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Securities attorney Wallace DeWitt and George Mason University law professor J.W. Varrett talked about the outlook for the Securities and Exchange Commission's tentative agenda under the second Trump administration.
Other topics included cryptocurrency and the threats it could face from possible legislative proposals from the incoming 119th Congress.
This conversation was hosted by the Federalist Society in Washington, D.C. and runs one hour.
I'm really excited to be here with my friend Wallace DeWitt.
Wallace and I are together on this panel.
This became a sort of a Laurel and Hardy routine that we're going to do, but we're going to talk about the exciting things about what the future holds for the SEC.
So I'm introducing Wallace and he's introducing me.
Wallace C. Wallace DeWitt, he's a securities lawyer in Washington, D.C.
He formerly served as senior counsel to acting chairman and commissioner Mike Pivovar of the Securities and Exchange Commission.
So he was there during the time of the interim chairmanship during the last Trump transition.
So he's got some unique insights for us.
Welcome, Wallace.
Looking forward to talking with you, my friend.
Thank you, JW, and happy Thanksgiving to you, friend.
I call JW it's Varette, but Veg is as it's properly pronounced.
JW is an omnipresent crypto bro, but in his spare time, he's a professor of corporate law, securities law, and forensic accounting at George Mason University's Scalia Law School.
He's a board member of the Zcash Foundation, which supports a blockchain incorporating both Bitcoin and untraceable shielding tech.
He's a former member of the SEC's Investor Advisory Committee, of which he was a very vocal and important member.
Look at his pinned tweet, actually, BlockProf to see more on that front.
He's a member currently of the FASB Advisory Committee, and he serves as an expert witness in cases most prominently against the SEC, but also in private litigation.
Above all, he is a cryptomaniac.
Is that the accepted term?
But he is a well-known speaker on crypto topics, which of course has been a major part of the last three years of the SEC, actually eight or 10 years of the SEC, really, and certainly bids fair to be relevant for the next four.
Welcome, JW.
Welcome, my friend.
I just want to talk about crypto today, but Wallace says we have to talk about other things too, corporate governance, climate change, all of that.
Yes.
So you were, let's start talking just about that vital time, the interim chairmanship.
So there's three or four months.
The last chairman was confirmed in April, the one before that in May.
So you got three or four months of one of the commissioners being the interim chairman.
And so you were counsel and senior advisor to the interim chairman, assistant to the regional manager.
The regional manager.
Yes.
But I mean, that's so interesting to be there and to just have the gavel of power.
Tell me about that.
Tell me about the reach of the interim chair's power, how that transition works, what you can get done during that time of the interim chair, what you got done, what interim chair Allison Lee got done.
Give me the interim chair playbook.
Yeah, it's an exciting time in DC generally, though the whole town is aflutter about this.
And certainly securities world is no different from any other.
Taking it back to this is late 2016 after the quite unexpected victory of Donald Trump over Hillary Clinton.
I happened to have an article published in National Affairs magazine that they titled Saving Securities Regulation, in which I had slightly strategically peppered with a few quotes from the sitting Republican chairman or commissioners of the SEC.
Anyway, yada yada yada.
A few days later, I was hired to serve as counsel to Commissioner Pivar, who was a social friend previously.
And my first day in office was actually January 20th, so inauguration day.
I was the second to last employee hired by the SEC before the administration-wide hiring freeze.
So really just got into the door before they pulled up the ladder for a few months.
So you let me get you joined the SEC and they said that's it.
Freeze on hiring.
That's it.
That's right.
We're closing the cannon.
Yeah, yeah, that's right.
So very early on, we took over with the chairman's quarters on the 10th floor of the SEC.
The last transition, I would say, compared to the current process as I'm seeing it from the outside, was a bit more hectic.
Certainly, it was more of a swirl of activity.
So in the early days of the administration, one of my first jobs was to call over some friends in the White House Council's office to get the actual designation FedExed over of Commissioner Pivar as the acting chairman.
Now, turning to what you can do in office as acting chairman, it's a pretty simple answer.
Under RE-ORG Plan 10, which is a Truman-era document showing how the governance of the independent agencies would work, the acting chairman of the SEC is simply that.
He's the chairman of the SEC, having plenary authority.
Now, that's obviously circumscribed by political circumstances.
In Commissioner Pivovar's case, we had a one-to-one SEC where he was the sole Republican commissioner at the time, and Commissioner Stein Karistine was the sole Democratic commissioner at the time.
So that had various quorum-related issues.
In fact, with the two of them, the Sunshine Act, of all things, was a significant barrier because if the two of them were in an elevator together, that was technically a closed meeting of the commission.
And so we had to keep the commissioners apart, even in the hallways, and certainly not talking about any substance.
While in office, we know that Commissioner Pivovar had the full authority of the acting chairmanship because some of his early acts, like pulling back enforcement delegations, we did a few things with staff interpretations of the Congo conflict mineral rule.
They did a few rulemakings, like the uncontroversial things like T plus one clearing.
Those activities were all well in his hands, but a certain senator, Senator Elizabeth Warren, didn't like it.
And so she actually asked the inspector general of the SEC to look into what the authorities of Commissioner Pievivar actually were.
And as I recall, the opinion came down that, yeah, the acting chairman is just the chairman.
What I would expect to see in the next few weeks is when Chairman Gensler leaves office, as he said, at noon on January 20th, and Commissioner Lisaraga will be leaving separately on the 17th of January.
That will yield a two-to-one commission with Commissioners Peirce and Dueda on the right and Commissioner Crenshaw on the left.
I would expect one of the two Republicans to be designated by President Trump as the acting chairman.
And I think they would go about things very similarly to the way we did when we were there.
So the next, so our next interim chairman is going to be grateful for Senator Warren requesting that opinion from the IG.
So it's something they can rely on.
So thank you, Senator Warren, for that.
We really appreciate that.
I also remember Senator Menendez giving Mike some trouble for using his power as acting chair.
And now Mike is doing well and Senator Menendez is going in a different direction.
So if you wait by the river long enough, right?
Yeah, I think one of the key things we did and that one would do in this circumstance, the acting chairman's overriding role is to prepare the decks for the new chairman, whoever he or she may be.
So that may mean supervising the probable exodus of a significant portion of the enforcement staff, given the change in politics, and also dealing with departures of senior officers for a few months, making sure that basic work is tidied up so that when the new chairman hits the ground, he or she can hit the ground running.
The question a lot of crypto lawyers are asking me is: what happens during that time?
Can the interim chairman dismiss ongoing litigation?
As you said, this is a unique situation where it's going to, Liz Raga is going to leave, so it's going to be 2-1.
So the interim chair can actually pass things.
So can the commission dismiss ongoing litigation?
Now, realizing that we've got a unique situation here where never before has the SEC spent so much resources on registration-only footfall, no-fraud cases where a registration path is not available and where circuit judges have noticed this and kind of gone, this is weird, guys.
So unique situation we've inherited from Ginzler.
Can the interim chair dismiss some of these registration-only no-fraud cases?
Yeah, there's a couple.
There's a couple areas in litigation that I think are critical here.
There's the one you're alluding to, which is the SEC's own enforcement actions that it's brought against various third parties.
Those would have been voted by a closed commission by majority vote.
In many cases, let's just stipulate or assume that they would have been voted on a 3-2 basis by the three Democrats over the two Republicans.
I think in theory, and I'm not a litigator nor an expert on this, but my expectation is that in theory, that could be done, depending upon this particular status of each particular case, yes.
As a practical matter, however, and as a political matter, the Democratic commissioner, Carolyn Crenshaw, would have some ability to play, let's call it charitably quorum games.
She wouldn't be the first, certainly won't be the last.
But the SEC's quorum rules, as I read the other day, I think it's under the Exchange Act.
The quorum rules is that a majority of the full five-man commission is quorum.
Where there are fewer than three commissioners, as there were, for example, when Commissioner Pivobar was acting chairman, all of the commissioners, whether it be one or two, standing in the body together, would be the quorum.
Here, since it's a two-to-one commission, as opposed to the anticipated two-to-two, had Lizaraga not resigned, absenting oneself from the SEC or going on an extended holiday, in theory, could block controversial moves like that.
The other question I have, and we can maybe come back to this when we talk about regulation, JW, is what is the SEC, particularly the acting chairman, going to do about the pending rule challenges brought, among others, by the crypto community, but other private litigants.
By one count, a client of mine, the Committee on Capital Markets Regulation in Cambridge, counted up.
There are about nine rules of the Gensler chairmanship that have been challenged.
Of those that have been finally litigated to completion, there's about five.
Of those, four have been vacated and remanded.
And a number of important ones remain outstanding.
So, for example, the climate change rule, I don't believe, has been argued yet in the Eighth Circuit.
So if you're inheriting this commission and a rule that you voted against as a commissioner, what does Commissioner Peirce or Commissioner Ueda do vis-a-vis that Eighth Circuit litigation in that particular controversial case?
Very interesting question.
And I don't know if you have any thoughts on that, JW, but that's another area where.
Yeah, great question.
And another twist on this, I think.
So parties make settlements in litigation all the time.
And usually courts will review the terms of the settlement, but then you'll be bound to the terms of the settlement, including the government.
So what happens?
So one strategy could be potentially the SEC decides to settle the challenge to the climate change litigation and says, you know what?
You'll have a point.
You have a point.
We did a bad rule.
We admit it.
We admit it.
So as part of the settlement with you, we're going to rescind the rule.
And that's going to be a binding term of this settlement with you.
So when the commission goes back to rescind the rule, someone's going to challenge that, right?
Someone's going to sue the SEC to say, you're not allowed to do that.
And the SEC can rely on doing its own cost-benefit analysis of this, reviewing materiality, reviewing issues like the independence of FASB, which was what I argued in a comment letter.
But one other thing the SEC will be able to do at that point, if you game out, there's a lot of chess games here because the SEC can say, well, we're just abiding by the terms of the settlement in private litigation because we knew that we were wrong and we admitted that we were wrong.
I don't think that's ever happened before, but.
That is an incredible and Machiavellian device that I could only see leaping forth from the brain of J.W. Veray.
That is wonderful.
Other options, you know, you can't, I can't anticipate that the SEC would just simply take a dive like a boxer in the litigation, right?
Any court would say, look, if the SEC is not going to defend the rule, sort of similar to what the Obama administration did in ordering the Solicitor General not to defend the RIFRA statute of which they, you know, the Religious Freedom Restoration Act, of which they were not fond as a substantive matter, you could see something like that happening here, I guess.
I think the concern would be that a court would appoint another party in interest, for example, the Sierra Club or the National Resource Defense Council or something to defend the rule.
And then depending upon the outcome of the case, the SEC could have its hands bound in ways that it doesn't like.
So I think participating in the litigation, settling the litigation, maybe changing the strategy of the briefs in important ways, those are all on the table.
And I think it's going to be one of the most fascinating things over the next several months.
And I think it's going to be something that falls very just given the briefing timetables very squarely on the acting chairman's shoulders, JW.
And maybe the settlement, I take your point.
So maybe the settlement, the better strategy is a settlement that is not throwing the fight, but that is more like, okay, we promised we'll redo the rule, more focused on materiality boundaries, more focused on permissive disclosure that you can opt out of, things like that, kind of modify the rule.
Okay, so another thing I want to ask you, just one more question about this interim chairman's period.
So my friend and policy opponent, Allison Lee, was the interim chair for a while.
I studied what she achieved when she was interim chair.
She was very focused on the climate change project.
And she did a lot with it as interim chair.
She had roundtables.
She had a request for comments.
She had a concept release.
She achieved a ton to kind of get momentum under the new confirmed chairman.
Can our interim chair do that with crypto?
Can we do roundtables?
Can we do requests for comment?
Can we basically wrap up all the good ideas that we're going to talk about when we get to crypto regex, you know, disclosure from a Siddley project, the stuff in FIT21?
Can we put all that in a document, SEC throw it out and say, world, start commenting before we do a proposed rule and do a bunch of roundtables with some cypherpunks, some die-hard, you know, cypherpunk lawyers.
Can we do all that in the next three or four months?
That could be a fun way to start the new year.
I think it would be, and they can, and they should.
I think there's a lot of interest in the subject matter.
The acting chairman, whether it's Hester Purse or Margareta, can certainly direct the SEC staff even to begin work on revised rulemakings.
My guess is just because of the quorum issue I alluded to earlier and the general desire to see that the new chairman have a free hand in putting his or her stamp on any new rule.
I would think that final rules would only be promulgated subsequent to the confirmation of the new chairman.
But yeah, I mean, there's no time like the present.
I think they should certainly hit the ground running.
The peculiarity of the independent agencies is that their confirmations of their heads tend to fall in the calendar much behind the executive departments, right?
So you can see situations even historically where, if I'm not mistaken, you know, Secretary of State Colin Powell was nominated and appointed before President Bush even took office, right?
You can see things like that.
You know, after the financial crisis, Mary Shapiro was boom, boom, confirmed very shortly after the inauguration.
But what's normal is a four or five month period where the rest of the executive agencies go through the Senate calendar and then the SEC comes.
And the side effect of this is that you kind of lose that 100 days metaphor, right?
Not metaphor, the 100 days of the administration you lose at the SEC.
And so I think that one thing that one of those two, Esther or Mark, could focus on is, yeah, let's hit the ground running.
Let's try to use the energy newly in town from the inauguration to get something done so that the new chairman is drafting off of that when he or she comes into office.
Cool.
Another thing Acting Chair Lee did was she appointed, because you can hire people, she appointed John Coates to be director of Corpor Finn.
Yeah, I wouldn't do that.
No, I wouldn't do that either.
He was my BA professor, and we have been opponents in just about every issue since then.
But, you know, do the opposite of that.
Put Wallace as director of Corporate Finn.
Can you replace staff as they leave and get started?
How does that all work?
It's maybe a bit aggressive, but it's been done before.
There's precedent now for it.
Yeah, I mean, it's aggressive, but the government can't cease to operate for the period of six months waiting for the vagaries of the appointment process.
It depends upon the subject matter.
Now, what is peculiar about that period, the last transition, namely the transition from Trump to Biden, is that unlike, say, 2008, 2009, there was no grand crisis afoot in the land.
There was no market in free fall.
There is no particular reason why this day and not tomorrow and not next week is the day when we need to adopt climate disclosure rules that are novel interpretations of the Exchange Act and Securities Act.
That said, appointing someone to a temporary role like Professor Coates was certainly makes sense to have somebody in there.
The only concern I would have, and I presume without knowing that this was negotiated and understood at the time, you do want to make sure that the new chairman has a free hand to appoint whomever he or she wishes.
So I think if the assumption is that the appointment to one of the senior officer roles is temporary, then have at it as far as I'm concerned, yes.
And you probably got it.
One of the things about doing too much is if you're coordinating with the incoming chairman before they're confirmed, then somebody might feel like you're being too presumptuous.
The Senate's very careful about prerogatives.
You raised another point about quorum as a strategic tool for the minority.
So is it one of the counterweights to that, a reason to not excessively use that strategy, is that if you're not showing up for meetings, you give the president the ability to remove your fur call.
Yeah, right.
So I mean, again, another untested proposition, but non-feasance, whether your view of the Exchange Act is that the president has four cause-only dismissal powers or plenary dismissal powers, as any sensible FedSOC member would say.
I believe in the unitary executive.
So I once had an argument with someone on the 10th floor that the president could fire me from Commissioner Pievevar's staff if he so desired.
So I have an extreme view on that point.
But yeah, I think non-feasance of the job would run a certain risk.
Now, whether the president would pull the trigger on a firing under those circumstances is, you know, with the president's discretion, if that's a fight that he would choose to have, I don't know.
But of presidents, this was perhaps one of the ones that I would least be inclined to test if I were in the position to do so, shall we say?
Yeah.
Shall we talk a little bit about JW, the climate disclosure more specifically?
And I think there's an interesting issue here.
Let's set aside the question of the litigation and how that comes out.
Let's say that there's a continuance asked for by the SEC pending further rulemaking activity, for example.
What do you think the prospects would be for uprooting the law through notice and comment rulemaking by the SEC?
And are there any challenges that you would anticipate in doing that?
Well, the precedent for this is Gensler's move on just complete 180 on proxy disclosure, proxy advisor conflict disclosure, which is a pretty straightforward rule, very similar to credit rating agency guidance that progressives at pension funds supported.
But when it came to their ally at the proxy funds, they didn't like the application of those conflict disclosures.
So they wanted to stop it.
So Ginsler came in right after a new rule was promulgated, adopted, and just and just first said, I'm not going to enforce it.
I won't enforce the rule.
Sorry.
I know you adopted a rule in the last administration, but I'm just not going to enforce it.
And then he said about undoing it.
And they were, I think, cross-lawsuits in that.
I don't know what the final resolution was of that.
Do you know what the final resolution was of those suits?
No, I can't recall.
So that's probably the precedent for doing something like that.
You know, it's hard for me to be objective about that conversation about that rule because I did maybe a 30-page comment letter on it.
And I just, I felt like the rule cited more to, in order to demonstrate materiality, it cited to a lot of international climate accords and international climate policymaking bodies, which just has no relevance for the concept of materiality in the federal securities laws.
I mean, I'm sorry, I just, I can't pretend the emperor has no clothes, has clothes on.
The emperor has no clothes.
I think I've said that like 10 times in my letter.
And also, I felt like it really threatened and was disrespectful to the good folks at FASB, who I've admired very much in my work with the Air Force Recommend.
So I'm just such a hard critic that I can't really be objective about that rule and for lighting it on fire and letting it die.
But I'm sure that there are more nuanced approaches, like you know, what we'll rescind this, but we'll do some version of Chair Shapiro's concept release, but with more substance to it instead, to say these situations might be material, but generally speaking, materiality is an important constraint.
Nothing, I mean, just what has the thought was to harmonize with Europe's approach on scope two and scope three disclosures.
And I'm sorry, but the federal, the 33 and 34 acts are not compatible with scope two and scope three disclosures, and they never will be.
So I just don't think we can have anything like that.
So it's either kill it or it's some sort of a materiality in the context of environmental issues, interpretive release to expand upon the risk disclosures that are already there and the environmental liability stuff in GAP that's already there.
You can do that instead, perhaps.
Yeah, I can't disagree with anything you've said there.
I think there's a further concern that I might have.
There are certain late Clayton era rules.
I thought there was an accredited investor one.
Maybe the proxy rule you're talking about here, proxy advisor rule, is another, where the commission did a 180, as you say, during the early Gensler period.
And this was when those rules had not yet even gone into effect.
There certainly was no change to the economic record in response to those.
So there was no real evidentiary basis built in order to do that.
And in order to uproot those rules, as those in our audience who are not specialists in administrative law, may need to pay attention to, to regulate under the Administrative Procedure Act is substantially the same process as to deregulate.
So if you want to pull down a rule, you have the SEC's Division of Economic and Risk Analysis must come out with an economic cost-benefit analysis of the change in the rulemaking baseline.
Early on in the Gensler administration, there are some incredibly beautifully written but scathing dissents by Commissioner Peirce in particular, faulting the SEC.
And this is a commissioner who has regularly, and in my view, quite rightly said we need to have an automatic look back every five years periodically on all SEC rulemakings, even uncontroversial ones, to see how they're working.
To turn around with respect to the climate change disclosure rule, which has not yet gone into effect, but there's still subject to litigation, and simply uproot it without having the requisite economic basis to do so would be a difficult and uncomfortable position to be in.
At the same time, discomfort about making the argument probably is outweighed by the costs of what is reputed to be the most costly of all SEC regulations.
So I certainly would like to see it uprooted, but I'm curious to see how they will handle that issue as well.
That's fair.
The record is voluminous.
So you can use the old record, we'll return the rule.
Yes, but the staff members who are writing the cost-benefit analysis haven't changed, presumably, in the six months since the last one was promulgated.
So I think there is an awkwardness to this conversation, given the permanence of the SEC staff and the impermanence of our political arrangements.
So that is a fascinating issue.
Now, another topic now, I think we have delighted our audience long enough with the generic admin law discussions.
I think we should give the people what they want and a discussion of digital assets and crypto in particular.
And I think we have the right man to do that here in Professor Ferret.
So we talked a little bit about what the new chairman, what the new acting chairman might do.
There's going to be roundtables, presumably, on market structure reform, DeFi, CeFi, et cetera.
Give me a few minutes of JW Varette is a roving advisor to the acting chairman or the chairman of the SEC.
He's a vocal member of these roundtables.
What do we need to do to resolve not only what's gone on the past four years under the against the regime, but arguably, I think the crypto community is not so hot on what was done in the previous regime where I was there in Corp Finn covering Corp Finn for Commissioner Pivovar in the Clinton era?
So, what do we need to do to get to set the ship aright?
The first thing is open source the process as much as possible.
Learn from the open source ethos of blockchain development to open source the development of regulations within the blockchain financial sphere.
And in doing so, tap the genius of the crypto law community that have been ignored for four years and have, I mean, talk about pent up energy.
We're talking about megawatts of electricity in the crypto law community.
And these folks are the kinds of backgrounds that SEC staff are familiar with and respect.
There's a lot of former SEC people who made the jump into DeFi, who are really excited about DeFi.
I know three or four people.
And I would say maybe at least two or 300 lawyers who work in crypto, who have big law experience, some SEC experience, or other Treasury or banking regulators who are working in DeFi and crypto and have ideas.
They have a lot of ideas.
So open source and tap that knowledge base and you're going to, you're going to, we can fix this.
They are ready to go.
And so you had mentioned, you know, one of the concerns being potentially a staff not ready to get their heads around change from the last four years.
You know, there might be some of that, particularly in the enforcement, I mean, an enforcement group devoted to the crypto cases that are out there now, the non-fraud cases.
I could see, I certainly see that.
At Corp Finn, though, I don't know.
You know, I know some folks in crypto who've gone to Corp Finn and had great conversations looking for no action relief and very productive conversations.
And all of a sudden, once it gets to 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. Gensler 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 there, but 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 done in 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 scan 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 Vansbar or something.
The rumor is that it's likely that we will see crypto legislation from the new Congress.
I've 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.
Fit 21 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 Purce 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 and maybe 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.
They were built on top of that, what they call a fork of that proposal, something I really like called Reg X. Reg X 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 very 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 rush.
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 CFI 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 CeFi, 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 a 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, 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 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.
So you can KYC transactions.
You can have somebody who can roll back the blockchain if there is 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, 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've 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 bold.
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 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.
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?
Do you see any distinction between the two sides of the GOP on our issues?
Not now.
I mean, I think 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 SEC.
We haven't talked yet about AML reform and Patriot Act and the threats that that poses to crypto on the Treasury and the bank side.
And 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.
It's 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're not, 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 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 if 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, 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 that.
That's right.
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.
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