To Corp Finn and had great conversations looking for no action relief and very productive conversations.
Then, all of a sudden, once it gets to the 10th floor, it dies.
That's where good ideas go to die for the last four years.
So, the first thing is just tap that community because they know what they're doing.
And there's some good ideas already that have gone in the SEC.
So, I did a request for rulemaking back maybe almost three years ago on crypto after I addressed some of my concerns directly to Mr. Ginsler when I retired from the Investor Advisory Committee.
And then six months later, I think Coinbase got the idea for me because they did a request for rulemaking on crypto, but that was much better than mine.
I mean, their team had developed something much more useful in their requests for rulemaking that they've now used in litigation and that's going to the third circuit and got an interested discussion among the third circuit panel.
They saw the hypocrisy.
I don't think never before has a defendant requested regulation a year before they were charged.
That's never happened.
So, tap that community.
That's the first thing.
Tap that community.
And when you say that the no action requests, among other things, when they get to the 10th floor, again, the top floor of the SEC, they die.
What's your perception of why they die?
Is that a consensus position?
Is that because they come to the chairman's desk and it's here and no further?
What's your read on that?
I mean, all I know is that there are a lot of line-level staff discussions that have gone well within Corp Finn, but that then, you know, then you get ghosted.
You get no callback.
And so I'm just guessing that someone in senior management maybe just understood that they would go nowhere and kill the for whatever reason.
I think there are a lot of people inside the building that get it and that we could work with.
In general, so in my spare time when I'm not on C-SPAN, I do a bit of broker-dealer advisory work at a law firm.
And the issue of custody of crypto assets and digital assets by banks and broker dealers has been a perpetual problem for the SEC staff.
Where do you think that issue stands currently?
And what do you think could be usefully done in the coming administration?
Yeah, so for market structure issues generally, one place the SEC can start to look is the compromises that made their way into FIT21.
I'll say about FIT21, it's a long bill.
It's a 70, 80 page bill.
So there's some things I really like in FIT21.
There's a lot of things I really don't like in FIT21.
One of them being the DeFi exemption, which we need, but it's not good enough.
It's not sufficiently designed, not good enough.
But we can continue to open source that and build on that.
Anyway, to your question about custody, there's some thinking in there about custody and about the idea that you might have a separate affiliate of a broker dealer that handles custody, or you might have an external partner like you handle the trading, external partner handles the custody or something.
There's different ways to skin that cat.
And I think we can figure it out.
And I think that's a question for the roundtables and for an initial comment.
But I mean, generally speaking, you shouldn't, there are reasons to separate trading and custody, whether within affiliates of the same entity or within different entities altogether, because of the lessons learned from FTX, reasons to separate custody among central exchanges from trading.
But generally speaking, you don't have to be scared of custodying crypto.
I mean, it's in a lot of ways, it's easier if you have, if you're using the right multi-sig technology or you're using, I mean, there's all kinds of different ways to custody innovations in custody that DeFi uses that works pretty well for the older, more established protocols.
I mean, Uniswap transfers a lot of money and it's been working fine for a number of years now.
There are some newer DeFi protocols that go to market without being battle tested, without being audited, where there's a massive hack.
And those are the stories you read about.
But people are LPing into DeFi protocols and keeping their, as an LP or managing to keep their custody safe because they're using the latest ledger tech and they're using Gnosis Safe and they're using multi-sigs and they've got different parties, including sometimes, I think some of the hedge funds use, keep some of the multi-sigs with different entities, with an accounting firm or with a law firm.
So there are ways to figure this out.
You don't have to be scared of custodying crypto the way you might be with cash or something.
Right.
And so you mentioned FIT21.
The rumor in DC, you know, on the street where Republican securities lawyers hang out, is that Bobby Vans Barr or something.
The rumor is that it's likely that we will see crypto legislation from the new Congress.
I have also heard rumors that the beneficiary of that legislation might well be the CFTC, not the SEC, that Congress and the markets are just fed up with the last decade of SEC governance in this area.
What do you think on that front?
I mean, are you hearing the same thing?
And would you expect legislation finally to come through?
It would surprise me if an industry spends $100 million to flip the Senate, keep the House and support a flipping administration, why wouldn't they wait until the new Congress and get a better deal and instead humor the ambitions of an outgoing Democrat Senate agriculture chairman who wants a legacy bill before she leaves the Senate?
I put the odds very low.
I mean, I've heard those same rumors that you've heard.
I don't like it.
I think we should wait until next Congress.
And, you know, the outcome of that is I have some concerns about some things that weren't done sufficiently in FIT21, but overall, it's a good effort.
It's an effort intended for the best.
But I think through the glass darkly of the Senate, I think what we would see is those ideas take the same path that crowdfunding legislation that started in the House that was the brainchild of Patrick McHenry before he was chairman when he was a young guy.
We saw crowdfunding go through the House into the Senate and then just destroyed by the Senate compromises that have now led us to a crowdfunding market that's broken.
And I guess we should thank that history because that's what fueled the speculative turn to crypto.
There was no sense in speculating and crowdfunding because there's nothing there, just a couple hundred million dollars.
So all that fuel turned to crypto instead in the last 10 years.
And I guess we should be grateful for that.
But that's what I would see happening.
FIT21 through the lens of the Senate.
And let's also remember the CFTC is not unequivocally better than the SEC because look at some of the cases there.
The UKDAO case, which that approach would destroy DeFi.
I mean, one of the CFTC commissioners said she doesn't see a way that DeFi can ever work if it's not fully KYC'd, which I don't know what KYC DeFi is, but it's not DeFi.
You can't have a chief compliance officer to a decentralized protocol.
That's not a thing.
Turning to another, staying on the same topic of crypto, during the last three, four years, we have had some interesting comments.
I think as recently as this week from Commissioner Ueda, I was on television talking about FinTech and crypto sandboxes.
I know Commissioner Peirce has talked in the past of her purse exemption sort of for the period.
And you'll explain this to our viewers better than I, but talking about the transition from a security token that is subject to the securities laws into a utility token, it may be giving a bit of grace to the token in question for a period of months or years so as to not kill this industry off at the root.
What do you think the prospects of those are?
Is that something that requires legislation in your view?
Is it something that the SEC could do unilaterally?
Is it something they could start again in the acting chairmanship period?
We could start that effort on Inauguration Day and with the SEC's plenary exemptive authority.
And those are some great ideas that you mentioned.
So Hester started with a safe harbor idea that, look, when you launch a new protocol, a new token, a new L1 or something, you want it to be decentralized, but it's not on day one.
It becomes increasingly decentralized over time.
So she said, look, apply as a development team.
You want to, you know, think of a team that's like the early Ethereum developers.
Apply for this exemption.
And then in three years, we'll see if you're decentralized.
For now, you might have some disclosures, but we'll see if you're decentralized.
And then in three years, if you're not, then you got to find a different path to register and be regulated.
It's a great idea.
It's a great place to start.
And it needs to be on the menu of the roundtables and what we're doing.
It was built on top of that, what they call a fork of that proposal, something I really like called Regex.
Regex was built by two lawyers who need to be at that roundtable.
I want them in those rooms.
Gabe Shapiro and Sarah Brennan are some brilliant lawyers from a firm called Delphi.
And they wrote Regex, two versions of Regex.
One is a Regex Safe Harbor, which is like the Purse Safe Harbor, but has a little bit more bells and whistles to it and more required disclosures.
So it's designed to be a little bit more of a palatable compromise among the different members of the SEC.
And then they have another Regex exemptive proposal where the offering is exempt, but has a number of disclosures about the whales who own a big portion and the kind of what people call tokenomics or the economics of the blockchain, the audit of the blockchain itself, and some basic disclosures, not accounting.
We don't need accountants.
This is not GAP, but this is some valuation information and the white papers and sort of a light touch disclosure thing, kind of like what the MICA approach in Europe, kind of some ways similar.
So they're both great ideas to put on the table in terms of exempt relief.
And I think also it's important to have exemptive action to show that, and this is contained in the Regex Safe Harbor is making clear that airdrops are not a distribution of securities.
I think that's fairly important.
I think that's just a statement of the law as it is, as it stands.
SEC settlements notwithstanding.
I think it is like Apache notwithstanding.
I think it is the law that airdrops are not a distribution of securities.
If I go down a little bit of a rabbit hole, some of the treatise writers and people who want to make this argument, kind of John Reed Stark and such, they say, no, an airdrop is an offer of securities because you are giving something away for free.
How can it be an offer of a distribution of securities, right?
An offer of securities if you're giving it away for free.
Well, the convoluted argument is that because you're distributing it, you're trying to create a market in it.
And therefore, when you later sell into that market that you've created from the free distribution, it somehow can be hammered into the Howey test in some way.
That sounds like the Wickard v. Philburn of securities law rationalization.
And the only precedent on this is a case involving equity stock spin-offs, which is totally different.
Like if when a company does a dividend of equity stocks in a subsidiary, it does it for free.
It's still considered a distribution of securities.
Okay, fine, but we're talking about equity stock that doesn't even need the Howie test, right?
So I think that is not useful precedent for that question.
So anyway, exemptive relief that says airdrops are not a distribution of securities, never.
It will be easier, generally speaking, to do exemptive action that says this is not a distribution of securities than it will be to try to define what tokens are securities versus commodities.
Like that exercise is like a Zen cone meditation.
You can sit there all day.
You can sit there for a year and meditate on it and back where you started, be back where you started.
I've tried to do that.
A lot of us try to do that.
It'll be a lot easier to slice the exemptions of what we know is not a distribution of securities.
And another good idea, in addition to those, another good idea that is interesting at the intersection of TradFi and C5 is an idea that my crypto bros, don't hate on me, bro, because I think the more ideas, the merrier, and the more options, the merrier.
I mean, keep your peer-to-peer distribution of Bitcoin.
Keep buying Bitcoin indexes, but it's fine if BlackRock wants to have a Bitcoin ETF as well.
As long as I can still self-custody, I'm fine if TradFi plays in our space too.
That'll just pump my bags, right?
I'm cool with that.
So at the intersection of TradFi and C5, Siddley Austin and some folks from Avalanche and a few other protocols and law firms and such and exchanges have developed an optimal disclosure framework that's kind of modeled on the reg AB approach, which, you know, asset-backed securities are not equity securities, and yet there is an adaptive listing regime for them that developed based on comment letter, based on no action relief from the late 90s that then bubbled into a reg A,
a reg AB that created a kind of a listing option for that asset that still doesn't call defined it as an equity security.
So a lot of the mandatory stuff from reg SK and reg SX does not apply to reg AB securities.
So you can do that as well.
So you could then have your tokens that you can go buy on a traditional stock exchange and then withdraw them to self-custody in my wallet and then go LP them in a DeFi protocol or use them at a concert or use them as gas to buy my NFTs on Ethereum, whatever.
So you have a kind of a seamless integration between DeFi, CeFi, and TradFi, all integrated together, but still maintaining the core attributes of DeFi and of crypto that make it what it is.
I think that approach has merit.
What I don't want to see, my horror, my horror show, my nightmare is that this becomes some sort of a full tradfiization of crypto, that we lose the basic principles that make crypto useful.
Look, if you're not decentralized, permissionless, immutable, uncensorable, then what's the point of having a blockchain?
If you're going to have some central party able to roll back the chain or able to be the compliance officer for the chain or whatever, there's no reason to use the blockchain for that.
Use a central server for that.
It will always be faster than a blockchain.
Use the JP Morgan server if you want to use JP Morgan as your financial intermediary.
If you don't, want something different, use crypto.
So I'm saying a lot here, but let me close with this.
If you're on the SEC staff and you want to get involved in the future of regulation of crypto, start with Cypherpunk philosophy.
I want you to read Timothy May.
I want you to read the blog, Vitalik Buterin's blog.
I want you to read the writings of Gabe Shapiro, Zuko Wilcox.
I want you to read Nick Zabo, read Nick Zabo, who when he was a law student at GW came up with a lot of the foundations that became Ethereum and maybe was one of the early developers of Bitcoin.
We don't know.
Maybe was one of the people that made up Satoshi.
Read their writings and understand what we're building here.
I was at a roundtable with someone from the SEC.
I don't want to embarrass them, so I won't say who, but with someone with the SEC who sort of raised their hand and said, why don't you crypto builders like build in partnership with the government, like a public-private partnership?
You can have back doors to KYC transactions.
You can have somebody who can roll back the blockchain if there's a fraud or hack or something.
And I was just like, I'm not mad.
I'm just disappointed.
So you have to have a grounding in cypherpunk philosophy to understand what this is all about.
Read those people.
Check out these exemptions.
Tap the resources in the crypto law community, and we can get this done in a couple of years.
Well, that was some excellent John Galt crypto red meat for the audience.
If you are, are you not entertained?
That is terrific.
I'd like to throw out some.
I mean, the thing is, totally right.
But the thing is, I know a lot of like 33 and 34 act lawyers who have also been crypto-pilled by this literature.
You can be both.
You can be both.
Right.
Well, let's throw out some red meat for the other constituency of the Federalist Society, the conservatives.
So we have a few minutes remaining today.
I think we should do a brief look back on the Gensler years.
And let me start a little bit out of character, a little bit provocatively, perhaps.
I'm going to do a modified, limited praise of Chairman Gensler.
You know, we're not here to praise Chairman Gensler Caesar, but to bury him.
But let me say this for his time in office.
We have a limited government with limited powers, even if the independent agencies don't sit neatly within the original framer's intent.
But within those limited powers, accorded to the federal government by the states, the expectation expressed in Federalist 70, for example, was that we would have energy in the executive.
And I can think of very few public servants who, over their careers, have more embodied energy in the executive than Chairman Gensler.
Maybe you could make an argument for Lena Kahn, for Henry Kissinger, John Bolton.
There's other names, both people who use their powers by their lights to achieve their ends efficiently, effectively, and with a single-minded assiduousness.
I might even say sedulousness, because I'm here with a fancy professor.
I think Gary Gensler, I would maybe disagree with 80, 90% of his rulemakings.
I think I pulled together statistics with a client that say upwards of 80% of his rulemakings were not specifically mandated by Congress.
So it's been a very active time.
Let me contrast the Gensler regime to another way, a particularly Republican way of being a chairman of the SEC.
Less Hamilton and more Hippocrates, right?
Do no harm as the motivating principle of an SEC.
Isn't that bad?
There's a Burkean defense of that, right?
There's a Chesterton's fence to switch metaphors in midstream.
Is that what you want to see?
We're not going to speculate.
For all we know, we've been looking at each other on this Zoom call for an hour.
We don't know who President Trump's going to appoint.
He may have appointed it by Twitter while we've been talking.
This might be stale already.
But when thinking about what kind of man or woman you'd like to see, what kind of chairman, would you like to see a center-right conservative libertarian Gensler type who comes in with on a man on a mission, or would you like to see something more of a caretaker?
Well, the times call, I mean, I'm leading you to it, but the times call for the former, I should think, right?
I want both.
I want bold.
Look, I agree with you.
And I think one reason for the one-way ratchet in regulation is because when Democrats are in, they get aggressive, especially post-Dodd-Frank era.
They get very, very aggressive.
And when Republicans come in, they say, we need a measured hand at the helm.
And so you get your one-way ratchet.
So now the new, particularly the financial regulators are coming in with the mandate of heaven to solve the roadblocks that have been created in the U.S. for crypto and for broader capital market growth.
So we need bold.
I want bold.
Another question along these lines that occurred to me this morning, in areas like foreign policy or in areas like tariffs or taxes, et cetera, social policy, there's been a lot of talk the last decade since the rise of Donald Trump to power.
There's a lot of discussion about what is the Republican Party, what is the GOP, what is conservatism, right?
And to take two emblematic figures, you might have a Paul Ryan type on one side of some kind of right-wing spectrum.
You might have JD Vance as an emblematic figure.
Oh, yeah, there you go.
Joe Joe Biden, probably not on that spectrum.
Well, this was, let me defend myself.
This was back when he was a senator in Delaware when I was clerking.
That's when he was the pro-corporate federalism guy.
Well, so on that spectrum of the, just to be very loose and blithe here, the neocon versus paleocon, the Bush-Reagan consensus, three-footed buckle-ite consensus on one side, or MAGA national conservatism, whatever you call it on the other side.
In my estimation, this distinction is not as critical in financial regulation as in some other areas.
I was thinking through the conversation today, whether it be crypto or the rulemaking agenda or changing the direction of enforcement.
I feel that if you and I sat down with either JD Vance or Paul Ryan, they'd come out of the room nodding their heads vigorously after this conversation, right?
Did you see any distinction between the two sides of the GOP on our issues?
Not now.
I mean, I think that as a libertarian securities lawyer, which is a banking lawyer, which is a hard thing to be, it's cognitive dissonance is how you're going to live your whole life.
I find comfort in the kind of the Trump crypto alliance that's developed this election.
I feel very comfortable right there staying in that lane.
So, yeah, I don't see that as important.
And historically, one of the real issues here was we haven't talked yet because we've been focused on SUC.
We haven't talked yet about AML reform, Patriot Act, and the threats that that poses to crypto on the Treasury and the bank side.
That's the stuff I really get revved up about.
Let's do another one on that.
Yeah.
Well, as a reactionary securities lawyer, thrown an altar securities lawyer, I couldn't agree more with that sentiment.
So I see we're coming up on our hour.
I don't know if the Federalist Society has received any questions from the audience.
We'd be happy to filibuster for seven minutes.
I'm sure we have plenty more opinions we can deliver ourselves up.
But if there's questions from the audience, we'd be happy to field those now, Edith.
Yeah, we've got a few.
Let me ask you one of them.
A few of them we've already answered about the flexibility of the interim chairman to take action, whether it's no action letters or hiring people or even settling litigation with the two-to-one vote on the commission for contentious issues.
He's got one question I'll put to you, Wallace, and see what you think.
Will the SEC's agenda include any pursuit of antitrust law, perhaps against the very large passive investment shops that have pushed through ESG or the adoption of particular policies across competitors?
or for that matter, issues of those same entities as joint owners controlling shares of public companies.
So the SEC has a kind of antitrust power, particularly over stock exchanges.
But there are issues about ESG within investment funds.
On the one hand, some people say, well, look, BlackRock's just doing what they choose to do.
This is a free market.
Let them do whatever they want to do.
On the other hand, they are fiduciary for their passive investors.
And so are they pursuing their own interests in violation of their fiduciary duties?
Let me throw all that to you.
What's your commentary on that?
That's a really interesting question.
I would look to the writings actually of Matt Levine on this general subject.
His daily Bloomberg newsletter and now podcast are an essential reading for any securities lawyer.
And this is a topic, particularly when we're talking, for those who are not familiar with the premises of the question, we're talking here about large fund complexes, index fund complexes, no need to mention any particular names, JW.
But we're talking about general fund complexes that hold large swaths of entire industries.
And there has been some academic research suggestive of the idea that this kind of cross-shareholding pattern, which is in some ways reminiscent of a Japanese Keidetsu in a way, may be anti-competitive in that if you own every airline, perhaps you're not so interested in price competition over ticket prices, for example, as a controlling shareholder.
You know, I think the counter argument from these large fund complexes would be that we are not a controlling shareholder in the sense that you should be worried about.
We are passive shareholders and there is no transmission mechanism by which we could convey any such views because we don't engage in the management of the companies in that way.
I don't know that I've heard this.
This is a almost answering my own question from before.
This is sort of a MAGA adjacent populist concern about the nature of financial capitalism that in direct answer to the questioner, I don't hear echoes of this much in the speeches of Commissioners Peirce or Ueda, so far as I know.
I don't know whether Commissioner Crenshaw from the left has touched on this.
This is a subject that I could just as easily see on the horseshoe theory coming from either side of the spectrum.
I don't, my gut tells me that this is not going to be top of the agenda, but this is an area where I could easily see the executive branches, the executive agencies getting focused on for sure, because it is a topic that I'm seeing percolate quite a bit.
Cool.
A lot of state level stuff on this issue as well.
Now, there is one reference with the final question I would like.
There's a question here about post-Chevron commissioners.
And I don't think we would be lax as commentators on the SEC if we didn't address the elephant in the room, which is the dramatic changes to American administrative law, West Virginia versus EPA being one case.
Help me with the name of the Chevron overturning case, Loper Bright, Loper Bright, the Chevron overturn.
How critical do you think these are?
And how perfectly timed do you think these cases were for what's coming next?
Yeah, so this is the unique, you were talking about horseshoe theory that some of that in administrative law.
So the earliest and strongest supporter of chevron deference on the Supreme Court was Justice Scalia.
We don't like to talk about that at FedSOC.
If somebody mentions it, we're like, but it's true, right?
Because at the time, it was Reagan administration and some of those, at least the ones that teach in banking, were the competitor of the currency, enhancing the definition of what constitutes banking services so that banks could provide.
So you want to do your armored card service?
Okay, that's considered the business of banking.
It's kind of like exemptive relief.
So he gave some deference to agencies doing stuff like that, EPA under the Reagan administration.
That doctrine took over a life of its own.
And I think the Supreme Court just watches a graph.
And in fact, Neil Gorsak has this in his book, a graph of the growth in the size of the code of federal regulations.
And it's one of those exponential charts.
So it's like viral, you know, exponential logarithmic growth in the code of federal regulations.
So they say at some point they say, okay, enough.
And then Loprobite comes along.
So some of my friends that lean progressive in securities law circles say, see, we got you now.
Since there's no administrative deference, when you Republicans want to do exemptive rulemaking, we're going to challenge them and you won't get agency deference.
And so we'll be good to go.
Here's the problem with that, though.
You only need chevron deference when the statute isn't clear.
The statute is clear.
You don't need chevron deference.
And I would argue the exemptive authority under the 33 and 34 Act is clear.
I mean, we don't need any deference to understand the SEC has wide exemptive authority.
And the only times I've seen exemptive authority challenged in the past is when the SEC says, okay, in order to continue to use this exemption, we're going to put some frontline requirements on you.
You have to check off.
Like if you want this exemption, you need an independent chairman for mutual funds.
Well, that was challenged.
If they had had a wide, just a wide exemption, I don't think it would have been challenged.
So you don't think you need Chevron to do exemptive relief.
Well, with that, I think we nailed it.
We didn't cover aliens or psychedelics or whether Tom Aspinall should fight John Jones, but I think very soon Joe Rogan will be out of a job if the two of us keep at it.
Totally.
If you enjoyed this, you all need to watch the one that Wallace did with Jennifer Schultz from CATO in the last, there's a similar FedSOC webinar.
Brian Knight, yeah.
Oh, and Brian Knight, great.
So we do the here's an idea.
So Wallace and I and Jen Schultz do a regular securities law policy lunch with cocktails and discussion.
We should live stream everyone, right?
Shouldn't we do the next one?
That'd be awesome.
That'd be great.
Well, thanks very much.
And thanks to you, Edith, for organizing the whole day.
Thanks so much, Edith.
Yeah, thank you.
On behalf of the Federal Society, we just want to say thank you so much to JW and Wallace for speaking with us today.
We're so grateful for your time and expertise.
And thank you also to our audience for joining us.
We really appreciate your participation.
You can stay up to date with announcements and upcoming webinars on our website, fedsock.org, or on all major social media platforms.
Thank you once more for tuning in, and we are adjourned.