JONES DAY TALKS®: Crypto and DeFi Platforms: Aggressive SEC Enforcement on the Way?
SEC Chairman Gary Gensler has left little doubt that his commission will closely monitor activity in the cryptoasset markets and the actions of decentralized finance, or DeFi platforms, as investor interest continues to grow. In prepared remarks delivered at an early August event, the chairman said, "We just don’t have enough investor protection in crypto … we have taken and will continue to take our authorities as far as they go."
Jones Day’s Josh Sterling, Brian Rabbitt, and Mark Rasmussen talk about what the heightened scrutiny means for crypto market participants, and discuss what additional regulatory and enforcement actions could be coming.
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Read the full transcript below:
Dave Dalton:
Interest in crypto and digital assets continues to accelerate as investors seek to capitalize on one of the most intriguing financial innovations in decades, but not surprisingly regulators are taking a key interest in the topic as they seek to ensure that investors are properly protected. SEC Chairman Gary Gensler talked about crypto-related matters during an August speaking engagement telling the audience, "We just don't have enough investor protection in crypto. Frankly, at this time it's more like the Wild West. We have taken and will continue to take our authorities as far as they go." Well, obviously the SEC has taken a hard look at cryptoassets and to centralized finance or DeFi platforms. We have a Jones Day panel here to sort it out. I'm Dave Dalton. You're listening to Jones Day Talks.
Dave Dalton:
Josh Sterling has 20 years of experience in the derivatives and securities markets, both as lead counsel to major companies and as a senior federal financial regulator. Josh represents clients that are active in the derivatives markets with matters before the U.S. Commodity Futures Trading Commission, or CFTC, the U.S. Securities Exchange Commission, that's the SEC and various self-regulatory organizations. Prior to joining Jones Day, Josh was director of CFTC's market participants division, which regulates the banks, intermediaries, and asset managers registered with the agency to trade derivatives in the U.S. markets.
Dave Dalton:
Brian Rabbitt is a litigator with deep experience, resolving complex problems and handling sensitive investigations and enforcement matters at the highest levels of government. He provides strategic counseling and representation to clients facing high-profile, high-stake civil and criminal matters involving the Department of Justice, Securities and Exchange Commission, Commodities Future Trading Commission, state of attorneys general, and other government authorities. Prior to joining Jones Day, Brian was the active Assistant Attorney General for the DOJ's Criminal Division.
Dave Dalton:
Finally, Mark Rasmussen is a seasoned litigator and investigator with more than 15 years experience representing clients in complex litigation and regulatory matters. Since 2016, Mark has advised client on cryptocurrencies, blockchain technology, and FinTech matters including initial coin offerings and token issuances, money transmitter and virtual currency regulations and litigation. In 2018, he was appointed by a federal district court judge to be the first-ever receiver and an SEC enforcement action involving an initial coin offering promoter. Mark is co-editor and co-author of the book Blockchain for Business Lawyers, published by the American Bar Association, as a frequent speaker on legal issues related to blockchain technology.
Dave Dalton:
Josh, Brian, Mark, thank you all for being here today.
Josh Sterling:
Our pleasure. Thank you.
Dave Dalton:
Let's start with Josh. SEC Chairman Gary Gensler focused on crypto-related matters during an address earlier month at a national security conference hosted by the Aspen Institute. The Chairman said the SEC will use its full regulatory powers to monitor digital assets and called on Congress to expand the SEC's enforcement authority. Josh, what are his particular concerns, and is this a meaningful shift away from what the previous administration's view was of crypto assets and DeFi's?
Josh Sterling:
Thanks for that, Dave, and I'm very happy to be on here again with you and the fellows. I do think that we're going to observe a change in the regulatory approach to crypto under Chairman Gensler. There's a few reasons for that. After he got done regulating the derivatives markets post financial crisis at the CFTC, he went out and did a number of things, one of which was to teach crypto-related courses, I think at MIT.
Dave Dalton:
MIT. That's right.
Josh Sterling:
One of our associates actually had him up to Harvard Law School to give a presentation. In that presentation he apparently put up a slide to refer to the duck test, which is if it walks like a duck and talks like a duck, then it is a duck. Tired, but true. I've used it. We've all used it, but now that he's at the SEC and he has jurisdiction over the SECurities markets, I think he's paying a lot of attention to the duck principle, which is: what is out there, whether it's in digital assets meaning cryptocurrencies, or decentralized finance meaning DeFi, it looks like a securities offering, a security sale, a brokerage transaction, or the operation of an exchange or a clearinghouse?
Josh Sterling:
Should it be registered with the SEC and should it to be enforced against if it's not so registered? The answers to all those questions, to his way of thinking based on what he said, is "yes". I do expect to see a more aggressive focus on DeFi and tokens outside of the obvious cases of fraud. We've seen those cases over several, including under the Chairmanships of Clayton at the SEC, and Tarver at the CFTC. Those will continue, as they should.
Josh Sterling:
I think we're going to see more of a push on the regulatory infrastructure and whether people are falling the Ps and Qs there on the theory that it's not so much the random token offering with touts and promoters out there breaking the SECurities laws as being a problem. It is, but it's the whole ecosystem that needs regulation. I think that in part explains why he's also, frankly, been lobbying with Congress to get legislative authority pushed the SEC's way to do more in the space.
Dave Dalton:
Josh, in doing a little background research for this program, I don't know if I'd go as far as to call the Chairman a fan of crypto or a big hardcore advocate, but some people, after his remarks at the Aspen Institute, were maybe not surprised, but thought, "geez, this is not as light of a touch as we were expecting"
Dave Dalton:
Is that fair?
Josh Sterling:
Perhaps my own take was that I expected that Chairman Gensler would be aggressive. That was certainly his MO at the CFTC. I had a whole division they'd worked under then CFTC Chairman Gensler, and was pretty familiar with his approach anyway, which was to be more aggressive. I do think that crypto is more of a focus under his SEC than it was when Jay Clayton was Chairman.
Josh Sterling:
I know Brian worked with Mr. Clayton. I think there's more of an intensity to it, more of a focus on it. That's Gensler. He comes off as very intense and focused and wanted to pursue his perspective on things. That's not to the discredit of Clayton or Tarver. They were very focused on doing the right thing, as well. I just think there's a certain intensity to a Gensler regime that we're going to be experiencing here. That's true in crypto as it is other places.
Dave Dalton:
It's a good thing we're talking. Since you brought up Brian, let's go straight to him. Brian, the Chairman said the crypto asset class is, and we're quoting here, "rife with fraud, scams and abuse in certain applications".
Dave Dalton:
Let's talk about exactly what sort of activities he is talking about. What were the bad actors doing that grabbed the attention of the Chairman?
Brian Rabbitt:
You're absolutely right, Dave. Chairman Gensler and his remarks made a big point to focus on investor protection, or the lack thereof really, in the crypto and DeFi spaces. He went so far as to describe the current environment as, and I'm quoting here, "The Wild West". Quite a bit of attention.
Brian Rabbitt:
Some of what he was talking about, Dave, and Josh touched on this before, is really standard garden-variety fraud, which is unfortunately not a risk that's unique to the crypto or DeFi spaces. It does play an unfortunate role in a number of crypto related schemes. Take, for example, the agency's recent enforcement action involving blockchain credit partners. I know you want to talk about that a little later on in the program, but that enforcement action got a lot of attention because it was the agency's first involving a DeFi platform. At the end of the day, a big part of the SEC's case involved allegations that the company was not using investors' money, the way it said it was going to, which is pretty standard garden-variety fraud. You don't really need digital assets to do something like that.
Brian Rabbitt:
Beyond the standard, typical fraud schemes, the big part of what Chairman Gensler was focused on in Aspen relates to the concept of investor protection more broadly. So much of our federal securities laws are organized around the principle of protecting investors: the central part of the SEC's three part core mission. One of principle ways that our securities laws seek to do that, as Josh alluded to, is a pretty robust regime of registration oversight and disclosure to investors.
Brian Rabbitt:
When I was at the agency, and you were talking about this a few minutes ago, our public enforcement work focused in large part on registered initial coin offerings or ICOs. One of the principles that we pursued in those cases was that digital assets were being offered and sold in the marketplace without any of the required registrations or disclosures of key information to investors that come with registration as well as oversight.
Brian Rabbitt:
That's certainly part of what Chairman Gensler's talking about. He endorsed Chairman Clayton's focus on ICOs and on registered offerings. It's fair to say that will be a focus going forward. I was struck by the shift in focus, to a certain extent, on trading and lending of digital assets on platforms in particular, the fact that there are a lot of digital asset trading and lending platforms out there in operation right now. Chairman Gensler went out of his way to refer to those in his Aspen remarks. He made the point that in his view activities on those can be susceptible to manipulation, fraud, and abuse, just like trading on securities exchanges that are in fact registered with at the SEC.
Brian Rabbitt:
Many of these platforms are not subject to registration, either with Josh's old agency, the CFTC, or my old agency, the SEC. As a result, they don't have the procedures in place to, for example, conduct market surveillance over trading activity to police market participants conduct. One of Chairman Gensler's big points was that these in important investor protection tools are missing right now. He's looking to bring some certainty and some regulation to that space.
Dave Dalton:
Brian, doesn't this always happen? Isn't the technology always a couple of steps ahead of oversight and regulations? Is this just a natural part of the process, maybe?
Brian Rabbitt:
It is true that technology is always pushing the envelope when it comes to regulation. One of the things that we've seen in recent years with digital assets is just that they're a very transformative technology. Chairman Gensler said that they sit astride of, and they don't fit neatly into any particular regulatory regime, whether that's the CFTC regulatory regime, the SECs or another regulator. As a result, it's a slightly different duck, to borrow Josh and the Chairman's analogy, than what we've seen in the past.
Dave Dalton:
We did a program several months ago about tax considerations, where it comes to digital assets and crypto. Is it a currency, is it a security, and so forth? Maybe the Chairman's not all wrong. It is a bit of a Wild West flavor sometimes in terms of everybody trying to figure out exactly what's going on and how this should work.
Dave Dalton:
Let's go over to Mark. Mark, welcome back to Jones Day Talks. It's been a couple of months. Glad to have you back on board with us here.
Dave Dalton:
Mark, you've written extensively on crypto assets, blockchain, and related matters like that. Someone mentioned earlier while Chairman Gensler was on the faculty of MIT, he researched and taught classes on FinTech and Digital Currencies. Here's a guy who understands this. He gets the technology. Given your background and what you've written and what you know about this, Mark, how might the Chairman's academic-leaning background influence his decision making as an enforcement authority as a regulator? This isn't a guy who has maybe been in the private sector and in finance his whole career. This is a guy who understands the nuts and bolts of how these things work. Will that be a factor moving forward?
Mark Rasmussen:
I definitely think it will be. From my own perspective, I approach every new client matter with this in mind. I need to understand the technology at a real granular level before I can really start providing any kind of advice. The same is true for our regulators, our lawmakers, and anybody who's going to be in this industry or regulate this industry.
Mark Rasmussen:
The greatest fear I have is someone trying to pass laws for enacting regulations who doesn't really understand the technology because they don't understand the power behind it, what makes it so special, why it's transformative, and they're not really attuned to what laws and regulations are needed.
Mark Rasmussen:
From that perspective, I'm optimistic based on Chairman Gensler's background, having studied the issues and generally how the tech works. He'd be in a better position to regulate it or make recommendations to lawmakers as to how to pass laws to oversee it.
Mark Rasmussen:
It's true, not just with Gensler, but other commissioners and staff at the SEC, in my talks with them, most of the people I've discussed the technology with are intrigued by it. They like it, are enthusiastic about it, and many of them understand it at a really granular level. I don't get the sense that people are there in the SEC just trying to shut it down because it's something they don't understand. It's new. That process needs to continue going where business and industry educates all the commissioners and the staff to make sure that they understand the power of it, because there's more good out there than bad.
Mark Rasmussen:
I'm glad we've got the SEC and other regulators to police it and, and make sure the bad actors are kept in check so that the good actors can flourish. I think it will be a net positive, overall, to have Chairman Gunther understanding anything. I hope our lawmakers can invest as much time as he and others have to make sure that any legislation they propose is well tailored.
Dave Dalton:
Mark, when they're formulating policy and recommending regulations and so forth, how formal is the process in terms of reaching out to the affected parties? I know they ask for comments sometimes on proposed regulations, but how does that process go based on your experience? How do they pull in the information they need from the people who are actually on the ground, working with these things every day? How proactive are they?
Mark Rasmussen:
It's a great question. It's not something that the public gets to see very much, but I know that the legislators have their own staff council, the various committees. The house and the Senate have staff council. The commissioners at the SEC have their own council.
Mark Rasmussen:
They're all reaching out to industry. The industry's reaching out to them. The folks I've talked with are more than welcoming of outreach from the industry. They want to understand what's going on. They crave it. I've had folks reach out to me and say, "who else can I talk to? We, we want to understand this better".
Mark Rasmussen:
I know that's happening. I can't promise that it happens enough before legislation gets written, because some things come together awfully quickly in the last, final hours. That doesn't necessarily mean that they've had enough time to study the issues. There's a steady process of education going on when you are in those crunch moments and writing legislation in the final hours. You will have done the work already. There's more to be done in that regard, but they all make an honest effort to try to understand the tech before they regulate it.
Dave Dalton:
That's certainly encouraging. Let's stay with Mark for one more. You've been watching crypto for the last several years. Have you noticed particular areas of focus when it comes to oversight and enforcement? Are there areas that the regulators seem to be honing on?
Mark Rasmussen:
My observation is, this is true of many regulators, and it's certainly how I've seen things developed at the SEC in this space. First, you have staff or commissioners identify the issues relevant to a new technology. Then, you have staff commissioners elaborate on those issues, speeches, and other informal guidance that they put out.
Mark Rasmussen:
Tight around then, they start to bring some of the easier black and white cases, the low hanging fruit. Over time they move into the more nuanced cases. At the SEC, that's how it played out.
Mark Rasmussen:
We got some guidance in 2017 on how they were viewing the sale of digital tokens into the market. Shortly thereafter, we had more speeches. The Cyber Unit was created and they started bringing actions against fraudsters because that's who we want to stop first. The cases they were bringing in the early days were very easy, and pretty black and white in the way that the tokens were being marketed, which was very clear that they were securities.
Mark Rasmussen:
It's just now, recently in the last year or two, that they've started to bring more nuanced cases. They've got one right now pending against Ripple that is very nuanced. That will be interesting to see what kind of rulings we get out of that.
Mark Rasmussen:
That's the pattern. They started with the ICOs, as Brian mentioned. They slowly expanded toward broker dealers, investment advisors, exchanges, and hit every step. They were careful to make sure that they were establishing precedent when they settled these enforcement actions that would be instructive to the industry so that people would know how to get in line and get compliant or to do their token sale in a compliant way.
Mark Rasmussen:
They had some models out there and at the same time as they were bringing these enforcement actions, I was pleased to see that they were also granting no action relief. There were three companies that went to the SEC and said, "here's how our digital asset works. We think blockchain technology is great and it can improve our business. We don't think these tokens are securities," and the SEC granted no action relief request in those three scenarios. That also provides a guidance that's helpful to the industry.
Dave Dalton:
Sure, and obviously more coming, I think we're in the Second inning of a nine inning game. The way things are sounding, there's a fine line, Brian, or a tightrope, almost, regulators have to walk. I think the challenge in policing activity relating to any new technology or industry is making sure the investors and consumers are given protection, but you don't want to stifle innovation and creativity. How does the SEC make sure it gets it right?
Brian Rabbitt:
It's absolutely a challenge, Dave. You're right, it is a very fine line that the agency has to walk. The SEC and the CFT, as well for its part, given its equities in the space. It's something that we grappled with during my time at the SEC in the Enforcement Division and with Chairman Clayton. We were very mindful of the need to protect investors and protect markets while at the same time ensuring that we didn't step in the way of and stifle good, beneficial, meaningful innovation. Part of that is being very thoughtful about what you seek to regulate and how you do it.
Brian Rabbitt:
Mark is exactly right. There are people at the SEC and at the other agencies as well. I spend a significant amount of time at DOJ. There are experts in both agencies on these new technologies that understand them, that engage in a meaningful dialogue with industry, and interact with market participants and drivers of the technology.
Brian Rabbitt:
They stood up the FinHub at SEC, which houses a tremendous amount of FinTech and crypto related expertise. I think it seeks to serve as a resource for industry. It seeks to also consult with and talk with other folks in the building, including in enforcement to make sure that they understand what they are looking at and what the consequences of their enforcement activity may be for the industry.
Brian Rabbitt:
It really begins with being very knowledgeable and very thoughtful in how you approach the problem at hand. Another thing that's very important is to be clear about how a regulator views the law and how it's going to be applied to a particular set of facts or a particular technology before acting. I am really not a fan, in any environment, but particularly in the technology related or the crypto space, of what some have called regulation by enforcement, where you force first and explain it later. It is exactly backwards and really the wrong way to do it.
Brian Rabbitt:
Obviously, as Mark alluded to, each enforcement action sends a pretty clear signal to the market about the way that an agency views the law and the way that it's going to use its enforcement authorities. Regulators should be clear about their expectations and the way they view the law and the way they intend to apply it before they take enforcement action, particularly when you're dealing with a new or an emerging technology that breaks new ground like so much of the crypto space does.
Brian Rabbitt:
Mark alluded to the Dow report, which was issued during my time at the agency, in which the SEC may clear its views on ICOs and how it approached them. That was followed by a significant number of enforcement actions in that space, which came after the SEC said, "look, here's how we view ICOs, and here's how you should view ICOs going forward".
Brian Rabbitt:
Then it took enforcement action. Now the agency doesn't always issue 21A reports. In fact that they're pretty rare. As Mark was mentioning, the agency also speaks pretty clearly through speeches and through guidance to the industry. I think that's a big part of what Chairman Gensler was doing in his recent remarks. He was signaling to the industry that a lot of what the SEC has been doing in this space will continue. He was also signaling, I think, where he intends to ask the staff to go in the years ahead in areas that maybe the SEC hasn't been as active in recent years. It's not hard to read the tea leaves from his or from other SEC officials' public remarks.
Dave Dalton:
I was going to say, if people are paying attention at all, and certainly the participants in this industry are, they've got to know where the emphasis is in terms of enforcement, correct?
Brian Rabbitt:
They do now. The SEC under Chairman Clayton tried to be very clear about how it viewed technology in the intersection of that technology and the federal securities laws. Obviously critics will say that they weren't, but there has been a significant effort on the part of regulators and enforcement officials to be upfront about the way they view these things and where they intend to deploy the agency's enforcement resources.
Dave Dalton:
Let's go back to Josh Sterling for a second. Now, Josh, this is going to be a little tricky, and you'll see where I'm going with this in a second.
Dave Dalton:
You and I talked in previous podcasts. In fact, Brian was with us on one. We talked about how federal agencies coordinated investigations and enforcement. Even state agencies get involved occasionally.
Dave Dalton:
After commissioner Gensler's remarks earlier this month, the then CFTC Commissioner, Brian Quintenz, I hope I'm pronouncing that right, said, "Hey, my commission has staked out a position relative to crypto". Now, a little inside baseball for listeners is we were preparing to record today's program. We found out that Commissioner Quintenz has resigned. There will be new leadership there. That doesn't matter as much as the bigger question.
Dave Dalton:
What do you make of the potential conflict here, Josh? How does it complicate matters for parties potentially under either group's jurisdiction? The SEC is watching this. CFGC is watching this. How does a party of these transactions, these markets deal with that?
Josh Sterling:
As best as they can, would be my glib off top answer, Dave. What you would hope for is clear rules of the road, defining the steers within which the SEC will regulate exclusively, and the CFTC will regulate exclusively. There can be dual regulation, but it is separate. I would contrast that to joint regulation, which is an absolutely bad idea. I say that from the experience of having watched every 20 years, a change in the law that made single stock futures and other products like that, we call them security futures, legal in this country, jointly regulated by the SEC and the CFTC.
Josh Sterling:
There is not a market you can go to in the United States today, that I know of, where you can trade a single stock future. It was essentially regulated to oblivion whether the product's good, bad, or indifferent, that's the case.
Josh Sterling:
That's not good. The point of regulating a market is not to extinguish it. I have to tell you, although there is a generally positive and friendly working relationship between the SEC and CFTC, I do believe this area I just mentioned, security futures, was a definite tension point because as hard as Congress tried to stake out how things could be jointly regulated, it was subject to interpretation.
Josh Sterling:
You get a bunch of lawyers in the room and sometimes they can't agree. I would hope that there can be some clear guidelines if indeed Congress is going to act, as Senator Warren and others have signaled. Brian can talk about the Congretional points way better than I. That will be helpful.
Josh Sterling:
I will say, preceding that, I think there was generally a spirit of detente between Clayton and Tarver the two Chairman that preceded those in power now, where it was pretty well staked out by Chairman Clayton's leadership team when a token would be a security.
Josh Sterling:
When I was at the CFTC, that made sense to us and our leadership team under Chairman Tarver would say, "okay, things like Bitcoin and Ether and the Chairman before, Mr. Tarver, as well said, many of the same things are more like commodities". They're sort of broadly distributed things. That worked.
Josh Sterling:
I don't know if that's going to continue to work. I don't know that the industry is going to be comfortable with that long term, because of the evolution and the crossover and products. You have tokens. Now you have DeFi. You have utilities that use those. It's not a good spot to be in, giving advice to people where you say, "well, we think that you should register as an exchange with the CFTC and as a futures commission merchant".
Josh Sterling:
What if one little thing is different or if there's a speech that comes out from the SEC? Maybe you actually need to be a securities exchange and a securities broker dealer as well. What's the answer? It is the job of Congress to give that answer so that both agencies can act responsibly along those lines.
Dave Dalton:
Need more guidance. At least, you know, which lane you're in.
Dave Dalton:
Back to Mark for a second. Mark, evidently Commissioner Gensler was serious. Just a couple days after the Aspen Institute addressed the SEC charged DeFi platform and its executives for unregistered security sales of more than 30 million dollars, and with misleading investors. This was the blockchain credit partners matter. It involved two Florida men. Mark, what exactly is the SEC alleging here?
Mark Rasmussen:
We're all calling this a DeFi matter and a DeFi platform. It has some of those attributes. It's not quite as decentralized as some other platforms are out there. There's a lot of centralization here in terms of how it was all going to work. Basically, the company behind it, which was called DeFi Money Marker, DMM, was issuing two types of tokens: an M token and a DMG token. The DMG token was a governance token. If you bought that, you had rights to participate in the governance of the network, to vote for changes, and you were also entitled to some profits from the enterprise. The M token promised you a fixed interest rate of six and a quarter percent. What would happen is the purchasers of these assets would send money, Ether or Stable Coin to a smart contract address, then DMM would go and take some of those funds and purchase revenue, generating assets like car loans.
Mark Rasmussen:
The idea was that those car loans would generate more than six and a quarter percent return, so that DMM could pay the M token holders the promised rate. The SEC said, "hey, both of those tokens are securities. Both are investment contracts, and the M tokens are like a note on top of that. You didn't register these. On top of that, some of the statements you were making about this weren't true, they were omissions".
Mark Rasmussen:
If the facts are presented in the settlement, and there's always more to the story, but as the facts are presented in the settlement, it's probably one of those low hanging fruit cases that I'd mentioned earlier, one of the easier ones to go after because of the apparent fraud that was going on. It's also sending a signal to the marketplace that DeFi as an area focus. There may be some more nuanced cases ahead that will shed more light on how they're going to regulate the space.
Dave Dalton:
The players are on alert, that's for certain. Let's go back to Josh for a second. Josh, you talked a couple minutes ago about the need for more clear rules, guidance, and so forth. What should we look for in the coming months? Will enforcement actions accelerate? Will Congress finally act? What do you see coming around the corner?
Josh Sterling:
Thanks for that, Dave. I will defer to Brian on the Congressional piece, given that's much more of his practice than it is mine. I do think that SEC enforcement cases will continue to be brought.
Josh Sterling:
The way this works is a commissioner or a Chairman of an agency will be aware of the priorities or, in the case of a Chairman, set the priorities, understand what cases are in the pipeline. We understand that Mr. Gensler has been encouraging his staff to quickly find and bring cases, shape a narrative around that, and time it all so that you give a speech on policy and it's followed up by cases. Then you talk about those cases in your policy statements when you write a rule. The cases are the facts that support your policy that make the rule. It's a complete loop.
Josh Sterling:
We're in that stage now. The speeches have been given, cases have been rolled out including, as Mark has said, in DeFi, so I think we'll continue to see more of that. We will probably see some SEC proposed rule makings, short of Congress taking action, to give more authority to the SEC. I would say the same on the CFTC side, although they're a little bit behind the SEC simply as a matter of administrative transition. Commissioner Quintenz did resign. The commission now has three members rather than the full five. There's certainly a two to one democratic majority that can move things along by way of rule making, but they still need their acting Chairman, as has been reported to be nominated and confirmed to the full Chairmanship, if you will, so that you have a full Chairman with a back in the White House to set forth an agenda. The CFTC will be a little bit behind that, but I would expect them to move on some pieces as well, probably not with deference, but with an understanding of where the SEC is going.
Josh Sterling:
There are certainly rules we worked on when I was there in the crypto space that we didn't get to do because the pandemic focused our agenda a bit in different ways. They can be picked up or refashioned that the commissioners that are still there are aware of. Those could move quickly, but they might not hit the particular philosophy that Mr. Behnam or any other Chairman over there would want to see put in place. I'd like to think they're perfectly middle-of-the-road, but others may disagree. They would have the reason for that, which I'm sure are good.
Josh Sterling:
That's how I see it. You're going to continue to see speeches and enforcement actions following the speeches. If I were to say which one's going to come out first with rules, I would guess the SEC. Certainly if we do get some legislation and the legislation says the SEC or the CFTC shall adopt this rule, and you know what the rules are, those will come quickly as well. If there's one thing Gensler can do, as he did at the CFTC, which is much smaller than the SEC, the man can get rules adopted right quick.
Dave Dalton:
Let's talk about legislation with Brian. You mentioned maybe Brian would want to comment on this. Brian, two things for you. First of all, you expect Congress to act. What might that look like? Second of all, given your experience at the SEC, what are the key takeaways from all this, and what do our listeners need to know? Talk about potential congressional action and legislation first?
Brian Rabbitt:
Dave, it's a lot easier to talk about Congressional action or activity up on Capitol Hill than it is to predict whether Congress will act on this and where they'll get to. We've seen across the spectrum of substantive issues, Congressional action these days is a difficult thing to get. It can be challenging to move any bill through both houses. What you saw in Chairman Gensler's Aspen remarks, which were followed quickly by a publicly released letter to Senator Elizabeth Warren, was a real focus on the SEC's authorities or lack of authorities in this space.
Brian Rabbitt:
There have been efforts on the Hill to legislate on various topics relating to digital assets for years now, but in his recent remarks, Chairman Gensler called clearly for Congressional action on the topic. It's clear from his speech that he thinks neither the SEC, nor the CFTC have adequate authority to properly regulate the digital asset industry as a whole.
Brian Rabbitt:
As he put it, there are what he called "gaps" in the current regulatory framework. Regulators need, again in his words, additional authority to prevent transactions products, platforms, and exchanges from falling through the regulatory cracks. It was remarkable. I've never seen, or have not yet seen, as clearer a recognition from a regulator in this area that additional authority is both necessary and desirable and a clear call for that.
Brian Rabbitt:
I think you saw pushback from a couple of different areas to Chairman Gensler's call for additional authority. In addition to Commissioner Quintenz at the CFTC, who pretty quickly issued a statement disputing what he viewed as an attempt by Chairman Gensler to move into areas that the CFTC has traditionally regulated. You also saw Republicans on the Hill, including Representative McHenry who's the ranking member on the House Financial Services Committee push back pretty quickly, as well.
Brian Rabbitt:
He called Chairman Gensler's remarks in his letter to Senator Warren a "power grab". He has been an advocate of, along with a number of other representatives in both parties on the Hill, the creation of a joint SEC/CFTC working group to study the issue and decide whether additional authorities are, in fact, necessary and advisable. That was his response to Chairman Gensler's remarks.
Brian Rabbitt:
It's difficult to predict what Congress will do. If the recent negotiations, or attempt to negotiate, over tax-related treatment of digital assets and cryptocurrencies that we saw in connection with the recent Senate legislation is any indication, it's going to be very hard to build any sort of consensus on this issue on the Hill. Chairman Gensler clearly thinks it's necessary and he's clearly advocating for it both publicly, and I'm sure, privately at the staff level as well.
Dave Dalton:
It will be interesting to watch, that's for certain. Brian: Key takeaways from all this?
Brian Rabbitt:
After listening to Josh and Mark talk, and thinking more about Chairman Gensler's remarks and some of the enforcement actions that have followed closely on the heels of those, to steal a phrase from game of Thrones, "enforcement is coming".
Brian Rabbitt:
Chairman Gensler asked for more authority from Congress. He's been very clear about that. We were just talking about that. There's no indication that he's going to wait for those authorities before taking what I think is probably going to be pretty significant and aggressive action in this space. That was not his track record at the CFTC. He was known as a very aggressive, forward leaning enforcer. You've seen the SEC move into new areas, including DeFi, following Chairman Gensler's speech. I think more is coming and more is coming in new areas that we maybe haven't seen as much focus and activity on in recent years. Everybody should buckle up and get ready.
Dave Dalton:
Keep your eyes open and your radar on, I guess.
Dave Dalton:
This is terrific as usual, Josh, Brian, Mark. A lot of information. You covered a lot of ground in a short period of time. Thanks so much for being here. I have a feeling we're all going to talk about this more soon, probably by the end of the year. Thanks so much. Great program today. I'm so grateful that you made some time for us. Thanks so much. Thank you.
Dave Dalton:
For complete biographies and contact information for Josh, Brian, and Mark, visit jonesday.com. That's also where you'll find our insights page, which features more podcasts, videos, publications, newsletters, blogs, and other useful content. Subscribe to Jones Day Talks at Apple Podcasts or wherever else you find your podcast. Jones Day Talks is produced by Tom Kondilas, and as always, we thank you for listening. I'm Dave Dalton. We'll talk to you next time.
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