Mar 1, 2024

Commissioner Tung Chan from the Colorado Division of Securities joins "First Mover" to discuss the state of crypto regulation in the U.S. and biggest challenges for a clear path forward.

Video transcript

You can pay your taxes with crypto in Colorado, you can pay DMV fees in Colorado. I think that we're working towards using it in a uh throughout the government in different ways. That was Colorado Securities Commissioner Tung Chen on the novel ways that Colorado is implementing crypto more from her in just a few minutes. Welcome to first mover on coin desk. I'm Jen Sani and as always, I'm here with your top news headlines and interviews with industry heavy hitters. So what's going on in the news this morning? I mean, I'm at East Denver, our commissioner is at East Denver. All the builders are out here in Colorado, but the news is still happening in other regions. Let's head off and find out what's going with World Coin and we haven't talked about that project in a little bit. Their token WLD fell in European morning hours and that's on the back of a lawsuit against Open A I. Now, Reuters is reporting that Elon Musk, we all know him as the owner of social media platform X, the controversial owner of social media platform X. What is what I should be saying? He sued Open A I and CEO Sam Altman for a breach of now. This is coming from a filing on Thursday. Musk is accusing them of breaching contractual agreements made when he helped found the company in 2015. At the time, Altman and Musk were co chairs. There's a little interesting bit of information that you might not have known. Altman is also a board member and co creator of World Coin. The controversial project that aims to scam people eyes in exchange for digital ID and tokens in the past year A I tokens have tended to move when there are developments in the broader artificial intelligence industry. So we'll just continue watching this uh and keep you updated on what's going on with Elon Musk and open A I. Now we're going to talk all about regulation in just a second. But a group of state attorney generals are arguing that the SEC exceeded its authority in suing crypto exchange crack in state law enforcement officials from Montana, Arkansas, Iowa and Moore filed a joint amicus brief on Thursday alongside industry lobbyists. Now, the filing says that the states weren't filing in support of the exchange, but rather in opposition to the federal regulator. The filing also said that the SEC suit might harm consumers and that the agency was expanding the definition of an investment contract. And lastly, some news out of East Denver, Robin Hood announced that they are going to allow users of Robin hood wallet to access swaps on Arbitra. Arbitra is of course a layer two on top of Ethereum Arbitra ARB Token searched on the news jumping more than 11% just moments after that announcement. Now, according to a press release, the two entities are going to work together to support access to cross chain swaps and other campaigns that lower the barriers to use web three on the Robin Hood wallet. Johan Krat, the General manager of Robinhood crypto said, quote, accessing and transacting on LWS has historically been difficult to non crypto natives. But Robin Hood wallet now helps strip away the complexities to help on board those new to web three and quote. All right, let's get to our first interview. Now, regulation is top of mind at East Denver as builders discuss how to navigate the space that is largely unregulated. Joining us now to weigh in is Colorado Securities Commissioner Tung Chen. Hello. Hello. Good morning, Chen. Good morning. How are you enjoying the conference? It's really fun. This year is, uh, just as lively as it always is and it's actually really exciting to see the conference get bigger and bigger and more folks joining from a regulatory perspective. Have there been any conversations that you've had or overheard that have surprised you? I don't think conversations have surprised me because I've been in this space for, uh, almost a decade. So nothing surprises me. It's a really lively ecosystem, uh, full of innovators So, no, you know, it doesn't surprise me at all. Yeah, that is a mark of a veteran in the space. No more prizes. There's no much going on in this industry. That's right. You were on a panel yesterday? It was called this Common Sense crypto Policy within Reach. Curious to hear your thoughts. Do you think it's within reach? Well, before I start, I have to say that I'm speaking on my own behalf and I'm not speaking on the divisions or, um, the states. Uh, so I do have to put in that, uh, uh caveat, but I, I do think it's in within reach. I think we're closer than we've ever been. As I mentioned, I've been in the space for almost 10 years and I do think in the beginning, um, it was, uh, you know, it, it was a lot less clear, um, as more people go in, as more people become involved in crypto and as it becomes more mainstream at the same time, I think, um, there's a maturity in regulation as well. Now, I want to break this down for the audience. You're a state level securities commissioner and then we have the federal level securities commissioners. How, how do the two work together if they do, um, as it pertains to this industry in particular? Well, that's a really good question. Um, I would just speak, uh to how securities works and it, it is relevant to any kind of investment that ends up being a security. So, um, we have federal re uh legislation and then we have uh state legislation and there is some overlapping jurisdiction. But the thinking, I think of having it this way is that we have 50 states and, you know, in Colorado, we have issues with oil in uh other areas, they may have issues with coral or some kind of uh orange groves. Um So there is some thinking that the Feds have this overlay. But at the state level, we know our constituents and we know what's happening here and we know it on the ground level and if somebody loses $500,000 oftentimes, that's too small for the feds. So without us, you have no one looking into that and I don't know about you, but if someone I knew lost $500,000 that would hurt, that hurt a lot. And to feel like nobody understands the securities level of that and nobody's interested in that fraud or regulating that industry. I think once you feel that loss, um, I think it becomes, um, uh, clear why there are state regulators. A lot of state regulators like to say that we're the cops on the beat and in securities terms, that's kind of what it is like. I will know my neighbor and I will know and I will care if you lost $50,000 for folks who are building in this space. How, how would you recommend they navigate this? Right? Because we have state regulators on one hand, who might be saying something different than what the federal regulators are saying, how, how should folks who are maybe at East Denver who have a start up or try to navigate the space, who don't want to get sued kind of um operate? You know, that's a really good question. And I think I have a perspective that maybe uh I haven't heard other folks uh say, say and so maybe the question is one that goes back to the developers. I am really interested in the innovation. The Blockchain is a powerful tool that I think is gonna, in my view, my personal view is going to be integrated into so many aspects of our lives in the future that it will be something that won't feel mysterious and difficult to uh the regular person just like the internet, right? We all use it now. So the question for me is why if you're doing all this innovation on the Blockchain, why do you have to meld it and mix it with a capital raise if once you go into capital raise world, right? You're trying to raise and you're trying to say, hey, if you invest in us, you're gonna be, you know, you're gonna make a lot of money and we're gonna make that happen because we're running this business. That's a security. But you're trying to do this innovation on the other hand, why don't you just do the innovation and do the capital raise in a way that doesn't put consumers at risk? And I think that is the question for me. So I kind of throw it back to of your audience or anyone else who wants to respond to that to let me know why they want to conflate capital raise with innovation. Now, I just want to get some clarity here when you say capital raise. Are you talking about a token launch? Yeah. Yeah, I understand you need capital. Everybody needs capital. The person who's opening car dealership needs capital, the person who's opening a restaurant needs capital, they don't get to violate the laws. But for some reason in this space, if we try to hold people to regulation, a lot of them will say, well, so you're stifling innovation, we're not stifling innovation when you o open a cool brewery, right? And you have to capitalize like everybody else. So I don't really know why those two issues are conflated. And I think that's something that I would love to hear an answer about. Yeah, that is really interesting. I'd love to hear an answer about that too. So then I guess, are you saying that projects who have a token who have launched a token who have uh retail investors who are participating in that token, whether it be for governance or uh more in a kind of capital raise realm should be more aware of securities regulations as we try and figure out um a clear path forward for regulation. So if I think one really good thing in this space as it's evolved is that uh it is becoming more mature and oftentimes through pain. So we have seen FTX Collapse and we've seen Celsius and Voyager of Collapse and issues with Genesis. So, and, and many others, right? And I think that's just fact, I think what you're seeing is that the people in the ecos space who are builders are also people who lost coins or, you know, were involved in these. They're also people who are in the space with their own money and they're starting to realize that they don't love the feeling of losing all the crypto FTX or Celsius or Voyager. And hey, where were the regulators? Right? Like that's what we get like before they like there should be no regulation but then they lose money or their, or their parents lose money or, or somebody they care about loses money and then they're like, oh, so I think the evolution of the space is that they're understanding that nobody wants fraud in this ecos space and, and that fraud in terms of securities is investing under the, under the Howie Test and under the principles since the 9 1934 Securities Act, the principle was if you are hustling to get people to buy your stuff so that they, so that you can use it to, to build your business and you're telling them that this is gonna make you a millionaire. Don't worry, we're taking care of everything. That's a security. It doesn't matter if it's orange groves or crypto or anything. The whole point is, um, in 1934 the securities act was put in place to make sure those kind of hustles are regulated that you can't lie when you make that offering. Right? So it's not regulated like you can't do it, you just can't lie and you have to follow some rules just like everybody else who's right, a small business or starting up. So I think the principle behind that is, uh, sound and it's, it's still there. So when I say capital way, yeah, I mean, if you're trying to get people to buy in and you were telling them you're gonna manage it and they're gonna be so rich, you shouldn't lie, you shouldn't omit material things. It's not fair and that's the principle behind it. I want to talk now a little bit about that clear path forward. You know, we've heard a lot of folks in the industry speak kind of negatively about the fact that there hasn't been a clear path forward with regulation and express, I guess frustration that some of the decisions are being made on a court level, curious to get your perspective there. Well, I don't think that there, uh, uh, well, I think it's a three pronged approach on how our regulation develops. Right. So we've got legislation so that would be the Congress or the state legislatures. Um, and then there is uh the courts, the judiciary and then of course, there are the administrators like the SEC. So I think that, I think that ultimately good re regulation comes from all of those, all of those branches working towards it and it is iterative and it does take time. So in an industry that is, uh, has a lot of urgency. I, I can understand that, that um, process which can be slow, um, would be really frustrating. Uh I think that what's happening now is there's a real will, there's a real push to have legislation take over in Congress. Um, but at the same time, you're seeing uh really important cases happening at the court level and I think the place to look is the second circuit district court. We have the terraform case and we have the, uh, uh the ripple case, two different judges working trying to work out, uh, what a security is, what if security isn't? And I think that's really interesting. Um I think the dominant case that a lot of us talk about in terms of determining whether something is a security is a Howie case and that's over 60 years old by the US Supreme Court. And so you can see that it's not, not just Congress, but it's the judiciary that also will play a big role in how this shakes out. And right now, like I said, I think the second, uh, circuit district Court is where the action is happening. Commissioner. Just before we wrap, I got to ask you what is Colorado doing? Uh, that's different than other states when it comes to crypto regulation. Well, our governor is really tech forward and business friendly and so I think there's a lot of, um, there's a lot of thinking and working groups to, uh, try to develop some innovative ideas. Uh One thing that the governor announced and has that has been happening is you can pay your taxes in crypto. Uh, you can pay your, uh DMV fees in crypto. And these are really exciting. I don't know that there's another state that's doing something like that. Uh, and, and it's, uh, I think it's a lab right now where folks are trying to think about really innovative ways of um incorporating crypto and Blockchain into the government um in a way that is also protective of consumers. So it's a really exciting place with, uh, with um an amazing uh ecosystem of people who are really knowledgeable and there's just a lot of energy here. So I think that um I think that puts Colorado uh at the forefront of innovation and also uh developing some good, good legislation. Do you think we're going to see other states follow suit? I mean, I think about paying taxes in crypto. And I think about if we were just all operating in crypto, how easy it would be to pay your taxes because there would be a clear ledger out there. Do you think we're going to see other states follow suit and see some of these new ways of operating with the government that involve crypto? I think there are a lot of interesting use cases popping up around the country. I believe that there's um like title, they're thinking about um recording your title. Like if you buy a house or something like that, um on the Blockchain, which to me just makes like so much sense. That's not a security issue, right? Like you're recording on the Blockchain and it, it um leverages all the advantages of Blockchain. So it, there's transparency, it's immutable. Um you know, and everyone can look at it and you can look at it and know that nobody else is messing around with it. So I think there are so many different um use cases that are developing around the country. I think that is one of the most exciting things about having a state, um, and federal, uh you know, uh system at the state level, you can really innovate. And if it, if it's a great idea, I think more states will pick it up and, and then, you know, the fed uh can join in. Uh one thing that we are at the state level is we're more nimble, the fed has this overreach, but if it was just feds, it, everything would be even slower. So I do think that the, you'll see more use cases at the state level. I know. I keep saying it's the last question and this is really the last one because we're at East Denver. I know that you served as general counsel for the Ethereum Foundation years ago and it took 10 years to get an approval for spot Bitcoin ETF. Now everyone is talking about a spot Ether ETF. Do you think we're going to get one this year? So exciting. Such a, such a hot question. I think everybody wants to know. Um I don't know. I really, I, I don't, I can't say because I think the SEC has put out statements saying, hey, just because we do one doesn't mean we're doing others. And frankly, that's how it works with uh all other securities. And I don't know, but I will say just to remind people in the crypto space, you're not the, you know, you're very, very important, but you're not the only one. And so whatever they're doing in terms of other spaces, you know, where they are careful and say, you know, just because we do one, we didn't do, we're not gonna do all of them. They say that too in every kind of product in space. So they're gonna say that here. And I think that is fair to say that that's, each one has to be fact specific. And uh so the answer is, I don't know, but the answer is also, you know, you, you guys are really and it, you know, a very urgent space. It's very young, it's very hot and very like, let's go, let's go, let's go and, you know, maybe cool your jets a little bit. Let's so just a little bit, Commissioner. Thank you so much for joining the show this morning. It was a pleasure. It's a pleasure. Thanks for having me. We're going to talk more about that spot, Ether ETF with coin desk reporter Nick Day in just a few minutes. But first, let's take a look at the chart of the day. The chart of the day is presented by, the leading crypto platform trusted by over 80 million users worldwide. Bitcoin, the leading Cryptocurrency by market value has gained over 40% in the last four weeks and is trading just 12% short of its record high as of early this morning in these bullish market conditions, traders and speculators who missed that initial early rally often jump in headfirst using riskier leverage products like futures to maximize gains. If you're one of those people, you might wanna consider this first news and analysis website, the market year said in their Thursday newsletter, quote, Bitcoin RSI at 88 we have not seen RSI this overbought and Bitcoin trading at these absolute levels ever and quote they added that chasing it here looks like a very late trade. RSI is a momentum indicator that measures the speed and change of price movements over a set period. A reading above 70 reflects overbought conditions or a situation where the assets price has seen a long run of success, higher prices or rallied a little too fast and might correct lower soon. That said RSI is not the Holy Grail markets often maintain a strong upward trajectory for days and weeks. Keeping the RSI above 70 for a prolonged time. Ok. Despite everything that's going on in the industry, we're still talking about that spot, Bitcoin ETF and the potential for a spot Ether ETF. Let's take a look at our eth update. This spot Bitcoin ETF update is presented by Grayscale, the world's largest crypto asset manager with the spotlight on the potential for spot E ETF. This year, Coin Desk's managing editor of Global Policy and Regulation. Nick Day joins us now to talk about the legal path ahead. Nick. Welcome back to first mover. I have missed you dearly can react. All right. It took 10 years to get the spot. Bitcoin ETF approved. Now the industry is very hopeful for a spot E ETF uh this spring summer. What's your perspective there? What are folks saying to you? It seems that people are, I would say more optimistic than not about the chances of a spot you ETF getting approved uh the date to look out for is uh late May. So you have a couple of months left of filings or whatnot. But in the next, uh I would say, you know, a couple of weeks, we should start to see the flurry of activity that preceded the spot Bitcoin ETF approval. And that's really what's gonna tell us, you know, if we start seeing uh issuers or would be issuers uh start to update their filings and, you know, all those small little ways that the spot Bitcoin ETF issuers were uh right before that approval in January, then that'll probably be a really good sign that it is gonna happen or it's more likely to happen at least once we get to that May, I think it's May night then like now, uh spot E ETF issuers are reportedly supposed to meet with the SEC this month. Tell me a little bit more. What can we expect from these meetings? Is it going to be very similar to what we saw with the Bitcoin ETF S? Well, that's what, you know, what we're keeping an eye out for is, you know, if after these meetings, we start seeing the issuers start to add little details about, you know, the fees and the custodians and all those little things that I, you know, we saw with the Bitcoin ETF applications, then it shows that there is dialogue happening that the dialogue is progressing. Um If we start seeing takers added, if we start seeing uh the various, you know, parties that are gonna be supporting the ETF S being disposed. Um All of those are the, you know, those details that will be, you know, hopefully seeing uh or nothing as the case may be. Now, Nick, could it be a little bit more complicated? Could the question come up of whether it is a security or not that thus making this um application a little bit more complicated than the Bitcoin application was? Yeah, absolutely. So, uh you know, we've had, we've talked before about how the sec views certain cryptocurrencies. It has been kind of in this weird place where we know that at least pre merge before it was on this proof of state consensus algorithm. Um It was pretty much accepted as not being in security post merge now to move to proof of stake. Uh It's been a little bit more uh unclear, I would say where you have SEC chair, Gary Guns, not outreach stating, but suggesting that it is perhaps more likely to be a security. Now, we haven't seen it mentioned in any of the lawsuits that the SEC has brought against crypto exchange. So the cases against coin base cracking BB US, they don't mention es they do mention other cryptocurrencies as being securities or unregistered securities in the S ECs view and the fact that we haven't seen it, honestly, it's hard to say what to make of that. But what is likely to happen if the TC rejects the E ETF S, especially if they say, well, we think this might be a unregistered security. Um, it's probably the same thing we saw when the SEC rejected the gray scale Bitcoin ETF conversion application, meaning, you know, someone's in a civil and that's when, uh, if that happens, that's when I think we'll probably start seeing a lot more about, you know, just that discussion of whether or not it is uh a security in the S ECs view. Now, I'm curious if you think that the EF ETF is going to come up in the conversation here when that was approved, we had analysts on first mover say that this kind of solidifies e as a commodity and not a security, but like you've just mentioned, Nick, it's kind of murky waters. Do you think that that's gonna come up as we anticipate an approval in May? I would be really surprised if it doesn't. Um Certainly if the SEC decides to reject a spot, Ether ETF, for any reason, we're gonna see a lawsuit and they're gonna make the same argument that gray scale made, which is how are you able to approve a futures Ether ETF uh which has the same underlying data, the same, you know, pricing data uh based on the same, you know, underlying asset uh if you are going to reject uh spot. So, um yeah, the argument is gonna be, it's either the same, you know, you can't argue market manipulation. Uh, we saw how that worked out with the Bitcoin ETF, uh, you know, lawsuit. Um, maybe you can say, oh, it's a security but, uh, you know, it still raises the same question. So just the fact that they're, you know, the fact that it is a thing is gonna make it a lot more difficult, I think for the SEC to reject a spot ether application or, you know, several, uh, without us going through, uh, you know, the same, you know, grounds of legal filings lawsuits. And I mean, without you, I I'm not gonna predict what the lawsuits are gonna result in, but I would say the chances are pretty good that a court of appeals is gonna, you know, make a similar argument or a similar decision to when the Bitcoin ETF applications were being, uh f All right, we are gonna keep an eye on what's going on with the spot E ETF and Nick. Hopefully we'll have you back as there are more legal developments. Thanks for joining. Thank you. That was Coin Desk's managing editor of Global Policy and Regulation Nick Day. That's it for first mover. Happy Friday to you all. Thank you so much for watching and thank you to our guests, Commissioner Tung Chan and Coin desk reporter, Nick Day. As a note, we do sometimes edit interviews on the show for clarity and length. If you can't get enough of news and want to know what's going on this weekend. Head on over to Coin And if you want a little bit of a deeper dive into what's happening in the markets, check out markets daily on the Coin Desk Podcast network that is also sometimes hosted by me and sometimes hosted by our brilliant ETF reporter, Helene Braun. This is first mover. I'm Jensen. Ey. We'll see you on Monday.

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