SEF Central 2024: Digital Assets and Cryptocurrency: Regulation and Enforcement of Exchanges, Crypto Lending, DeFi, NFTs and More
A transcript from the Digital Assets panel at the Securities Enforcement Forum Central 2024 follows. The panelists were:
Katherine Kirkpatrick Bos, General Counsel, StarkWare
Jerry Lin, Principal, Cornerstone
Kristin Pauley, Assistant Director, Crypto Assets and Cyber Unit, SEC
Kayvan Sadeghi, Partner, Jenner & Block
You can find the video on Docket Media’s YouTube channel here.
00:00 - 00:38
Bruce Carton: So this is our last panel before lunch. It's a great panel, a very timely panel, and one that changes year to year like no other. So digital assets and cryptocurrency regulation, enforcement of exchanges, crypto lending, DeFi, NFTs. We'll try to touch as many of those as we can in the next 45 minutes. Let me first introduce our moderator, Katherine Kirkpatrick-Boss, General Counsel of Starkware in Chicago, where she just started this month, right? Congratulations. Previously was Chief Legal Officer at CBOE Digital. Next to her is Jerry Lin. Jerry is a principal at Cornerstone located in Chicago. And . . .
00:38 - 01:24
Bruce Carton: he specializes in litigation and regulatory investigations related to market microstructure securities valuation with a focus on issues involving sophisticated large-scale data analytics. Welcome, Jerry. Beside Jerry is Kristin Pauley, Assistant Director in the SEC's Division of Enforcement based in Chicago, and notably for this panel. Kristen's a member of the SEC's Cryptoassets and cyber unit. Thanks so much for joining us, Kristen. And finally, rounding out the panel, we have Kayvan Sadeghi, a partner at General Block in New York. And he is leader of the firm's blockchain practice. Kayvan defends clients in high stakes investigations before the DOJ, the SEC, and many other regulators. This is a terrific panel and please turn it over to you, Katherine.
01:26 - 02:03
Katherine Kirkpatrick Bos: Great. I'm very happy to be here. And I just want to kick things off to say about a year ago, Kristen and I were on the same panel, but things are quite different in the environment for crypto a year later. You know, last year we were all still reeling from FTX and a lot of extreme volatility that we saw in the crypto markets in 2022. There was a lot of activity kind of sitting and waiting on the sidelines. A lot of major entities had pulled back their investment and engagement in the space. Things have really changed . . .
02:03 - 02:51
Katherine Kirkpatrick Bos: and grown quite a bit. We're seeing historic volumes flowing into crypto. We saw really frankly shocking performance tied to the spot Bitcoin ETF. We're seeing additional engagement from a slew of traditional financial services entities or as crypto folks call it, TradFi. We're also seeing a lot of white shoe financial services entities like BlackRock and others upping their investment and engagement with crypto market participants. But what is notable is despite seeing an uptick in that volume, an increase in conversation, definitely some bad but also some good engagement by both presidential candidates with crypto, including historically the first . . .
02:51 - 03:47
Katherine Kirkpatrick Bos: purchase by a presidential candidate using bitcoin in a New York bar last week. We are still in many ways in the same place we were a year ago with respect to crypto enforcement, meaning we're still seeing a lot of activity from the SEC and other regulators focused on the industry. So I think we have a lot to talk about here. I can't promise that this panel will be too spicy, but hopefully everyone will learn a little bit. Let's start with Kayvan. I know that much of your practice has been focused on the crypto ecosystem and crypto market participants because there's been a lot of legal work. Can you kick us off by kind of framing the crypto enforcement landscape right now and particularly highlighting any significant wins and losses we've seen with respect to SEC enforcement and litigation.
03:47 - 04:17
Kayvan Sadeghi: Sure, happy to, and I guess I can start with some of the same preface that we've heard from other panelists that my views are my views and not necessarily my clients and certainly not the Commission. Then I will try to keep it from being too spicy. So as the title of our panel suggests, there's a lot going on across a lot of different aspects of the crypto market. A year ago, I think you guys were talking a lot about Ripple, and a lot of the actions that had taken place up until a year ago are really
04:17 - 04:50
Kayvan Sadeghi: focused on token issuers and the SEC going after the companies that are Responsible for a token issuance or token sale and what are essentially fundraising transactions I think the law is is getting more settled around those we've seen the SEC I think consistently win or survive motions to dismiss at least in a few cases up through summary judgment, finding that a fundraising transaction involving the sale of a token is a securities offering. And that seems relatively settled though the Ripple case will be going up to the Second Circuit, so we will more to come on that . . .
04:50 - 05:27
Kayvan Sadeghi: to some degree. But I think the focus really has moved to the secondary market. And how do you address crypto tokens as they move through secondary market trading platforms, which some people call exchanges, or you engage with them in other ways in the secondary market. And that's really become the focus of a lot of very large actions right now. Some of the most notable are the SEC's case against Coinbase in the Southern District of New York, against Binance in DC, and against Kraken in the Northern District of California. So this is sort of spanning the country . . .
05:27 - 06:06
Kayvan Sadeghi: in three of the biggest trading platforms. And all of these cases share somewhat common allegations that the trading platform is operating as an unregistered exchange because it is facilitating trades in various crypto assets, some of which, some of those transactions at least are alleged to be securities transactions. And so under the SEC's view, they would have to register, these platforms would have to register as exchanges. I think what's very interesting, these cases really pinpoint an issue that is very difficult for anyone to wrap their head around who doesn't deal with this all the time, which is . . .
06:06 - 06:42
Kayvan Sadeghi: this distinction between the tokens themselves and what might be the security, if there is anything that you can identify as a security. For a long time, I think the SEC has used the term crypto-asset securities, and recently the SEC's taken the position that that is shorthand for a sort of broader concept, but the courts in each of these cases have pushed back on the idea that the token itself is the security. And instead, what we look at when we look at tokens in the secondary market, everybody's evaluating these tokens under what's known as the Howey test, . . .
06:42 - 07:18
Kayvan Sadeghi: which is a test designed to determine if something is an investment contract. The Howey Test is designed to look at a contract, transaction, or scheme, not an asset. It's a fact and circumstances based test, and so you're looking at facts and circumstances. What was offered, what were people's expectations, things like that. And from the original Howey case that involved interest in an orange grove through myriad other cases over the years, there have often been investment schemes that had at their center, as the object of the investment scheme, some asset. It could be interest in an orange . . .
07:18 - 07:52
Kayvan Sadeghi: grove, whiskey barrels, cattle embryos, chinchillas, you name it. There have been cases involving all sorts of different assets that were part of the investment scheme. That doesn't make any of those assets itself a security. And so that all makes sense when you're dealing with an issuer and you say, okay, if you're the issuer and you're doing a token offering as a fundraise, we can call that an investment contract or scheme. It doesn't matter if the token itself is a security, you're still the one engaged in a securities offering, that's fine. The difficult question which all these . . .
07:52 - 08:27
Kayvan Sadeghi: courts and the SEC and private litigants are dealing with now is how does that translate into a secondary market? Once that token leaves that initial transaction and it's now in some other set of facts and circumstances around downstream transactions in the secondary market is that a securities transaction can you treat the token as a security even if it's not a security on its face and what does that mean for purposes of the regulation. And what we've seen, this is where there's a lot of nuance in deciding what wins and losses are. Because each of the three . . .
08:27 - 09:02
Kayvan Sadeghi: cases I just mentioned against Coinbase, Binance, and Kraken have survived either a motion to dismiss or in the Coinbase case, a motion for judgment on the pleadings under that same motion to dismiss standard. So the claims are going forward. What is less clear is how the courts are going to grapple with this distinction between the token and what is the security offering involved, what transaction makes it a securities offering. And each of the 3 courts has dealt with it a little bit differently. And so we have the Southern District of New York looking at and seem . . .
09:02 - 09:38
Kayvan Sadeghi: to adopt the SEC's view and argument that some of these transactions, some of the tokens really represent the purchaser buying into an ecosystem. That when you're buying a token that's native to a certain blockchain, you're essentially buying into that ecosystem and they develop a securities theory around that. Binance, on the other hand, in the DC court allowed the claims to go forward based on allegations specific to tokens that were actually created by or largely facilitated by Binance. And so they said you were actually the issuer of Binance of these tokens or directly involved in the sales. . . .
09:38 - 10:14
Kayvan Sadeghi: So claims went forward on that basis, but the SEC had alleged claims involving 10 other tokens that were also predicate for their claims. And the court, threw out that part, dismissed the claims with respect to these 10 other assets and just allowed the claims to go forward with respect to the Binance-related tokens. Most recently, we had the court in California allow the claims against Kraken to go forward, but the judge noted that the term crypto-asset securities, I believe his term was unclear at best, and thought that was semantically unhelpful, and made clear that he thought you have . . .
10:14 - 10:45
Kayvan Sadeghi: to look at each transaction sort of on its own, and allowed the claims to go forward because transactions in some of these assets are likely to be securities transactions in his view, even in the secondary market. But then the question becomes, how do you prove that and what are you looking at? Are you looking at what is represented to people on some website or a blog or how do you determine what are the facts and circumstances around a transaction if it's not the asset itself? And that is the big question and that is the unanswered question . . .
10:45 - 11:26
Kayvan Sadeghi: for all of these cases so far. So the cases are going past the motion to dismiss. The courts are hesitant or rejecting the idea that the tokens themselves are securities. And then how you apply that in a secondary market is really very unclear. And it matters for a lot of different reasons. This isn't just a semantic distinction. The SEC just this month had a settlement with Galois Capital and one of the allegations there relates to, or findings I guess, relates to whether Galois is properly using a qualified custodian to custody crypto assets. Well, if the asset . . .
11:26 - 11:46
Kayvan Sadeghi: itself is not the security, then where does the qualified custodian requirement come in, because nobody's custodying the facts and circumstances of a transaction. You're not custodying the expectations of the investor based on what was put on a website, you're custodying an asset. And if that asset's not the security, how do the custody rules come into play? So . . .
11:46 - 12:49
Katherine Kirkpatrick Bos: they're really- There's a bit of a waterfall effect in all of this.
Kayvan Sadeghi: Right. So it really matters how you categorize these assets and whether you can treat the asset itself as a security or not, or do you have to look at the facts and circumstances for each transaction. And If you do have to look at the facts and circumstances, those are gonna change. And what people expected about some token in 2020 is gonna be very different than what people expect of that same token today. And so how do you evaluate that, and particularly in the secondary markets, which involve third parties under a strict liability regime, how do you apply this in a way that people will know what they are and are not allowed to do? So those are-
Katherine Kirkpatrick Bos: And we haven't even touched on the CFTC's opinion on all of this, which is for another panel. But that's incredibly helpful framing, Kayvan, and the interesting thing about this conversation is a lot of your discussion pertained to the actions that the SEC has levied against centralized exchanges, but that's also one piece of the pie. So I would love to turn to Kristen and get your thoughts. Can you tell me how the SEC is approaching crypto enforcement at this point in time.
Kristin Pauley: Sure. I just have to first give the typical disclaimer that my comments today are in my official capacity as an assistant director in the enforcement division and do not necessarily reflect the views of the commission, the commissioners, or any members of the staff. So crypto remains a very high priority within the Enforcement Division and the Crypto Assets and Cyber Unit, which we call CACU, has received increased resources as a result. So we have approximately 55 attorneys and other specialists spread across nine offices within the SEC. And what's driving this is a concern that crypto with its promises of financial inclusion . . .
13:22 - 13:59
Kristin Pauley: and life-changing wealth creation, coupled with what we've really seen as an industry-wide non-compliance and almost complete dearth of meaningful disclosures is the perfect storm for investor risk. And we've unfortunately seen that play out in recent years with, for example, the collapses of FTX and Terra, just to name a few. To date, the SEC has brought or settled more than 200 cases against crypto asset intermediaries and token issuers, covering a very broad spectrum of conduct. So fraud obviously remains a very high priority. In the crypto space, these often resemble traditional securities fraud schemes, so you know, Ponzi . . .
13:59 - 14:42
Kristin Pauley: schemes, MLM, affinity fraud, affinity group frauds. We also have seen cases involving misrepresentations contained in marketing and offering materials as well as misappropriation and investment scams. So in addition to FTX and Terra, I'll just highlight a case we brought last week, which I personally found particularly egregious. We charged five entities and three individuals in connection with two relationship investment scams involving fake crypto asset trading platforms. We alleged that the defendants created these fake crypto ecosystems that displayed false information to investors. They lured investors in through social media and other apps in order to earn their trust
14:42 - 15:22
Kristin Pauley: and then convinced them to transfer large sums of money, after which they stole hundreds of thousands of dollars worth of investors crypto assets and the impact on these victims was just devastating you know financially as well as emotionally. In addition to you know fraud we’re also obviously very focused on illegal and manipulative trading in the crypto space. We're seeing these cases more and more, I'll just note. And then separate from the fraud and manipulative type trading, we remain focused on registration violations. So under-registered offers and sales of securities, as well as unregistered crypto asset intermediary activities, . . .
15:22 - 16:00
Kristin Pauley: so acting as an unregistered broker or dealer, operating as a national securities exchange without registering, as well as operating as a clearing agency. And we brought a settled action with eToro last week, which is another example in addition to Binance Coinbase Kraken that we heard about a moment ago. We've also looked at touting by promoters, in particular some celebrities. So where they're touting a particular crypto asset without disclosing that they're being compensated for doing so. Sorry, I'm going really quick. I know we've got a lot to cover. Cases against so-called DeFi platforms and services, as well . . .
16:00 - 16:41
Kristin Pauley: as more recently AI as a new area of focus. So as AI continues to develop and firms rush to capitalize on investor interests and promote and tout their supposed use of AI, we're gonna look carefully to ensure that the statements they're making to investors are not false or misleading, and then they're not perpetrating fraud or other type of manipulative trading in connection with AI. And we brought a couple cases earlier this year that concerned making false and misleading statements about the supposed use of AI. So the crypto space, enforcement in the crypto space is very time, . . .
16:41 - 17:03
Kristin Pauley: it's very resource intensive. We often face parties that are not cooperative with our investigations. You know, they claim overseas jurisdiction even though they're selling products and services to US investors and they're very well-funded for protracted litigation. So, but all that said, we will remain steadfast in our mission to root out wrongdoing in this space.
17:04 - 17:41
Katherine Kirkpatrick Bos: That was a lot, but there's a lot going on. So my joke that I keep making is if someone asks you to invest in an AI cannabis company where you can pay in crypto, I think that you should probably turn around and decline that investment because there might be regulatory risk You know as Kristen mentioned there continues to be a focus on fraud and manipulation from SEC enforcement And you know we're all aware or we even talked about it on the previous panel, that the SEC is increasingly using data to spot irregularities. Jerry, how is the private sector in crypto using data with respect to regulatory issues?
17:42 - 18:14
Jerry Lin: Thanks, Katherine, and thanks, Kristin, for that overview of the current landscape from the SEC's perspective. So before I answer that question, maybe just chime in briefly. I'm more of a numbers guy, so I just wanted to share a few observations. At Cornerstone Research, we put out an annual publication on sort of the trends in SEC crypto enforcement, and I just wanted to share a few observations. So I think the first interesting observation we found is that for this current year, we've actually seen a decrease in the number of new crypto enforcement actions. So I know we're . . .
18:14 - 18:48
Jerry Lin: only three quarters of the way through the year but so far we think we've seen about 10 to 15 new actions that are filed that number may differ depending on you know how you count them it's interesting I think the romance scam actions that were filed last week they're actually fake asset crypto asset platform so they were pretending to be crypto but I didn't actually there were actually no underlying crypto assets being transferred so so about 10 to 15 so far this year whereas about last year there are roughly 30 as of this time. Now . . .
18:48 - 19:24
Jerry Lin: granted, 2023 was a bit of an outlier. I think we saw a much larger number filed last year than compared to previous years. So if you were to look at this year compared to 2022, sort of roughly on pace for the same number of actions being filed. That's the first observation. The second thing that's interesting as we looked at sort of across the landscape was that this year we saw a record-breaking penalty, the largest ever in the $4.5 billion penalty against Terraform Labs and when I say penalty that's disgorgement, prejudgment interest and civil penalties altogether . . .
19:25 - 20:06
Jerry Lin: And that single penalty represented a 1.5 times, I think, the total number of penalties we've seen from when we first started tracking this, so back in 2014 to 2023. So again, just for context, I think the next largest penalty was in 2020, I think a $1.2 billion penalty against Telegram. So this 1 against Terraform Labs really was a really large penalty. So with that, yeah, there are a number of different ways that we see that crypto data and data analysis can often go to the center of some of these regulatory issues and I just want to . . .
20:06 - 20:44
Jerry Lin: highlight two brief ones. So first is, you know, oftentimes there are the issue of manipulation of the actual price of a token, right? So this can range from allegations of merely propping up a price, or maybe even artificially inflating that price. And whenever there are these kind of allegations, it requires careful analysis of the order books and trying to understand, recreate the state of the market, and what would happen if you were to sort of undo some of the illegitimate trades or orders and understanding the price impact of those particular transactions. And I think an interesting . . .
20:45 - 21:23
Jerry Lin: and sort of recent example of this, was the Terraform Labs case. And even though there wasn't a specific allegation of market manipulation, one of the central parts of the complaint was related to the stablecoin, right? And whether or not when it de-pegged, you know, was there a third party that sort of helped it reclaim its peg or was the protocol working as intended. And so that's the kind of situation where there's a lot of detailed work that needs to go into disentangling what was going on in a very turbulent time in the market, understanding how . . .
21:23 - 21:59
Jerry Lin: a particular entity's trading might have affected the price of that stable coin versus what other things were going on in the market as people were trading. So that's one example. And then 1 last example that I'll just mention briefly is it's a little bit simpler, but a big part of what you can do with the crypto data is to trace the flow of funds. And it's interesting, I think, in this, the first two sort of romance scam sort of case that were brought, because there wasn't actually crypto involved, there isn't sort of tracing that needs to . . .
21:59 - 22:28
Jerry Lin: be done, but there are lots of cases where, involved in these scams, where there is money being moved through crypto. And I think a big part of that is understanding and analyzing the data as it is being transferred from the person getting scammed to another wallet. And then oftentimes that wallet is then circulated to a mixer designed to obfuscate where the money is going. And so there's a lot of data analysis that goes into sort of following the flow of money and understanding what exactly is going on.
22:28 - 23:02
Katherine Kirkpatrick Bos: I think there's a lot of potential usage with respect to law enforcement engagement in the transparency of transactions on the blockchain. For those of you who aren't familiar, if you have access to a computer, you can actually see the flow of funds from crypto wallet to crypto wallet, exactly where they're going. The issue, however, is you can't see who's behind those funds. So there's pros and cons with respect to the transparency of these transactions. One of the things that is a big change from last year is we've seen some pretty significant Supreme Court precedent over the . . .
23:02 - 23:54
Katherine Kirkpatrick Bos: course of the past year. And I'm talking specifically about Loper-Bright, which overturned Chevron deference, and Jarkesy, which limited the SEC's ability to collect fines through ALJ proceedings. When that occurred, I would say that the whole crypto industry was cautiously optimistic about the effects of that precedent. And we've actually already seen a reference to a new reliance on traditional tools of statutory construction due to Loper-Bright in the district court opinion in Cal-Shee event contracts the other week. Kayvan, can you touch on these changes or on these cases in particular? Do you think the optimism from the industry that this precedent is gonna turn the tide of crypto litigation is warranted?
23:55 - 24:29
Kayvan Sadeghi: I would focus more on the cautious than on the optimism, I think, and the cautious optimism on that. I do think it's that some of that recent precedent or the trends that that precedent represents are likely to have an impact. I think that's probably more in the medium to long term and not in the short term. I think A lot of people in the crypto industry are critical of the SEC and its approach, specifically with some of the securities questions and how to determine what is a security. Those issues I don't think will be so impacted.
24:29 - 25:03
Kayvan Sadeghi: On that issue, we're mostly looking at interpretations of the Supreme Court's Howey case and other case law that has developed over time. And that's not really what overturning Chevron deference is getting at as far as an agency interpretation of a Congressional act. And so I don't think it necessarily will have quite the same impact there as it will other places. I think it gets a little more interesting when we move to some of the other issues that we've just sort of touched on so far. When you look at what's the definition of an exchange, what's the . . .
25:03 - 25:40
Kayvan Sadeghi: definition of a broker, how are those sort of things set out in the statutes? And when you look at crypto companies, crypto projects, particularly DeFi, some of these issues, and you start trying to apply concepts of what an exchange is or what a broker is to a software protocol or a wallet or other basic blockchain infrastructure, it's much less clear how that applies and that's the kind of place where there may be less deference to an agency interpretation. I think more broadly, it seems that there is a good degree of skepticism as you move up the . . .
25:40 - 26:15
Kayvan Sadeghi: appellate court ladder up to the Supreme Court with respect to expansive views of agency authority. And I think that general trend line, if that is true, will play into the way some of these cases get resolved, if not at the district court, maybe at the appellate courts, or ultimately if these issues get to the Supreme Court. Because we are facing across all of this new technology that does not cleanly fit into the existing boxes. If you look at an exchange being something that brings together buyers and sellers, this technology obviates the need to bring together buyers . . .
26:15 - 26:48
Kayvan Sadeghi: and sellers by having people trade against a pool of assets that's managed on a blockchain protocol. It doesn't quite fit the definition. Similarly with brokers, which would typically be affecting transactions on behalf of others, you put in a protocol, it's not exactly doing that. Can you apply that or not? And now you're starting to look at how can you interpret things that don't clearly fit and where an agency wants to interpret everything to fit within its mandate, that's where I think we may see pushback from the courts on how expansive they can be absent clear direction
26:48 - 27:04
Kayvan Sadeghi: from Congress. So I think there are going to be issues that come up. I think you're more likely to come up on those other issues. But I don't think it will impact the core mission of things like fraud manipulation. Those things I don't think get impacted. The interpretation of Howey, I don't think that gets impacted as much.
27:04 - 27:40
Katherine Kirkpatrick Bos: Thank you. And I should have clarified for those in the room, there's a lot of smart people in this room, so I'm probably stating the obvious. But Chevron deference is the concept which, if a statute is unclear, then the judges defer to the regulator. So there is a perception that prior to overturning Chevron deference, the SEC had a slight edge, particularly when it comes to something like crypto, which arguably some may take the opinion that certain statutes are unclear. Kristen, anything to add on Kayvan's sense with respect to these decisions? What's the SEC's perspective on this change?
27:42 - 28:19
Kristin Pauley: I think it's too soon to tell whether these decisions are going to have any effect on the SEC's enforcement program. I will note though that they were not entirely unexpected and that we've continued to bring significant and many matters since the decisions came down both within the crypto space as well as other types of matters. So, you know, accounting frauds, Ponzi schemes, you know, widespread record-keeping failures, violations of the whistleblower protection rule, Reg BI violations, just to name a few. And we brought those cases both in the context of civil injunctive actions filed in federal district court as well as settled administrative orders.
28:20 - 29:06
Katherine Kirkpatrick Bos: Thank you. So, the elephant in this room that we haven't talked about, we frankly don't have time to talk about, also because it's entirely speculative, is the very fast approaching election, which could affect rulemaking, appointments, judicial appointments, could have material changes on this industry. I'll note that the Trump has released official, as part of the official platform, specifically supportive commentary directed at crypto. The Harris campaign did not mention crypto, although it had a reference to emerging technologies in their platform, although just recently candidate Harris had mentioned that she wanted to encourage emerging technologies such as crypto.
29:07 - 29:16
Katherine Kirkpatrick Bos: So there's a lot of speculation as to how this is going to change things. Kayvan, any predictions on how this could or will affect crypto either positively or negatively?
29:16 - 30:01
Kayvan Sadeghi: How could I possibly be wrong, right? I think a lot of people in the industry are assuming that if Harris wins, it's likely to be a continuation of the current, essentially the current policy. I don't think people are expecting a sea change. I think some of the statements about fostering emerging technologies while protecting investors is similar language we've heard from the current administration and I think that there's not a lot of reason to or clear guideposts to suggest that there's going to be a sea change if Harris wins. I'm not in the business of predicting what . . .
30:01 - 30:23
Kayvan Sadeghi: will happen if Trump wins on this or many other things. But he obviously has been more vocally favorable towards the crypto industry in at least certain ways, whether that pans out, and whether it pans out in a way that's helpful or harmful, or how that plays out is, yeah, anyone's guess.
30:23 - 30:55
Katherine Kirkpatrick Bos: He's now launching his own DeFi company as of last week, so it'll be interesting to see how that materializes. You know, one of the things I wanted to shift to is whenever you talk about crypto, you always have to talk about traditional financial surfaces, right? The two are linked or certain parts of the crypto ecosystem are more financial crypto than others. Jerry, you do a lot of work with so-called TradFi and also work with crypto. What's different right now between the two? Like data, attitudes, otherwise?
30:55 - 31:29
Jerry Lin: Yeah, thanks, Katherine. And before I discuss a few differences, just first say that actually a lot of similarities and overlap between TradFi and crypto. And that's a really good thing in terms of analyzing the data. That means that we don't have to completely reinvent the wheel, but we can leverage existing theory and the toolkits that we have from traditional market microstructure and just apply it in a crypto setting. That being said, there are some key differences that are important to keep in mind every time you analyze crypto data. And I'll just mention briefly a few here. So . . .
31:30 - 32:04
Jerry Lin: First of all, in crypto, there's this idea of on-chain as well as off-chain data. And you don't have that distinction in TradFi. And for those of you that might not be familiar with that terminology, on-chain activity is transactions and records that are directly recorded on the blockchain. Hence why it's called on-chain. And these can be direct transactions between wallets, they can also be intermediated by DeFi pools or other smart contracts, and oftentimes it's what people have in mind when they think about crypto data. They think about some transaction that's immutably written into some blockchain somewhere. And that is a big important part of crypto data. But the thing . . .
32:09 - 32:14
Katherine Kirkpatrick Bos: And it cannot be manipulated. That's the most important facet of on-chain data.
32:14 - 32:46
Jerry Lin: That's right. And the part that people sometimes aren't as aware of is that apart from that there's a lot of quote-unquote off-chain trading as well and that's trading that happens on centralized exchanges such as Coinbase or Kraken, right, and the data that you get in in these from those venues are going to be more similar to what you see in TradFi, right? So the kind of data, equity trading data that you might get from NASDAQ or CBOE is gonna be more similar to the trading data you get from the centralized exchanges. So that's, whenever we come . . .
32:46 – 34:00
Jerry Lin: to analysis, I think it's something to keep in mind both through this on-chain as well as this off-chain data. The second thing I would say is that in crypto, one difference is sort of the amount of fragmentation that you have in the number of different venues and in addition to on-chain and off-chain, there's no concept of a national best bid or offer or international best bid or offer since it's traded all over the world. In fact, there's documented cases of persisting price premiums or discounts on specific venues. And what that means is that, you know, the question of, you know, what is the price of a particular token at a particular point in time, it's not a trivial one, right? Depends on where you're looking, what's the venue, what is the underlying currency pair. And so I think that's just another important difference as you think about crypto data. I mean there's lots of other things to be said. You know, the fact that it's continually trading instead of just having market hours, right? That there's no circuit breakers to stop trading when something big happens and the easy access to leverage. But I think the fact that on-chain versus off-chain, as well as sort of the fragmentation would be some of the two big picture differences.
34:00 - 34:27
Katherine Kirkpatrick Bos: Those are great points. So, Kristen, on this point on kind of TradFi versus crypto, there has been criticism levied at the SEC that they are so focused on crypto, which is you know a fairly small industry, a nascent industry, that there are less resources, just sheer people, litigators, enforcement staff, etc., to go after wrongdoing in the much larger TradFi environment. Do you think that this criticism is valid?
34:28 - 35:08
Kristin Pauley: No, no, Katherine, I would disagree. So while I mentioned earlier that the CACU unit has received some additional resources in the past few years, the number of attorneys and other specialists focused on crypto and cyber matters is just a fraction of the overall number of enforcement attorneys nationwide. We're also nearing the end of this current fiscal year, so we'll see soon how those numbers shake out. But as Jerry noted, in the last fiscal year, so fiscal year 2023, enforcement recommendations resulted in a total of 784 total enforcement actions and only approximately 50 of those concerned crypto . . .
35:08 - 35:56
Kristin Pauley: or cyber matters. So the division as a whole is bringing hundreds of cases spanning the securities industry, charging violations by a diverse group of market participants from public companies to investment firms to gatekeepers to social media influencers. And they've also brought numerous enforcement actions addressing conduct that undermines the oversight of the securities industry. So for example, actions to protect whistleblowers as well as actions to enforce the record keeping and other requirements that are important for investor protection. So no, I would not agree. Maybe if possibly it gets an outsized number of, you know, attention from the press, but as far as the overall activity of the Enforcing Division, I would not say that's true. Great points.
35:57 - 36:37
Katherine Kirkpatrick Bos: Obviously, there's a lot of facets to crypto, as we've all referenced. Two worth mentioning, particularly given the title of this panel, are crypto lending and NFTs, non-fungible tokens, which are historically associated with things like the art market and gaming or collectability. Just recently, the SEC charged Abra in connection with crypto asset lending and the very popular NFT platform OpenSea disclosed a Wells notice. Kristin, I know you can't comment on these particular matters or any particular matter, but is there anything you can say regarding the SEC's attitude towards crypto lending and NFTs specifically, either historically or forward-looking?
36:38 – 37:28
Kristin Pauley: Sure. Yeah, both historically as well as forward-looking, we will continue to aggressively pursue registration violations even as the market evolves to create you know novel products and services such as crypto lending and NFTs. So crypto lending products is just another type of public offering it goes by many different names But the product is usually marketed as offering some form of earning potential or interest or yield. So these cases or these products and services raise similar concerns for us from a fraud standpoint, you know, unregistered offer and sale of securities as well as violations of the Investment Advisers Act as well as the Investment Company Act. So the Arbor case we brought a few weeks ago is one example of that as well as several others we've brought in the recent years. With respect to what . . .
37:28 - 38:04
Kristin Pauley: I'll say called supposed NFTs, you know it depends on the facts and circumstances, but they may also be offered and sold as investment contracts and therefore securities where the investors are looking to profit based on the efforts of the issuers. And we have brought several cases concerning NFTs over the past year, where we charged the issuers for conducting unregistered offerings of crypto asset securities in the form of NFTs. So there was the impact theory in Stoner Cat's cases about a year ago this time, and just a few weeks ago we brought a case against Flyfish Club, . . .
38:04 - 38:43
Kristin Pauley: which raised approximately $15 million from investors in order to finance the construction and launch of a private members only restaurant. And according to the settled order, Flyfish NFT was gonna be the exclusive means of obtaining membership to that club. So what these cases that we brought concerning crypto lending as well as NFTs you know really drive home is that we are required to look beyond whatever cosmetic label that an issuer applies to a particular product or service. Instead, we're going to focus on what the economic realities of the offering are, how it's marketed, as well as . . .
38:43 - 38:59
Kristin Pauley: whether the project is touting its potential success as a path to investor profits. So if you're telling investors that they can expect a profit based on your efforts, from our perspective that looks a lot like a securities transaction.
39:00 - 39:32
Kayvan Sadeghi: If I could just jump in on that 1 briefly, I think this gets back to where I started things with you can build a fundraising scheme around anything, whether it's an NFT or whether it's a physical object or a piece of fruit or a whiskey barrel, it doesn't matter. You can build something around it that says everybody who gets one of these pens, we're only going to make 10,000 of them, and everybody who gets one is going to be a member of whatever club. And you can build something that turns, and you'll expect profits based . . .
39:32 - 39:58
Kayvan Sadeghi: on the club doing whatever it does and generating revenue that you'll get to share. And sure, you can create a fundraising that everybody who wants one of these pens has to pay $1,000 for the pen, but I'm gonna take all that money and I'm gonna go market this pen to whoever wants it. We're gonna get it placed in movies, everybody's gonna want this kind of pen, I'm gonna take your money, pull it, we're all gonna profit based on based on that. That's fine. The problem comes with when you start going to the trading platforms and . . .
39:58 - 40:32
Kayvan Sadeghi: saying, okay, well now we're gonna go after, whether it's an OpenSea or a platform, how do they know that this pen, if this pen is for sale on eBay and Amazon and wherever, and somebody else creates a sneaker that's their membership thing that's available on StockX, and there are all these platforms that are selling assets. How do they know that somebody behind that is making representations around it that turn that into a fundraising scheme? Where are they supposed to look? Are they supposed to look at the Twitter platform, whatever Twitter messages are being sent by . . .
40:32 - 41:02
Kayvan Sadeghi: whoever created the pen, are they supposed to be looking at a blog, at a website, at what's on Discord or some other social media channel that we don't even know yet? How do you know what is the set of representations you're supposed to look at to determine that buying that asset is actually a securities transaction and not just buying an asset. And if you're a trading platform that trades in assets, how do you know which assets on your platform might trip you up and require you to be registered as a national securities exchange under a strict . . .
41:02 - 41:20
Kayvan Sadeghi: liability regime. And it is a very, very difficult question when you start saying that the facts and circumstances around the NFT is what makes it a security. So those are the issues that we're grappling with as an industry, I think, more broadly. And I think it's tough enough to crack for everybody involved.
41:21 - 41:38
Katherine Kirkpatrick Bos: I know we're running short on time, but one question I did want to get to that's important, I mean, at least from the Crypto GC perspective. I'm sitting on the edge of my chair, and all of the outside counsel in the room that does regulatory work should listen carefully as to who they should be cultivating right now. But what area of crypto do you think, Kayvan, has the most enforcement risk right now?
41:39 - 42:12
Kayvan Sadeghi: Well, I always think the fraud and misrepresentation issues are a huge problem in the industry and it's something that needs to be addressed and that is being addressed. I think we're gonna, I expect and I'm sure Kristin has a better crystal ball than I do on what the SEC might do next, but I think we're gonna see more approaches into DeFi and some of the other building blocks, not just the centralized exchanges. I think there are a lot of questions around whether things that claim to be decentralized are actually decentralized. So this sort of bridges the . . .
42:12 - 42:25
Kayvan Sadeghi: gap of what's DeFi and is it a misrepresentation. I think there's a lot to be hammered out there. So I think that's an area of increasing focus, I would expect, for the industry as a whole as we go forward.
42:26 - 42:32
Katherine Kirkpatrick Bos: And I'd love to see, Kristin, anything to add there, anything you can disclose in your thoughts? Probably not.
42:33 - 42:35
Kristin Pauley: Nothing more than I've already said, no.
42:35 - 43:09
Katherine Kirkpatrick Bos: Understandable, although I would love to see the inside of your head right now. Well, let's wrap with, Jerry, we just talked about NFTs and crypto lending. You and Cornerstone and many other third parties have been more focused on manipulation, trading data, a lot of what we've been talking about in the context of financial crypto or centralized exchanges, more relevant to exchanges and maybe DEFI, which stands for decentralized finance, cutting out financial intermediaries, then NFTs are lending. But do you have any other thoughts on these issues?
43:10 - 43:50
Jerry Lin: Sure, yeah. I think there's a lot of interesting issues around NFTs, but I think from my perspective, thinking about SEC enforcement, one issue that sort of jumps out is thinking about wash trading, right, which is trading between the same entities or related entities. And usually when, you know, wash trading, it's usually for the manipulators trying to inflate the amount of trading volume, whether that's to show that a market is, there's a lot of active trading in a market or for other reasons. But the thing that's interesting about NFTs is that because it is literally unique, it's . . .
43:50 - 44:23
Jerry Lin: one of one, you have an opportunity not just to sort of trade with yourself and increase the trading volume, but it's much easier to inflate the price as well. So usually if you were to engage in wash trading and you were to try and to inflate the price, that can be very difficult or very expensive to do. But when you are trading with yourself, you're essentially cornered the market and you're able to do that without sort of any risk to yourself. So I think that's one interesting aspect about NFTs that you don't see in other kinds of crypto products.
44:25 – 45:09
Katherine Kirkpatrick Bos: So we have one minute left. The other thing I wanted to ask Jerry and Kayvan, one of the things we haven't discussed, which is novel products tied to crypto that aren't crypto in and of itself, like I'm talking about ETFs, options, derivatives, etc. In many ways, these are much easier to grapple with because they're really not crypto. They're the traditional financial products that are very clearly discussed in the context of the law. But do you think we're gonna see more of these products? Because we've seen a lot of activity this year. I referenced the historic ETF performance. There's a lot of chatter with the big TradFi exchanges, looking at options and other derivative products. Any thoughts, Kayvan?
45:09 - 45:44
Kayvan Sadeghi: Sure. I do think we'll see more, and I think not just in the US, but globally. And I think that's 1 of the key things to leave with, is that we've been talking about what's happening in the US but this market is growing rapidly and the laws are becoming more clear in a lot of jurisdictions around the world and it is becoming part of the traditional financial infrastructure globally regardless of what we're doing in the United States, and I think that will drive more of this change here as well. We may not be a leader in this space the way we have been historically in a lot of technology and financial markets, but we're gonna be brought along for the ride, whether we like it or not.
45:44 - 45:53
Katherine Kirkpatrick Bos: Perfect. And I actually think we're right about at time. So if anyone is interested in Jerry's thoughts, you can grab him during the break. Appreciate everyone's input.