[0:00]Hello, everyone. My name is Elizabeth. I am the VP of operations at the blockchain Association. And I'm thrilled to be here with you all today to talk about this really important topic. I'm joined today by some incredible individuals who I will let introduce themselves. We're going to dive into a moderated discussion, and then we'll leave plenty of time at the end for audience questions. So without further ado, let me hand it over to my colleague here to kick us off. Thank you, Elizabeth. I'm Mike Buttig, a partner at Munger Tolls and Olson. I'm a litigator. I represent clients in a variety of industries. And in the last few years, a lot of my time has been spent representing clients in the crypto industry in lawsuits, regulatory investigations, and other types of disputes. So I'm pleased to be here today to discuss a topic that I'm spending a lot of my time on. Hi everyone. My name is Emily Parker. I am the director of Global Content at Coin Desk, and I also oversee Coin Desk's policy and regulatory coverage. And I'm thrilled to be here with all of you. Hi, I'm Scott Johnson. I'm the CEO of Prometheum, a FINRA and SEC regulated special purpose broker dealer that's focused on digital asset securities. Great. Well, thank you all for being here today. To kick us off, Emily, I'm going to turn to you first to set the stage for us a little bit. Can you give us a brief overview of the current regulatory environment as it pertains to digital assets. Sure. So I think as a lot of you know, the US regulatory environment is not exactly a picture of clarity at the moment. We've seen a lot of enforcement actions and this is really a source of frustration for a lot of people in the industry. And as far as the enforcement actions that we've seen, it's really the SEC that's been very aggressive on this front. And the SEC has basically said that they view virtually all cryptocurrencies, except for Bitcoin, as unregistered securities. And so because of this, they've launched a lot of enforcement actions against exchanges, against issuers, staking services. And there was a lot of hope at one point that there would be some sort of legislation coming out of Congress that would clear things up. There are some bills in Congress right now, for example, the Fit 21 Act, which passed the house recently, but it's really unclear what's going to happen with that. It's not clear whether it's going to pass the Senate. And then of course, we have an election coming up in November, and there's a lot of uncertainty about that. So I would say that the regulatory environment is still very murky. It's not clear where we're headed, but I think the industry is pushing for more clarity. And the industry is also pushing for what it sees as more appropriate regulation for digital assets, which are very different from traditional securities. Thank you for that overview, Emily. Mike, turning to you, in the absence of comprehensive legislation, as Emily mentioned, how are courts currently interpreting existing securities laws and applying them to digital assets? Yeah, it's a great question, Elizabeth, and I think one of the more interesting aspects of what's going on in the regulatory environment is the role that courts are playing in this. Because as Emily explained, there's not a clear regulatory framework from Congress. And we're seeing regulators take fairly aggressive stances as to how they think existing law applies to digital assets. So what ends up happening is those aggressive stances are challenged in court. And judges are left with the task of having to interpret these decades old securities laws and decide how they apply to this relatively new asset class. And you know, what we've seen to date is somewhat of a mixed bag. You know, one of the more famous cases, I think everybody in the industry is aware of is the SEC versus Ripple case. Where the court issued a mixed decision finding that Ripple made unregistered sales of securities when it sold XRP directly to institutional investors. But at the same time, it found that Ripple's programmatic sales of XRP on exchanges to retail investors were not sales of securities. So a mixed bag there and something that I think a lot of us are still trying to understand and wrap our heads around as to how that's going to play out in the long term. You know, more recently, just in the last few weeks, there was a case involving the SEC and Terraform Labs. Where a federal judge in New York found that Terraform Labs and its founder Doe Kwon engaged in the unregistered offer and sale of securities. Now, that was a default judgment because the defendants chose not to appear in that case. But it was another instance of a federal court in New York concluding that certain digital asset transactions constituted sales of securities. I think it's fair to say that courts have shown an openness to the SEC's theory that many digital assets are securities. And they've applied the Howey test, which many of you know, is the test for determining whether something's an investment contract, they've applied the Howey test to digital assets. However, the courts have also shown that they're going to apply it to the specific facts and circumstances in each case. And there's not going to be a broad, sweeping ruling saying all digital assets are securities. And at the same time, we're also seeing some courts take a more skeptical view of the SEC's expansive theories of jurisdiction. So I think we'll continue to see this play out in the courts. And as more and more cases work their way through, we'll get more clarity on how courts are applying existing law to digital assets. Thank you for that, Mike. Scott, you know, as Emily mentioned, the industry is really pushing for more clarity. And in the absence of legislation, you know, we're seeing more and more of an argument that there are already existing regulatory frameworks that apply to this space. Can you tell us a bit about that and how Prometheum is navigating that existing framework? Sure, I'd love to. So first, I'd like to just clarify that Emily is certainly right that the market is pushing for clarity, but the market also needs to understand that there is existing clarity and a framework already in place. And to Mike's point on the Ripple decision, as well as the Terraform Labs decision, the Howey test is applied to digital assets. And when the Howey test is applied to digital assets, what we're finding is that the vast majority of digital assets are in fact securities. And as such, the existing securities law applies. So Prometheum, our co-founder and I, we've been working on this for seven plus years. And from day one, we've always believed that the vast majority of digital assets were securities. And so our goal was to build a system where digital assets could be properly offered, bought and sold, clearing and settled by following the existing federal securities law. So we went to the SEC and FINRA, and we applied for special purpose broker dealer licenses that cover both the digital asset securities, as well as the fiat currency, and now with the recent approval for a clearing agency, that means that we'll be able to clear and settle digital asset securities on a T+0 basis. So there is a framework already here. The market needs to realize that. And the fact that there's new technologies does not mean there needs to be new laws. There needs to be new application, but not new law. Thank you, Scott. Emily, I'm going to turn to you now. There are some who argue that the SEC is overreaching and stifling innovation with its current approach. Others argue that robust regulation is necessary to protect investors and ensure market integrity. What's your take on this debate and what are the potential implications of each approach? It's such an interesting debate, and it really comes down to the question of whether the existing laws are fit for purpose. And the crypto industry broadly argues that digital assets are unique, they're different, they're not like traditional securities, and therefore the existing laws don't apply, or they shouldn't apply. And I think that's why we've seen so many people in the industry calling for new legislation. But as Scott just mentioned, it's not clear that new legislation is going to happen anytime soon. And I think on the other side, you have people like SEC chair Gary Gensler who argues that the existing laws are fit for purpose. And that these laws were designed to protect investors, and that crypto investors deserve the same protections as traditional investors. And I think the implications are really quite significant for both approaches. So on the one hand, if the SEC continues with its enforcement heavy approach, then I think there's a risk that a lot of innovation will be stifled in the US. We're already seeing a lot of crypto companies move abroad to places like Dubai, to places like Europe, where there's more regulatory clarity. So I think that's a real risk for the US. On the other hand, if we move towards a more laissez-faire approach, then there's a risk that investors won't be protected. And we've seen a lot of scams in crypto, we've seen a lot of fraud in crypto.
[11:24]And I think that's really what the SEC is trying to prevent. So I think there's a delicate balance to be struck between fostering innovation and protecting investors. And I think we're still trying to figure out where that balance lies. Thank you, Emily. Mike, I'm going to turn to you now. There are different regulatory approaches to digital assets being adopted globally. How do these international approaches compare to the US strategy, and what are the potential implications for global market harmonization? Yeah, it's a great question, Elizabeth, and I think one of the more interesting dynamics we're seeing play out in the digital assets space is that other countries are taking a much different approach than the US. You know, the US, as we've discussed, has primarily taken an enforcement first approach and a regulation by enforcement approach. Other countries have recognized that digital assets are here to stay and that they are a unique asset class. And that rather than try to shoehorn them into existing frameworks that were designed decades ago, they're coming up with new, comprehensive regulatory frameworks to govern this asset class. So, you know, we're seeing this play out in the EU, in the UK, in Dubai, in Hong Kong, in other countries, they're enacting bespoke legislation. And in some ways, this puts the US at a disadvantage because there's a lack of clarity in the US. And as Emily alluded to, some companies are taking their innovations, taking their businesses elsewhere. And that's a risk to the US, particularly as it relates to maintaining its leadership role in innovation and financial services. So I think there's a lot of debate right now in the US as to whether the current approach is the right one, and whether perhaps we should be more aligned with what other countries are doing. And I think in the long term, we will see more global harmonization. But it's just a matter of time as to how long it takes the US to get there. Thank you, Mike. Scott, I'm going to turn to you now. Given the current regulatory landscape, what do you see as the biggest opportunities and challenges for the digital asset industry in the coming years? Sure. So what I want to do is kind of just respond to a couple things that Emily and Mike said. And I want to set the record straight. The idea that there's not clarity in the United States and the idea that there needs to be new regulation in the United States, I think are both inaccurate. And actually, they're really just industry talking points that the current industry wants to propagate.
[14:33]From our perspective, there is plenty of clarity for digital assets that are securities and commodities. And the digital assets that are securities are covered by federal securities laws. The ones that are commodities are covered by the CFTC. What has happened is that a group of market participants have chosen to operate outside of the existing regulatory framework. And that is the root of the issue. Now, with that said, the opportunities are enormous. The opportunities are immense. We think that the use cases, as well as the underlying technology, are going to transform the financial services industry. The challenges are that the industry needs to come to grips with the fact that these are securities, and they do need to be regulated as such. And so, as we look to the future, as long as the digital asset industry embraces that concept and works with regulators to come into compliance, I think the opportunities are really unlimited. Thank you for that, Scott. We're going to turn to audience questions now, so if anyone has a question, please raise your hand. It looks like we have one over here. Hi. My question is, given the recent approvals of spot Bitcoin ETFs, do you think there's a higher likelihood of other crypto assets also getting ETF approvals in the near future? That's a great question. Emily, I'm going to turn to you first on this one. Sure. So I think the spot Bitcoin ETF approval was a really significant moment for the industry. And I think it does open the door to other crypto assets potentially getting ETF approvals. We've already seen a lot of applications for spot Ethereum ETFs. And the SEC has delayed those decisions. So I think it's still an open question as to whether those will be approved. But I think the Bitcoin ETF approval did set a precedent. And I think it does signal that the SEC is perhaps becoming more open to these types of products. Mike, what are your thoughts on this? Yeah, I largely agree with Emily. I think the Bitcoin ETF approval was a significant moment. I think it was a recognition that Bitcoin is not a security. And I think that opens the door to other digital assets that are also not securities, potentially getting ETF approvals. The challenge, of course, is that the SEC views most other digital assets as securities. So unless there's a change in that view, or unless courts rule otherwise, I think it's going to be an uphill battle for other crypto assets to get ETF approvals. Scott, what's your take? So I think we need to understand what the Bitcoin ETF approval means. And it means that Bitcoin is a commodity. And the SEC has always said that Bitcoin is a commodity. So it's consistent with their position. The question is whether Ethereum or other digital assets are commodities or securities. And the SEC has been pretty clear that they view Ethereum as a security. So unless that changes, I think it's unlikely that we'll see a spot Ethereum ETF approved anytime soon. And I think it's important for the market to understand that distinction. Thank you, Scott. It looks like we have time for one more question. Yes, over here. Hi. My question is, what role do you think AI will play in the future of digital asset regulation? That's a very timely question. Mike, I'm going to turn to you first on this one. Yeah, it's a great question, and I think AI is going to play a significant role in the future of digital asset regulation. I think on the one hand, AI can help regulators identify illicit activity, identify fraud, identify market manipulation. So I think it can be a very powerful tool for enforcement. On the other hand, I think AI can also help companies with compliance. I think it can help automate compliance processes, it can help monitor for compliance. So I think it's going to be a tool that's used by both regulators and the industry. And I think it's going to be a very interesting space to watch. Emily, what are your thoughts? I largely agree with Mike. I think AI is going to be a really powerful tool for regulators to monitor the markets and to identify potential risks. I think it's also going to be a tool that the industry uses to better understand the regulatory landscape and to ensure compliance. I think the challenge, of course, is going to be how do we ensure that AI is used responsibly and ethically? And how do we ensure that it doesn't lead to unintended consequences? So I think there's a lot of work to be done in that area. Scott, what's your take? So I think from our perspective, AI is going to be incredibly important for ensuring market integrity. And the reason why is because the markets are becoming so complex and so fast that it's very difficult for humans to keep up. And so AI can help us identify patterns, identify anomalies, and identify potential risks that humans might miss. And so I think it's going to be a very powerful tool for ensuring that our markets are fair and orderly. Thank you all for that insightful discussion. And thank you to our audience for your excellent questions. This concludes our panel discussion. Thank you.
