Please join this panel to learn about:
- The current state of legislation
- An explanation of the new framework
- The risks that worry officials most and what it means for advisors working with cryptocurrency
- Where oversight is going, and in what areas?
Brian Heimer (00:07):
Well welcome. Appreciate you folks coming out today. We are going to be talking about US government regulation of cryptocurrency Today. I am Brian Heimer, Editor-in-Chief of Financial Planning. Prior to the banking crisis earlier this year, the collapse of FTX and subsequent prosecutions brought crypto into the national spotlight for something other than its unexpected price swings. President Biden signed an executive order aimed at ensuring responsible development of digital assets, along with a framework for how that will work. In this session, we are going to talk with Dan Kobler on those efforts, latest legislation and other efforts into crypto oversight. Dan is CEO of Intel Invests Securities, a firm specializing in raising capital for companies serving the blockchain and cryptocurrency markets, as well as counsel to the Warren Law Group where he is currently involved in several cryptocurrency projects, including representing a client in current in federal court involving a major cryptocurrency hack. Dan, welcome.
Dan Kobler (01:05):
Thank you. Great to be.
Brian Heimer (01:06):
Here. So Dan and I are going to do this as a conversation. We want to open it up. If there is any questions from the audience at any time, raise your hand, say hello. Happy to throw those Dan's way. But Dan, I talked at the beginning right here about FTX and we had a cryptocurrency conference last year that you of course know you came and you spoke, but there was all this hype at the time that this is going to be it. This is the thing that is going to happen, that everyone's going to say, we have got to get regulations really in place and understand the cryptocurrency landscape and how it is going to be regulated. And I haven't seen very much in the mainstream media other than Sam Bankman Free's name lately. Where are we? What's happened since then? And what's sort of the lay of the land when it comes to crypto regulation?
Dan Kobler (01:51):
Well, it is interesting because December 12th, which was when your last conference and I spoke on this similar topic, was the day that Sam Bateman free got arrested. And so it was pretty timely. And then just before.
Brian Heimer (02:03):
We time that on per, yeah.
Dan Kobler (02:04):
Well, that is what I was wondering because a lot has happened just in the last week. Last week, the SSC, as you probably know, they brought two major complaints, one against Coinbase, which is the largest international exchange, and then the other one is Binance and at least the US arm of it. And that is a sea changer because back in December, Dan Shaw did a piece in your magazine and where I said, well, all you have to do is look at the charging documents of the SSC, I am sorry, the indictment against Sam Bankman Freed. And you will be able to know everything you know want to know about the current state of the regulatory actions on crypto. Well, the same is true. Now, if you go online, all you have to do is go to sec.gov and you hit on the press release, they will have the two complaints.
(03:05)
The first complaint against Coinbase is 136 pages, the finances a hundred pages. But do not let that scare you because most of it is talking about the specific tokens that the SEC are claiming are regulated. That should be regulated as securities Solano, Caro, and Polygon. But here's the thing, the SEC lays out in a very cogent, clear way, almost as clear as the indictment against Trump, but we won't go there. Okay. It is so well laid out in terms of a narrative, in terms of what the state of the law is with respect to why these entities should be registered as a broker dealer, why they should be registered as an exchange, why they should be registered as a transfer agent. Equally as important, it talks about the liability, at least in the Coinbase case of the individual control persons. Now, you do not see that a lot with the SSC.
(04:11)
Usually they will go after the entity. And in the Binance case, they did not go after Brian Armstrong, but in the Coinbase they went after Chang Pang Jao, CBZ, and he is the genius behind Coinbase. And in the complaint, they are charging him with very serious it is crimes. I mean, violating the fraud, the conflict of interest, the intermingling of funds. And so to answer your question, you are absolutely right. The media has not covered as much as they were up until Sam Bateman free. He took sort of the air out of the room, but do not let that fool you. There has been far more action happening since December 12th to the present than the previous equivalent time before December 12th. You have the committee, commodity Futures Trading Commission, bringing more enforcement than they have ever brought. You have the SEC adding, they added 20 new investigators and are arguing and will get much more money from Congress to try to regulate the markets.
(05:31)
You have more legislation being proposed, not being adopted. And we can talk about that in a minute, why. Part of it is because Sam Bateman free was the biggest lobbyist, second only to George Soros in terms of contributions to the Democratic Party. So his hand prints are all over the Scow Bozeman Bill, which is also known as the Responsible Financial Innovation Act. They all have these great fancy BSS names. But this bill was backed heavily, not only by Bateman free giving the maximum to stab AAU and Bozeman, but also he paid $270,000 in lobbying costs. And the reason why is that this bill, which has been pulled but is going to be reintroduced, I believe, basically puts the regulation in the hands of the commodity and future trading commission and not the SEC. So the industry very much wants to be regulated as a commodity.
(06:43)
It does not matter from us as a financial planning industry. It really does not because the standard that we have to follow. And I assume that everybody here has either a 63 or a 65 or a six. Somehow you are regulated under FINRA, and if not directly, then indirectly. And the major rule for FINRA is Rule 5, 20, 10, which basically says a member in the conduct of its business must observe high standards of commercial honor and just an equitable principles of trade. Now, that is very, very important because I am a member of the New York Bar and three other bar, and we have similar, vague, aspirational, do the right thing, but it is aspirational, it is not enforceable. The difference between 2010 and the equivalent that you see in the legal profession, the engineering profession, the medical profession is that 2010 not only has teeth, but it has utility. Because the second most important rule that affects our industry, and this gets to the current changes in the regulation because in the absence of any of these pending bills, there is regulation.
(08:15)
it is the current regulation. And after 2010 FINRA, rule 2020 is the most important rule. And what that rule basically says is that no member shall affect a transaction in or induce the purchase or sale of a security by means of a manipulative, deceptive or other fraudulent device or contrivance and the operative word in 2020. And the word that is driving 80% of all this activity is the word security. So once have, then we have the obligation of the anti-fraud. And you may not recognize 2020, but you are probably aware of Rule 10 B five, which is basically the same, nothing fraudulent in connection with the purchase or sale of a security. If you read the AWCS, as I do on a real time basis on the FINRA website, you will see that virtually every time they bring an action against the RIA, by virtue of their licensing with FINRA, it will always key in to 2010.
(09:35)
So if it is fraud, they will say you committed fraud. If it is an outside business activity, whatever the major underlying crime or violation was, FINRA will also charge. It is a violation of 2010. And when you look at 2010, what amazes me as a securities attorney or an attorney at all is that it has never been challenged on the basis of vagueness because who knows what high standards of justice, justice and honor, commercial honor, I do not know what it is, but to my knowledge, it is never really been challenged on that basis. And the reason is the SEC has such broad powers and it is like fighting the IRS. You can fight the IRS and you can fight the SEC, but I do not want to say manipulate it, but they negotiate in such a way that you really either have to be making a stand for some other reason, or you have to be an idiot not to settle and accept that AWC or any other activity that they are charging you with. So I have digressed a little bit, but Well,
Brian Heimer (10:51):
Yeah, I want to ask, because you are talking about where there is two separate paths, it looks like, and you are talking about SEC enforcement action that is leading to a new understanding of the regulation here, right? But there is the other path which is there ever going to actually be any congressional action and regulation? So I guess let's go to that side of it for a second because you, you are right, the SEC has gone after Binance and has gone after Coinbase. Is that first of all, is that the best way to be regulating? Are those actions the way to get to the regulatory framework where everybody feels more comfortable or should this be a legislative action and what is going to get us there?
Dan Kobler (11:34):
Okay, eventually, it definitely will be a legislative action. The president in March 9th, 2022, made a demand of the various regulatory agencies. You got the EPA, the OMB, the Federal Reserve System, FTC CFTC OCC FDIC, and they were all mandated the heads to report back to Biden within, in some cases it was 90 days, and then there is another one within a year. I just read it. Okay. And nobody did it. What is he going to do? Fire? He appointed them. It is just interesting. I didn't how made the point that he was amazing. Nobody really listens to the president, but it is coming in. And the one that is responding the most was Yellen. And she is been out there, she is been talking. So yes, eventually there is going to, and there, there is a committee that has been charged with doing a regulatory framework.
(12:31)
But unlike Europe, the United States has no comprehensive regulatory system at this point. Not only is it bifurcated between the federal and the state, but you have all these various agencies. And one of the big problems is the Administrative Procedures Act because baked into all of this, and the isue that you just raised, Brian, is the APA act constitutional in the sense that it allows the administrative agencies, including the SEC to be judge, prosecutor and jury. And surprisingly enough, the attacks have been getting traction. So for example, the warrants, the Consumer Commission Protection Commission, there is a lawsuit pending now saying that the fact that they are self-funding somehow violates the constitution because they have, it is a conflict of interest. The more fines they get, the more money they get and so on. And so, yes, definitely this will all filter out, but it is moving too fast.
(13:47)
If you read Biden's declaration charging all his agencies, we got to get behind this and we got to look into having a central bank digital currency. They do not know where this is all going. Nobody does. And it is moving so fast, and they're all waiting to see is crypto or fab, is Bitcoin going to crash? it is down to $25,000 today, just below 26,000. It is been down as low as 17,000. It is been as high as 67,000. And people swear, I was down in Bitcoin Miami last month, and I was going to start out and say, how many of you invest in Crypto? I do not care. does not matter. I never answered the truth anyway. But I was going to ask, how many of you have taken the orange pill? I'll ask this question. How many of you have ever heard of that expression when it comes into, has anybody?
(14:53)
No. Okay, so that is what the crypto people talk about. It is from the old movie, the Matrix. And if you believe in freedom in the future and wonderful things, Bitcoin, you have taken the orange pill. But if you want to stay stupid and you want to stay safe and not be with the reality, then you take the blue pill. And Gary Gensler, who I would suggest is probably one of the smartest guys in America with respect to crypto. After he left the Commuted Commodities Future Trading Commission, before he went to the SEC, he taught at MIT. And guess what? He taught crypto. And most of what I learned when I was just starting out learning about this stuff, which is not that long ago, I mean you are talking about 2018, is there is a 24 open source curriculum that is on YouTube, just put in Gensler and MIT.
(15:57)
Each one's about an hour, and he talks about that. So anyway, really, and some of the people we are talking about, you've got to relate to these people, the younger people. Absolutely. Because down in Miami, for example, this was Bitcoin, everything else I know this is a family audience. So everything else, alt coins, they call S four letter word coin. So it does not matter if it is Ether or any of the other thousands of Crypto, it is only Bitcoin that matters to the Bitcoin people. They are so into that. And then you have Ether, you have Solano, you have all these other tokens. And so what the reason why, and basically you have four pending legislation. You have the Gilda Brandand Loomis bill, which is I mentioned the Responsible Financial Innovation Act. Okay? She was quoted just today is saying that she is going to reintroduce that one has the best chance of eventually being the main one because it is going to divide the world into crypto commodities, which is regulated by the CFTC.
(17:15)
Even Gensler is saying some of that should be regulated by them. And then you are going to have the Definition Securities. Then you have the, what is it? The Digital Asset Market Structure and Investor Protection Act. That was just introduced last week, June 2nd, by the guy that had the agricultural committee, Glenn Thompson, and it was co-sponsored by Pat McHenry. Then you have the Stab Bozeman bill, which I talked about. And then the fourth one is the Retirement Savings Modernization Act, which basically says that it is protection for us. If you are investing and putting your clients in crypto, it gives you sort of a safe harbor. And before I forget, I got to tell you about, because it is your folks that told me about this, I hadn't even caught it. Okay, so last in December, the CFP Board put out notice to CFP professionals regarding financial advice about cryptocurrency related assets.
(18:25)
I recommend this to you because it basically will tell you exactly what you need to do. And it is common sense. you are fiduciaries, you have to educate yourself, which by the way, attending conference like this could be used as evidence if you are ever sued in an arbitration because you are taking steps in the right direction to keep yourself to meet whatever standard they're claiming you have to meet. So in addition to the federal stuff, you've got virtually every state in the union regulating crypto. And I got to just tell you something that I think it is funny, Brian, can we do a little humor in this? Sure, of course. It is okay.
Brian Heimer (19:08):
I told a joke. They got two laughs this morning.
Dan Kobler (19:10):
Well, I was one of them. So appreciate that. I would appreciate reciprocity. So I Google cryptocurrency, 2023 legislation, just waiting for one of you out there to say, well, I am from North Dakota. What's the status of the law in North Dakota? And I am ready for you here breaking down by state. Okay, so last night I am reviewing this stuff, and most of it has to do with money transmission. A lot of it is money transmission. A lot of it is tax. A lot of it is uniform commercial code using crypto as security as any other item. Let's see, how am I doing on the top.
Brian Heimer (19:55):
We got six minutes.
Dan Kobler (19:57):
I got six minutes. Okay. So one of them happens to be Missouri under digital asset mining and virtual currency. It is got sexual offender registry. Now, do not ask me why that has to do with crypto, but probably you are not going to get a crypto license if you are on that list.
Brian Heimer (20:19):
Well, I am going to tell you, in Illinois, you can't harvest the deer from the side of the road if you haven't paid child support.
Dan Kobler (20:24):
Okay, there you have it.
Brian Heimer (20:26):
These things.
Dan Kobler (20:27):
There you have it.
Brian Heimer (20:28):
There is a question in the back.
Dan Kobler (20:30):
Yes.
Audience Member 1 (20:31):
I wonder if you care to comment on.
Dan Kobler (20:38):
Oh, yes. Okay. So what she is referring to, it is the first special purpose broker dealer for broker dealer to be able to engage in crypto. And I run a very small licensed broker dealer, and I have set up dozens in the last 45 years. This is what I do. And when I hear these entrepreneurs say, oh, it is so hard to do a broker dealer. Well, we know why it is hard because you are subject to audit. We know why it is hard because you got some compliance officer putting a bullseye on the compliance people, but it is not hard to do. You pay somebody, you get the written supervisor procedure. So that is a step in the right direction, and I think it is going to be a sea change. I got to mention one other thing. In the time I have got yesterday, I am sorry, Friday, a game changer happened, and it is not on anybody's radar yet, but it is a company called UKI.
(21:44)
UKI was one of these platforms that was issuing tokens. They did an ICO initial coin offering, raised several million dollars, but they got hacked for $50 million. That is another myth. Oh, the crypto, you can't get hacked. That is nonsense. It happens all the time. The CFTC won Friday, Thursday actually. But it is not in any of the media where they charged them with illegal exchange. But here's amazing about it. They charged all the individuals, all the people who are voting, who have a token. That is how the decentralized system works. That is why blockchain is so good. You need 51% consensus in order to validate a transaction. Well, guess what? Because of this case, all of those people now could have liability for the acts of the hall. And UKI said, no, no, no. We are an unincorporated association. But California under that law, they said, does not matter.
(22:53)
You are all charged. And then they said, well, you do not even know who we are. So they said, fine, we are going to serve you through your website. And it worked. And I looked in it. there is nothing in the mainstream media yet. It is only online under crypto news. But this is a sea change, a sea change, because now this nonsense was Satoshi Nakamoto being this anonymous guy, which is nonsense to me. Brian, would you publish a letter to the editor if they said anonymous? No, no, no. And yet all it is quaint. No, it is not quaint. It is nonsense. And I'll tell you down in Miami and a lot, I love blockchain. It is the future. You've got people out here like UST, with team members with quant. They're doing Central Bank digital currency in Spain, in Britain. It is the future. But Michael Saylor was in the main hall, and the people around me booed him for saying the following.
(24:00)
Here it goes. I'll paraphrase because he is writing this book on Sam Bateman for free. It will be out soon. He was promoting the book, Liar's Poker, by Michael Lewis. And he says, what's interesting to me, he says, the regular money that we use, it is all based on trust. It is even written and trust God. We trust it is on the dollar bills, but nobody really trusts the banks. We do not trust the banks. If you put somebody in a bank and it was under the insurance, you'd get big, you'd be breaching your fiduciary responsibility. On the other hand, you have all this crypto, the Bitcoin, and it is based on mistrust. Oh, we do not trust a centralized decision maker. We do not trust that. And yet they're all getting ripped off by the Sam Bateman Frees and this Ang Zou and all of these from Genesis to all of these exchanges are going bankrupt.
(25:01)
Three Euros. You name them, what's going on here? So he chuckles boo. People do not like that. So the advice that somebody gave about dealing with the young people, you got to know the lingo, but it is moving so fast, they do not have time to listen and to judge your qualifications of the financial planner. If you do not show an open mind this about crypto and you rush to judgment, you are going to lose that person as a client. And that is going to be a problem because it is the people in this room, and it is the industry that maintains the liquidity and the capital structure of this country. In 1933, when the Securities and Exchange Commission was created, if you go look at Roosevelt's speech as I have done, and he promises and he has Joseph Kennedy promise that he is not going to mess with the capital markets. All he is going to do is keep the poor sucker who's sitting at a bar and has his paycheck, he is going to protect that guy from somebody cycling up to him and saying, hey, I got some bonds to sell.
(26:13)
But guess what? Over the next almost a hundred years, the markets have changed. It is no longer the Rockefellers and the Vanderbilts and the Carnegies that are moving capital round that do not need the protection. That is what Roosevelt even said, and the Kennedy, Joseph Kennedy. But with the increases, sophistication, technology, internet, what's driving these pension funds in the institution are your clients that is controlling it. So all of this SEC rules, the 34 Exchange Act, FINRA, which was the NESD, it was all created to just protect the consumer. But unbeknownst to anybody, it is now what is the major way of protecting the capital markets and keeping the US the best economy in the world. And that was, that is the only reason why you can still, to your question in the back there, I am almost known as a nickel broker. I have as much power as Goldman Sachs, and all I need is a $5,000 net capital. It is crazy. It is never been increased, and there is reasons for that, which we are not going to have time to get to for now.
Brian Heimer (27:31):
Yeah, yeah. Well, I think we are out of time. So Dan, thank you so much for joining us today. Appreciate it. Thanks everybody for joining us here today. I am sure Dan will stick around for a few minutes if anybody has any other questions. We'll see you in the next session.