Cryptocurrencies and the Blockchain


We are the cryptocurrency and blockchain
panel. We will take questions throughout the course of the panel discussions so
don’t feel like it’s necessary to wait until the very end and with that we will
get started. So my name is Melisa Gomez Nelson. I’m a partner at Denton’s and I
sit in the Washington DC office good afternoon my name is Bryan Michael and
I’m a partner at King & Spalding in their Los Angeles office and I’m partner
in our special matters in government investigations Practice Group and head
up our cryptocurrency working group and before joining King & Spalding years ago
I was a federal prosecutor both in New York and Los Angeles and then most
recently was deputy general counsel and group chief compliance officer 21st
Century Fox the median entertainment company and so of both the in-house
experience as well as now obviously back at a law firm.
Good afternoon everyone, my name is Ken Joseph I am a managing director at Duff
and Phelps and also had the firm’s blockchain and cryptocurrency task force
I came to Duff and Phelps this past January having spent 21 years of the US
Securities and Exchange Commission the first 16 is an investigator litigator
and then the last five and a half heading the investment management
examination program for New York and New Jersey which involved of course all of
the many of the world’s largest hedge funds and investment advisors and
investment companies and the like. Thank you, Mary Beth Buchanan. Joseph is
so so modest he did not even mention one of the most key things about him which
is that his law firm is hosting the reception we will come to this evening. Like Bryan I began my career in the US Justice Department I was a assistant US attorney
and then spent eight years as a United States Attorney like Sally the first and
only woman United States attorney in the district in which I served after that
I spent a lot of time at the UN and then I was a partner at this illustrious firm
now Bryan Cave Leighton Paisner and it’s great to be back to spend some time with
some of my former partners I left in April to join the digital asset exchange
known as Kraken the corporate name is Payword Inc., but we do businesses
as Kraken so it has been it’s been a very exciting last couple of months and I’m
very happy to to be here with you today hello my name is Federica De Santis
I’m an associate at Goodwin Proctor Base in London in its privacy in
cybersecurity practice about my brother practices technology so I work with you
know all tech companies in including blockchain field but more broadly on all
fields of technology before joining Goodwin in London I was
an associate in Goodwin Boston offices and before then I qualified isn’t
Italian though your business hélène a media and Technology law firm good
afternoon everyone for those of you who maybe weren’t here this morning I’m a
bank poor our partner at PwC and I had our part digital and forensics
investigations practice in here in the UK what I didn’t say this morning is
that my background is is technology and I specialized in in forensic and legal
technology I’m not I’m not a lawyer but I I kind of spend most of my time
working thank you everyone so like many of you I have you know worked with a lot
of lawyers and have family members who are lawyers and friends who are lawyers
and we often find ourself in the discussion of blockchain and
cryptocurrency and I’ve come to realize that lawyers don’t quite get it how many
people here own cryptocurrency how many people here know what cryptocurrency is
if you were asked the question okay well but you guys are doing better than
most they will say but you know with that I think it would be helpful for the
few who may not fully understand it yet or who may not fully understand that
it’s not all a Ponzi scheme so that Umang is gonna give a little bit of an
overview for us about the technology yeah sure so let me I’ll start with what
blockchain is and then we’ll move on to kind of how blockchain is used and also
talk about cryptocurrency because they do relate together I talked a little bit
about the benefits and then I’ll hand over it to my colleagues on my left to
talk about so imagine a technology where records can be stored facts can be
verified and the security is virtually guaranteed of that information and any
suspicious activity or manipulation of that information is immediately flagged
and that is effectively what blockchain technology supposedly delivers for us so
blockchain technology first of all it is a technology it is a decentralized and
distributed ledger so what does that mean what it means it’s in a not in a
normal situation so for example take your own banking records write your own
transactions they will be held typically by your bank on one or two
central servers by that Bank and that is the only place that information is held
they may have some backups etc with blockchain the information is held in
millions of different places or thousands of different places depending
on what kind of blockchain we’re talking about the information is held that is
held in those thousands or millions of different places is effectively exactly
the same so if it changes in one area that change has to be effected in all
the different places that the information is held and typically the
the the storage of that information is on computers and a lot of cases that
that information is stored on servers or computers held by individuals and
organizations as and there’s an encrypted format but what
that means that comes with a load of benefits that we’ll talk about in a
little while so each record or piece of information whether it’s a transaction
of some sort whether it’s information about a particular widget it’s encrypted
and it’s held in something called a block okay and a block is basically a
bunch of zeros and ones that identify that piece of information the block
itself has a digital fingerprint so if somebody attempts to fraudulently change
the contents of the block the digital fingerprint of that block will change
and what is happening is that on a continuous basis each computer that
holds that information it’s comparing its digital fingerprint of that block
that piece of information with all the other hundreds of thousands or millions
of databases that hold the same bit of information so that enables it to self
verify in addition as you add new information new blocks are added and
order in which those blocks are stored and appear also have their own digital
fingerprint so if you try and change the order in which a piece of information is
stored then the digital fingerprint of the holder will also change again what
that means is if somebody attempts to change the order in which the
information is stored you will the computer itself will immediately know
itself and what you can get is effectively divergence so if somebody
attempts at any point in time to change one of the blocks in any particular
storage location if it doesn’t match with the others it will flag it flag it
up for you so what’s the what are the what are the
uses of this technology well it’s most commonly used in the context of
cryptocurrency or some most commonly known but I’ll come back to
cryptocurrency in a minute because I want to just talk about other uses I
think it’s really important to realize that blockchain will be and is already
being used in other scenarios that are outside of cryptocurrency so let me give
an example around something contracts and if we take a simple
example of a house purchase so you’ve got party a and party B party a selling
their property to pony B they have agreed that the property transaction is
gonna go ahead in in in the standard well they will draw up contracts but in
this case you would have a digital contract that is connected to a
blockchain in addition to that some of the terms that need to be met for that
contract to be fully executed each of those points are also within the
blockchain so again using a simple example for a moment one of the things
that needs to happen for the ownership to go from party a to party B is that
the money has to exchange from party B to party a and that money has to be
received and they need to verify that the source of those funds are clean
effectively so you can now actually create a digital contract that you set
up and as the transaction goes through whether it’s the survey whether it’s the
the money being transferred as those events take place the contract itself
automatically knows that that has happened and it will it will then
execute the next stage itself so you don’t need a human being to necessarily
verify what’s going on there including in certain cases if done done well then
you know transfer of the funds as well and then when the final transfer takes
place of the funds and all the everything is effectively digitally
signed then at that point at least in the UK the Land Registry needs to be
informed that that property is now gone from poly poly a to party B and again
the contract can make that in that information request to the to the
authorities to say this property is now owned by party B and it’s an automatic
transaction and so that that is that is the use of blockchain ins in the context
of small contracts blockchain is being used in many other mechanisms all the
way from Identity Management is being looked at in the context of voting so in
most countries still though the concept of voting is still done bring manually
because because electronically has too many issues with
it in terms of potential fraud but with the with blockchain coming in and by
hacker by enabling individuals to be registered by blockchain and the voting
to occur with blockchain technology the the likelihood of fraud can really be
reduced significantly but back to crypto crypto currency right so what is
cryptocurrency well it’s effectively a form of blockchain it’s a digital
currency which is you which uses the underlying block game blockchain
technology there is no central bank or administrator because remember we’re
blockchain all the information is held on different nodes or computers that are
all around the world in hundreds of thousands of different places so that
means that the exchange of that currency can happen without necessarily a central
party like a bank or a clearinghouse you know it can be a peer-to-peer
transaction but that comes with some benefits in terms of speed in terms of
potential cost savings but it does come also with some damp it downfalls and
pitfalls as well we’ll talk about some of these in terms of terms of the risks
now at the beginning I painted a picture of blockchain which is a very positive
one you know you can’t you can’t you can’t be defrauded it can’t be hacked
one thing that people should remember that it’s not 100 percent right
we’d like with any new technology the criminals will always find a way to work
their way around it so for example one of the things that
can happen is if if 51 percent of the computers that I was talking about are
hundreds or thousands of computers can be taken in control by one single party
then they could very easily start to manipulate the information within the
database because effectively what’s going on is they have the majority of
the servers or the computers under their control they can change the information
in 51 percent and then you’ve got the other 49 percent which will then
automatically agree with that because the majority is effectively effectively
winning there’s there’s the potential in a very
small network of a blockchain to have some collusion between between
individuals that are holding the information as well and then there are a
bunch of legal risks which I will hand over to my colleagues my left if I made
to that very eloquent simplified discussion is there’s a private box
blockchain and there’s a public blockchain so from a business and legal
standpoint I’m sure you would be worried about having your information on a
million or a thousand or hundreds of thousand different nodes the private
blockchain is an attempt to circumvent some of those issues the other thing
that I wanted to point out as well is that as sort of under four Abal they
just made up an English word I think that that the system is designed to be
it is still very much very risky and fraught with fraud that’s not to say
that every user every company is indeed as a fraudulent motive behind it but at
this early stage of the technology it is still very much a Wild Wild West type
situation at least in the perception of most regulators minds and end of the day
it’s created by human beings and so as much as it’s trying to remove the aspect
of trust no need for an escrow agent no need for the middleman which for those
of us who do FCPA and I corruption work sounds like a great opportunity to
actually use it to help mitigate those risks at the end of the day you still
have human beings they’ve created the technology and I think we’ve all seen
enough things that are not hackable be hacked and it’s probably only a matter
of time until it gets to that point you certainly see certain exchanges or
certain more limited you know entities in the crypto blockchain space rather
than the you know the etherium blockchain the big broad ones being
hacked but the risk is real and it’s there and then if you think of the
underpinnings of the blockchain it was largely this decentralized unregulated
no central authority anonymous world you know very libertarian view some would
even say anarchists but if you get into the private blockchain world or what’s
also known as a private ledger you can improve the trust there by having known
parties participate not anonymizing themselves requiring particularly if you
care about AML kyc controls who they are what their identity is but suddenly now
you’re taking a step back really from what sort of the underpinnings of the
blockchain was and it’s gonna start getting back to that element of trust
that and to a certain degree you know the real evangelists of the blockchain
say no longer or what requires trust it just requires you know understanding how
to execute a transaction and then you have this decentralized ledger that you
can look to so it’s I think is that’s evolving and as we’re gonna talk about
regulatory enforcement you’re seeing the sort of the some of the central themes
of the blockchain have to adjust to the realities of the world particularly as
more mainstream players or trying to get into it that’s exactly right and so as
its evolving and changing it’s all happening very quickly and keeping up
with this specifically across the globe is quite challenging at times but I will
say it’s exciting in many ways it’s the future and so with that we’re gonna try
to give a little bit of an overview of what’s happening from a trends
perspective across the globe and since I’m sitting right next to Brian here
I’ll start with the US and and can please feel free to chime in as well and
others so I don’t want to steal Ken’s thunder as a former SCC lawyer but I
think the place to really start with enforcement activity in the blockchain
world is with the SEC they’ve been one of the most active enforcers in this
space and that’s because when you deal with an initial coin offering they’ve in
essence determined and the Chairman J Clayton of the SEC has said there’s
really no coin or sometimes known as a token offering that in their view
doesn’t you know walk and quack like a duck like a security and you know if you
apply the Howey test as many of you may be familiar with as to what is a
security and you apply that to tokens or coins
that are offered the FCC has come down very clearly that their view is at least
they’ve yet to see a coin or token that is not also a security so the
expectation is that in doing an offering you’re gonna comply with the US
securities laws they’ve begun to bring some enforcement action in that space
and they’re ramping up they’ve also issued a lot of subpoenas
across the industry or made informal requests for information to a lot of
players in the crypto and blockchain space
I think they’ll tell you if you talk to them and I’ve talked to a lot of the key
regulators at the Commission or at the Enforcement Division they’re still
catching up themselves and still learning and the technology and the
industry and the ecosystem is evolving so quickly you know it’s really
impossible for them to stay up it to where it is at this present moment and
that’s also created a lot of tension because the regulations are also equally
as far behind and haven’t evolved and are now being used to create enforcement
actions in a new evolving technology and new evolving you know environments you
think there are regulations well if you ask the SEC they’ll tell you that they
are and I and actually I will say though the even the SEC has recognized that
they’ve got to step back a bit from it and they have softened some of the
earlier statements that Jake Layton that you know came out with very strong
statements almost atypical for the Chairman to come out and speak the way
that he did and I think they’re realizing like they don’t want to scare
the innovation away they realize there’s a lot of good actors who maybe have made
missteps because it’s really hard to figure out within this ambiguous
evolving world and they’ve gotten more clarity from the SEC as of late but it’s
still very much a there’s still quite a bit of tension there and I think I think
you’ll find that the two of us don’t really disagree that much look I I
disagree with the fact that there’s regulation because really there isn’t
the this space started to become you know
big in the US and and big around the world in 2013 so since 2013 the
regulators have seen that this is coming but they haven’t really done anything so
it wasn’t until recently that we that we have the SEC even coming out to say what
they think is a security and and what is not and what they have not done is come
up with a set of regulations other than Howie from the 1950s that that we’re
working with to try to figure out whether a token is or isn’t a security
so I am also going to disagree with it I wasn’t endorsing their view I was
espousing what the regulator’s position has been just to I also think that there
clearly are a number of tokens that have a real use they have a use in an actual
network that allows them to provide value and to function in that network
and those tokens are absolutely commodities and and many of those were
were marketed to with it with an exception from the SEC regulations you
know at the time at which they were not fully functional and since that time
many of those tokens have become fully functional so at the point at which they
were originally sold they may have been closer to a security but as they have
evolved they they are a commodity rather than a security so I’m gonna let my
colleague jump in or get a rebuttal on these two points here look it is true
that there is no regulation that the SEC has on it in its playbook if you will
that will ever say the word cryptocurrency
or digital asset in it it is also true that the framework for evaluating
whether something is a security or not is long-standing well settled the 1946
Howey case which either we apply to orange groves it’s a far cry from cryptocurrency yes
but the four-part test which pretty much hinges on a finding of an investment
contract is the framework by which you would apply the analysis yet to
determine whether the SEC first of all has jurisdiction over it the Commission
and I feel streams are a little bit having to defend my former colleagues
but let’s just get the facts straight the Commission could care less whether
currency is being used as currency so the original intent and now they’re
over two maybe three thousand different crypto currencies Bitcoin being one of
the more widely known ones the Commission could care less about
currency being used as currency now the IRS may have an issue
the CFTC may have an issue the states may have initiative and so on but not
the SEC the SEC is most concerned about when whatever the underlying asset is is
being offered for sale meeting how we test to investors period and so I just
want to make sure that everybody understands that regardless of the
underlying asset at issue here some of the same problems and benefits as well
that you would find in any security offering the disclosure is there any
fraud concerns the investor protection concerns are all at play here and I
think that’s where that tension comes from because the SEC has a mandate and a
mission to protect you know mom-and-pop investor the Main Street investor and
you see this much money being made this quickly apparently as easy as it at
least seems with icos the regulators are going to show up because they are I
think faithfully executing their duty and responsibility to try to protect the
investors but to your point they’re applying the Howey test they’re using
regulations that are meant for traditional securities offerings and
applying them now to the crypto world and to initial coin offering and as much
as I agree with Mary Beth that there are utility tokens out there that have
actual use and value beyond just in a trading exchange the SEC is not yet in
or that view and at this point they’ve made some noise that they might be
softening but you know for those of us sitting in the position of having to
represent clients who’ve received those subpoenas requests for information or
may just want to know do I have potential exposure the SEC isn’t quite
where Marybeth is yet and I think that we all would like to see them get there
and there’s a lot of lobbying going on a lot of conversations going on and it’s a
productive dialogue but it’s still very much released from the perspective of
the SEC one that they have not yet moved I think from my perspective far off
their original position I’d like to talk a little bit about the landscape that we
have out there because there is some confusion about you know what what is a
cryptocurrency what is an ICO what is an exchange you know they’re all different
so right now in the market there there are more than 3,000 tokens out there and
not every one of them is a good thing if you look at the the exchanges that are
operating around the world there are more than 200 of them so if you went on
a site coin market capcom you would see all the various exchanges and you would
see you know which ones are more liquid and you know which type of currencies
and then beyond about 25 there when you get past 25 there they’re very small in
you know their their market presence and what you would also see is that almost
all of these exchanges are foreign so we’ve got a handful of exchanges in the
u.s. competing against 95% of exchanges in the world that are operating in
places where there are no regulation so the US companies and the company that I
work with Kraken is one of these companies that is trying to get it right
trying to get it right in the absence of regulation and what we have seen that
lit the little that we’ve seen from the CFTC and from the SEC is regulation by
enforcement that is what it is with with the are you surprised I mean with with
the CFTC for example you know they came out in I think it was 2015 and said
that virtual currency is a commodity and just add for folks the CFTC is the other
most active I would say federal regulator in this space right now and
have as Marybeth has said have you know made some bold pronouncements typically
through their enforcement activity but it’s not as though Congress came out and
said crypto currency is a commodity and therefore we will we will give the CFTC
jurisdiction over this commodity that is not what happened
the CFTC decided upon their own that they were going to call this a commodity
and they were going to take over the regulation of this particular asset and
so they didn’t just say it what they did was they started to put companies out of
business because they were not registered with the CFTC but the problem
here was that there was no way for these companies to become registered with the
CFTC so they were just picking them off one by one and putting them out of
business because they weren’t registered so what the the exchanges did was make
sure that they operated in a manner that was outside of the commodities exchange
act so that they were they were no longer operating you know within that
jurisdiction and they’ve been in Bolden by a couple Federal District Court
decisions and have found that the CFTC does have jurisdiction over crypto
currencies or that they can be under certain circumstances a commodity you
ever do decision in the Eastern District of New York and the District of
Massachusetts very recently so it’s emboldened them quite a bit because
they’re having these victories in court as well so let me contrast even though
it hasn’t been a fair fight apparently okay let me contrast the SEC approach
the developments in these area began with some very public statements by
Chairman Clayton the division director of trading and markets and then the
first really for a for the Commission in this space was with the Dow 21a report
what does that mean they did an investigation they decided not to charge
but they issued a report nevertheless which outlined as far as the SEC is
concerned what a coin offering looks like and what rules are going to be
applied they often mentioned how we test the subsequent series of cases if you
really look at it in addition to the continued speeches about it the feature
of what a coin offering a fraudulent clean offering looks like on the
Commission’s landing webpage they created a token is one token how he
token or something like that but it was all in an effort to increase awareness
and then a series of enforcement cases came see I told you the FCC calling
their piston a series of enforcement cases ensued which focused on those
offerings that were in my view on the extreme end of things these were not
really close calls here these were squarely within the
fraudulent activity spectrum the latest series of cases have moved to the
gatekeepers the unregistered broker dealers and other gatekeepers you
wouldn’t be surprised the lawyers for example who may be advising some of
these companies to proceed with offerings without registering them or
qualifying for an exemption or otherwise registering as a broker dealer in order
to offer securities FINRA the SRO has recently gotten into the act and
actually brought an enforcement action against a friendly registered person for
offering unregistered securities that was in the form of an ICS let’s take a
few steps back okay you know the SEC and I and I do think they did the right
thing by not trying to charge anyone in the in the Dow you know creation and
hack space you should read this down so Dow means decentralized autonomous
organization which meant nobody was in charge and so the creator was not in the
US so while they did the right thing I think that they really they wouldn’t
have been able to do anything else but they did a good service by trying to
explain what in their view would be a security nonetheless they’ve gone
forward and they have prosecuted some of those outliers who are clearly violating
the securities laws and most of the cases that have been brought have been
people who have made wild claims about the the specular you know speculative
nature of what this coin will do and why it is such an investment well that’s
exactly a security you know so so they are going after you know the bad actors
in the space so while it is instructive to to show coin developers what they
should never say you know before they release a token it still isn’t really
providing you know clear guidance and with this issue of being registered as a
broker dealer or an automated trading system well that’s a good idea
assuming that the SEC would allow developers to register these coins as
securities so right now you’ve got a lot of companies going out there getting
these licenses but unless you have something that is registered as security
you can’t trade it on your 80s so again you know we’re lacking regulation and
and the US has in the past not been shy about creating regulation except here in
this instance so we’ve had at least five good years where where they have not you
know really done anything well and I think the idea of guidance is precisely
on point where you have a lot of companies who are our clients and
private practice or companies like crack and who they’re out there they want to
do the right thing they’re trying to navigate all these various jurisdictions
and so we spoke a little bit about the federal side do you all want to talk a
little bit about the state side and how the New York AG is working in in DFS per
a little bit let me set the stage a little because I think Mary Beth’s gonna
have something to add on this point the New York Attorney General and it’s not
surprising in you have state regulators in this space first of all and there’s
state registration or licensing requirements that are out there and in
New York they’ve taken a very aggressive position on this and put themselves out
there starting principally first with the banking regulator the New York
Department of Financial Services DFS and certainly the New York AG or aspiring
governor wasn’t going to be left behind and decided that they were going to get
into the mix as well and recently issued a voluntary information request to some
of the biggest exchanges out there including Kraken whose CEO kindly said a
few to the New York attorney general’s office that’s my perception that’s
that’s the legal term that’s my perception I’m certainly not speaking
for Mary Beth on that but refused to provide that information and ultimately
as a result the report came out a couple weeks ago by the AG’s office in which
they you know took all this information and and then there were three exchanges
that they referred to DFS for not being registered in New York even though
Kraken apparently doesn’t do business in New York and one of them was Kraken so
this needs to be put in in perspective as well I mean theoretically every state
in the country could issue regulations and attempt to regulate cryptocurrency
transfer they could do that some states have most of them have been taking sort
of a hands-off approach but New York decided that they would create a
licensing regime called the bit license which there are a few exchanges that are
registered and Kraken made the conscious decision not to attempt registration in
in the state of New York at that time and since that time you know they they
have refrained from doing business in certain states that that it just was not
when you do a cost-benefit analysis it’s it’s not work sort of the the regulatory
hurdle to you know to do business in these places so when when this request
for voluntary information came out it was right before I came on board a
Kraken would you advise your CEO say something different I think that you
know the the request was a styled as a voluntary request for information we’ve
all received those voluntary it was this information was demanded within within
two weeks so that’s not that doesn’t really sound very very voluntary and to
give a little you know color on this these exchanges particularly the US
exchanges we receive daily requests from law enforcement not just in the US but
around the world because we do business globally so these may be requests in you
know federal criminal cases they may be terrorism cases other types of national
security and we have to process all of these requests and provide information
to law enforcement which we do on a daily basis and we work very closely
with with regulators in in these types of cases so here you know the Krakken
made the decision that we you know we don’t do business here this is not a
place where we want to spend our time and money complying with this you know
maybe had it been asked in a different way like truly voluntary you know come
and help us then maybe you know maybe they would have made a different
decision but if you look at those exchanges that did voluntarily comply
they certainly weren’t rewarded for that either because the New York AG just
decided to publish this opinion and slap everybody around so regardless of
whether they you know do business in New York or not whether they complied or not
the New York AG’s seem to have some unkind words to say for for every
exchange well I’m glad I’m glad you raised this
point because crackin actually was involved in helping the victims of the
mom coccyx and we continue to work with the trustee today to help refund money
to the victims and it’s also appropriate for a
shameless plug for crack in that of these you know hundreds of exchanges
Kraken and coinbase are you know the top two for security so security is really a
very high priority and I think Japan is leading the way now by creating a
comprehensive regulatory scheme so that exchanges would be regular and that’s it
that’s a great segue you know just to talk a little bit about some of the
other regions across the globe and I know if you want to talk a little bit
about the UK and Europe generally yeah and actually what is interesting hearing
from what Brian and Ken we’re saying before is that you know in the u.s. the
approach is that well it looks like a security let’s regulate that as a
security in the UK we had more I would say technical approach so currently
there is no regulation for these kind of activities because it’s really a
technical point so crypto currencies are not included within these specified
activities or specified investment under the financial conduct authority and
regulatory box so the conclusion was that these kind of activities don’t fall
within the current financial regulations and and so likewise for utility tokens
they are just like digital access to services and applications they are not
really security so let’s not regulate them currently so this was the position
I will say indeed I mean is the position currently but the UK has been studying
really hard the subject matter first of all to gain the expertise to understand
what the technology is what are the risk what are the benefit and at the same
time trying to understand what is the right model the right regulation for
this sector especially because of course there are security concerns certainly
but another concern is also making sure that investors invest in the technology
so making sure that they have the confidence and bring the money in the UK
for companies established in the UK and so the current proposal in the UK is
exactly to extend the current financial regulation to you know Karen
exchange platforms and operators in this field so trying to stretch a little bit
the existing regulation and apply it to these operators including of course
making sure that the initial coin offering are you know provide all the
information to investors that advertising that you may often sin okay
in London subway is not misleading so soon this may be regulated and also
making sure that people as Mary Beth was saying you know they may have the right
redress and so making sure that there are like sort of insurance schemes or
there are some mechanism it’s it’s also interesting that you know the UK has
been like sort of looking around to see what is the right model so they’ve seen
Japan they are seeing you know states like for example Malta and Gibraltar
which are you know pretty interesting cases where actually there is regulation
so very recently they enacted this sort of you know digital the basically
blockchain licenses for the operators distributed technology ledger licenses
whereby companies just abide by you know certain principles so it’s a quite
flexible regime and what has been said now in the public what is happening is
that many companies either you know in the US or in Asia are just moving and
you know changing location relocating in these kind of countries because at the
end of the day what companies really want is regulatory certainty which
currently of course is not the case in the UK but from what I’m hearing is also
not the case in the US and so I think the discussion that will be are
happening now is what kind of balanced regulation can really be introduced
while at the same time protecting consumers and also making sure that
whatever regulation is introduced is not dead and old when it is you know created
like it happened for you know that a protection with the gdpr and other kind
of legislation where they were in some respect or really old when they have
been enacted because it’s a technology does evolving every day and so coming
back to the UK they think hearing you know in the
market a operator themself to be regulated because they want at the end
of the day regulation clear guidance from the regulators another development
which is also just I think worth mentioning in Europe is the anti money
laundering directive which directly which will be States Ave implementation
date in January 2020 and the new think is that the currency exchanges platforms
and the Sanya and wallets for cryptocurrencies will be required will
be subject effectively by low to AML requirements so even if today this
happens already on a voluntary basis it will be low so there will be a legal
requirement to identify suspicious transactions and to to identify
customers and to report suspicious transaction and and in the u.s. along
those lines FinCEN has been active in this space and has brought some
enforcement actions for failure to implement or maintain proper AML kyc or
failure to file SAR SARS suspicious activity reports and so that’s another
area of enforcement risk and activity here in the United States compliance
needs and custody needs and AML and kyc meeting incidence in receiverships and
so on in the case of hacks also a huge need to
try to trace where the assets would transfer to and as public as the
blockchain is is traceable to some extent it is
designed to be public yet anonymous which is trying to get it right what
they what they’re required to do under the anti-money laundering requirements
is to to have the the wallet addresses registered so that they verify in
advance where the digital currency will go if it ever moves moves on the
exchange so speaking about some of the other going back to the global trends if
you will maybe both have you seen any advantages from an in-house perspective
to operating in one region more than another or how has it been in your
experience I think right that the the exchanges that want to comply with the
law we are not afraid of these regulatory schemes in other countries
and so right now you do have Japan which is has introduced a series of
regulations that would regulate exchanges you have in abu-dhabi they
have a comprehensive regulatory scheme that was published in advance and people
in the industry made comments and then they made revisions to this this scheme
finally in Singapore they have not yet enacted regulations but they have
published guidelines which again you know members have members of the
industry have commented and they will regulate not necessarily the exchange
but they will regulate the activity so if it’s the activity of a buying or
trading or transferring that’s that’s what they’re regulating whereas with
with Abu Dhabi and Japan they’re actually going to regulate the exchange
and I think ken just gave you a laundry list of things that would keep any
compliance officer general council you know fully engaged 24/7
for as many days as they could fail given how much work needs to be done
there are technological tools out there that are being offered I think even in
the space you have the actual entities that have the know-how within their
companies are building out their own controls as well so you’re seeing a
balance it’s not clear yet what will sort of meet the needs and how
regulators when they do come knocking because right now I think as was said
they’re going after the low-hanging fruit there’s a lot of obvious bad
actors out there but at some point those worlds could you know merge where folks
trying to do the right thing there’s significant loss or a number of victims
you know what point will the government say well what you did was good enough
you tried hard enough or you fell flat and fell short and will hold you
accountable go ahead are you an enforcer I thought that was you back there I take
back everything I said about the CFTC I do I do think that there is a
responsibility on the part of the regulator’s to work with those in the
industry to come up with a set of regulations that make sense and and I do
think that again there has been a little bit of gotcha out there particularly
when they’re there there is not a you know a way for some of the companies you
know to to operate you know with within the old sort of schematic for other
types of commodities so there there’s work to be done on both parts and there
are a lot of really good serious companies out there US companies trying
to get it right and we would like to have the opportunity to see this
technology stay in the US and not follow all the you know flockers to Malta and
in doing that we would like to work with regulators and coming up with something
that makes sense rather than regulators sort of looking for you know someone
who’s doing it wrong I mean certainly the people are doing it wrong should be
prosecuted I mean but Mary Beth have you found that the regulators are receptive
to that because in fact I think your successor Jamie McDonald who is now the
head of enforcement at the CFTC was the former colleague of mine has made it
known that he welcomes the opportunity to talk to you know the Krakens of the
world certainly the SEC having created their new cyber section has lawyers
there I was recently talking to Ken’s former colleague who’s the head of him
exams for the San Francisco regional office of the SEC she too has said she
welcomes those opportunities so I do think there is an avenue there and I’m
curious Mary Beth have you’ve had success in that
that’s right I mean I haven’t we haven’t engaged yet with the new enforcement
director but that’s a great idea thank you I do think that you know the SEC
you’re much better looking you know trying there they’re trying to get it
right as well and they are uncharacteristically open and helpful
and yes I think that they’re doing a great job right now trying to work with
the industry and and I hope the CFTC you know follow suit and you know so let me
just maybe make two points on that one is I look I’ve been around for every
financial crisis that has occurred in the last 21 years on the regulatory side
and I can’t tell you the number of times I’ve heard that’s regulation by
enforcement for the accounting cases the dot-com cases every single one of them
and and we are where we are today the second thing I would say is yes indeed I
think even at the SEC as they regulate they’re also opening the door to
industry there’s a chicken-and-egg problem I think where clearly there are
a lot of folks who want to get it right but as of right now you go in and you
lay it out there’s really no guarantee that what you’re laying out may not
ultimately end up in an enforcement investigation at the minimum or a name
or an exam somewhere down the road so what I encourage folks to take advantage
of that open door I also encouraged especially the lawyers and the
accountants and the other gatekeepers to understand what the regulatory framework
is and to advise your clients accordingly if you’re involved in a
securities offering I don’t care whether it’s cryptocurrency waterbottles
whatever it is there’s a regulatory framework that’s in place that until
it’s changed we need to comply with that are there any other questions from the
audience so the question was where are we with
central bank’s I mean that would be a great irony right it’s exactly what the
creators of cryptocurrency and the mythical Satoshi who created we’re
trying to avoid in the first place and so that might be their worst
you know nightmare come true but there aren’t any central banks that have
issued digital currency yet and candidly I haven’t seen anything that I think is
on the you know anywhere near to that but it’s certainly something they’re
exploring and looking at yeah I mean some have looked at it but I think when
they start really thinking about it it’s very hard to make it fit within the
world in which they operate I think you know it’s the innovators who are gonna
figure out how to fit with some regulatory of all evolution that we
obviously you need the other part of the irony is forget central banks for a
moment but I think there are several governments who recognize the power of
the underlying technology and blockchain technology so whether you end up with a
crypto or not the technology clearly has uses that ultimately may survive we’ve
done it we’ve done work with two governments now I can’t I can’t say
which ones but two governments now who have where we’ve helped them conduct a
study on what digital currency of the future might look like and it’s a case
of kind of how quickly can we get there and how quickly can we build the
confidence but isn’t the bigger story ultimately the blockchain and what it’s
going to create in terms of opportunity exactly I mean you can you know you for
part of this discussion you could you could sing much it’s never
gonna happen it’s all very negative it’s it’s all very risky but the underlying
blockchain blockchain technology brings huge amounts of benefits and as it just
as another example like in the healthcare space to be able to validate
the authenticity of particular drugs right through blockchain it’s gonna it’s
gonna have huge amounts of but we mustn’t forget the underlying technology
just adding that as among said it’s it’s more in other fields of of the business
rather than payment itself because there is also sort of widespread also in in
the UK opinion that really you’re not using cryptocurrencies as a means of
payment because like retailers almost they don’t really accept you know the
Bitcoin or aterial more whatever so it’s more about trying to unleash the in you
know the power of technology for like supply management or other fields rather
than really right now as a means of payment is not really mature and the
result so I NOP near the g20 level international level that there is no
real risk of financial stability right now due to these features we’re coming
up on time so I think we can take one more question if there is one yeah I
mean I mean that’s not the concept of mining Bitcoin as an example it’s hugely
expensive and hugely energy inefficient and in some ways Bitcoin as a
cryptocurrency is a commodity because there’s limited supply because of that
right so but yeah I mean in some cases the dollar cost of the pound cost of of
actually creating a Bitcoin can depending on the value I was just saying
that expensive to mine and power hogging to mine has actually created some
opportunities in some dying towns especially in the New York area I’m
familiar with that have cheap hydroelectric power imported from Canada
thank goodness for the new NAFTA which you know has revitalized have
revitalized those towns at some of the crypto – warehouses and factories and so
on look it’s a supply and demand and I think as long as it’s there and the
technology improves it will continue so it looks like we managed to keep
everyone awake I’m so that’s the success thanks to all of our panel members

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