Regulating Cryptocurrency

Litigation Practice Group Teleforum

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Recently there has been much discussion over the proper regulation of cryptocurrencies and initial coin offerings (ICOs), as well as litigation asserting that ICOs must be registered with the Securities and Exchange Commission (SEC).  Given the broad range of products and significant expansion of these markets, there has been confusion over the proper regulation of these instruments under various regulatory frameworks and by various regulatory bodies.  Join us for a Teleforum discussion of these issues featuring Mark Rasmussen, a partner at Jones Day who was appointed to be the first ever receiver in an SEC enforcement action involving an ICO promoter, and Dave Hirsch, an enforcement attorney at the SEC who serves as the Cyber Liaison for the SEC Fort Worth Regional Office and is a member of the SEC DLT Working Group and the Dark Web Working Group.


David Hirsch, Enforcement Attorney, U.S. Securities and Exchange Commission

Mark W. Rasmussen, Partner, Jones Day


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Event Transcript

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Litigation Practice Group, was recorded on Friday, August 17, 2018 during a live teleforum conference call held exclusively for Federalist Society members.     


Micah Wallen:  Welcome to The Federalist Society's teleforum conference call. This afternoon our topic is on Regulating Cryptocurrency. My name is Micah Wallen, and I'm the Assistant Director of Practice Groups here at The Federalist Society.


      As always, please note that all expressions of opinion are those of the experts on today's call.


      Today I'm happy to announce we have joining us David Hirsch, who is an Enforcement Attorney at the U.S. Securities and Exchange Commission. We also have Mark Rasmussen, who is a Partner at Jones Day. After our speakers give their opening remarks, we will then go to audience Q&A. Thank you for speaking with us. Mark, the floor is yours.


Mark W. Rasmussen:  Thanks, Micah, and thank you to The Federalist Society for the opportunity to speak today. Before we dive into the substance, I'll let Dave give his standard disclaimer.


David Hirsch:  I appreciate that. And thanks everyone for joining us today and giving us the opportunity to speak with you. As a matter of policy, the Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the commissioners, or other members of the staff.


Mark W. Rasmussen:  So we'll start at the beginning. I'm sure many people who have joined have heard about Bitcoin and some may be familiar enough with it to explain what it is and how it works. But I'll give a brief overview of it and some of the alternative cryptocurrencies that have emerged.


      There's this fake news story that's floating around on the internet, well, it was last year anyway, about a man from New York who was defrauding people by selling fake Bitcoins. And he made them out of these Chuck E. Cheese tokens. The physical tokens and he scratched off the little Chuck E. Cheese emblem and put a 'B' on them and was purportedly selling them to people. The story was confirmed as false as I understand it. But it raises an interesting question of just what are Bitcoin? What are virtual currencies?


      Bitcoin was the first successful implementation of blockchain technology, and it started with a white paper in 2008, and was first launched in 2009. It was designed by a person named Satoshi Nakamoto, which is a pseudonym, to be -- it was designed to be an electronic cash system that would allow payments to be sent directly from one person to another without going through any kind of financial intermediary—no bank, no PayPal, no Venmo, no system standing between you and person receiving the electronic currency.


      Bitcoin's intended to fill some of the same purposes as the government currency, but it's not recognized as legal tender in the U.S., and it's not backed by bank deposits, and it's value is not based on earnings of any company. It's not, in fact, tangible at all. It's just an entry on a digital ledger. And that ledger is replicated across a network of computers, and those computers communicate directly with one another without any kind of central intermediary. And this peer-to-peer network keeps the ledgers synchronized and records all transactions chronologically and links the transactions in this ongoing chain; thus, the name blockchain. And each set of transactions is linked to the prior set of transactions.


      So in the year since Bitcoin launched, competitive currencies have arisen as well. These are sometimes referred to as altcoins, alternatives to bitcoins. And there are thousands of these that are on the market. Some have characteristics like Bitcoin in that you can transfer value from one person to another, while others are very different, a variety of different characteristics. The prices of bitcoin and other cryptocurrencies if you've been following the headlines have fluctuated wildly over the last year and a half, and the total market cap of all virtual currencies is estimated to be around $200 billion as of a day or two ago. Daily trading volume is around $10 to $20 billion across the entire market, and about a third of that trading volume is in bitcoin.


      So where does bitcoin get its value? Some say that it should have no values. Others say it's based on market forces. Some compare it to gold in that it is scare, it's fungible, it's easily transferable—gold, maybe not so much—but it's easily transferable, and it's portable. It allows the transfer of value, or it can act as a stored value, and it's divisible.


      So some of the headlines, if you've been paying attention, concern so-called initial coin offerings or token sales. They've been popular, particularly over the last year and a half or so as a way to raise capital and distribute coins to the marketplace. I think most would agree that the first ICO, if you will, occurred back in 2013 with Mastercoin, I think is what it was called, or something like that, where someone realized that you could use this Bitcoin network as a protocol layer upon which you can build other currencies, and thus developed this new currency and sold it to the marketplace.


      At its core, an ICO is really a mechanism for some entity to issue a new virtual currency to buyers in exchange for value of some kind. Typically buyers receive these coins or tokens that are related to a specific company, a specific protocol, or a specific application, and they'll give either fiat currency, government currency, or some other virtual currency, such as bitcoin or ether, which is most commonly contributed to ICOs.


      And these coins or tokens can be customized. They carry a variety of rights. Some purport to act like a license or allow you to exchange them for other goods or services that the offering entity provides currently or will provide in the future. Alternatively, you can structure these tokens to be more like investments in that they carry the right to receive profits or dividends or interest. And some entities are issuing these tokens to use the money raised through an ICO as capital to develop their business or the ecosystem which the token exists. Last year there's an estimated $6 billion raised through these ICOs or token sales, and roughly three times that amount has been raised this year according to one tracker. So it's big business. It's growing and probably not going away immediately.


      ICOs can take various forms. A lot last year, particularly, were done through direct sales to the public. The issuer didn't go through the SEC. But more and more I think companies are seeing the risk in that, and we're starting to see businesses offer their tokens under exemptions to the securities laws such as Reg. D, and they're offering them only to accredited investors. Some are looking at doing it through Reg. A as well. Very few are going through the full registration process that you would do for like an IPO, but I'm aware of at least one group called Praetorian that has filed an S-1 registration statement. So that's the lay of the land on ICOs.


      Let me turn to the regulatory landscape for a few minutes before I'd like Dave to elaborate on the SEC's views of this market. And some people have claimed that the cryptocurrency market is the Wild West. And that might be true in some respects, but the Wild West was notable for not having any kind of law enforcement. With the crypto market right now, I think there's a lot of law enforcement, there's a lot of regulatory oversight. You've got the Treasury Department, which generally regards crypto assets as currency and oversees this market through the FinCEN Bureau, Financial Crimes Enforcement Network. FinCEN enforces laws against money laundering, and it's issued guidance way back in 2013 explaining how companies that operate with cryptocurrencies and crypto-assets might come under its purview as money services businesses and might be regulated under the Bank Secrecy Act. And they've issued other interpretive guidance since then.


      The CFTC—Commodity Futures Trading Commission—which enforces the Commodity Exchange Act, regards bitcoin and other cryptocurrencies as commodities. And it has regulatory oversight over derivatives and features tied to commodities and platforms that allow trading of such products. Under Dodd–Frank, it also gained enforcement authority over fraud in connection with the sale of commodities and interstate commerce, whether their derivatives or futures, or if commodities are just being sold in fraudulent spot transactions. And the CFTC has brought quite a number of enforcement actions under the CEA since about September of last year and even before that as well. And one court, Judge Weinstein out in New York, actually upheld the CFTC's jurisdiction over virtual currencies, that they can be treated as commodities and that the CFTC had enforcement authority in connection with fraud and the spot market.


      The SEC considers, as Dave will elaborate on more in a moment, but the SEC considers many virtual currencies to be securities, requires them to be registered or issued via recognized exemptions. And this is probably a good place to let Dave jump in and talk more about the SEC's approach to crypto assets.


David Hirsch:  Absolutely, and thank you very much, Mark. The preliminary view regarding the SEC's take on any digital token or crypto asset is jurisdictional. As Mark indicated, there're a number of different regulators who are all looking at different aspects of cryptocurrencies or crypto assets because there is no universal regulator within the United States who has sole authority over these products. It really depends on what is the specific nature of that product will determine who has the authority and the jurisdiction to regulate it and to enforce violations relating to that.


      And so, at the SEC, our initial view of everything is jurisdictional. Is this an investment contract or security such that we even have the jurisdictional authority to enforce violations or compel compliance without regulations? So kind of as an initial matter, semantics are important here. They're not determinative. That somebody calls something a cryptocurrency, it could still be a security, but we have certainly encountered situations where defendants or people we are investigating will try and argue, "We are a cryptocurrency. The SEC has no authority over currencies, and therefore you're not our regulator, and you can't enforce any potential violations." And so, we try to be fairly careful in describing these products more universally as digital tokens or as crypto assets so as not to sort of pre-judge the outcome as to who has jurisdiction, or what is the product that is going to be reviewed.


      All of these products, when we conduct an analysis of them, really depends on facts and circumstances. The products vary quite a bit. Some more than others, but they can occupy a wide spectrum of different types of offerings, and there is no cookie-cutter mold that either identifies the limits of our jurisdiction or the nature of what it is we are examining, and therefore we need to be flexible in our approach and respectful of other regulators, jurisdiction, and interest in pursuing potential investigations and compliance exams and things of that nature.


      So taking a step back, the SEC, we have a three-part mission statement. One, we are to protect investors. Two, we are to ensure fair and orderly markets. And three, we're supposed to facilitate capital formation. And typically in most regards, I think those three mission statements work very much in harmony with each other. In the context of this emerging technology, there are times where it seems like there may be some tension. And you can envision the situation where we would do everything we could to facilitate capital formation and, in the process, step back from requiring some of the other things we normally require of issuers of securities or investment contracts that we do to try and protect investors. And similarly, we could go so overboard in trying to protect investors that we inadvertently or intentionally stifle innovation and capital formation. And it's always our goal as an agency to be conscious of the tension between those mission statements in this regard and to be respectful of our need to honor all of those different competing, at times, mission obligations.


      From the enforcement side regarding these crypto assets, the SEC, before we do anything, first takes, as I mentioned, a jurisdictional analysis. Is this even something over which we have authority? If it is, then we have to try and look at are there concerns about fraud, such that we're worried about investor loses or investor harm? Are we worried about manipulation of markets? Are we worried about regulatory compliance? Issuers of securities, issuers of investment contracts have obligations under the '33 Act and '34 Act to provide disclosures to their investors. And failing to register means often that those investors miss out on some of the disclosures that are required of companies that do register with the SEC. And so, we see a failure to register, in a way, as a potential threat to investors. Even if there isn't fraud present, they're just not getting all the disclosures to which they are entitled. And so, we may be inclined to bring a regulatory enforcement action. And I'll talk a little bit more about that in a minute.


      We also, at the SEC, we've got a number of different divisions and offices—some policy, some more directly interacting with issuers and investors or advisors. And so, on our examination side, we are looking at people who are creating investment funds that are either offering investment in pools of cryptocurrencies, such as bitcoin, or investments that might contain a number of different of these altcoins that Mark mentioned. Are those investment advisors, are those hedge fund creators or other fund creators complying with all of their obligations to provide adequate disclosures, to make sure that they're adequately protecting and having custody of the assets that they're investing in on behalf of others, and things like that. So we have an active enforcement arm and an active examination arm, and both are very much focused on these emerging issues and emerging technologies.


      The SEC's first and most, I think, important formal discussion of cryptocurrencies, or at least the earliest and most important formal discussion of these crypto assets, was something called the DAO Report. It's also known as a 21(a) report. It came out in July of 2017, and it analyzed and reviewed an investment offering that was live in the spring and summer of 2016. And the DAO is D-A-O, and it's an acronym that stands for decentralized autonomous organization.


      And, essentially, it was an investment vehicle cooked up by a few individuals with the idea that we would have an investment fund devoid of executives and devoid of managers, and it would just be decentralized and open to anybody who wanted to contribute their own assets into it. And the way to contribute assets would be to exchange a token called ether, which is similar to bitcoin in some regards and different in others—the precise mechanics aren't important for the story—to exchange your ether for a new token that was going to be issued by this entity called a DAO token. And then, with that DAO token, you could, as an investor, make decisions as to which possible investments this entity was going to be offering that you wanted to invest in. And when those investments proved profitable, the profits would flow back into the entity writ large, the DAO, and then the profits would immediately and by smart contract, or basically by computer code, be proportionally shared back to each of the investors depending on what proportion of DAO tokens they had contributed to that investment total.


      And the idea, in part, was we're going to get around regulations, and we're not going to have to deal with the SEC or other regulators because we are decentralized. There is no central decision maker making decisions for the company, and therefore there's no obligation. There's nobody who's responsible for all of this. The way that they tried to do all of this is something called a smart contract, where it's basically just computer code that is going to be written in that is going to determine if this, then that; if one thing happens, then something else happens.


      Unfortunately, the creators of the DAO had a not-very-smart contract. It had a significant flaw in it that allowed investors to withdraw more funds than they had contributed. And so, somebody basically figured this out, and before there was ever an investment made by the DAO, this person opened an account and looted the DAO of about, at the time, $65 million worth of ether tokens. Ethereum, as a network, as a cryptocurrency, figured it out and decided to change Ethereum basically. Usually one of the attributes of these cryptocurrencies is that they are immutable; they can't be changed. But here Ethereum said, "Well, we're still young enough, and this is a big enough black eye for us that we're just going to create a whole new Ethereum. It's called a Fork." Again, the mechanics aren't as important as the idea that basically everybody was made whole. All their investors got their money back and everybody was treated as if that whole DAO experiment never happened. They reverted the Ethereum blockchain to before the investments in the DAO occurred.


      So at the SEC, we were faced with a situation where there weren't really investor loses. And we hadn't really done any prior regulatory actions as to this type of investment or vehicle before. We had done other stuff having to do with bitcoin and other things, but in those cases, bitcoin had just been the medium of exchange used to commit fraud. We hadn't really addressed an ICO-type issue, and the DAO is very much an ICO. And so, rather than bringing an enforcement action, we released this report that said we could bring an enforcement action, but we're not doing so here. But we want to share with the public the reasoning that would be behind it had we done so.


      And the reasoning looks at the Howey test, and that's named after a Supreme Court case from 1943, I believe. Howey was a lawsuit having to do with orange groves. So basically the least technologically interesting thing you can think of. But in that case, the SEC asserted jurisdiction over somebody who was selling interests in an orange grove. And the offeror said, "No, we're not a security. You don't have jurisdiction over us." And the Supreme Court said, "No, but you are an investment contract, and the SEC does have authority over investment contract." And the way the Supreme Court got to that conclusion was looking at the nature of what was being offered. And it said it was an investment of money with the expectation of profits based on the efforts of a third party. Sometimes it's not an element, but another factor that's considered as to whether it is a common enterprise. But it's not necessarily written directly into the rule.


      But that Howey test is extremely flexible and has been used ever since by the SEC to help us identify when we have jurisdiction. And here looking at the DAO report, looking at the DAO as an offering, in the report we said there was an investment of money—in this case, ether and its prior precedent from prior SEC cases, where we said bitcoin was effectively money for purposes of deciding whether or not the Howey test applies. Money just means investment of something of value. Here there is an investment of money with the expectation of profits—that was very clear. The whole point of it was it was to be an investment fund that people would profit from—based on the efforts of a third party. That last prong was certainly the most tricky because the entity was supposedly created in a way that there was no third party. It was no individual efforts that would be involved. Everybody would be acting individually and in their own interest, and collectively, it would somehow yield profits.


      But we looked past the marketing and into what was actually happening. And the DAO had a couple of promoters who'd created the code and who went out and raised the funds and marketed it. And so, there were efforts of a third party in that regard, and also the DAO is structured such that they had a class of, let's call them super curators. So a group of like 13 people who would get to decide, is this an investment that we even want to allow our DAO token holders to even put money into. And they would say, "Yay," or "Nay," and they were serving as basically a gatekeeper model, and therefore, the investors could rely on them to determine whether or not they would get profits.


      And so, based on that, we said, yes, there's an investment of ether, expectations of profits, efforts of a third party is the promoters and these super curators. That's an investment contract. It falls under the Howey test. You need to register with the SEC and you didn't. People going forward offering something like this, you should be on notice that we are going to assert jurisdiction if it's similar enough. And by the way, there're a bunch of cryptocurrency or crypto asset exchanges out there where you can buy and sell various of these tokens, including DAO tokens. And we said if you're allowing the purchase and sell of securities on your exchange, then you need to register with us because there're registration requirements for securities exchanges. And if these are securities, you also need to register with us.


      And this was an effort to message the market and let people know what was going to happen. That, unfortunately, did not end the ICO craze. It did not even necessarily even seem to slow it down a whole lot. So in the month that followed, we brought enforcement action in a case called Recoin, where there was a promoter who was offering his own homegrown token. It was purportedly based on his own homegrown blockchain that was going to be supported by, initially, real estate, and then he quickly pivoted and said, "No, no. It's actually going to be supported by diamonds." Spoiler alert, there was no blockchain; there wasn't really any real estate or any diamonds. It was, in our allegation, a fraudulent offering. And so, we brought enforcement action against him, and that is still in litigation out of, I believe, the Eastern District of New York.


      Shortly thereafter, there was a case called Munchee. Munchee was something akin to Yelp. It was an app that hadn't gained as much transaction, I think, as the promoters would've hoped for, and they decided to do an ICO, both to increase their user base and also to raise capital. And they raised about $15 million during their ICO. And they made a bunch of claims about the potential for future profits, and that they had conducted a Howey analysis, and that they determined that they would no longer -- that they passed it. That it was not going to be considered a security. We went in before the ICO was complete and the tokens were actually issued and asked to see the Howey analysis, and I'm paraphrasing broadly, but the response was something skin to, "Well, maybe analysis is a strong word."


      So it turned out that they hadn't really performed a significant Howey analysis. They settled with us right away. We did not seek significant penalties against them. They gave all of the money back to their investors and just decided not to proceed with the ICO. And that was our opportunity, both to stop something we thought needed to be stopped because they had failed to register with us but also to message the market to other people considering doing these types of ICOs, you need to register with the SEC, you need to provide for robust disclosures to your potential investors.


      Again, that didn’t really stop things, and in January and February of this year, I was involved in an investigation into a company called AriseBank, though it actually wasn’t a company. It was just an individual, and I guess a sole proprietorship. He'd never incorporated it anywhere or created an LLC for it, claimed to be the first decentralized bank and claimed to have raised between $600 and $700 million in his ICO. Also claimed to have relationships that would allow him to offer a Visa card, so you could spend any of your 700 different altcoins anywhere that would accept a Visa. We investigated. We discovered that they did not have any relationships that would allow them to issue this kind of debit card. There were significant questions as to how much money they'd really raised and significant doubts that they raised as much as they had claimed, and a couple other things that we thought were probably untrue.


      And so, we sought and were awarded a TRO, a temporary restraining order, and were able to halt the AriseBank ICO before it went fully live. In that case, we also sought and were granted the appointment of a receiver. One of the things that are tricky about these types of investigations, these type of offerings, unlike most securities offerings or most businesses where you have to keep your money in a bank, and we can just to go that bank and issue an asset freeze order and make sure the money stays there until all the facts are determined for the protection of investors, here cryptocurrencies are extremely portable, very easy to dissipate or disappear in a way that would be very difficult to track or retrieve. And so, we wanted to have a receiver onboard who would be able to take possession of whatever money had been raised in the form of digital tokens and hold those for the protection—and keep custody of them—for the protection of the investors and for eventual return to the investors.


      And, actually, my co-presenter today, Mark Rasmussen, is the receiver. He is the first person ever to be appointed a receiver in an SEC action involving digital assets. And he's done a great job of that. That is not an official endorsement.


      And then, there've been some other enforcement actions in the days and weeks since. Just going through quickly, and I'll be happy to answer more questions about that later, Chairman Clayton, who is the chairman of the SEC, has been very open and consistent in public, saying that most ICOs that he sees look like a security. He says that it's possible that you could have an ICO of a token that isn't a security, but he's never seen one. Director Hinman, who's the Director of Corp. Fin. at the SEC, recently gave a speech in which he said, in his personal view—and he gave the same disclaimer before his speech that I gave before mine, so it's his kind of personal views—he doesn't think that Bitcoin is a security in that there isn't really a third party responsible for ensuring any profits, that it is so significantly decentralized that to the extent you make money from Bitcoin, it's based on market forces, not an individual promoter who is doing the work for passive investors. And he made the same comment about ether and Ethereum, although he caveated it mildly in saying, notwithstanding how it may've begun, today ether is so decentralized, you can't really claim that any individual or small group is responsible for generating profits for the investors, and so, therefore, it lacks one of the main prongs of the Howey test and wouldn't be considered a security.


      So some of the issues for kind of looking at this and whether a particular token or asset is a security, decentralization is definitely a factor. Like, if you can point to a person or a small group as primarily it's going to be their efforts that are going to build the network, build the product, build the company, otherwise be responsible for generating the interest that will increase the value of that token over time, then we may have the presence of a third party and passive investors. And that looks a lot more like an investor contact.


      Also, how the asset is marketed and sold. Is it something that the general public can just buy into and one day maybe use, but in the meantime buy and sell on exchanges? Or is it something that is going to a specific user group? So ether, when it was launched, a lot of the people who were buying it in its early stages were people who planned to develop applications on that network and needed that token in order to basically run the computing functions of powering the particular applications they intended to build. So it was sold to kind of a limited group for a limited purposed. And then, also, to what extent is a small group capable of changing the network or changing the asset over time?


Mark W. Rasmussen:  Apart from the regulatory actions that have been brought, there's been a significant amount of private litigation. I won't spend a lot of time on this, but I just wanted to highlight it for the audience. Just this week, in fact, there was a prominent cryptocurrency investor who sued a cellular phone company. He alleged that he lost millions in cryptocurrency because of conduct by the company. Basically, he said that the company allowed someone to hijack his SIM card and then take control of his phone, and through his phone, the hijacker was allegedly able to access his cryptocurrency accounts and steal $24 million from cryptocurrency. So he filed a lawsuit out in California this week seeking putative damages of $200 million and damages of $24 million.


      Other lawsuits, there're several dozen that you could point to, but there've been quite a few that focus on the issue of whether these assets are securities or not. Some of the more prominent ones have involved Ripple Labs, which Ripple controls one of the largest cryptocurrencies, just behind bitcoin and ether in market cap. And it was sued in California state court. That case was removed to federal court. It's a punitive class action under both federal and state securities laws, and the allegation there is that there's a scheme to raise hundreds of millions of dollars through unregistered sales of these tokens. There was no allegation of fraud, just registration violations and they're seeking to get their money back.


      The plaintiff alleged that the company created billions of coins out of thin air and then profited by selling to the public in this, quote unquote, "never-ending initial coin offering." There hasn't been a ruling yet from the court on whether the tokens there are securities. In fact, there hasn't been, outside of one magistrate decision in Florida that I'm aware of, there hasn't been any court ruling in any jurisdiction addressing this question of whether these assets are securities or not. In the Florida case, I think it was undisputed that they were securities. The magistrate judge found that and made a recommendation to the district court judge, but the district court judge, to my knowledge, hasn't taken any action yet.


      There's another case, the one that Dave mentioned earlier, REcoin. There's a parallel criminal proceeding. There's a criminal indictment against the founder. And there's a motion to dismiss the indictment, there, that has been teed up. The motion to dismiss has been briefed and argued, and we're awaiting a ruling. And one of the central issues, of course, is whether the REcoin and DRC tokens were securities or not. But until we get some judicial guidance on that, you've got the SEC has a view, private parties have a view, and we'll just have to see how the case law develops.


      Another private litigation involved Tezos, which was a company that did an ICO last year and raised $200 million or so. There was some conflict among the founders, and a number of class actions were filed out in California. Several of those have been consolidated. The allegations there: also failure to register, and there are some allegations of securities fraud. Again, no ruling out of that, but that'll be one to watch.


      And then, one I've kept my eye on. It's interesting, there's a company in Texas called Nano that launched a NANO coin called XRB, and they sold it to a bunch of investors. And the allegation there is that the company was encouraging investors to place their assets with a particular cryptocurrency exchange. And then their assets disappeared when there was a hack of that exchange. And the lawsuit is alleging that there was some fraud and reckless conduct there going on. And the remedy they're seeking is this "rescue fork." Basically, they want an order compelling the company to rewrite the computer code to restore ownership of the assets to the investors. Nano plaintiff has said they're not going to do that.


      But there's lots of fun issues, I think, ahead for securities litigators to involve in. First and foremost is whether theses crypto assets are securities. Second, issues of class cert will be interesting to litigate, whether there's market efficiency like there is in stock markets, and whether price of crypto assets incorporates new information. With respect to damages, measuring damages is going to be tricky because people are buying these products with all sorts of different cryptocurrencies and those cryptocurrencies have different valuations, some may rise, some may drop. So how do you measure losses? That'll be an interesting issue to work with experts on. And then, asset tracing. If someone loses a lawsuit and moves all of his or her cryptocurrency offshore and hides them and claims poverty and judgment proof, how do you go about proving that, no, that person actually has assets? And that's something we've been involved in at Jones Day in tracing assets for his AriseBank receivership.


      So I think we'll take just some couple minutes with some concluding thoughts on what the future holds and then try to leave about 15 minutes for questions. Dave, do you want to prognosticate about anything for the future in this market?


David Hirsch:  Sure. Absolutely. So I anticipate we will continue to see ICOs, and I hope that we will start to see more of them follow a more traditional securities-offering path, where they register with us; they provide full and fulsome disclosures to their potential investors. Whether they do a full registration or try and go out via an exemption like Reg. D or do a Reg. A offering, my hope is that they will start to become more compliant. We'll see. I'm definitely seeing more of that, but whether that's turning the tide dramatically, I don't yet know. It's early days still.


      I think that we will see some court rulings that will help everybody in the market start to have a better sense of what are exactly the parameters, or at least, what are broadly the parameters of those tokens that are to be considered securities, and those that are to be considered commodities or some third entity not yet named. And so, I think that will be very helpful.


      I don't anticipate that the interest and that the money being thrown at these things is going to go down anytime very soon. It could. Certainly the price of bitcoin was over or was about $20,000 back in January, and I think the last I saw it, it was under seven, and it was under six recently. And so, the market is definitely experienced some clawbacks. I was doing a presentation last year in I think November, and it was only less than $4,000. So it's still way above where it was. It's just a matter of the volatility may impact the interest of this, but so far, it does not appear to have slowed anything down.


Mark W. Rasmussen:  Yeah, I agree with David. The market is going to continue growing. There's a lot of energy and enthusiasm being put into this, a lot of thought. Some in the marketplace would like to see more clarity and guidance from the regulators. I think our regulators are really trying to understand the marketplace. I mean, keep in mind that Bitcoin was launched in 2009. It's actually younger than my twins who are just starting 4th grade. So it's not a mature marketplace yet. We're still trying to figure out how to define the boundaries. The SEC appointed a Crypto Czar recently to try to rationalize the application of U.S. securities laws to the marketplace and to work with other agencies to coordinate oversight.


      And I think over time, as these cryptocurrencies mature and they actually start providing real value to retail customers and people understand how to use them and they can improve our lives, we'll start to see classification of the assets, instead of trying to lump them altogether under this really precise heading of cryptocurrency.


      Some other jurisdictions have tried to classify them. The Swiss Financial regulators has said that you got to evaluate them on their individual merits, but they've set forth some categories. Some are payment tokens, like bitcoin. Some are utility tokens in that you can use them to do something or acquire some service or product. And some are asset tokens that they permit participation in earning streams or they're backed by some assets.


      So I think over time, the market will mature, and we'll start to see more categorization. The regulators will continue to study them, and there'll be more clarity from them and also from the courts, as to who really has oversight over which particular cryptocurrency because they're not homogenous, and you really got to look at them individually. I don't know how soon it will be before we get there but that's ahead, I think.


      So why don’t we stop there and invite any questions.


Micah Wallen:  Thank you, both, for those remarks. Let's go to audience questions.


David Emerson:  David Emerson, here, with The Federalist Society chapter out in Berkley on the West Coast. I've been practicing securities law for decades, and now the kind of disclosure and regulation compliance is extensive. And it's really kind of shocking to see how loose this market and these offerings are. My question has to do with, and I think you just mentioned this in one of your last comments there, about -- we've been talking largely about ICOs. A large part of what's going on are these initial token offerings, the ITOs, which are layered on top of something else, for example, Ethereum. And my question has to do more with the, I guess the final element of the Howey test was third or fourth depending on how you count, but being at the efforts of others, and whether or not in your minds there's a distinction where it's discussing whether the money gets raised on the front end in order to develop a utility for a utility token. Or that the development has been done up front, and then the money for the utility token is basically just implementing kind of the liquid process of the processing of the utility.


      So I'd appreciate your thoughts on that because it's actually been, at least out here, there's a fair amount of discussion about whether or not this is a distinction that we ought to be advising our clients over, and I'd like to get your reactions.


Mark W. Rasmussen:  Yeah, it's a great question. I think it's something that we're all thinking through. It's hard to give a concrete answer in the abstract. But I think regulators and plaintiff's lawyers would say that if you're taking money in -- I've talked with a lot of people that want to do an ICO, and they come to me and say, "But ours is a utility token. It has useful purposes." We probed that a little, and at the end of the day, you find out the real purpose is to just raise capital, to start going out to hire coders, to rent some office space and to buy computers and to develop a code and to develop this network. And if people are purchasing those products before anything is created, it's probably a tough sale to a regulator to convince them that the value of what they're buying isn’t dependent on what comes after, the efforts that come after.


      In contrast, if people have raised capital through traditional means, through angel investors or venture capital, not by selling a token or by selling a registered token, and they use that capital to build out a product offering, some infrastructure, and then they market to the public to the average person: you can use our token on this existing platform to license a song and use that song, or to sell a product, or to do a food review and to claim credit for providing valuable service to the community that is interested in food. There, there's a stronger case, I think, that the regulators might be receptive to that there is value. And so, I think, while I wouldn’t exclude the possibility that the former could be a utility token not a security, I think it's going to be a tough sale to regulators. And that's why we've been encouraging clients to look at registered or exempt offerings if their real purpose is to raise capital and build something out.


David Hirsch:  Yeah, and I would couch all my answers, but particularly one like this with the qualification that I am not a policy guy. I'm an enforcement attorney, so kind of a frontline investigator, and I do not sit in D.C. I'm based here in Fort Worth, and I don't necessarily have great visibility into what the policymaker arm of the SEC is up to in D.C., and I would not want to contradict them or get out ahead of them. And I would also couch, again, that obviously these are all my own individual views.


      But all those caveats being offered, the scenario that you describe, I think before I ever got to the efforts of a third party, I would be looking at the expectation of profit. That to the extent that what you're talking about is just a medium of exchange—I have a token, and I can use that to get something of value from you. You get the token back, and I get the thing of value—I don't know that, necessarily, the person who bought the token would think that that would become more valuable over time. And I don't know that that thing would necessarily want to be or need to be listed on an exchange, which provides liquidity but also creates, I think, the potential for a fluctuating value and a prospect that if your program becomes more successful over time, my tokens will become more valuable over time.


      So one of the first things that I always think about is how is this token being marketed, and how is the investor… and Howey is a weird thing in that a lot of the law is what is in the mind of the person doing the act, typically the issuer. But Howey has kind of a bilateral view where it's not just what the promoter intends. It's what does the investor expect in the expectation of profits? And so, it's being offered in a way where the investor might be buying it so he can get your widget, but he might be buying it because he thinks other people are going to want the widgets and the token will become more valuable over time, then you may have an expectation of profits issue under Howey.


David Emerson:  Right. Okay, thanks, gentlemen.


Micah Wallen:  I'll now hand it back over to our speakers if they have any closing thoughts before we end the call.


Mark W. Rasmussen:  I'll add one thought, sort of elaborating on what Dave said in response to the question. What we saw in the Munchee action, and I think that a great order is worth reading for anybody that's interested in this, is there was an emphasis from the SEC on how the company was marketing the product. If you're marketing the product to crypto-enthusiasts around the globe, intended purpose of it is local to California, purpose of the coin, it can be a harder sell to try to convince a regulator that what you're offering has utility and is not being purchased with the hope that it'll increase in profits. I think if a company, Munchee, for example, had been marketing it to the local California food population saying, "All you who like to go eat, look at our coin. Look at how you can use it and get reward points," because it was intended to act in that fashion. You get reward points for eating and writing reviews. Maybe it's a different outcome there. So that's an important outcome too. And you can't really look at any one of these Howey factors in isolation. You really have to pull all of them together and kind of weigh them collectively.


David Hirsch:  And I would conclude only in just, again, thanking everyone for their time and attention. To the extent we only got one question that means we did a fantastic job and that makes me really happy. To the extent that I was obscure in my comments, and so people don’t even really know where to start unpacking it, then I apologize. But I do very much appreciate the opportunity.


Mark W. Rasmussen:  Yeah, I echo that. Thank you very much for your time and interest in the subject.


Micah Wallen:  And on behalf of The Federalist Society, I want to thank both of our experts for the benefit of their valuable time and expertise today. We welcome listener feedback by email at Thank you all for joining us. We are adjourned.


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