The SEC Probably Thinks This Is A Security

columnist Matt Levine. I think that like the idea of like having a safety and Sina's regulator for like a crypto exchange, this feels many years away. Who is, or at least was, a practicing lawyer and someone who has written really extensively about security, securities, law, insider trading, all things that are very much topical in crypto right now.

Matt also interviewed Sam Bankman Free at the recent Bloomberg Crypto suwhere in New York and SPF as he's known, made some very interesting remarks about regulation, clarity, collateral predictability, profitability with sort of a dirty word for a number of years, and it is returned to investor parlance. Over the course of this podcast, will play you some highlights from Matt's conversation with Sam bankmun Freed. Matt, welcome back

to the podcast. Thanks for having me. I want to talk about something right now that does feel novel in the crypto context, which is people seem to actually be getting regulated at the moment. Do you think let's talk about it being reported about people considering regulating them one day? Um, I don't think that people are getting regulated per se. Well, they're getting arrested, yes, sure, they're getting arrested for insider trading.

Coin Base is facing a US investigation on cryptocurrency listings. Is this connect did to the insider trading investigation that was brought against a former coin based manage? Did any

employees inappropriately trade ahead of the announcement? Here in coin Base, by the way, says it did nothing wrong, But of course we have three sources telling Bloomberg there was an ex employee of coin base who got arrested on allegations that he was insider trading nine crypto tokens knowing that they would be listed and kind of like that their prices would go up once they got listed on coin Base.

The weird thing is for the sec to bring this action against this employee, they would have to have defined those crypto tokens and securities for the purposes of their jurisdiction. And that seems to be the thing that has absolutely freaked out a whole bunch of crypto lawyers and CEOs this week. Crypto lawyers are freaking out. I don't understand crypto lawyers, man, I just don't understand it. Like this is a years long thing. To me. The SEC, I think,

has always thought that almost all crypto is securities. I think they think that bitcoin is not a security. I think they have accepted that ethereum is not a security for sort of like historical we forgot about it reasons. And I think like if you came to them today with ethereum, they'd be like, that's a security um. But I think almost everything else they think is a security.

And I think that, like you look at some of the projects in the in the coin base case, like these are companies that are raising money by offering a share of their future profits in order to build a business.

Like it's just so clear that their equity security. It's so clear, and these crypto and like and and I don't I don't understand like the sort of legal analysis of crypto, because like it is the case that big law firms are giving big venture capitalists and coin base is a public company, get the advice that like lots of these companies that are raising money by selling equity securities are not selling securities, and so you can list them as as like commodity tokens on your exchange, and

if you're a venture capitalist, you can buy them and then immediately blow them out to retail without being an underwrit of security. And I think if you tie to anyone at the SEC, they're like, that's nuts, man, that's not And like they thought that forever, and they've said it publicly forever, Like I think there's nuanced that, and there have been there have been SEC speeches were like there's a path to like a utility token that is

not a security. But I think like in general, the sort of posture of the Trump SEC that J. Clayton

SEC was all these things are securities. And they brought a lot of enforcement actions against They used to be called I C O s. Right initially it was just like like the term that that fell out out of favor because like they kept getting enforcement actions for them, and the Gary Gainsler SEC I think has like Gary Ginsler has said publicly all of these things are securities, and the Clayton SEC was right about all of it.

But they haven't brought a lot of enforcement cases. And so there's been this sort of acceptance that you can kind of do this stuff where you are issuing like governance tokens and and I'm exaggerating a little bit as I described this, Like clearly a lawyer has touched this, right, Like there's like an argument that these things are not equity securities, right. The argument is, like, these things are

governance tokens, their utility tokens. They are usable in some app and they don't carry equity like rights to the profits of that protocol. We've just talked a lot about securities and the sec and tokens. If you in other than telling people read read your newsletter and what you write about this constantly, Um, how would you define securities

for our listeners? So securities, it's a complicated question. So, like the main thing is like stocks and bonds, right, Like a sheriff stock is a security, a bond is a security. And then the SEC has this this thing called the Howie test, which comes from a Supreme Court decision, which which is for a thing called an investment contract, which is another thing that's part of the definite the

statutory definition of security. An investment contract is a security, And what makes something an investment contract is like there's a multipart test, but it's like basically an investment of money with the expectation of profit from the activities of

someone else. Right, So if you like give money to a person who manages a company and she does some stuff with your money, and then you expect a return of your money, you know, with a profit from like her activities, you know, that's a that's a sheriff stock kind of But like if you don't call it a sheriff stock and it has different bells and whistles, then

it's still an investment contract. And I think if you look at the crypto world, I think most people would say bitcoin is very clearly not a security because bitcoin people buy because they expect profit. But there's not like a there's no there's no agent acting acting to like make a profit. Right, it's just purely um. It's like gold, where like you can buy gold thinking the price of gold will go up and it's not doing anything right.

You're just expecting the market to go up. But there are these dances where like, buying something because you think other people will buy it doesn't make it a security. Buying something because you think it will be useful on a protocol doesn't make it a security. Buying something because you think like someone will build a useful business that will make it profitable makes it, you know, more or less a security, and tokens kind of have all those

things intertwined. So, Matt, we're going to talk about Celsius. And before we start talking about Celsius, I wanna just contextualize this with you know, SBF sort of riffing on stage about the test that he had for whether he would or would not consider bailing out a crypto company or a crypto lender like a Celsius. Here's that, right. The first test is not even which is bigger. The first test is do I walk away from that first call feeling moderately confident that I know what the numbers are,

whether or not they're good? Do I even know them right? And like that was like sort of like the test for us to like consider doing like just some emergency thing while we could hear in other things. One of the criteria was that we know what the numbers are whether or not they're good. Um, and some failed that test of like not just the numbers were bad, but

like we literally came away confused. We've talked about one domain which people are clamoring for a certain type of SEC clarity, But there's another domain in which people are also clamoring for any type of SEC clarity, and that is situations like what's happening with the Celsius is the three hours capital where you once again have a bunch of people who arguably should have been smarter about their

risk management, etcetera. And you know, in an interview that you had with sound back when Freed, he was like, maybe a regulator should have asked, is there any collateral backing this? Is there is there like anything substantive to this. I think one thing that regulation would really want to

do is like ask is there collateral? Right? Like that that seems like a really important perspective that like there should have been somewho out of oversight, your transparency or like you know, enforced good risk management on but there just wasn't an again from the outward facing perspective, no one has any idea whether or not you actually got

that collateral. These crypto lenning protocols, I think we're very highly leveraged and investing and weird stuff, and people may not have realized how leveraged they were, or how much weird stuff they had, or how concentrated it was, or how insecured it was. You know. Sunda Can said, like, you know, people sort of assume there's collateral, and a

lot of these things are making on secured linths. So one thing is like you could have better disclosure, and one way to get better disclosure is to register things of security. And you look at like Celsius, like cells. The product that Celsius was selling was very similar to the product that block Fire was trying to sell that they got find a hundred million, find a hundred million dollars for and that the SEC said, this product, this like crypto lending product, is a security and so you

have to register. And by the coin based tried to similar things that got shut down before they could even do it. So like is crypto lending and security? Well, the SEC certainly thinks it is. And the fact that Celsius was doing it without registering it. One suggests that the people involved in Celsius could be liable for like deep pockets that floated around Celsius, people who promoted Selsia's, people who bought Selsia's you know, tokens and sold them

or whatever. Or the people involved in Celsias could be liable for um, you know, unregistered sales of securities where they have to get the money back. I don't know how valuable that is because like the money is gone. It's not like there's some other pocket of money that has the Celsius money. But that's one thing. Another thing is like should they have registered that. If they had registered that, then people could have looked at their financial

statements and said, oh, this is like super levered. Right. I don't want to put too much emphasis on that, because Voyager is a public company that does have financial states. It's like it's based on the yes with listened in Canada and like you can go read the financial statements and you can be like, oh, wow, this is lever and like investing in crypto and people bought it anyway, right, So it's not like transparency is not the end all. Yeah.

I mean think about like how people invest in crypto, and people think about people invest in stocks, and like, you know, ask how many people are going to read a balance sheet. There's there's a assumption in the stock market that like like super dangerous over levered companies like want to tract a lot of institutional capital and so like the price will below and retail investors won't. But

and I think that's less true in crypto. And it's like less true in the stock market than people thought it was because like you have events like games that where the sort of institutional conventional wisdom doesn't dissuade people from taking a flyer on the stock. Coming up more on coin Base Securities and Sam bankman Free It's Crypto

Strategy with Bloomberg opinion columnist Matt Levine. The only thing I'd say about Celsius and like the blow up of crypto lenders because like when Sam mcman freed says, you know, maybe a regulator should have asked if I if I had collateral. That's not really an issue for the sec that's that is an intuition around banking. These crypto shadow

banks are banks. You know. One big symptom of the crypto winter is like there's been a blow up of a number of platforms that I would sort of loosely call crypto shadow banks, where they're taking in short term demand money from customers and lending it in weird, opaque ways. And you have touched in some form probably all of those.

You've been a lender, a borrower, a rescuer. So like the natural segway is like how much of the rescuing activity is about that very long run view of like it is healthier for the crypto ecosystem that you are levered to for depositors not to be constantly blown up.

That's a real part of it. And maybe to make this like more concrete, the explicit sort of like working principle we had in a number of these was like it's okay to do a deal that is moderately bad in bailing out a place like the bar was not this is a good return on investment. The bar is like this is not that bad a return on investment, or like we are incinerating a relatively small issue amount

of money in doing this. Actual banks, you know, get collateral for their loans and like you know, don't concentrate all their loan portfolio and tests yeah, Like they have a lot of stuff that regulators impose on them that are not about you know, the like the SEC is essentially a disclosure regulator, right, and like banking regulation is not essentially about disclosure. It's essentially about safety and soundness. And there is a system of regulation based on safety

and soundness for banks. And one sort of stress point in the traditional financial industry is about like what sorts of shadow banks should get swept up into what sort of like quasi banking type regulation where you have like, you know, money market funds are just like, oh, their SEC regulator, they just do whatever they want. And then like people are you know, that's bad because they're kind of a bank, and so like it's driven by the SEC.

There's some you know amount of like capital and safety and sundence regulation that that effectively applies to money market funds because they're like and then in crypto banks, it's like, ah, we'll see what we can get away with, you know. And like you could say, well they should have they should have to register securities and disclose their financials, but like you look at page you're like that doesn't help. I think that like the idea of like having a

safety and sinus regulator for like a crypto exchange. This feels many years away, right, and very like antithetical to like the philosophy of the whole, the whole, the whole thing, right, Like like the FED is going to set up a new regulator who will tell crypto exchanges what they can invest in. It just doesn't seem like that's gonna happen. But it's also one way to prevent the exchanges from

losing all their customers money. I think that like a thing that happens here is that people, you know, it's a bull market. It was a bull It was a bull market for crypto. People are used to like things

working the way they're supposed to work. You know, people got like cuddled by like financial exchanges and banks like just kind of working, and so when they put their money into celsus, they're like, well, that's my money, I'll get that back, even if you know, they sort of expect things to work in a nice way and then like they work in a terrible way, and maybe like in the future, people will ask better questions. I love your optimism. I'm not that optimistic. I'm saying this for completeness.

Um but like you know, I would separate like will people like learn substantive lessons from like will people be less enthusiastic I've putting their money into crypto schemes when the crypto schemes go down, right, Like, I don't know,

we shall see. I've been fascinated, you know. We we had an interview with the founders of Three Arrows Capital in which they kind of told us on the record that the biggest mistake was expecting that markets would continue to rise and that credit would continue to be available henceforth. And sure, but it does. It does strike me. And

this is also something that SPF said. And when you look at the companies in crypto and frankly across the space, I think profitability with sort of a dirty word for a number of years, and it is returned to investor parlance right like last year if he saw a typical funding round from vcs, like, was that valuation related to the profit of the company, probably not, like revenue was sort of like like they're sort of without saying so explicitly,

everyone just subtly slipped from like you know, even though our profit or something to just purely revenue as like the driver of value and like no thought towards like

how profit would eventually catch up to that. And I think that there's been a substantial rerating towards looking for at least likely or at least flaws will pathway towards profitability being a core component of an investment thesis in a company, which feels a little strange to say, but but I think was something that was kind of missing. Do you think any of this is going to change

for institutional lenders and investors and players at all? Or are we just going to be like having another conversation in five years being like, huh, remember when I don't know, I don't know what I mean? So what does institutional I mean? I mean, like, one thing it means is like the most cynical possible view is like you're putting money into protocols that you can blow out to retail, right, where like as institutional is doing an arbitrage between you know,

lots of money. Yeah, and I think that you know, one would hope a retail pullback sort of eliminates that. And then you have institutional investors who are thinking, you know, about investing in building some sort of long term viable business different skills set, right, I mean, I mean, yeah, the skill set disconnect. It is really like what are

you doing is an institutional player in crypto? Like one thing you could be doing is you're a tech venture capitalist, where you're like picking teams and businesses that will build long term, viable, valuable products. Right. Another thing you could be doing is like your a hedge fund or like electronic carbitage firm, and there you're like, there are a lot of gamblers. I can look at like patterns and that gambling and try to you know, anticipate market moves

and make money from it. And like that's a viable institutional product. But like there needs to be some audience that you're interacting with, right right, who's on the other side of the because if it's just like a bunch of abi trage heads funds, than like you know, that

business gets a lot more cut threat. And also like that if it's just those people that goes away like that that business exists in the stock market, right, But the stock market is like doing something, right, it's like funding businesses, and so like you need to have that underlying real economic activity in order to have run an abit trage business against it indeed, well, thank you, terrific,

thank you. You can find more of Matt Levin's work on the Bloomberg terminal, on Bloomberg dot com or on Twitter. He's Matt Underscore Levine. That's l E V I n E. On the next episode of Bloomberg Crypto. Despite being one of the leading cryptocurrency exchanges in the world, coin Base has had, frankly a rough couple of months. They've had to contend with speculations about bankruptcy, deal with increasing regulatory scrutiny, and even handle internal employee dissent. So what's really going

on over there? To help us better understand what's take for coin Base, I'll be joined by Bloomberg Business Week columnists Max Chapkin. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions or suggestions for the show to Crypto at Bloomberg dot net or find us on Twitter. We're at Crypto.

The supervising producer of Bloomberg Crypto is Vicky ver Galina, our senior producer is Janet Babin. Desta wonder At is our engineer. Original music by Leo Sidrin. I'm Stacy Marie Schmal We'll be back tomorrow.