May 8, 2024

Lisa Bragança, Bragança Law attorney and former SEC enforcement branch chief, joins "First Mover" to discuss Robinhood's Wells Notice from the SEC and the agency's approach to crypto regulation.

Video transcript

I would never bet against the SEC in court. I don't think Robin Hood is likely to win in a full on battle with the SEC. There's yet to be any crypto legislation passed in Congress. And as we creep closer to the election here in the United States, it becomes less and less likely that we'll see any clear laws passed in regards to crypto this year. All of this while the cop on the beat, the SEC continues to regulate by enforcement. Yesterday, we learned that Robin Hood received a Wells notice from the regulator and just a month ago, decentralized Exchange unis swap received the same type of notice here to make sense of this all and tell us what's going on is an attorney at Braganza law and former SEC branch chief Lisa Braganza Lisa. Welcome to first mover. Good morning. It's great to be here. It's great to have you here. There's been a lot going on. I've been so looking forward to this conversation because it's kind of hard to make sense of what's going on when we hear about these wells notices. So let's start um, at the beginning, I believe you've done this for us before, but just humor me, uh, unpack what a Wells notice is and what that actually means for people. Sure. It's such a foreign concept of a Wells notice is uh the notice that the, the securities and exchange commission enforcement division gives to a company or an individual when they have concluded that they are going to recommend that the commission, those five, you know, appointed people, uh who are the commission when they're going to recommend that that commission authorize an action. So it's sort of a heads up like, hey, these are the charges, these are the violations we think you've engaged in. You get a chance now to try and convince us otherwise and maybe to submit something that might convince those five commissioners that that's not true. How likely is it that a company gets a wells notice and that they're actually able to convince, uh, the commissioners that whatever is in that notice is not true. And the reason I ask you that is because often in crypto, we've seen the well notices come and then very soon after comes a lawsuit, right? Typically, uh, you know, I, I think the, the process is, uh, can often work to change what the, the charges are or what enforcement thinks the real violation is very often, there's, that's a way to, uh, move toward a settlement. There are times when those charges change what the enforcement division decides to charge will change. But in this kind of situation, I don't see there being any change. I think this is just uh this is what the enforcement division has concluded. The charges will be. There's very little that Robinhood or Consensus or anybody can say to change their minds. Were you surprised to hear that Robin Hood received a wells notice? I mean, they only offer 15 cryptocurrencies. They seem to be very set on being compliant and working with regulators. Was this surprising for you to hear at this point? Nothing surprises me that nothing about what the sec is doing in crypto can surprise me anymore. Uh You know, I, I think Robin Hood is a registered broker dealer. I mean, it's other entities or it serves as a registered broker dealer. Uh It clearly has compliance people, professionals overseeing what it's doing. I think Robin Hood was trying to be very compliant, but then Coinbase was trying to be very compliant too and, and certain of the other exchanges. So it doesn't surprise me. What do you think happens from here? Um I, I think the SEC is looking to get determinations from the courts about what their view is validating or rejecting their view of what crypto constitutes a security. And I think what's interesting here is that uh the consensus lawsuit I think lays out pretty clearly. Uh the problem of the sec shifting from believing that Ether, which we all kind of thought based on what the SEC said was not a security how that has now, um, in the S ECs estimation become a security somehow, but we don't know exactly what that, what specifically about Ether caused it now to be a security. And I think that's all gonna go in front of the courts. You know, uh, Gary Gensler has asked Congress to weigh in on this. Congress doesn't weigh in the sec. The part of the problem is the SEC is trying to fit crypto the square peg into the round hole of its existing securities loss. And not surprisingly, it doesn't fit. It's interesting that you, you bring up this, the fact that the SEC has asked Congress to come up with clear legislation, but that's not really happening. Gary Gensler has been somewhat of a target for this industry and that's not to say that the industry isn't also looking at Congress and saying, come on, please give us some legislation. Uh, please do something here. Do you think it's maybe, uh, unfair to, to have this view of Gary Gensler when he's just working with? What, what he has? Um, I, I think what's happened most recently with Ether, I, I think results from Gary Gensler being between a rock and a hard place. II, I do hate to really, um, dump on him over that. Um, he is not allowed to comment, um, on what investigations are going on within the sec until that, you know, until the commission has, uh, voted on them and authorized them and they become public via lawsuit or a settlement. So, when congress asks him, well, is either a security or not, if his statement would reveal something that he's not allowed to reveal, he's, he can't really say anything by the same token boy was, uh, the industry gobsmacked by this. It was basically a 180 you know, we all believed based on statements in 1990 2019 and, um, 2020 2021 that Ether was not considered a security by the SEC and, and certainly by the CFTC, which everything it's done has been based on the fact and, and its statements that, um, Ether is a commodity and yet here we are. So break this down for me if Ether is deemed a security, what does that mean for firms that are operating in the United States that are offering Ether to retail investors to trade and buy? And what does that mean for products that have already been authorized by the CFTC? Like the Ether futures? ETF. Oh, the Ether's Futures ETF is definitely a, a conundrum for me. I don't know exactly what's gonna happen with that. That, that's a real kind of mess at this point. I, uh, with respect to others, uh, products, like what consensus is offering or the basic, you know, consensus is, um, lawsuit says, look, we've set up a, a product that they've got two parts to it. They've got their meta mask swap or their meta mask stake, I think with respect to the meta mask swap. You know, they're saying, look, we're like the ebay of Ether. You know, if, if people want to buy or sell, we're just gonna bring those people together. We're gonna charge a commission for that for the cost of having a platform. And that's, that's what we're doing. Unfortunately, that, you know, if the thing that you're selling on ebay is a security, you now have turned into a brokerage firm that the SEC regulates and will shut down if you're not complying with their regulation. So everything turns on whether Ether has changed. And I think what is really at work here is that when the SEC initially was commenting on Ether, that was pre merge and now post merge, we have a, a different kind of animal. And um we also have um this idea of staking this metamask staking is something that, you know, the SEC has gone after. Otherwise they have brought other cases and they, they just don't like staking staking is like a co op and, you know, everybody puts their stuff together and then they, you know, we're all gonna, our fortunes will all rise and fall together. Somebody is kind of managing that, that staking pool and whether it's uh you know, a piece of software that's managing it or it's a person that doesn't make a difference, I think to the SEC and I think to the, the, you know, community it does, but to the SEC it doesn't, you know, a bunch of people have gotten together, they have put their assets, they put their ether into a pool and that then turns it into something that under the Howie test, which I know that your listeners have, have heard many, many times, uh, that now turns those orange groves into a security, turns the ether into a security. Yeah, it's, it feels very, it just feels like, wow, I wish that there could be legislation and I wish that we didn't have to talk about this all the time. It's like, you know, we talk about the Howie Test, we talk about applying it so often on the show and it feels like we're getting nowhere. So we have consensus that is suing the SEC. The SEC has issued wells notices to uh Robin Hood and Unis swap, two very different entities, right? Unis swap is a decentralized exchange. Robin Hood is a centralized exchange. Do these factors actually make a difference when we're looking at, um, applying what a, applying the laws that currently exist? Doesn't matter if something is centralized or decentralized in the eyes of the law at this point? I don't think so. I think if, if a decentralized exchange is used to facilitate staking, I, I think it's the staking itself that the SEC is going to go after I'm not convinced I did think previously that, that centralized versus decentralized might matter because who is the SEC gonna go after? There's no Mr Bitcoin or M Bitcoin that they can bring an action against? But they have done that. Um They have kind of just named a platform or named participants uh not specific like control participants. But uh so I don't think the fact that it's decentralized is, is going to matter. And I think a lot of what is driving the sec rethinking, this is the discussions about A I, we can't have a I sort of stepping in um and taking the place of the person. So, you know, if we have software that's really A I or it's, it's uh just programs are running on the Blockchain uh that can't be used to get around this idea that when people pool assets and then have something or somebody manage them and generate revenues from them that uh that isn't a security. Oh, that's really interesting. I haven't thought about the introduction of A I. So what you're saying is maybe they're trying to nip this in the bud, get some kind of clarity in the courts if they're not getting it from Congress. So that before um things become autonomous and it's harder to pinpoint centralized points in these ecosystems. There, there's some kind of precedent set. Is that what you're saying? I, I just think it's changing the way they're thinking. Um because what happens if you have, um, you know, the SEC regulates investment advisors and brokers will investment advisors make decisions and, and, um, exercise discretion over an account. Well, what if you have A I, an A I program doing that? Well, who's responsible for those investment recommendations and rebalancing and all of that? And what happens when it all goes wrong? Um, I think the SEC would look at that and say, wait a minute, we, we want to hold somebody responsible. We can't just have, you know, somebody turning loose this uh A I program that does investment management for people that, that acts as an investment advisor and then have nobody to go after. So here I think staking is, is really the lightning rod. I think that is what has brought the SEC back to and, you know, we've moved away initially. Ether Ethereum was a proof of work network and that was just like Bitcoin proof of work. Now after the merge, it's become more proof of stake. Well, that's a problem, proof of work while it's very energy intensive. And, you know, it is not something that I, I think people love at this point. Um Proof of steak is very much uh like a co op. We are gonna put our stuff, you know, we're gonna take all our, our toys, we're gonna put them into one basket, then we're gonna loan them out. People are gonna pay to use them and then they're gonna uh all those funds are gonna go back into a bucket and it's all gonna be distributed. Now, that's looking a lot like an enterprise and that's something that the SEC considers to be a security. Now, I asked you if it is deemed to be a security, what that means for firms that have tethers to the US or that are operating in the US? What does that mean for people in the US who are holding e that's a real problem. It's going to make a big difference at some point. I think it's interesting. I, you know, I was just looking at the price and, and um at, at Charlie Gasparino comments about like why hasn't Bitcoin skyrocketed and e you know, plummeted. I, I think everyone knows this is going to take a long time. There's gonna be quite a bit of time uh for people to see how the court looks at this. Um Certainly in the consensus case, I think it's the consensus case against the SEC was filed in a location in Fort Worth, Texas that is likely to be less favorable to sec regulation than many other jurisdictions. So that was a very savvy move. Certainly. Uh you know, when you have Wachtell Lipton representing you, that you're getting the best representation around, uh, you know, was, was quite a savvy move and you know, that's it, the, the Fort Worth District is within the fifth circuit and that's just not a circuit that's terribly friendly to um sec regulations. So we may see rulings, you know, in 2025 let's say, um, from the, the district court, but then that's gonna go to the appellate court, the fifth circuit and then that's gonna take a little while and then, you know, likely things will go to the Supreme Court. So it's gonna be a long time before we really have a ruling there. We may have rulings in the ripple case before that. We may have rulings in other cases Coinbase before that. So, um, you know, there's, there's time for people who hold e um, and, you know, I, I'm not saying that everybody who's a big holder of E should move offshore right now. But, um, you know, it, it's going to potentially become more difficult for people to sell it, buy it, do anything with it before I let you go. I want to get your opinion on two different things. Uh There was a report that came out yesterday by KBW and they said that Robin Hood would likely win in a court case against the SEC because of their strict listing standards. We spoke a little bit about that earlier in our conversation. Do you think that's true? I, but as a rule, I don't bet against the SEC, they are wrong. Sometimes they have made some significant mistakes and also they will abide by whatever the court says. So, um, you know, I think to the extent that they, they're not sure, uh, the court could, court, could provide clarity. Um, but I, I don't know that just the fact that Robin Hood has strict standards is going to be enough. If the SEC has very clearly said, at least for, you know, for the last, since 2019, they've been very clear that the only two digital coins that they considered to be outside the realm of, uh, a security were Bitcoin and Ether. And so if you're listing something other than that, II, I think, you know, you, you've been on notice that, that you're, uh, you have a risky proposition and I think I know the answer to this one, but humor me, do you think there's going to be an approval for a spot Ether ETF soon? How could there possibly be? I don't think so. Um, I, it's, it's really quite puzzling and I don't know what's gonna happen with, you know, the, the existing, um, uh, ETF s or not ETF setps that are out there. I just don't know.

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