This is a transcript of the podcast episode Howard Fischer with the US crypto update between GRIP’s US content manager, Julie DiMauro, and Moses Singer LLP and a former SEC litigator, Howard Fischer.
[INTRO]
Julie DiMauro: Hi, welcome to Global Relay Intelligence and Practice podcast. My name is Julie DiMauro, the US Content Manager for GRIP, working in our offices in New York City. At Global Relay Intelligence and Practice, or GRIP as we call it, we offer a range of articles, reports and podcasts on global regulatory compliance topics, and offer insights and best practice pointers. You can find us at grip.globalrelay.com and on LinkedIn, where we hope you will follow us.
Today’s podcast on recent developments in the crypto space, particularly in the US, Attorney Howard Fisher provides an overview of where we are now and where we might be heading in this dynamic arena. Before we move into our discussion, Howard, would you please introduce yourself to our listeners?
Howard Fischer: So thank you, Julie, for having me back on the podcast. I am a partner in the white collar and litigation departments of New York law firm Moses & Singer. But before that, I was a senior trial counsel at the US Securities and Exchange Commission for about a decade or so. And my interest in digital assets, in crypto and in the way that the regulatory world intersects with that of digital assets comes out of that background as a former SEC prosecutor.
And perhaps unfortunately for the digital asset world, the way it has been regulated so far has not been with a series of regulations, with rule proposals, with legislation, but with a series of enforcement cases brought by the SEC and sometimes some other agencies that have established rules for the way it’s supposed to govern itself, not through the public notice period, but through bringing people to court.
Julie DiMauro: Good point and great introduction to our topic today, Howard. Thank you. Just getting into some recent events, the SEC has closed its investigation into the blockchain protocol Ethereum 2.0, and cryptocurrency firm Consensys said in a post on social media platform X last week that that investigation had indeed closed.
It had filed the company Consensys, filed a lawsuit seeking an injunction against the SEC in April over regulation of the Ethereum blockchain. And the company said the SEC’s decision to close that inquiry marked a significant victory for ethereum.
Now, Howard, what do you think? Is that a significant victory for Consensys? Are they right to say that? How do you interpret the SEC’s closure of the inquiry and the significance of that in the crypto sector?
Howard Fischer: I think that while the digital asset industry has certainly been a proponent of a lot of hype in its history, this is one of those times where the hype is actually warranted. I think this is very significant. I think we’re at a point in the SEC’s approach to some digital assets that a year ago, I would have predicted we would never have reached.
Let me just remind your listeners that it was very recently when Chairman Gensler, the head of the SEC, was before Congress. He was pressed repeatedly on whether ether was a security or a commodity.
And he kept saying, I can’t give you that answer just yet. We’re still studying it. And he was asked this again and again, subject to a lot of criticism for seeming to evade the question. But he stuck to his guns. And it seems like now the SEC has receded from the position that we’re still studying the question and has moved towards a, well, I guess we’ve reached a conclusion and there have been to continue the studying metaphors like they’ve finished up and brought their blue book up to the front and are just waiting to be graded by the professor.
But this is very significant. This follows the SEC’s surprising request for more information from various proponents who want to offer an ETH ETF. They’ve essentially approved ETFs for Ethereum. And all we’re waiting for is the S-1 forms to be approved. And for those who aren’t familiar with the way that the SEC regulatory structure works, a form S-1 is effectively a registration form for a new security like an ETF.
And this includes information about the company, prospectuses for the products they want to offer, and detailed investor disclosures. So quite frankly, if you had asked me or pretty much anyone who follows the industry or who was in the industry a year ago or even six months ago, if we would be at this point, I think the answer would have been, it’s always possible, but it’s unlikely. Well, we are at that unlikely point.
Julie DiMauro: Following up on that, I mean, a lot of what Consensys had written in their social media posts was exactly what you said, which is, you know, listen, it’s a commodity. That’s been repeatedly confirmed by the CFTC, allowing folks to transact on their own using Ethereum doesn’t make the apps they use to do so, broker dealers.
So and then you brought up the ETH ETFs. That’s a mouthful. And, you know, ultimate regulatory approval depends on those applications and proving that you have the compliance and infrastructure in place to support these products. Again, it sounds like you think that that approval also has broader implications in terms of the SEC’s posture toward crypto in general, going forward.
I mean, the majority of SEC commissioners, very much so Gary Gensler, but the majority of them, three of the five, have been skeptical, seeing a lot of financial crime emanating from the space. Not sure where, you know, crypto falls in being, you know, whether or not they should be regulated as securities. So how is this going to affect the majority of the SEC’s commissioners and their posture going forward, do you think? The ETH ETF specifically?
Howard Fischer: Well, I think that it is very likely we’re going to see the approval of the ETH ETF sometime this summer, maybe within a few weeks. There are some predictions that it could come as early as the first or second week of July. Chairman Gensler was quoted the other day saying that whether it’s approved depends on how quickly and how completely the applicants fill out their applications and provide all the information required for an S-1. But we’re not looking at a very long time horizon here.
This is something that is going to happen sooner rather than later and much sooner than anyone would have anticipated even two or three months ago. But I think you raised an interesting question about what this means for the broader digital asset world, though. And, you know, there are some who have argued that this might be the harbinger of the SEC taking a broader perspective towards digital assets in general.
We’ve seen the approval of a bitcoin ETF. Now we’ll see the approval of ETH ETFs. So the question many people have asked is, well, does this reflect a real changing of the SEC’s position? And I think we need to be very careful about reaching that conclusion. And we need to be careful for three reasons.
The first is that the SEC, in particular, Chairman Gensler, has expressed significant reservations about the entire space. And I think it’s important to look back at the chairman’s statement when they approved the bitcoin ETFs in which he said through gritted teeth. And very reluctantly, we’re doing this.
The courts have pushed us to do this. But we just want to note that bitcoin, unlike other commodities like steel or gold, is mostly useful for terror financing and money laundering. So these are not the words of a digital asset enthusiast. I think, though, there are two other reasons why we should be careful about announcing that this is some kind of seed change for the regulatory approach to digital assets.
The second issue is investor demand. Right after bitcoin ETFs were approved, there was a tremendous inflow of money into that space. And at some points, there were over a billion dollars a day invested in bitcoin ETFs.
That’s really remarkable. That’s a lot of money. There was huge pent up investor demand. But that demand might have peaked. In the last week or so, we’ve actually seen an outflow of assets from Bitcoin ETFs, although we’re not talking at the same level, obviously, as the inflows. But there has been an outflow.
There’s also been a slight return from the at the all time high prices that have been reached. Ethereum has retreated a little bit in recent days from the prices it had reached when the initial news about the SEC’s change of heart towards ethereum ETFs was reached. So the question is, what is the amount of investor demand? Because if the demand is limited to just several different kinds of assets, then it may not be the SEC holding things up and may be what investors demand.
And I think the last point is performance. We have seen an unprecedented period of good news in the digital asset world. I’ll remind you that, you know, at the end of 2022, with the collapse of FTX, we had seen a year of collapse after collapse of fraud, an incredible amount of carnage in this space. We haven’t seen anything like that. And memories are short. And so people are thinking, well, it’s been good for the last year or so as have broader market indices been. So I think it’s going to continue to be good.
But if we see significant collapse, and who knows what’s going to happen, what’s around the corner, I think there’s going to be both the pullback from investors, as well as from members of Congress who have been pushing the SEC.
And I’ll just close this point on noting that, you know, one of the prime advocates of deregulating digital assets has been Representative Emmer, who is the co-chair of the Congressional Blockchain Congress. And he has been very critical of the SEC and of its approach. But he was one of the first persons to tweet following the collapse of FTX. Where was the SEC? Why did the SEC allow FTX to collapse? Why didn’t it take in Sam Bankman-Fried and talk to him as a source of information? So I think if we do see some kind of turnaround in their performance in this space, there’s going to be a turnaround in attitude as well.
Julie DiMauro: Great points, Howard. Thank you. Very comprehensive. And you’re providing me a bit of a segue into a continuation on, you know, prognosticating, looking toward 2024 specifically. You know, without getting too granular, I would be remiss not to mention that, you know, we are in a presidential campaigning season. It’s strongly getting underway now.
So Donald Trump has been on the campaign trail saying he’s going to end Joe Biden’s war on crypto if he wins the presidential election. But I also hear President Biden has been speaking privately with crypto executives in a more friendly way to establish some ties with them. So do you have any predictions as to what we can expect given either of those administrations taking charge next year?
Howard Fischer: Well, you can call me cynical, but I tend to discount campaign promises. And I’ll point out that a lot of the SEC cases that were very hostile to the digital asset industry were brought under Commissioner Jay Clayton at the beginning, who was a Trump appointee. And Trump has historically been hostile to the digital asset industries and his appointees in his first administration were certainly no friends of the industry either. So I think that we should take campaign statements or campaign promises with a very large grain of salt. And I think that that’s not really a good rubric for making predictions.
What I will say, however, is that I think we’re looking at the wrong organ of government. I think the real locus here is the House and the Senate. And I think you have to look back to the earlier days of the digital asset world, where it marketed itself or saw itself as standing either outside of traditional institutions or in some ways as opposed to them. And that is the ideological grounding of this industry. And I think it’s only been in recent years that it’s learned that you can’t stand outside the industries. I mean, just look at what Sam Bankman-Fried said. I mean, he said he boasted that he gave millions to Democrats openly and millions to Republicans in secret.
Unfortunately, the DOJ decided not to charge him, not to proceed with the trial on the campaign finance violations. So we never really learned what he actually did, which is unfortunate because that would have been very interesting.
But I think we need to look past the presidential election towards partisan elections on all levels. And I think that what we’re going to see is the digital asset industry. What we are seeing is the industry establishing relations with legislators on the Senate side, on the House side, and doing so on both sides of the party, both sides of the political aisle. And one thing to note is that a lot of the places where the digital asset industry is strongest are in blue cities, where there is a base of educated technology workers.
So in order to succeed in influencing the legislative process, which is where the real change is going to happen, there needs to be an outreach towards Democratic legislators because they are going to be the ones who have a vested interest in seeing that the industries in the districts they represent succeed and prosper going forward.
Julie DiMauro: Fantastic points. And absolutely, that industry has been courting congressional representatives, senators and congressional representatives in the House, quite a lot and giving them a lot of money for their political campaigns, plus just, you know, bending their ear. But also, we’ve seen a lot of, and you’ve highlighted this action in the judiciary, right? There’s been a lot of litigation too, from trade industry groups and companies and other persons, individuals. So a lot of it is happening in those other branches. I’m glad you pointed that out.
Getting back though to Congress, the House of Representatives, it’s, you know, having its time in the Senate right now, but, and pausing there, but the House at least passed the financial innovation and technology for the 21st Century Act on May 22. They passed it by a vote of 279 to 136. That law would amend existing securities and commodity regulatory statutes to facilitate the use of digital assets. Where do you see that piece of legislation going, if you were to say, now that it’s sitting in the Senate?
Howard Fischer: What’s interesting, Julie, about this legislation is how relatively even handed it is. There were a lot of proposals going forward, going around. There were proposals that would have taken a very hands-off approach. There were proposals that would have taken a very aggressive pro-regulatory approach. And this one, interestingly, is really a bipartisan compromise in a lot of ways. If you recall, one of the main issues in the regulatory proposals was the question of who is going to regulate crypto.
People who were pro-crypto or who at least wanted more of a regulatory hands-on approach wanted the CFTC to regulate it. Those who wanted a more aggressive stand wanted the SEC to regulate it. And what this does is that it says, okay, both of you could have your turn. Now, the SEC will regulate some parts of the industry. The CFTC will regulate some part of the industry. And in doing so, it really seems to follow some of the recent cases which have made a distinction between digital assets that exist on a specific ecosystem versus those that exist more generally on a blockchain.
So the legislation actually follows a lot of the recent cases. And by giving the SEC and the CFTC authority over different parts of the crypto sphere, I think it is more likely that this is the kind of bipartisan bill that has a stronger chance of passing in the Senate than if it had just been all one thing or all another.
The other thing the bill does is that it says that both the CFTC and the SEC have to come up with a more substantial regulatory framework for different aspects of the industry. So it’s not saying we’re going to tell you exactly what to do. It’s saying we’re telling you what you have to do in terms of what responsibilities you have, but you get to fill out the particularities of those responsibilities and deal with some of the finer details of what any kind of regulation would be.
And it’s sort of interesting, and I have to admit somewhat amusing, to see that a piece of legislation that is designed in some ways to create more certainty over the regulatory framework is calling for what is likely to be if it passes at least a year or so of additional back and forth over what the particularities of the ultimate regulation are going to be.
So and that’s just the process for both of the SEC and the CFTC proposing the regulation, publishing it, taking in comments, and finally approving it. I’m not including in that the expected time, which would include traditional challenges to part of it from one group or another. So this is actually something, because it is relatively even-handed and takes seriously everybody’s concerns, is more likely to win approval on the Senate as well.
Julie DiMauro: Thank you so much for joining me today and sharing your great insights as ever, Howard.
Howard Fischer: Thanks for having me.
Julie DiMauro: And a sincere thank you to our listeners today as well. Please tell your colleagues about GRIP, check out our content each day, and stay tuned for more podcasts. Have a great day, everyone.