Feb 17, 2023

The U.S. Securities and Exchange Commission (SEC) sued Terraform Labs, the company behind the failed TerraUSD stablecoin, and its co-founder, Do Kwon.

Video transcript

The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency. The Securities and Exchange Commission is charging terraform lamps and do with fraud, selling unregistered securities and selling unregistered security based swaps. Well, that's a lot joining us now to discuss this former CFTC chair and Harvard Kennedy School, research fellow and Director of Digital Assets Policy uh of the Digital Assets Pro Policy Project, Timothy Masci. Welcome back, Chairman Massad has been a long, long time. You see? Yeah, it's good to see. So, uh what's your reaction here to uh the S ECs charges against uh do and terraform? Well, I think they were absolutely right to make these charges from what I have read when you solicit people to invest in a token by promising them a 19 to 20% return. That's a security. It doesn't matter that the way you obtain that is depositing your tokens into a smart contract, uh and so forth. Similarly, when you basically market Luna as something that can be obtained by exchanging terra and that the value of Luna will also increase depending on sort of various actions that are taken. I think that's also a security. The industry often complains about lack of regulatory clarity. But you know, you just need to have good lawyers who can read the law and say, yeah, that's probably a security. I think there are other areas where we need clarity and where we need a comprehensive framework. So my only concern is that while I support stronger enforcement, I would also be very much in favor of creating a more comprehensive regulatory uh framework particularly so that we can take advantage of the opportunities with something like stable coins, stable coins to me pose both risks and opportunities and we're not seizing that moment. So there's one other stable coin that's in news, of course, and that's Binance US DB US D um which is issued, the, the, the original form is issued by XOs. However, there's a pegged form that seems to have been issued by Binance, which is supposed to hold B US D and Escrow. It's almost as if it's a, it's a stable coin built off of another stable coin. Um Do you think the sec, we, we don't know the full details of exactly what they're uh looking into here? But do you think that the SEC has any reason to be concerned about B US D or pegged B US D? Which, which one should they be concerned about? Which one should be fine? Yeah, on the, on, on this one, all we have is the fact that the SEC has issued a wells notice so we don't have a complaint yet. We'll really have to wait and see what their charges are. Um, you know, the, and, and the NY uh Department of Financial Services has also uh brought an action against paso with regard to this one. I think the state concern does have to do with the fact that this was being traded on a Blockchain that Nydfs had not approved and they were, had some concerns about that. But you know, when I was saying earlier, we need a, we need a framework. I am speaking of stable coins that are pegged to the dollar and backed by cash or treasury securities unlike terra, but uh the, the B US D coin was meant to operate that way. Um And I do think we would be better off if we could create a framework because you know, here we have a, when you look, when you look at what the US government is saying on those, on the one hand, we have the treasury saying stable coin should only be issued by banks. On the other hand, we have the bank regulators saying banks shouldn't issue stable coins. And then now we have the sec who may be arguing. Uh This is a security because of some particular aspects. So I think we do need a framework there uh because I do think stable coins that are backed by cash uh do pose opportunities as well as risks. Yeah, you were the co-author of the white paper back in August that focuses on putting the stable in stable coins, I guess. You know, how do we go about doing that? Where, where does the industry go from here? Yeah, exactly. I mean, what we wrote about it and I did this with two law professors, Hal Jackson at Harvard Law School and Dan Ari at Cornell, what we argued is while legislation would be great, we don't need to wait for legislation. The bank regulators have the ability today to create a framework that could uh basically license stable coin issuers require that the tokens be fully backed by cash or creasy securities, impose requirements for capital and liquidity and impose requirements on how uh stable coins are traded, where they're traded, what chains they're traded on, making sure those chains have adequate um resilience and, and procedures. Um So they could do that today, we believe. Um because while there have been those in Congress who have called for legislation, there's not yet a consensus on legislation. So, uh another thing that just happened, of course is, is what happened with crack in the. Um, it, it's uh virtually a swap for a fixed for floating, uh seems to have gotten under the skin of the sec and they, they put an end to it. How should such things like staking as a service be regulated if at all? Is it, is it really a security? Is it a type of swap that maybe could be sold to the retail customer? And, and is there a way out for people to, if for companies to offer staking as a service or is it just, uh, you know, something that's just beyond the pale for, for them? Right. Well, when you read the crackin complaint, you see that the SEC does cite a lot of particulars about the crackin program which I think clearly did make this uh solicitation uh of, of an investment contract if you will, I mean, was soliciting people to deposit their tokens in return for essentially a return that uh a profit that Crackin would pay, that wasn't uh necessarily equivalent to what Crackin was earning. Um Now, are there ways to set up staking programs that don't do that? Uh We'll have to see, I think, you know, if it's direct staking that's not going through an intermediary. Uh because, you know, when you have an intermediary soliciting people to do that, that clearly puts it into the uh the uh investment contract category. So it'll, it will take some time to work out. Um But again, you know, what we've seen over and over with the industry is there is an enforcement action and yet similar sorts of things are not then immediately re re evaluated, you know, when, when the SEC settled with block five, which clearly, you know, was a charge that this kind of lending service, uh, violated securities law. We didn't see all the other lending platforms then, you know, revisit what they were doing and walk into the SEC as far as we know, maybe they did to say, well, how can we do what we're doing in con, in conformity with the rules? So the industry does need to step up. I, I agree there's some need for clarity in certain areas. Uh, but I think the industry also needs to be a little bit more forthcoming on compliance. Yeah. Well, Officer um the Office of the Comptroller of the Currency Chief, Michael Xu has previously said that the crypto industry has an unhealthy dependency on hype. So how can regulators better protect investors? Well, I think there, we've seen a lot of that too. Look, once again, I think we need both stronger enforcement and more of a comprehensive regulatory framework because I think, you know, if we had adequate, excuse me, uh investor protections with respect to trading platforms that so that they clearly are required to prevent wash trading clearly are required to ensure that, you know, the tokens they're listing are not securities uh that we have adequate disclosure. You would take some of the hype and uh and uh speculative error out of this market, which would be a good thing. And then maybe we could focus more on developments that truly are um uh innovations that can help improve our financial system instead of just speculative uh investments. All right, Timothy, thank you for weighing in. That was former CFTC chair and Harvard Kennedy School research fellow and director of the Digital Assets Policy Project. Timothy Masset.

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