This is Bloomberg Law with June Brusso from Bloomberg Radio.
As I've often said, it's a wild West and a bunch of casino operators.
SEC chair Gary Gensler has made no secret of his views on the crypto industry, repeatedly arguing that most tokens are subject to his agency's oversight and that swaths of the industry have been breaking the law.
In the crypto space, it's largely built on a business model that's non compliant with the securities laws. People are coe mingling all of the customer funds there. It would be as if the New York Stock Exchange is also operating a hedge fund and trading against their customers.
And now, in a one to two punch, the SEC is cracking down on the shadowy industry that burned investors with blow ups like the collapse of FTX last year, suing its two biggest players, Binance, the world's largest cryptocurrency exchange, and Coinbase Global, the largest US crypto exchange. CEO Brian Armstrong says Coinbase has taken a compliance first approach and in its complaint, the SEC has made no allegations of misappropriation of customer funds or wash trading.
It's really debating this more technical legal question of are some of these assets commodities or are these securities? And I think that's something the court will have to decide to sort of get some legal press, some case law out there which will ultimately benefit us, because that's what we've been asking the SEC for for a long time, is how do we get more clarity? So if we need to go to the course to do it, it's
not our first choice. We'd rather the regular had just published a clearer rule book.
Joining me is securities law expert James Park, a professor at UCLA Law School. Two lawsuits against major crypto exchange is in two days. What's the message the SEA is sending?
So I think that they've been very deliberate and thoughtful about bringing cases and building up the argument that they should regulate the industry. And I think part of what we're seeing here through enforcement is that the SEC is essentially making the case that regulation is necessary, and they are doing so in a way that is not too abrupt.
I mean, I think they're also capitalizing on the SPX crisis, where we all see what can happen with an unregulated exchange, and so I think the argument that exchanges should be regulated and is going to fall in more sympathetic years. And I think that's why we see this one two punch. In these cases that the SEC has brought this week, they're sending a very clear message that they are here in the space and there is asserting their authority to
regulate cryptos. And I think that they're trying to strike while the iron is hot.
Are these cases, the one against Finance and the one against Coinbase? Are they similar in in some ways are completely different?
There are some similarities. I would say the Binance case involves some more serious allegations of market manipulation and permitting market manipulation to happen. There's also an allegation in Binance about commingling of funds and the concern that customer funds that are deposited by US investors could be diverted by the parent company and the founder. And I think this clearly is meant to be analogous to what happened with FTX, where customer funds were diverted and used to make vet
by an affiliated hedge fund. So I think the charges against Finance are more serious although a smaller percentage of Binance's operations are in the United States, and so the significance of the coin Base case is that Coinbase is primarily operating in the United States, but we don't have
the same allegations of market manipulation and problematic commingling. This is really more of a basic argument that this is a securities exchange that is subjects to regulation under the Securities Exchange Act of nineteen thirty four, and that basic argument is made with respect to both Finance and Coinbase.
The question of whether certain tokens are securities has hung over the crypto industry for years, and SEC chair Gary Gensler says most crypto products are no different from stocks, bonds, and other securities, and the crypto businesses have to follow the same rules as traditional stock and bond exchanges. Explain what he's looking.
To do, you know, I think you can see a little more elaboration about his position in the two complaints that we saw filed by the SEC and Coinbase and Binance. And one of the things that the complaints highlights is that you know, if you go on to these websites and purchase crypto, you know the interfaces in the distinguishable from the website of Fidelity or Vanguard, where I'm buying stocks or bonds, and so I think that is a message they're trying to convey, is that fundamentally these assets
are just like security. They are valued based upon assessments of the success of some underlying projects, some underlying business, and very important for investors to get fair prices when they're buying and selling these particular assets, and I think that's a similar concern that we see in stock markets.
There's also the potential for manipulation. That's an allegation we saw in Binance, where market participants can insuade the price of the security through certain manipulative trading, meaning that investors are not getting fair prices. So there is a similar concern between stock markets and crypto assets markets. Now, I
think the limitation though. One of the questions I had about both of these cases, and it's also a question about Genstler's position, is that the SEC only identifies about ten to fifteen crypto assets that it claims we're trading on these exchanges, that it clearly makes the case that they were securities under the so called Howie test, which governs whether or not something is or is not a security, and that's out of maybe two or three hundred different
crypto assets that are trading on these exchanges. And so that to me since sort of an odd message where Genstler is saying, you know, most or virtually all crypto assets are securities, but then the case that they're filing, they only identify a small percentage of the crypto assets
on these exchanges and make the case that they are securities. Now, the SEC does say that at a minimum of you ten to thirteen crypto assets that are trading on these exchanges that are security, so there may be more, but it seems a little bit odd to bring a case where you're only identifying a small percentage of the crypto assets on the exchanges when the chair is saying that virtually all of these crypto ascids are securities.
On Bloomberg TV today there was an interview with coinbase CEO Brian Armstrong, and he said that they had had something like thirty meetings with the SEC over the last year. They got no feedback and then they got the wills notice, which tells you the SEC is going to bring an enforcement action. I mean, should the SEC be providing these companies with better guidance A great question.
I think the SEC's argument is that, you know, you started up this exchange that has violated securities laws, and it's operating, and now you come in and say you want a register, right, Why should we accommodate you when you didn't come to us before you started this business which has billions and billions of dollars of transactions that are happening, and many, according to the SEC, are clearly in violation of securities laws, violate the law, and then
you come in and try to fix things. You know, we should have some discretion as to what we do in a situation like that. You know, we have no obligation to accommodate you. We think we should bring enforcement because you went ahead without asking us and created a very very large business in this space that is violating federal securities law. That is the position of the SEC. I think Cooinbaso would say that that's not fair because
the law's unclear. We didn't know that there were these ten or fifteen crypto assets that you consider to be securities, or at least we believed in good faith they were not securities. We've been trying to comply with the law, and so we want to talk to you and get some more parity about your position of what the law is.
The reason we moved forward without your permission is that we sincerely believe that these assets were not securities, and to the extent that you believe that they are securities, you should give us a little bit of leeway in finding a mutually agreeable solution. So I think there are arguments on both sides as to the significance of these meetings.
The reaction by both coinbase and Binance has been similar in that respect. Armstrong said the SEC under this chair has created regulation by enforcement instead of creating a clear rule book, and Binance said the lawsuit reflected the SEC's misguided and conscious refusal to provide clarity to the crypto industry.
That's an argument that has been made for many decades. It first appeared back in the nineteen seventies with investigations relating to foreign bribes paid by public companies. The companies argued that it was not clear that these bribes violated securities law. The SEC brought a lot of enforcement cases, and there were some criticisms that they were regulating through
prosecution or regulating from by enforcement. Now, I think the SEC's defense in this situation is that, you know, these are laws that are on the books, and they are deliberately vague. They are deliberately vague because we don't want to provide a roadmap to people who are committing fraud
as to how they can evade regulation. Congress made the definition of a security deliberately vague because they understood there are going to be a lot of things that people would try to structure in order to avoid regulation through the federal securities laws. And that's how the federal securities laws are built, and so to some extent, some form
of regulation by enforcement is inevitable. I would also say in the SEC's defense that the problem of crypto has been extremely challenging because if you, you know, think about the technology, you can create fifty billion crypto assets with a single program and distribute it widely, almost instantaneously to millions and millions of investors. This is a far different world from the old stock schemes, where at least you'd have to print out stock certificates and all people on
the phone. The speed and magnitude of the development of crypto has been extraordinary, and I think the SEC has been scrambling over the last five to six years as to how they should respond with respect to the boom in crypto assets. So I think that the industry has a point to some extent that perhaps at times the SEC has been a little bit clumsy in terms of the message that it's sending. Maybe it's been a little bit deliberately unclear in a certain way because it wants
to avoid being put into a box. The SEC's response is, well, that's just how the security laws are structured. I mean, we're just trying to understand the issue and problem, and it takes time for us to do this, and that's why we're not giving you clear answers. We're trying to figure it out first, and we don't want to preclude any regulation by taking premature positions that are not well thought out.
Gensler has compared the crypto industry to the wild wild West at pure exaggeration or is that true in many respects.
I think it is, and it's something to be concerned about. And I think retail investors, you know, young people for examples, are very sort of into these digital markets, and they're on social media where these coins are being touted, and there's a concern that a lot of money is going to be lost to people who are essentially stealing it,
and that's not a good thing. And I think that there has been a tendency by the industry to push the boundaries, to push the boundaries of regulation, and I think that the idea that it's sort of the wild West, you know, it's an apt description.
Looking at these cases, do you think that they're hard cases for the SEC to make?
There are challenges with both cases. In the finance case, you have more problematic conduct, so that's in favor of the SDC. On the other hand, only a portion of finances operations are clearly in the United States, and so there's kind of a question of the limits of the SEC's jurisdiction and to what extent can they regulate operations
that are completely overseas. The SEC is making the argument that these overseas operations clearly have an impact in the US because they are basically soliciting US investors and encouraging them to sign up for trading on foreign platforms, even though the foreign platforms are not really supposed to have
US investors. There's some allegations that they're encouraging potential US clients to log in with an Internet connection that doesn't identify where you are logging in from in order to allow that person to get through the various screens that are meant to keep out US investors. So certainly there is an argument that some of these other operations should be subject to US jurisdiction, but I think that could
be a bit complicated to establish coin Base. I think the challenge for the SDC is that, you know, they've only identified about ten or so crypto assets that it maintains are clearly securities, and so certainly Coinbase may try to dispute in court that these crypto assets are actually securities under the Howie test. They may dispute that the sec may have to defend its position crypto asset by crypto assets. And that's sort of the broader question of what does the SDC want in the coin Base case.
Are they trying to say that Coinbase should be shut down? Is there an alternative registration option that they think could proceed? You know, could Coinbase argue, hey, we'll just stop allowing training in these ten to fifteen things that you see our security and if we do that, maybe we're not an exchange and so we don't have to register going forward.
So I think that, you know, these are very carefully thought through, thoroughly investigated cases, but there could be some complications if these exchange decide to litigate.
In course, maybe you can make this clear. If there are only those few in the coin Base case that the SEC is asserting our securities, is this then not an attempt by the SEC to assert its jurisdiction over the crypto industry.
They are still saying, though, that your entire exchange has to register with US, and so that's a little bit puzzling to me. You know, I just read the complaints. I haven't really had a lot of time to think through the legal issues in doctrine, but that's something that seems a bit odd to me, because you know, clearly there are crypto assets trading on coinbase that are not securities.
You know, my understanding is about half of the trading volume is bitcoin and ether, and the SEC has conceded that those are not securities, and so there's kind of this issue of, well, if only a portion of the trading on your exchange relates to securities, should you have to register with the SEC, and the SEC is saying, yes, you do, and so I think they are asserting authority
over these exchanges. I think the question is whether or not there may be some questions about the legality of that, because you know, there might be intermediate solutions where you could kind of jettison those crypto assets that are securities and argue that you're outside of the SEC's jurisdiction. But I think it's clear the SEC in the lawsuits they do want to regulate coinbase and binance as stock exchanges securities exchanges.
So if Congress doesn't act in this area, does that mean the courts will be deciding what is a security and what is not?
Yeah, they'll be deciding a couple things, right, They'll be deciding case by case, are these crypto assets that the SEC claims are securities are they actually securities? And then secondly, they're going to decide the broader issue of when do you have to register with the SEC as a securities exchange. I think there are a couple of major legal issues here that the court will look at if Congress does not act and Coinbase and Binance decide to litigate these cases.
Some people say these lawsuits could transform the crypto market. Do you think that's true.
I think they could. If the SEC wins, then I think we're going to have a much more regulated crypto market. When you register as an exchange, the SEC has oversight, the power to shape the rules on the exchange and their obligations on the exchange to look for market manipulation in fraud. It's going to be much more of a regulated industry. If the SDC succeeds, that may not be such a bad thing for exchanges to comply with SDC oversights.
And you know, this is not unprecedented in that, you know, you think about the New York Stock Exchange more than one hundred years ago. It starts out as a private association of individuals who are interested in making a more marketplace. It becomes, you know, this great institution, a private institution, and you have the federal government in the Securities Exchange Act of nineteen thirty four, basically taking jurisdiction over this private organization. And so we could have a similar dynamic
here in the crypto industry. And that you know, in the long run, could that be a good thing for crypto It might be it might be something that gives the crypto markets a bit more legitimacy to the extent that they are regulating. I don't envy the SPC and sort of the difficulty of regulating this industry. So one of the questions that may come up with these cases is that these exchanges have been operating for some time.
You know, why didn't the SEC act sooner? And I think the answer is if they had acted sooner, then there would have been criticism of the SEC that there's squelching entrepreneurship, there's squelching something that could be really, really good. And so I think that they've been very deliberate and thoughtful about bringing cases and building up the argument that
they should regulate the industry. The SEC is taking advantage of what it believes is public perception that these crypto exchanges are problematic, and I think this comes out of the FTX collapse, and I think they're sending a message that they are going to regulate the space fairly heavily. And I think that they think that public perception is skeptical about the value of crypto and is very wary of the potential for fraud and manipulation at these exchanges.
So I think they're sending a very clear message that they are here in the space.
It'll be interesting to see where these two cases go. Thanks so much, Jim Best, Professor James Park of UCLA Law School. Revelations about Justice Clarence Thomas's real estate transactions and undisclosed luxury trips paid for by his billionaire friend and GOP donor Harlan crow have fueld debate about the conduct and ethics of the justices and the lack of
oversight over the highest court in the land. A Bloomberg review of ethics policies across the federal government shows that the other two million federal workers would face a harder time accepting gifts far smaller than those bestowed on Thomas. Joining me is Bloomberg Legal reporter David Voriakis, who's been looking into this, start by refreshing our recollections about Justice Thomas's failure to report travel and other perks what was revealed.
Pro Publica reported that Justice Thomas accepted several luxury gifts and perks from his billionaire friend Harlan Crowe. They included private jet travel to go on a vacation on Crowe's yacht, and they also included buying the home where his mother lives and still lives. And these gusts were not reported by Clarence Thomas, and that's caused quite a controversy about
whether they should have been reported. He said that he did not need to report them because they were excluded under federal ethics regulations by the friendship exception that if this is a friend of his, that he did not have to report it. And Harlan Crowe has described a close personal friendship with Clarence Thomas. What made the pro public A reporting so powerful was the extent to which they had a very close friendship and the lavishness of the gifts that Harlan Crowe gave to Justice Thomas.
So what's the rule for most federal employees as far as gifts are concerned or perks?
Most federal employees are not allowed to accept gifts above a very modest level. In most cases, they are supposed to refuse those gifts, particularly if they're from someone outside the government, if they're from someone that they may have a matter pending before them. And there is a certain gift threshold level beyond which many thousands of employees are
supposed to disclose those gifts. I would say that across the government, in the legislative branch, in Congress, in the executive branch, which is nearly two million employees, and in the judiciary, there is this so called friendship exception, which is that if you have a personal friend or a relative who gives you a gift, that is an exception.
There are other exceptions as well. And what we report did was that in many instances, gifts or other types of ethical dilemmas that may arise for federal workers go before ethics officers who are following and interpreting the nineteen seventy eight Ethics and Government Act and later legislation and regulation that flowed from that. And that's the legislation that essentially determines what sort of gifts, what sort of travel, what sort of recusals or conflicts of interest, what sort
of post employment opportunities people can accept. And for the vast majority of the federal workforce, they understand that those rules are in place and that they need to go through ethics officers in cases that you know, maybe or close calls or where the regulations need to be interpreted.
What's different with Justice Thomas is while the Chief Justice John Roberts says that the nine Supreme Court justices follow the rules that are in place for the federal judiciary, there is no outside oversight of the Supreme Court and how those rules should be interpreted for the nine justices, and so that's caused a lot of controversy and obviously of pushing Congress to try to reform that, and there's been a subsequent pushback by Chief Justice Roberts, who essentially
says that they adhere the highest standards of conduct.
Thomas maintains he didn't have to disclose the luxuried trips because Crowe's a close friend, but for everyone, don't gifts totaling over four hundred and fifty dollars in one year from a single source, including friends, have to be disclosed.
They do, And there are tens of thousands of federal employees who need to make annual financial disclosures, as do Thesereme Court justices and all the district judge and of Pella judges and members of Congress and senior executive branch employees, so they would have to disclose those on their financial forms. The difference with Supreme Court justices, is they don't have to go to an ethics official in their branch of
government for permission. For instance, with Congress, which generally has more permissive ethics rules, because the notion is we want our legislators to be out in the community and meeting people. They need advance approval for many types of trips and gifts and honur area. And that's also the case in the executive branch, that they need advanced approval for various
types of gifts and travel. With the judiciary, it's largely on them to decide do they need to disclose financial conflicts, say to litigants, do they need to disclose gifts on their disclosure forms? So to a large degree it's up to those judges.
Let's go through a few possible gift situations and you'll tell me what's acceptable for different government employees. So a lobbyist offers to pay one hundred and twenty five dollars share in a private golf club's.
Green fees, what we reported is across all three branches of government, that's not an acceptable situation because the general notion is that if someone has business before the government, it's unacceptable to take a gift from that person, because that could be seen as trying to improperly influence their decision, their action, or possible inaction in a way that's favorable to that lobbyist.
This one strikes me as it probably happens a lot. A trade group offers two hundred dollar concert tickets. People are always throwing around tickets to different events.
There's some fairly complicated rules on what events are permissible to accept. There are public events that are in some cases permissible, but not in a case where there's significant value attached to tickets, like in this hypothetical scenario. So again, in this case, all three branches of government would say that's not an acceptable gift, that if you want to take the tickets, you need to pay the fair market value for those tickets.
And here's one that sounds very familiar, an invitation to fly on a jet owned by a friend for a quail hunting trip in Idaho.
In that case, we said, essentially in all three branches of government in Congress, the executive branch, and the judiciary, that would be permissible because of the personal friendship aspect. But in Congress it would need the approval of the House Ethics Committee or the Senate Ethics Committee. In the executive branch, it would be permissible if the gift is
motivated by friendship and not by business interests. And in the Judiciary, we said that it would be permissible, but that the flight would need to be disclosed on the judge's annual financial statement.
And I understand that Justice Thomas is going to after the fact update his disclosures. So you talked to Walter Shabb, who ran the Office of Government Ethics for four years.
Tell us what he said about He says, essentially that the practical effect is that ethics laws applied more rigorously to low level executive branch employees than to members of the Supreme Court. And he believes that's the travesty and that it's standing ethics on its head. And he believes that the higher up you are, the more you should be accountable, because you have more power to do harm.
I had talked to a number of ethics officials across the government in working on this, and the idea is that you want an open government free from undisclosed financial or business interests that are operating in secrecy to influence the outcome of legislation or executive actions or court proceedings. These were all post Watergate era reforms, and there are several hundred ethics officers across the federal government who are working to try to ensure the government is as open
as it could be. Now, of course, we know that in practice it doesn't always work that way. But what is driving the reform effort for the Supreme Court, which so far has resisted those efforts, is a similar notion that the Supreme Court should be just as open as the other branches of government.
Thanks David, your article illuminates a real problem. That's Bloomberg Legal reporter David Voriakis coming up next a Tennessee anti dragshow law is deemed unconstitutional. This is Bloomberg and that's it for this edition of the Bloomberg Law Show. Remember you can always get the latest legal news on our Bloomberg Law Podcast. You can find them on Apple Podcasts, Spotify, and at www dot Bloomberg dot com, slash podcast Slash Law, and remember to tune into The Bloomberg Law Show every
weeknight at ten pm Wall Street Time. I'm June Grosso, and you're listening to Bloomberg