaker 6: They keep, you know, a lot of crypto for themselves
• 14:59
  Speaker 6: of the price of the crit that goes up, they
• 15:00
  Speaker 6: make a lot of money, almost like a kind of
• 15:04
  Speaker 6: like a controlling shareholder or insider of the organization. You know,
• 15:08
  Speaker 6: those organizers could certainly provide disclosure. They could, you know,
• 15:12
  Speaker 6: certainly be responsible for filing a registration statement, and that
• 15:17
  Speaker 6: has not happened. I think that's what they would argue
• 15:20
  Speaker 6: in response.
• 15:21
  Speaker 1: So you know that it's often hard to tell from
• 15:23
  Speaker 1: the oral arguments how the judges are going to rule.
• 15:27
  Speaker 1: So a couple of the judges did acknowledge that this
• 15:30
  Speaker 1: was a new area and maybe you'd want to proceed slowly,
• 15:34
  Speaker 1: But then you had some sort of accusations against the SEC.
• 15:38
  Speaker 1: One judge said that it looks like you're going after
• 15:41
  Speaker 1: platforms in a way that would crush the industry without
• 15:44
  Speaker 1: getting into rulemaking, and another said, it's not that you're
• 15:48
  Speaker 1: not interested in the area, it's just that you're interested
• 15:51
  Speaker 1: in picking off wrongs without giving higher level guidance. It's
• 15:54
  Speaker 1: hard to measure which way it's going, But it did
• 15:57
  Speaker 1: seem like they had a lot of hard questions for
• 15:59
  Speaker 1: the SEC.
• 16:00
  Speaker 6: Judges are going to ask hard questions aboth sides, and
• 16:04
  Speaker 6: it's hard to know if they're playing devil's advocate or
• 16:09
  Speaker 6: these are arguments that they're grappling with. But I suspect
• 16:12
  Speaker 6: it's very possible, and it's maybe probable that these questions
• 16:16
  Speaker 6: reflect a certain skepticism about the SEC's position. And you know,
• 16:22
  Speaker 6: the idea that the SEC is crushing the crypto industry
• 16:26
  Speaker 6: is probably accurate to some extent. Now, the SEC would say, well,
• 16:30
  Speaker 6: the reason we are closely regulating this industry and preventing
• 16:35
  Speaker 6: the schemes from flourishing and selling and distributing crypto to
• 16:39
  Speaker 6: a lot of members of the public is because we're
• 16:41
  Speaker 6: concerned that a lot of these projects are fraught and
• 16:45
  Speaker 6: that investors are going to lose a lot of money,
• 16:47
  Speaker 6: and if we don't keep an eye on it, we're
• 16:49
  Speaker 6: going to be blamed. People are going to ask us,
• 16:52
  Speaker 6: you know, what were you doing, And given past experience
• 16:56
  Speaker 6: with you know, FTX, for example, and some of the
• 17:00
  Speaker 6: other scandals that we've seen, there is probably good reason
• 17:04
  Speaker 6: to be very careful about allowing wide scale distributions of
• 17:10
  Speaker 6: crypto to public investors in the United States. So I
• 17:15
  Speaker 6: think that the judges, though, are you know, I think
• 17:19
  Speaker 6: that probably reflects the sincere questioning of the SEC and
• 17:22
  Speaker 6: its regulatory approach. It has moved sometimes in contradictory ways,
• 17:28
  Speaker 6: in ways that are ambiguous, and you've seen some shifts
• 17:33
  Speaker 6: in their policy where sometimes they are open to passing rules,
• 17:37
  Speaker 6: other times, you know, they seem to not be open
• 17:40
  Speaker 6: to that, and so they have kind of shifted their
• 17:42
  Speaker 6: position here and there. The SEC would say, well, this
• 17:45
  Speaker 6: reflects the difficulty of keeping up with this innovative technology
• 17:50
  Speaker 6: and understanding exactly what's going on. And we were very
• 17:53
  Speaker 6: careful at first. We didn't crush it right from the
• 17:56
  Speaker 6: beginning because we just wanted to see how it would evolve,
• 17:59
  Speaker 6: and over time, with experience, we now understand there are
• 18:02
  Speaker 6: some real problems in dangers. There have not been a
• 18:05
  Speaker 6: whole lot of useful applications of crypto that we know of,
• 18:10
  Speaker 6: other than its use as a currency to you know,
• 18:14
  Speaker 6: make transfers of money that would not be permitted under
• 18:17
  Speaker 6: other federal regulations like banking law, and that's that's sort
• 18:20
  Speaker 6: of the main thing that it has been used for.
• 18:23
  Speaker 6: So I think that, you know, the questions, I think
• 18:26
  Speaker 6: do reflect a general frustration at the SEC, and maybe
• 18:31
  Speaker 6: you know the reality. I think that the SEC is
• 18:35
  Speaker 6: not interested in creating an easy path for these crypto
• 18:39
  Speaker 6: firms to flourish. I think that is probably accurate.
• 18:42
  Speaker 1: So do you think that that's the reason why they're
• 18:44
  Speaker 1: not making rules, because it seems pretty clear under Gary
• 18:48
  Speaker 1: Gensler that they consider digital assets as securities.
• 18:53
  Speaker 6: I think so. I think that it's it's complicated. I
• 18:56
  Speaker 6: think that there are a lot of really difficult issues here,
• 19:00
  Speaker 6: and there are no clear answers as to what sorts
• 19:04
  Speaker 6: of regulations you would pass, and a lot of the
• 19:07
  Speaker 6: sort of issue of whether a digital asset is a
• 19:10
  Speaker 6: security or not is very fact intensive. So you know,
• 19:13
  Speaker 6: to give an example, sometimes crypto is purchased for consumptive reasons.
• 19:19
  Speaker 6: I want this digital coin because it gives me access
• 19:22
  Speaker 6: to this service. Sometimes it's purchased because I want to
• 19:25
  Speaker 6: make money, because I'm speculating, I'm investing in this network.
• 19:30
  Speaker 6: And if it's investment, it's more likely to be a security.
• 19:33
  Speaker 6: If it's more for consumptive means, then that's less likely
• 19:36
  Speaker 6: to be a security. How do you write a rule
• 19:39
  Speaker 6: that tells us when something is more of a consumptive
• 19:42
  Speaker 6: purchase than something that is for investment. It is very
• 19:45
  Speaker 6: difficult to do so, and you know that I think
• 19:50
  Speaker 6: is part of the reason why the SEC is wary
• 19:54
  Speaker 6: about getting into this process of trying to draw these distinctions.
• 19:58
  Speaker 6: It would much rather look at these situations case by
• 20:02
  Speaker 6: case and bring an enforcement action and maybe litigate it
• 20:06
  Speaker 6: before a judge, as opposed to trying to answer some
• 20:10
  Speaker 6: questions that may not be answerable. And I think that's
• 20:13
  Speaker 6: a reason why they are not essentially writing these rules.
• 20:17
  Speaker 6: And I do think that FTX is still you know,
• 20:20
  Speaker 6: and the crypto winter, as they say, is something that
• 20:23
  Speaker 6: has really affected the SEC's view of crypto. And if
• 20:27
  Speaker 6: you write rules that permit crypto firms to sell widely
• 20:31
  Speaker 6: to the public and there are significant frauds, then the
• 20:34
  Speaker 6: SEC will get blamed for that too, So it may
• 20:36
  Speaker 6: not be in their interest to go forward with extensive
• 20:41
  Speaker 6: specific rules.
• 20:42
  Speaker 1: Coming up next on the Bloomberg Lawn Show, I'll continue
• 20:44
  Speaker 1: this conversation with Professor James Park of UCLA Law School.
• 20:49
  Speaker 1: What's the most likely way the Third Circuit will rule.
• 20:51
  Speaker 1: I'm June Grosso, and you're listening to Bloomberg Cryptocurrency Exchange,
• 20:57
  Speaker 1: Coinbase and the SEC face staff. On Monday, before the
• 21:02
  Speaker 1: Third Circuit Court of Appeals in Philadelphia, Coinbase was urging
• 21:06
  Speaker 1: the Federal Appeals Court to force the SEC to create
• 21:10
  Speaker 1: new rules that would govern digital assets. The SEC contends
• 21:14
  Speaker 1: that current rules and existing laws governing securities are adequate
• 21:19
  Speaker 1: for the regulation of digital assets. I've been talking to
• 21:23
  Speaker 1: securities law expert James Park, a professor at UCLA Law School.
• 21:27
  Speaker 1: So at one point, one of the judges said to
• 21:30
  Speaker 1: Coinbase's attorney, well, what rule would we tell them to make?
• 21:34
  Speaker 1: I mean, do they have to say specifically or just
• 21:36
  Speaker 1: say SEC engage in rule making on crypto?
• 21:41
  Speaker 6: Well, I don't think the Third Circuit at this stage
• 21:44
  Speaker 6: would say or order the SEC to engage in rule making.
• 21:49
  Speaker 6: I think probably the best possible result for Coinbase, which
• 21:53
  Speaker 6: I think is feasible, is that the Third Circuit will
• 21:56
  Speaker 6: say that your denial was arbitrary and capricious because it
• 21:59
  Speaker 6: did explain enough as to why you are not making rules.
• 22:04
  Speaker 6: And so I think the SEC will still get a chance,
• 22:07
  Speaker 6: even if it loses this case to articulate the reasons
• 22:12
  Speaker 6: for denying coinbasis petition. Now, in the course of that exercise,
• 22:17
  Speaker 6: the SEC could essentially conclude, hey, maybe we should be
• 22:22
  Speaker 6: writing rules, and the NABE you could voluntarily do that.
• 22:26
  Speaker 6: But I think just the procedural setting of this particular
• 22:30
  Speaker 6: appeal is not one where even if the SEC loses,
• 22:34
  Speaker 6: they're going to be writing rules on crypto, you know,
• 22:38
  Speaker 6: a month after the decision comes out. I think what
• 22:40
  Speaker 6: happened is that they would look at the petition again
• 22:44
  Speaker 6: and they might deny it again but give more extensive reasons.
• 22:48
  Speaker 6: That's one one possibility. On the other hand, maybe they
• 22:51
  Speaker 6: will change their mind. It's certainly possible that they could
• 22:54
  Speaker 6: change their mind and say, hey, we will write right rules.
• 22:57
  Speaker 6: But I would be surprised if they did that. So
• 23:00
  Speaker 6: for long ways from the SEC being required to write
• 23:05
  Speaker 6: rules relating to crypto, I think that, you know, even
• 23:08
  Speaker 6: if Coinbase wins this appeal, the process will still continue
• 23:13
  Speaker 6: and take some time to work its way out.
• 23:15
  Speaker 1: So Coinbase wants the SEC to write rules. But do
• 23:19
  Speaker 1: other players in the cryptocurrency space also want the SEC
• 23:23
  Speaker 1: to write rules.
• 23:24
  Speaker 6: It's a really good question, you know. Coinbase, I think,
• 23:27
  Speaker 6: is any unique position. They are the exchange where these
• 23:33
  Speaker 6: various crypto digital currencies are going to trade, and their
• 23:38
  Speaker 6: incentive is for there to be a lot of these
• 23:41
  Speaker 6: projects coming up, a lot of these digital assets flourishing
• 23:45
  Speaker 6: and trading on their platform. And so I think that
• 23:48
  Speaker 6: they would like a set of rules that these digital
• 23:52
  Speaker 6: asset creators can comply with. So more of them are
• 23:56
  Speaker 6: creating digital assets that can trade. And I think that,
• 24:01
  Speaker 6: you know, because Coinbase is sort of in a position
• 24:04
  Speaker 6: where it is, you know, it's part of the establishment
• 24:07
  Speaker 6: of crypto and in some ways that they have one
• 24:10
  Speaker 6: set of us that I think are probably shared by
• 24:12
  Speaker 6: most investors and other players in the crypto industry that
• 24:16
  Speaker 6: they would like a set of rules. Now, is there
• 24:18
  Speaker 6: a set of more entrepreneurial, smaller organizations that may feel like,
• 24:24
  Speaker 6: you know, hey, maybe we can exploit this ambiguity in
• 24:27
  Speaker 6: order to get our projects up and going and that
• 24:30
  Speaker 6: we can avoid SEC enforcement. Maybe we don't want a
• 24:34
  Speaker 6: lot of rules that we'd have to comply with. It's
• 24:37
  Speaker 6: certainly possible there is a group like that, but I
• 24:39
  Speaker 6: think the dominant establishment voices in the crypto industry I
• 24:44
  Speaker 6: think would probably be with Coinbase on this issue.
• 24:48
  Speaker 1: Well, I'm wondering if it's better for the crypto industry
• 24:50
  Speaker 1: if the SEC sues them and then in some of
• 24:53
  Speaker 1: those lawsuits, you know, the court says, you know, this
• 24:57
  Speaker 1: is not a security and then they might go up
• 25:00
  Speaker 1: to the Supreme Court, maybe they'll do some revisions of
• 25:03
  Speaker 1: the Howie test.
• 25:05
  Speaker 6: It's a good point, and that's certainly something coinbas is
• 25:07
  Speaker 6: litigating right now, and the cases are working their way
• 25:11
  Speaker 6: up through the system. You know, is the best result
• 25:15
  Speaker 6: for the industry that we have a ruling that they're
• 25:18
  Speaker 6: not securities? One view is maybe that that would be
• 25:21
  Speaker 6: a good thing, because then the SEC could not bring
• 25:24
  Speaker 6: enforcement or regulate crypto. On the other hand, if it's
• 25:28
  Speaker 6: not the SCC and they're not securities and people are
• 25:34
  Speaker 6: losing a bunch of money on digital assets, then Congress
• 25:38
  Speaker 6: will have to step in and there'll be a different
• 25:41
  Speaker 6: regulatory regime, I think, one way or the other. If
• 25:45
  Speaker 6: we have crypto frauds and they are widespread, then somebody
• 25:50
  Speaker 6: will have to regulate crypto industry. Whether it's the SEC,
• 25:55
  Speaker 6: whether it's somebody else, I'm not exactly sure. And you know,
• 25:59
  Speaker 6: maybe the hope of the crypto industry in litigating whether
• 26:03
  Speaker 6: or not crypto can be a security is maybe their
• 26:06
  Speaker 6: hope is that if the court say it is not
• 26:09
  Speaker 6: a security, then that will spur Congress to act and
• 26:13
  Speaker 6: pass a statue, and then they would have the sort
• 26:16
  Speaker 6: of regulation that might confer some legitimacy on them. That
• 26:19
  Speaker 6: might be their ultimate hope.
• 26:22
  Speaker 1: I mean, the best result for crypto is it that
• 26:25
  Speaker 1: Congress passes legislation no identifying these things and it's not
• 26:30
  Speaker 1: left up to the courts.
• 26:32
  Speaker 6: I think it depends on the type of legislation that
• 26:35
  Speaker 6: is that is passed, where you have a clear set
• 26:39
  Speaker 6: of rules that may say that we don't need disclosure
• 26:44
  Speaker 6: for digital assets, that we will allow them to simply
• 26:48
  Speaker 6: run by themselves and not be regulated. I think that's
• 26:51
  Speaker 6: what they are hoping for. I don't know if that's
• 26:53
  Speaker 6: what is good for society. I don't know if that's
• 26:55
  Speaker 6: what will happen. I am skeptical that, you know, we
• 26:59
  Speaker 6: have totally decentralized associations where we are trusting that the
• 27:06
  Speaker 6: incentives will work and will not be used to exploit
• 27:10
  Speaker 6: smaller players and individuals. I'm skeptical that that is possible.
• 27:15
  Speaker 6: And you know, the crypto or coinbases argue that when
• 27:19
  Speaker 6: you you know, have found a crypto project, you have
• 27:22
  Speaker 6: no obligation to the people who buy the crypto. There
• 27:26
  Speaker 6: is no contractual obligation between the founders of the crypto
• 27:30
  Speaker 6: project and the people who buy the crypto. That's why
• 27:32
  Speaker 6: they're saying it's not an investment contract. It strikes me
• 27:36
  Speaker 6: as problematic. You know, if I'm a shareholder in a company,
• 27:39
  Speaker 6: I'm protected by various fiduciary duties that prevent the managers
• 27:44
  Speaker 6: from from exploiting me. As a crypto purchaser, I don't
• 27:47
  Speaker 6: have that, and so, you know, is it a good
• 27:50
  Speaker 6: idea to have these decentralized associations where there are no
• 27:55
  Speaker 6: contractual rights that customers have that individuals who buy the
• 28:00
  Speaker 6: don't have. I think probably not. And I think that
• 28:03
  Speaker 6: there will need to be some regulation in some form
• 28:06
  Speaker 6: that will protect the general public when they are buying
• 28:10
  Speaker 6: digital assets, whether it's securities are something else, there needs
• 28:15
  Speaker 6: to be some regulation in order for this to work.
• 28:19
  Speaker 1: You know, we've talked before about agency power in the
• 28:22
  Speaker 1: Supreme Court, trying to reign in agency power. I didn't
• 28:26
  Speaker 1: hear anything from these judges against agency power. They talked
• 28:30
  Speaker 1: about deference to agencies. Does agency difference or the changes
• 28:35
  Speaker 1: in that play any part here?
• 28:37
  Speaker 6: I think it does. I think that one possible outcome
• 28:41
  Speaker 6: I think is some of the judges they will want
• 28:43
  Speaker 6: to sort of say sec when you deny a petition
• 28:47
  Speaker 6: like this, you have to give more reasons, and that
• 28:51
  Speaker 6: is a bit less deference to agencies and their decision making.
• 28:57
  Speaker 6: It may be about setting up additional expectations, procedural expectations
• 29:03
  Speaker 6: about explanations agencies have to give. So I think it
• 29:07
  Speaker 6: could this decision could have implications for administrative agencies. The
• 29:12
  Speaker 6: way they denied petitions and explain their reasoning, that could
• 29:17
  Speaker 6: have some modest impact in restraining their discretion.
• 29:22
  Speaker 1: Yeah, one of the judges said something to the effect of,
• 29:25
  Speaker 1: you don't have to give much of an explanation, but
• 29:27
  Speaker 1: you have to give some. And this is totally vacuous,
• 29:30
  Speaker 1: was the word that he used about the SEC's explanations
• 29:34
  Speaker 1: for this. So, now, as far as the presidential candidates,
• 29:38
  Speaker 1: is one more than the other, you know crypto friendly?
• 29:42
  Speaker 1: Is Trump more crypto friendly than Harris? Or they both
• 29:45
  Speaker 1: seem to be trying to court the crypto industry.
• 29:49
  Speaker 6: It's what it seems like. Whether or not they will
• 29:51
  Speaker 6: follow through on sort of their campaign promises, I think
• 29:57
  Speaker 6: is another matter. I think because of the amount of
• 30:02
  Speaker 6: money that has been invested in crypto, the industry has
• 30:05
  Speaker 6: a lot to spend, and the presidential candidates are responding
• 30:10
  Speaker 6: to this. Whether or not they will actually want to
• 30:14
  Speaker 6: pass the sort of legislation that the crypto industry really wants,
• 30:18
  Speaker 6: I think is another matter, because they do not want
• 30:21
  Speaker 6: to be blamed if the public loses a lot of money,
• 30:24
  Speaker 6: and so I think that they're both basically remaining somewhat
• 30:29
  Speaker 6: vague as to what exactly they would do while trying
• 30:33
  Speaker 6: to appear like they're sympathetic to the crypto industry.
• 30:38
  Speaker 1: I did want to ask you about the FTX collapse
• 30:41
  Speaker 1: for a moment, because you mentioned the concerns about it.
• 30:44
  Speaker 1: Are the FTX customers though getting all their money back?
• 30:48
  Speaker 6: They are, they're certainly getting more back than we expect it,
• 30:52
  Speaker 6: and I think that reflects the rebound in crypto that
• 30:58
  Speaker 6: has happened over the last you know, last few years
• 31:00
  Speaker 6: after the collapse of FTX. This is a wildly speculative market,
• 31:06
  Speaker 6: and we will probably see other fluctuations as well. I
• 31:11
  Speaker 6: would be surprised if crypto never sees a major correction.
• 31:16
  Speaker 6: You know the fact that the market rallied for various reasons,
• 31:20
  Speaker 6: you know, and that resulted in the FTX customers getting
• 31:24
  Speaker 6: you know, substantial amounts back. I think that does notily
• 31:28
  Speaker 6: mean they're not dangerous to crypto and we'll see what
• 31:31
  Speaker 6: happens in the future. I don't know, but certainly that
• 31:34
  Speaker 6: is something that you can make an argument that, hey,
• 31:38
  Speaker 6: you know, the problem is not so great as we thought.
• 31:41
  Speaker 6: But I think there may be have been a little
• 31:43
  Speaker 6: bit of luck in that, and there's a lot of
• 31:46
  Speaker 6: money that is flowing around our system in speculative ways,
• 31:52
  Speaker 6: and if that reverses, though, that could have some disastrous
• 31:56
  Speaker 6: consequences for investors.
• 31:58
  Speaker 1: It's certainly a lot to think about. Thanks so much, Jim.
• 32:01
  Speaker 1: That's Professor James Park of UCLA Law School, and that's
• 32:05
  Speaker 1: it for this edition of the Bloomberg Law Podcast. Remember
• 32:08
  Speaker 1: you can always get the latest legal news by subscribing
• 32:11
  Speaker 1: and listening to the show on Apple Podcasts, Spotify, and
• 32:14
  Speaker 1: at Bloomberg dot com, slash podcast, Slash Law. I'm June
• 32:18
  Speaker 1: Grosso and this is Bloomberg