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Ava Labs x CBER Ep 1: Are Cryptoassets Securities?
9 Plays11 months ago
Lewis Cohen (DLx Law) discusses whether cryptoassets are securities from the perspective of US law. Lewis Cohen (DLx Law) explains the relevant US securities laws and then highlights how cryptoassets can differ from traditional securities. A key point is that many cryptoassets do not confer rights in the manner of traditional securities, instead conferring abilities. Cryptoassets thus might require a novel regulatory framework.
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Transcript
Introduction to the Podcast Series
00:00:02
Speaker
Hello and welcome to Crafting the Crypto Economy. I am Silvia Sanchez, Project Manager at OWL Explains by Avallabs, and today we bring you a transformative podcast series in partnership with the Crypto and Blockchain Economic Research Forum. This series features leading faculty from renowned global universities exploring various elements in the blockchain ecosystem. These episodes are a bit longer than our usual hootenannies, since we will be getting very deep.
00:00:29
Speaker
And also, each episode will have its accompanying paper posted on our website for further reading. And with that, I will hand it over to our moderators Fahad Saleh and Andreas Park.
Purpose and Topics of the Series
00:00:40
Speaker
Hi, everybody, and welcome to another edition of the Crafter in the Crypto Economy podcast series, a series that Fahad Saleh and I host together with Aul explained. And our purpose of the series is to discuss research papers and try to dissect them in such a way that the general interested public can understand them better.
00:01:00
Speaker
Now, we've had other topics in this podcast series ranging from the organization of DAO, decentralized autonomous organizations, and the governance. We have talked about automated market makers. Obviously, we're all very interested in the idea of a crypto economy, about blockchain technology.
00:01:21
Speaker
decentralized systems and the like. But ultimately and fundamentally, a blockchain is based on economic principles. And the economic principles around that use some form of representation of value, cryptocurrency to pay for things.
Regulatory Challenges in Crypto
00:01:37
Speaker
And at the moment, we're seeing in the regulatory space some real challenges to that notion and how this can be done.
00:01:44
Speaker
And at the end of the day, if regulators make the usage of cryptocurrencies or the issuance of cryptocurrency legal per se, or burdensome in such a manner that they can't actually be used, then that's a problem. And so, Father and I thought, one thing that we really need to discuss is the regulatory landscape around this, the thoughts about it and how this can actually fit in.
Guest Introduction: Lewis Cohen
00:02:08
Speaker
And we're really happy to have Lewis Cohen here with us, who will be talking to us about the legitimacy of thinking about crypto assets as securities or not. And we're really excited to have you. Now, Lewis, I'm going to let you introduce yourself for a moment so that the audience knows where she's talking to. Well, thank you, Andreas. Thank you, Fahad. A pleasure to be here and really looking forward to the discussion. Again, I'm Lewis Cohen. I'm a co-founder
00:02:37
Speaker
of a law firm in the U.S. with offices in New York, Wilmington, Delaware, and Washington, D.C., called DLX Law. And before we founded DLX Law about six years or so ago, I was a partner in two very large global firms practicing in the securities and capital markets area and spent a lot of time working with the SEC and other markets regulators, both in the U.S. and in other countries and spent a lot of time
00:03:06
Speaker
thinking about the application of securities laws to commercial activity. So it's kind of one of the things that kind of brought me into the crypto space, like so many of us, the fascinating new questions, opportunities and issues that crypto brought up. So thrilled to be able to talk to you all today.
00:03:26
Speaker
Awesome. Now, let's get right into
Historical Context of Securities Law
00:03:29
Speaker
it. We hear on the news and in public forums and the like, especially from the chairman of the ACC, regularly that there is an all-knowing and all-encompassing law passed in the 1930s that helped US capital markets flourish, and that this law is the law of the land, which must be abided by and under all circumstances.
00:03:55
Speaker
Now, for many people, this description alone sounds a little suspicious because in 1930, there was no internet, there was no computer actually, there was no digital storage of anything. A lot of transactions had to go through intermediaries and the like. And so that kind of sets a very different institutional environment.
00:04:14
Speaker
And we are all used to, at least in many countries, that laws have to be adapted over time. So for instance, in the UK, there is still a law on the books which says that it is illegal to handle a salmon under suspicious circumstances. I don't know what that means, but it is illegal and it is a law, but it's no longer enforced because we realize that we can probably handle salmon even under some suspicious circumstances.
00:04:40
Speaker
Now, what I would like you to do for our audience, and I assume many people are not lawyers, can you outline maybe a little bit about the history of where this law comes from, why it actually was put into place and how it has evolved and how its application has evolved maybe over the next few decades?
00:04:58
Speaker
Yeah, sure, Andreas, and completely agree. I think a lot of folks sort of dive into these topics because they become interested in crypto assets, blockchain, economic systems, and find themselves sort of thrown into discussions about, well, is this a security? Is that a security? Without a lot of background or understanding of how we sort of got ourselves here. So I think that it is really worthwhile just pausing for a moment to reflect upon that and to reflect upon some of the unique
00:05:28
Speaker
elements of the US legal system, one of the most important is broadly referred to as federalism, the distinction between those things that the federal government on a national scale regulates and those things that are left to the states. And pretty much everything is left to the states unless and until the federal government has a legitimate interest in stepping in and a constitutional basis for doing so and preempting state law.
Formation of Securities Regulation
00:05:57
Speaker
So going back to the earliest times in the country,
00:06:02
Speaker
You know, people had all kinds of commercial dealings with each other, and to the extent they were subject to legal principles, those were at the state level. You know, you traded things with each other. Did you cheat me? Did you lie to me when you sold me that pile of coal or whatever you may did? And those matters got resolved in a sort of ordinary sort of way. As legal entities started springing up, particularly corporations,
00:06:31
Speaker
a bit before the Civil War, but of course most particularly in the Industrial Revolution after the Civil War. It became a new class of what were otherwise commercial activities. Hey, I'm going to give you money. Can we kind of get on with this business together?
00:06:48
Speaker
And they sprung up where you could be abstracted away from the commercial activity simply by in some way owning either an interest in whatever venture had been set up or owning obligations of a venture that was a
00:07:03
Speaker
a legal person and not an individual. But all of that was still a state law matter. As that business grew and grew and grew, there were booms and busts and panics and markets developed, like markets developed for many different things, commodities and all sorts of things. But markets for these sorts of instruments developed, and we refer to them as securities, but they were all regulated at the state level. And of course, as we know, that sort of boom and bust cycle continue to pace
00:07:31
Speaker
until the ultimate boom and bust of the 1920s leading into the stock market crash of 1929. As many economists have dealt with, there are many causes of the depression that followed, but certainly the expansion and dramatic collapse of the equity markets in the United States had a large role to play in that. And so Congress stepped in, did studies, gave the matter consideration and said,
00:07:59
Speaker
It's time enough for there to be some national regulation of this sort of investment or securities activity. And there were hearings and what have you. And ultimately, a series of laws were passed, the first of which was the Securities Act of 1933. But of course, if you're going to regulate a sort of activity, you kind of have to know, well, what are we regulating here?
00:08:20
Speaker
So, the most important one might argue, the most important element of this new regulation, this new set of federal laws was, well, what is a security, right? What's the definition? How are you defining that? Congress sort of started to proceed the way I suspect many of us would have. They said, well, let's make a list here. There's stocks, there's bonds, there's notes, there's debentures, there's
00:08:42
Speaker
participation interests and various sorts of things and they sort of, you know, on their fingers, counted these things off and they went through, you know, a long list of, you know, 10, 15 odd things. And then when they got done with the list, you know, somebody sort of scratched their heads.
00:08:59
Speaker
Yeah, but those are all very particular, couldn't there be other things, you know, that we haven't named, but that nevertheless are kind of what we're trying to get at here. And so they look to the state laws and they said, well, states have this concept of an investment contract.
00:09:15
Speaker
Nobody knows what it means, but it sounds really good. In fairness, people did know what it means, and there were state law cases, lest my legal colleagues listening try and call me out here. But it wasn't super clear. In any event, Congress in their wisdom included this term, investment contract, in the federal statute and assumed that people knew enough about what it would mean to make it all work.
00:09:42
Speaker
And in fact, after the law was adopted in 1933, there was an extended period where there was no clear and certain understanding of what exactly that term investment contract meant. So let me interrupt you for one second. So just to have it a little more organic, I'm going to jump in every now and then to ask some questions.
Investor Assurance in Financial Markets
00:10:00
Speaker
So just to recap for a moment, so you identified a number of problems. So the first one is that
00:10:06
Speaker
essentially the interaction between somebody who gave money to a firm and the firm itself or the entity, whatever their money came from, was becoming less personal and became essentially tradable. So I think that's the first part which is of importance here. There is also the state versus federal part where there could be some discrepancy between different states and you want to have clarity. Because if you have a national market, you need to have something, you have to have a unifying force.
00:10:35
Speaker
And then the third part is that there are so many different schemes that you kind of want to make sure that as the economy evolves and as people's innovation in financial products evolves, that there is some form of clarity there too.
00:10:48
Speaker
Now, from my perspective as an economist, I always think about it as saying that, look, there's people who want to have other people's money. They need financing of some form. And then there's people who are willing to give financing. They want to put their money to good use. And to make this market work, you need to have some certainty as an investor that your funds are being used wisely, or at least legitimately and prudently.
00:11:13
Speaker
And so therefore, the people who want to look for the money, the issuers of these assets, essentially have an interest that the other side feels safe enough to do the investment. And so if you have a system which makes this market work, it's really in the interest of both sides. So that kind of seems to be the objective that we're after here. Yeah, I think that's right. I would, Andreas, introduce one other factor, which is an economist, I'm sure will be relevant to you, and that's market power.
00:11:42
Speaker
So, there's a core question of who has the greater market power, because that fundamentally drives this discussion. Because we can think about companies raising money from retail individuals. There, the money flows from the retail individual to the company. In most cases, the company has much greater market power.
00:12:02
Speaker
to set the terms, disclose what they want to disclose, and not disclose what they don't feel like disclosing, and creating potential information asymmetries. But we could look at another very similar sort of transaction with exactly the opposite market power. When banks loan money to individuals, there you have the large entity putting out the money, and it's the individual who you could say is the issuer, right, in that respect.
00:12:26
Speaker
they're getting the money, they're doing things. But the market power is completely different. The bank has many different ways to extract from the borrower accurate information and to enforce against the borrower for failures to do that. So I think it's really important to understand the market power dynamics that differ between those two otherwise similar activities.
00:12:48
Speaker
So really we're talking about then in some form that there is a fair information disclosure from both sides, from if you want the investor side and also from the side of the issue of security. So that essentially you need to know that the investor in some form behaves appropriately and then that the issuer of this item also behaves appropriately.
00:13:09
Speaker
That's exactly right. And that the investor, again, in the bank situation, the investor who is the bank, in effect, by making the loan, has the market power to ensure that they can extract the information. When it's the other way around and it's a retail person investing in a large company, that's where the interference of the government becomes more relevant because the individual does not have the market power, apps and other drivers, to ensure that they're getting accurate information.
00:13:39
Speaker
Now, if we don't mind, can we dive just that you already started with a description of investment contract versus securities, a particular types of assets being securities. I'd like to dive into this a little more. The securities that were listed in the act itself, or the items that are listed in this act, they have securities per se, so in and by itself, like a stock. There's no question about it.
00:14:03
Speaker
Well, not even that, I regret to say, because when it comes to the law, we can dispute anything. So the definitions have a key clause at the end, which is unless the context otherwise requires. And that becomes particularly relevant with the concept of a note.
00:14:19
Speaker
So, you know, you and I, Andreas, can go out for beers, and I forget to bring my wallet, and we've drunk a good bit, and it looks like I really should have ponied up $100, but I don't have $100. So I write a note. I say, I promised to pay Andreas $100 a month from now with 2% per annum interest. That's a note, unequivocally. That is a note. That meets the legal—then it's dated, it's signed, it has all the requirements of a note. But it's not a security.
00:14:46
Speaker
because the context otherwise requires and that does create significant confusion. So I just want to emphasize holding aside the concept of investment contract, the clause of unless the contract, the context otherwise requires sort of overrides everything, although it works backwards from something that is deemed to be or presumed
00:15:06
Speaker
to be a security unless the context otherwise requires. But it's an important nuance to understand, and it does come up in other contexts. I have a feeling that we're going to come back to this at some point. Can we dwell on that along with your naive question? So the context otherwise requires, what exactly does that mean? So why, for example, in the example that you just gave, does that make it so that this note is not a security?
00:15:35
Speaker
Well, that's why our legal system leaves things to the courts. So there's judge-made law that has interpreted that, and the prevailing case in this area, which is a bit of a confused case, is called Reeves. I think it's Ernst & Young versus Reeves or Reeves versus Ernst & Young.
00:15:57
Speaker
And the Reeves case sets out what's known as the family resemblance test. But prior to the Supreme Court adopting Reeves and the Reeves test, there was a split amongst the various circuits or the secondary courts in the United States as to how to interpret that. So there is no set and clear interpretation beyond what we have in Reeves. And Reeves is not always self-evident as to how to be applied.
00:16:25
Speaker
All right. This is going to be very interesting. So just for context, actually, so I'm talking from Canada. In Canada, we have actually, well, actually in Canada, we don't have a federal law. We have only provincial law.
00:16:40
Speaker
Yes. The Contario Capital Markets Act essentially says something to the effect of there's a long list of items that are securities and everything else that is also considered generally as a security as a security, which is a little squishy as you can imagine. Very Canadian squishiness. Now,
00:17:00
Speaker
Now, let's talk about the difference or the notion of an investment contract. I'm trying to understand this because as you describe the law, there's a list of items plus investment contract. Setting aside the context component, is every investment contract necessarily a security per se or is there
00:17:25
Speaker
is that it can act only as security and investment contracting can be something that's not a security. The technical term investment contract when used in its technical capacity is a security
00:17:47
Speaker
You can have things that you might informally think of as an investment contract, but unless they either they are the type of investment contract that is a security or they're not. It's really the best way to understand those two words combined here is from the various court decisions that have interpreted those words. So rather than thinking of them as two words.
00:18:10
Speaker
And again, a particular strict interpretationist will roll over in their seats by saying this, that I think some people want to say, well, if it's an investment contract, it must have a contract. That's a line of thinking. It's not personally my line of thinking, but it is a line of thinking. I personally prefer
00:18:30
Speaker
To think of those two words as you could include any words, magic bullet. A magic bullet is what courts have said falls into that category, right? So it's just the term we use for anything that we believe fits within that judicially mandated decision. Again, many believe that we should not look at the law that way and instead should have a very, very strict limitation
00:18:56
Speaker
as to what that means and follow state law. There are different points of view on that. I think we get to the same conclusion about crypto assets without needing to fight that fight about whether a very strict application is necessary or appropriate. All right. Maybe it is now time to go through the evolution of the understanding in the US economy and the US legal system, what actually constitutes an investment contract.
Understanding the Howey Test
00:19:24
Speaker
Tell us something about orange growth.
00:19:26
Speaker
Yes, yes. So we had this state of play for whatever it is between 1933 and 1946, where lower courts struggled around with this concept of investment contract, but the Supreme Court had not spoken. They actually spoke prior to the Howie case
00:19:48
Speaker
in an earlier case, but that didn't formulate a clear decision. And so that sort of kind of got a little bit brushed to the side. The Howie case was the first time Supreme Court came out and said, all right, enough of all of this. We are going to set out
00:20:04
Speaker
a clear rule, and the clear rule they enunciated in either three or four pieces, depending on how you like to count things, they said, what Congress meant, and they looked at the state law that had preceded them, and they kind of chewed on it a bit, and just said, what Congress meant, we believe, is that where there is an investment of money in a common enterprise with a reasonable expectation of profit,
00:20:32
Speaker
And it originally said solely from the efforts of others that was since modified to be substantially or primarily from the efforts of others because solely was a bit, you know, kind of.
00:20:42
Speaker
unduly restrictive, then that set of arrangements is what we mean by investment contract. And that's why I say I don't think it serves a lot of purpose to dwell on the two words as opposed to the Supreme Court's articulation. And look, at any point in time, there's nothing constitutional about this. If Congress wanted to completely scrap that test
00:21:03
Speaker
come up with a new test. That was terrible Supreme Court. That's not what we meant. What are you talking about? You guys are a bunch of numbskills. Here's what we meant. And they could do that. There's nothing that stops them to do that. But in point of fact, it served pretty well. And for the most part, Congress has not saw fit to fundamentally change that. And it's preceded a pace. So it's an investment contract. Are those four things? In terms of the orange groves, Andreas, that you allude to, that, of course, many people have heard oranges are not securities.
00:21:32
Speaker
et cetera, that goes back to the facts giving rise to this case, which are important to understand because they again help elucidate this.
00:21:41
Speaker
After World War II, this guy named W.J. Howie started a real estate business in Florida, which was kind of growing again. And a lot of people had returned from the war, needed some time off, and liked to vacation down in Florida. And they'd come down to his hotel, and they'd stay there, and they'd have fun. And he was quite the entrepreneur, so he would take them out to the Orange Grove that he had nearby to his hotel.
00:22:08
Speaker
And he'd say to these visitors, generally speaking, from up north, man, look at all of that. Can you imagine all the orange juice? You know, everybody up there loves orange juice, don't they? Wouldn't you like a piece of that? And they're all, yes, that's very good. Well, you can have it right now. Come back to our sales office. We'll help you out. And so these people, after visiting the groves, would come back to the sales office. Some would say, well, look, you can buy a plot of land with some trees on it.
00:22:36
Speaker
And if you like, you can do whatever you want with those trees. You can harvest them yourself. But conveniently enough, we have another company over here. And they'll do all the harvesting for you, don't you know? And so just sign these two separate agreements. One, the purchase of the land. Two, the management agreement with the company that would harvest the oranges. And Bob's your uncle. You're going to be in the swim.
00:22:59
Speaker
Well, this case made its way to the attention of the SEC. The SEC got involved and said, you know, this is the perfect case to really hone in on this concept because we think what this Howie company did was offer an investment contract. These two things taken together
00:23:17
Speaker
constituted exactly what Congress was trying to stop. People were not given the adequate disclosure. They weren't really interested in the orange groves, the oranges, or anything else. What they wanted is to invest in a business, and the business was being run by this Howie company, and that's what they were doing. They could have bought stock in the Howie company, and if they had offered that to the general public, they would have had to provide all this information, but they did not. They just simply kind of snuckered people
00:23:45
Speaker
into this kind of two-part deal, and there you go. And of course, that's what gave rise to the Supreme Court agreeing with the SEC and concluding that because those four factors that I had mentioned, an investment of money and a common enterprise with the Howie company, where the investors had a reasonable expectation of profit, they weren't doing it because they liked oranges and really hoped they could have a whole lot of oranges, and they were not planning to do it themselves for the most part. They were expecting the efforts of others.
00:24:13
Speaker
And those four factors present together as far as the Supreme Court was concerned allowed them to say, yes, that's what also should be subject to federal oversight.
00:24:28
Speaker
So I have lots of questions coming out right from the bat of this. So just because I want to, there's a few details I think that are important to understand. So the first comes from just basic logic. So as I understand it, just tell me if I'm right or wrong on this, but the highway test is essentially, it's a sufficient condition for something to be an investment contract and a security. It's not a necessary one. So it's possible that there are other schemes.
00:24:52
Speaker
that could also be counted as an investment contract, even though they don't satisfy the conditions of Howie. Is that correct or is that wrong? I'd say that's wrong. There is no law that I'm aware of that has attempted to say, even though the Howie conditions are not met, you are still an investment contract. I'm not saying there couldn't be, I'm just saying I'm not aware of any.
00:25:18
Speaker
Okay, so it is actually necessary and sufficient. That's actually very important. And I didn't say this, because saying it in the middle of the podcast is not the best time. But for the points of doubt, there's no legal advice being given here. I am not your lawyer, not anybody's lawyer that that's listening to me on this and you know, make your own investment decisions. This is really for informational and educational purposes only. So just sneak that one in there. But yes, so that's my that's fine. We're just going to cut it out.
00:25:47
Speaker
No, seriously. That's interesting because for me, it always reads like a sufficient condition, not necessary, because there's also all these other cases, but it's actually useful to know that at least in the understanding, commonly in the legal community, this is necessary and sufficient.
00:26:03
Speaker
In many ways, there are other investment schemes like the ones described by Howie that I'm not sure if they actually would count as a security. For instance, imagine you build a condo tower and you sell the apartments and then you have a maintenance company for the condos that then make sure that the condos can be rent out for, I don't know, Airbnb or two long-term vendors.
00:26:28
Speaker
Right. So now this is an investment contract, I would argue probably, but it doesn't, it's not really, it would not be something that you would register with the securities regulator. Or is it, is there an observation because there's a lot of law decisions, SEC guidance exactly on this topic, because somewhat self-evidently, whenever you have a valuable fixed asset that can be used to produce income or revenue,
00:26:58
Speaker
someone is going to be there to say, wouldn't you like a piece of this? Whether it's a condominium or any other thing, we can easily extrapolate up. And the SEC has given guidance. So there's another case that's well known, the Foreman case, in which cooperative apartments in New York City
00:27:18
Speaker
were being offered through sales of shares, so it's a little bit different. And one of the buyers was aggrieved and sought to say, well, I bought something that was a security or some sort of investment contract
00:27:32
Speaker
And the Supreme Court disagreed. They said, really, this was a consumptive. You were buying this to live in it, the sales, even though they were sort of cast as shares. There was nothing in this that struck us as an investment contract. It was a consumptive arrangement. Generally speaking, at the highest level, I would say Andreas, the core question in some of these very subtle things like timeshares is,
00:27:56
Speaker
Are you doing this primarily with a consumptive goal in mind or primarily with an investment goal in mind? It can be difficult to tease that out, but that's really the core kind of issue. Okay. So then, and then the next thing, and I think that actually leads into the bigger discussion that we're going to have going forward is that what is a common enterprise?
00:28:17
Speaker
Well, at the end of our article, which we have yet to plug, but I'm confident will be plugged in the podcast, we have an annex of scholarship on this topic, and there must be at least 10 separate lengthy scholarly articles on what is a common enterprise. It has caused great consternation. People have reviewed cases, tried to come up with theories. They've got everything to say. It's one of those things where there are three
00:28:47
Speaker
completely separate doctrinal definitions of common enterprise known as horizontal common enterprise strict vertical and broad vertical commonality.
Investment Contracts and Crypto Assets
00:29:00
Speaker
and different parts of the country have and their circuit courts have adopted, you know, different of these three definitions. And even within the three definitions, there's plenty of variation within those definitions as to how you actually apply them. So common enterprise, unfortunately,
00:29:17
Speaker
gives rise to a lot of uncertainty. And very often, in my view, what you see is a results-oriented decision. So if the court believes, hmm, I think what's going on here, somebody was screwing around, you know, they're going to find in some way or another that there was a common enterprise and vice versa. If they feel like, I don't feel like sort of anything really inappropriate was going on here, then they may say that there's not. But the three tests, the horizontal tests,
00:29:46
Speaker
has to do with a pooling of funds from many different persons and using those funds in some way. That would be horizontal. A strict vertical is where the promoter
00:30:02
Speaker
and the investor share some direct interest in the scheme, regardless of how many people are involved, because some courts have said, well, it doesn't seem right if there's two people, you know, you have an investment scheme, but if there's only one person, ha, bad luck to you, right? So the vertical test would say, if there's a direct alignment in the economics, like, we're going to do this together,
00:30:25
Speaker
And, you know, Fahad, you're going to get 5%, and I'm going to get 95%. That sharing in a scheme that we're working on, where you're doing all the work, that is, would meet that test, even if I was the only person in the scheme. And then broad verticality would be, if I'm really, it just eliminates the common enterprise test as a practical matter, and just said, well, look, if I'm putting in money and I'm depending on Fahad,
00:30:48
Speaker
then we're in some sort of investment scheme together, regardless of whether I'm relying on you. And that's really just, it's just another way of saying dependent on the efforts of others. And so other people have rejected that test because it just kind of reads out something that the Supreme Court clearly thought meant something. So horizontal, strict vertical and broad vertical are the three doctrinal versions of common enterprise. But even within those, there's a
00:31:16
Speaker
vertiginous set of fact patterns and conclusions.
00:31:22
Speaker
But that's actually incredibly broad, as you describe it, because it could encompass a lot of different things that we may not actually perceive as securities at all. Can I double-click on that, Andreas, because it's actually a hugely important point, and we bring this out in our article, the Intellectible Modality of Securities Law. Just plug in it constantly here. No, that's fine, but you should. We're talking about your research. This is really what we're getting at.
00:31:51
Speaker
And the point you bring out, Andreas, is that
00:31:55
Speaker
nobody sets out to say, hey, I want to do an investment scheme with you. What do you think? Because if they did, it would be a securities offering and you would know it and there wouldn't be any dispute. So pretty much by definition, we're only applying these rules in hindsight. And this becomes really, really important when we move to the discussion of crypto assets, because it is one of our core propositions is that
00:32:23
Speaker
The concept of investment contract relates to a relationship with two people who are doing business with each other and who, after the fact, somebody says, I think I know really what was happening here, even though neither of the two parties characterized their relationship as one of a securities offering.
00:32:43
Speaker
We're going to impose that upon them. So that lack of knowledge of whether you were entering into it is really critical to this whole discussion. Because again, if someone said, I'm selling you securities, then you just have a straight up unregistered securities offering. We don't need to spend a lot of time, hey, everybody in the world, would you like to buy stock at my company? I didn't register with the SEC. That's for silly people. I'm just offering it to you. Well, of course, we violated the securities laws. We don't need to go through this complex analysis.
00:33:12
Speaker
Well, I mean, this is really an opinion, generally speaking. And this is a little bit of a sidetrack, but I think it's useful to point out. So there is a difference between, so we all operate in a legal environment normally. And obviously, there's contract law and the like, which is relevant to what we do. But in many, many interactions, there is no third party involved that requires an oversight of what we do, where we have to report to a third party and the like.
00:33:40
Speaker
And what a regulator really is, is a third party that you have to make disclosures to comply with and so on. And in many cases, for many interactions, this is incredibly burdensome because, you know, let's face it, you have to, if you have to, anytime you have to interact with the government, you have to hire a lawyer, that's very, it's very time consuming, costly.
00:33:59
Speaker
as economists, we think of it as a friction. Unless there is a particular purpose served, that is, for the betterment that creates something better for the economy, then that's just wasteful, right? A hundred percent. And the betterment is the point- We're investing millions to save thousands, right? Yes, that's exactly right. And that's why I brought up the market power point at the very beginning, because that is exactly the betterment.
00:34:25
Speaker
The belief is that without that intervention of the government, we would not be able to ensure that people who do not have the market power to extract information and understand what they're doing will be given access to this information. And that's fundamentally what it seeks to do. That's why we have exceptions wisely or foolishly for transactions that don't involve a public offering and are only directed at what we call wealthier
00:34:52
Speaker
or accredited investors because the assumption is those people can extract the information that they need and they do not need the government to intervene and force that disclosure.
00:35:04
Speaker
So now I want to talk about disclosure compliance and so on at some later point. But I would like for you now, maybe we can transition to at this point to your main thesis about the statues of crypto assets as securities. So maybe this is something that you could just what is the basic premise of your theory? Why are on crypto assets, not securities? Well, giving it away what it is. So how about you say it yourself? All good.
00:35:34
Speaker
So fundamentally, what we did firstly as an empirical matter is we set out to review more or less the entirety of the relevant case law
00:35:45
Speaker
in the United States on this point. So the entirety of the circuit court cases, looking at this question of which there are about I think 260 or 270 different cases, there are maybe another thousand odd, maybe more lower court cases. Most of those can, you know, if they're important, they get bubbled up to the circuit court level. So it's just an empirical matter we set out to review.
00:36:12
Speaker
that set and sort of see what we came up with. And the theme really that became clear to us from that review was that this concept of investment contract really related to activity that involves the fundraising by one person from another.
00:36:35
Speaker
Again, the Howey test is the sort of secret. There's an investment of money. Someone is investing money in somebody else. The object of that investment scheme, what it is that is being offered, is generally speaking, irrelevant to the scheme because the person
00:36:53
Speaker
who is providing the funding does not have a consumptive interest in that object. They don't want to use the object, whether it's real estate, a crypto token, or anything else, or oranges, or we'll talk maybe later about the hypothetical we have in our article where we refer to a made-up fruit called a storage. But none of those things are really what the transaction is about. What is the transaction about?
00:37:18
Speaker
One person has capital, they seek to increase the amount of capital they have by giving it to someone else to deploy. That relationship is what is the investment contract relationship and the security, not the object. And it's much more self-evident when we talk about things like oranges or storanges or all these things that are not themselves legal instruments when one transfers that object of the scheme
00:37:44
Speaker
unless that object in and of itself provides rights to another person, they're simply getting something that puts them in a very different position. They're not contributing to the person running the scheme. They're just a passive sort of bystander in the scheme. And I think that becomes critically important. And we've seen at least one federal court in the Ripple case
00:38:13
Speaker
you know, zone in right on that critical point, that persons who are not providing funding to a project are not in, and although this is to be completely fair, this was sort of alluded to but not held in the ripple case, but are not in a common enterprise with the person.
00:38:38
Speaker
Our view of the appropriate understanding of investment contract is it's a scheme to raise money using some sort of object. The catch is that there's exceptions to everything and from time to time what you can do is create some sort of actual set of rights that can be transferred
00:38:59
Speaker
but don't fall into any of those enumerated categories, just an unusual transferable contract. And when you do have something like that that creates clear legal rights against an entity and that gets transferred, even those secondary transfers of that object now are securities because there are rights being transferred from one person to another. In other wise, what you have simply
00:39:26
Speaker
is a coincidence of interest. So one easy example to understand is with, for example, OPEC. OPEC could, or an oil member of OPEC, could agree in a transaction to sell Fahad, you know, a tanker full of oil. And Fahs said, well, why would I want to do that? And the OPEC member says, well, you know,
00:39:47
Speaker
I'm about to cut production, and if you buy this tanker for me right now, I undertake to you that I'm gonna cut production, you're gonna make a ton off this tanker, and I really need the capital right now. That's probably an investment scheme.
00:40:03
Speaker
especially if it was offered widely. Fahad is relying on the efforts of the OPEC member. He's contributing money. They're in a common scheme together, et cetera, et cetera. But if Fahad later transfers the oil to a third person, they have nothing to do with that scheme. They are just buying the oil. They have the same risk and reward as anybody else owning that asset. They may buy the asset from Fahad purely for investment purposes. But if Fahad hasn't promised them anything,
00:40:29
Speaker
and they have no direct relationship with the person who did make promises to Fahad, at that point they're just entering into a commercial transaction with an asset whose value may be subject
00:40:41
Speaker
to the activities of someone else, in our case the OPEC member cutting production, but otherwise they have no ability to exert any control over that and they're therefore quite distinguishable from someone buying a security where any owner of that security has equal and same rights against that issuer. That's the critical difference and that's why on the cover synopsis or the abstract of our paper we say
00:41:06
Speaker
adopting a different theory would create something we refer to as an issuer-independent security, which is just not a concept we have in our securities laws. There has to be an identifiable entity who has a necessary legal relationship with each security holder for there to be a security.
Legal Relationships and Tokens
00:41:23
Speaker
A concrete thing really for us is reasonably easy to determine. Is the object of the scheme, is the object of the scheme
00:41:34
Speaker
something that in and of itself, when you pick it up and look at it and say, hey, what's that? It gives you clear rights and creates a clear legal relationship between two different persons or entities as seed, a piece of real estate,
00:41:52
Speaker
and Squeezable Orange, none of these things create in and of themselves a legal relationship. That becomes the key thing. Now let's use what I think would be a good concrete example for you. Let's say you have a website and on the website you say, anybody who brings me one of these special jelly beans, I'll give you a dollar.
00:42:18
Speaker
You're a company and you say, here's the deal. You give me a dollar, I give you a jelly bean. Oh, you bring me a jelly bean, I'll give you a dollar.
00:42:30
Speaker
I promise to do that. That is a promise. We know you're a legal entity. You're Andreas Co. And Andreas Co. has given people jelly beans. This does not make necessarily the jelly bean a security because, you know, it's just a jelly bean. But there's a different kind of relationship there, right? Because there's an ongoing promise. Anyone who buys one of those special jelly beans with the nifty little A on it knows that they can always, if they want to, bring it back to Andreas
00:42:59
Speaker
put it in the little gumball machine, whatever, and get a dollar. That is a different kind of relationship. When you talk about a DeFi token, there's nothing, in most cases, in which you can go to someone with that DeFi token and say, hey, I've got one of these token-stroke jelly beans. Can you give me something else that I have a right to get? And if you fail to give it to me, I can pursue you. In the case of
00:43:24
Speaker
The Jelly Bean, I can go after Andreas' company and say, hey, hang on a second. Your website Terms of Service, governed by XYZ law, said you were going to do this. You didn't do this. I'm bringing a court case against you. With a DeFi token, you have no one to go to. If the protocol doesn't work the way you want it to work,
00:43:42
Speaker
You can be frustrated and upset, but you have nobody to go to to say, hey, you've got to make that whole. I think Fahad, an example I like to use is that of a physical key. So if you could imagine a physical key to a physical door lock, you could imagine two sets of circumstances
00:44:03
Speaker
one where you find a key in a house that you bought and there's a door and it opens the door and like all of a sudden if the lock gets jammed and it doesn't open the door sucks for you but that's you know there you go you don't nobody told you oh that key.
00:44:18
Speaker
I'm undertaking to open that door, but maybe somebody did. They said, well, if you buy this house, I'll give you this key, and every day I'm going to put some warm, hot food behind the door, and you can have that food. And you think, well, that's a pretty good deal. I'll buy the house. And then the key stops opening the door. You said, well, that was part of my legal deal with you. I said I'd buy the house if I could open the door and get the hot food that you were going to put there. And now that's not happening. There's a legal relationship that's ongoing.
00:44:48
Speaker
You can't have a legal relationship with protocol code, with code. You don't have that. You simply have an ability to give instructions to a network of computers. Hey, I'm going to sign an instruction with my computer private key, and I hope this network of computers will respond the way I want it to respond. But for example, if the network has a pause or delay or shuts down or just isn't doing what you thought it was going to be doing,
00:45:16
Speaker
you don't get to go to somebody and say, I want my money back. And that critical distinction separates tokens that could reasonably be considered either a security or part of a security scheme and those that are not.
00:45:31
Speaker
Okay, so now that actually is an interesting question, right? So when you have, you know, if you think of this, I mean, so now if you really want to go into this, now you can say, okay, but we have the proof of stake networks, right? And we have, we have leader, we have Coinbase, and Binance. So these are all legal entities that run proof of stake operations, right? Staking as a service, right? Put them together.
00:45:55
Speaker
Can you collectively sue them now? Because they're kind of firms, if you want, that make a promise. There's some form of organization that makes a promise to run the blockchain. And if it doesn't work, can you go after them? Let's slow that down. Again, just for the point of doubt, I'm not talking about any particular project, token, network, et cetera. But let's talk generally about proof of state networks.
00:46:18
Speaker
A proof of stake network involves one or more persons sending value to a smart contract address and locking it there, and that is subject to risk, to slashing, if that node operated by that person does not perform within the rules of the protocol. And so it creates an economic incentive for somebody's computer to behave in a way that's consistent
00:46:46
Speaker
with the predefined set of rules. Staking as a service means, well, boy, you just made my head explode there, buddy. I can't do all that, but I have a lot of tokens. Would you send them to an address and do that for me? Yes, that person that's providing the stake as a service is not running the network. They are simply doing an administrative task on your behalf. You could have simply sent tokens directly to an address
00:47:14
Speaker
and have that staking relationship with that address, but it's confusing to you. And so you get your buddy Fahad, hey, man, you seem to know that computer stuff. Could you do that for me? And if you want, you can take 3% of whatever I get and thank you for your troubles and give me the rest. Fahad's not running the network. He's simply providing administrative services to us.
00:47:35
Speaker
Now, we could change that. Fahad could say, actually, I'm really, really good at this. I can do all kinds of things. And that Andreas guy, he has no idea what he's doing, man. Give your tokens to me, and I will ensure at a minimum you're going to get a 90% return, and I'm going to do all these great things. And trust me, man, I'm the guy, because those other people,
00:47:57
Speaker
They're jokers. You know, all of a sudden we have a different relationship, right? Now Fahad is right. So there is a lot of gray area as to when do administrative services and an investment product begin. And it's in the nature of our legal system that courts have to ultimately be the arbiters of that.
00:48:17
Speaker
Right. But going back to crypto assets more broadly, because we're actually now getting into functionality very, very, very delicately. If we go back to the decision of Fripple against the SEC, I think Judge Torres essentially made a very clear statement saying that the XRP token is not a security, neither is Bitcoin or the ETH token, right? These cryptocurrencies, because in and by themselves, they don't make a investment contract.
00:48:47
Speaker
Yes. But they could be sold. They do not embody a scheme. I think, again, something we hammered on in our papers, this embodiment theory, and Judge Torres really embraces that. Whether she read the paper, maybe one day we will know, who knows. But she certainly embraces the thinking and says, not only are these not securities, but they don't embody a scheme. Because the SEC, I think, has recognized that what is a token, it's really
00:49:13
Speaker
the ability of a person to have access to a password, a private key, that allows you to give an instruction to an address that holds some other number. None of that stuff is inherently a security, and I think they sort of, more or less, have given up on that.
00:49:30
Speaker
Instead, they argue that, well, yes, yes, yes, I know there's really just numbers, but it embodies the scheme. I think what is critical is when Judge Torres says, no, XRP doesn't embody anything. There may be a scheme, and she found that there was when people came to Ripple Labs and said, hey, I've got a lot of money. You got anything interesting over there? They said, funny, I got a lot of tokens. Would you like some of those?
00:50:00
Speaker
Why would I want those? And they said, well, look at this select materials here. Don't you see? They're going to be worth much more in the future. Don't you know? How about give me some of that money? And they did. And they didn't have an available exemption. And Judge Torres said, well, that relationship, I give you money. You tell me things that lead me to believe that I'm going to make more money later. I don't have any need for the XRP tokens. I'm not doing stuff with them. That's investment contract transaction.
00:50:27
Speaker
And she found that those institutional sales were investment contract transactions. When people were buying and selling on existing marketplaces and not aware that little bits of XRP were being thrown into the mix, she's saying at a minimum, hey, SEC, you did not establish to my satisfaction that those individual persons who coincidentally
00:50:54
Speaker
happened to buy the tokens being sold by Ripple Labs as opposed to the tokens being sold by Fahad, Lewis, or Andreas, they knew were involved in any way. They had no relationship with Ripple Labs.
Case Study: XRP and Securities
00:51:07
Speaker
They weren't contributing or didn't know that they were contributing, and they were not part of that, and so there was no investment contract going on there.
00:51:15
Speaker
I see. So I'm still trying to wrap my head around this. So I'm just trying to simplify it for my piece I bring here. So first, so I think one thing that you're saying is if you have an item and that has no anchor in some form, then that's not per se a security, right?
00:51:35
Speaker
If you take a cryptocurrency, I mean, Bitcoin is probably a great example. It is something which floats around and it relates to nobody or nothing, right? At least not to a specific, well-defined entity, right? So there's no firm called Bitcoin. There is no single person who makes a promise relating to Bitcoin. The same holds for ETH. ETH is not, the ETH token is related to a abstract organism, which is the Ethereum blockchain or network, right? It's a network.
00:52:03
Speaker
So no entity which has made a particular promise or has particular control. So that seems to be one feature here. And then, so there's no anchor. Now, when I think about a DeFi application,
00:52:21
Speaker
So that gets actually quite interesting in a way because a DeFi application can be, it's basically a piece of code, right? And the application itself can send out, give people a token and that token can have some relation with that code. So that code is some form of anchor, but because it lives in an organism, it is again, not an anchor because it's not a single entity. Is that correct to say?
00:52:47
Speaker
Yeah, I mean, obviously using the term organism metaphorically speaking, yeah, it's just really just part of moving numbers around as code. And interestingly, there is a minority of scholars, but an important group who say,
00:53:03
Speaker
You know, we shouldn't view these as securities, as banking, as finance, as anything. This is just some strange form of wagering. And, you know, there is something to be said for that. It is, I would argue, much more complex than that. But, you know, they recognize that really all we are doing is sending a series of instructions to computers and don't have relationships with anybody that you can ring up and say, hey, you didn't do what you said you were going to do.
00:53:31
Speaker
By the way, so Louis, I just want to clarify because I think what you're saying is actually a fair bit more precise than maybe naively some people might follow, right? Which is that, so to take the example of a decentralized application, there may be an entity that is supporting it, for example, doing upgrades, et cetera. But I think what you're saying though, is if that entity doesn't offer any sort of right to the people who are acquiring the token,
00:54:04
Speaker
then it's still not an investment contract. So for example, I could be involved in upgrading the code that Andreas was referring to and there could be tokens associated with the code and I may have even been involved in the initial sort of release of those tokens, but as long as I have not sort of, as long as there's no like legal right that I'm giving out to the token holders,
00:54:29
Speaker
It's not an investment contract between me and the people who happen to be buying these tokens downstream, right? So there might be an entity that sort of bears the name of the token and even supports it, but that's not the same thing as there being a legal right between that entity and the people who happen to be holding the tokens prospectively.
00:54:52
Speaker
That's completely correct. And this kind of goes to this point of this idea of an issuer-independent security, which does not exist. There is a necessary relationship, Fahad, if you have a security with an entity that you would say, hey, you're the issuer. And one way to know that is if you dissolve that entity, you don't have any more security.
00:55:12
Speaker
However, in the case of the development company that, let's say, plays a critical role in maintaining an ongoing protocol, you can dissolve that legal entity, and some of the people can reform a new legal entity. Maybe it's all of them. Maybe it's 90% of them. Maybe it's 6% of them. Maybe it's one smart one and a couple of dummies that get together. But they can reform an entity and keep doing that support.
00:55:38
Speaker
There's no connection between the token and any one legal entity, and you can't really say. They could split off into two. They have a big fight with each other. Eh, I hate you. I'm starting my own company. And then they both do stuff, right? None of these things are aligned with the concept of securities. Insecurities, there is a person, there's an issuer. They dissolve. They go away. You don't have a security anymore. These are just people who have an aligned economic interest.
00:56:03
Speaker
You know, that does not mean that those people in raising money did not create investment contract transactions by saying, hey, give me money and I'm going to do all this stuff. But that relationship is with the people from whom they directly raise money. If two people not otherwise related to that development company are exchanging that particular asset,
00:56:26
Speaker
They have no relationship with the development company. They may be reliant on the development company, and it may suck for them if the development company does things not expected, but that's not anything they have any rights over in the same way that when you trade crude oil, you may have a high degree of dependence on decisions that OPEC take very recently, quite recently, like earlier this week,
00:56:47
Speaker
There are a bunch of stories about De Beers intervening in the diamond market. De Beers obviously plays an outsized role in the diamond market. Apparently, the diamond market was collapsing, and De Beers directly intervened to prop up prices and take steps to do that.
00:57:06
Speaker
We don't have, if we are on 48th Street or 47th Street, wherever it is for the diamond markets in New York City, we don't have, and assuming we're not otherwise related to De Beers, that could either help us, hurt us. Excuse me. In fact, you know what would be prudent is we ought to stop and just get some water, Chris. Can I do that for one second? Let's go. We'll get back to the fact that we'll cut this stuff. Don't worry about it. I should have had some water. We have a question.
00:57:43
Speaker
So actually a question I want to ask Louis when he comes back and maybe we can integrate it in is that when you think about, for example, let's say I write a white paper from, and I'm going to deploy a decentralized application and I'm going to issue some governance tokens.
00:57:59
Speaker
And the white paper, so I guess the white paper doesn't actually create rights in the sense that Lewis is describing, but does that somehow oblige me? Because I think one of the scenarios he's thinking about is sort of like, look, when I initially issued the governance tokens, I entered investment contracts with the particular people that I was issuing the tokens to, but I'm not in an investment contract with the people subsequently because I didn't really, you know, I have no relationship to them.
00:58:25
Speaker
But it's actually questions that we have to answer that to actually have questions on that too. Yeah. But so, Lewis, if I could interject a question for you, because I'm trying to
00:58:36
Speaker
naively going back to Howie for a moment, right? So because one thing you said basically is like, if the firm that you have in the relationship disappears, then the whole scheme disappears. But if you think of Howie, for instance, in Howie, there's the land which has the orange crops on it. And then there's the management firm that sells back, that basically leases back the orange crops and then manages the land and then
00:59:05
Speaker
It goes on and makes profits for people and disseminates the profits. In this case, however, if the corporation disappears, the land is still there, the orange crops are still there. Is that maybe too naive because maybe there's real assets involved because just the management disappears, right?
00:59:25
Speaker
And we would still have that scheme that they all put as an investment contract. Remember, broadly speaking, we see two types of investment schemes, the ones in which there's an object which is largely irrelevant to the scheme and the other where there's some sort of unusual contract.
00:59:43
Speaker
That is a contract but doesn't meet any of the other prescribed definitions that ladder but and much much smaller set is very different in the case of the your object and scheme there's always some sort of object and it persists.
01:00:01
Speaker
But nobody suggests that the ownership of the object by itself is a security, whether that's land, whether it's, again, the oranges, the strong seeds or, you know, a digital token. One thing I wanted to bring out, which I'm sure will be of interest to you guys as economists, is another argument that we've seen courts and certainly the SEC make is, come on, these digital asset things, they have no inherent value.
01:00:30
Speaker
And so that's why they embody a scheme, because no reasonable person would want something that has no inherent value if there wasn't some sort of scheme involved. And I think that's a tricky argument, but ultimately a false one because
01:00:47
Speaker
what inherent value, especially for economists, is wholly contextual. I think economists have addressed this for a long time. The value of a token, because what is a token? It's knowledge of a number that allows you to give an instruction to a computer. It has as much or as little value as you need to give an instruction to that computer. So if by giving instruction to that computer,
01:01:11
Speaker
or a network of computers, you can induce someone else to give you a Rolls-Royce because it's Bitcoin and you're sending five Bitcoin to someone and they're giving you a silver Rolls-Royce. That has a lot of inherent value to you. It really depends. If it allows you to engage in various transactions, it has value.
01:01:31
Speaker
So I think the idea that something inchoate and intangible like the ability to give an instruction to a network of computers has no inherent value is just fundamentally false and wrong. Like anything else, the value is contextual on what people need. So I think the idea that certainly has been proffered in certain of the cases is that there must be a scheme
01:01:56
Speaker
because the token has no inherent value. Now again, you can create a token that does nothing. As Fahad, you know, I think you've told me you do this in your class. You know, you can take 20 minutes and log in and create an ERC20. It's the simplest thing.
01:02:09
Speaker
And then you can go around and give it some fancy fun name, the Andreas Fahad Louis coin. Man, this thing's going to the moon.
Regulatory Focus on Token Investments
01:02:17
Speaker
And all of a sudden, give me a lot of money, and I'll give you some of these tokens that I created in five minutes. But it's really no different than the jelly beans or, you know, if you ran around, here you go, a little piece of paper.
01:02:30
Speaker
worth a lot in the future. It's a little pink piece of paper, right? You know, it's the same thing. That inducement to someone of saying, hey, I've got something, little piece of paper, token, jelly bean, orange, all those things. If you give me money, I'll make that thing be worth more in the future. That's what we're seeking to regulate. That's where we attach
01:02:52
Speaker
are principles which are someone wants to do something with their capital, they deserve, if they do not have the market power, to extract the information they need about that opportunity, the government should step in and ensure that they get that information. That is our core principle here.
01:03:11
Speaker
What the SEC has sought to do is to extrapolate that into these marketplaces and say, well, you should know marketplace that what you're dealing in is a security. That's where the whole thing falls apart. It is not because you cannot know. Nobody can reasonably assess whether a scheme is ongoing or not. And I know, Bahad, I gave you a lengthy example of some founders who start a token and then crash, and one of them is recovered.
01:03:41
Speaker
Like when you think the founders are dead, the schemes over, it's not a security and you find one and now it's a security again and how does that work? And it just doesn't really hold up. You can't impose liabilities on people who are otherwise have nothing to do with the scheme for trading something if they can't determine whether they're dealing something. And how do you determine whether something is a security?
01:04:04
Speaker
when you're a stranger to this scheme, you pick it up and you look at it. Oh, does it say, hey, if I give Lewis this pink piece of paper, he'll give me a jelly bean, that might tip you off, right? If all the pink piece of paper does is it allows you to give instructions to a computer that tells you nothing about whether there is a scheme.
01:04:25
Speaker
So I want to go into something really concrete though. And I know that you don't want to talk about a particular token, but let's keep it in the abstract. I think it may actually bring out maybe that the opinion that you have is really extreme in a way. And so let's do this.
01:04:43
Speaker
So landing platforms, you create a landing platform, landing platform is just a pool. And within the pool, you need, you know, in order to a landing platform to work, you need people to be willing to make deposits. And you need people to be willing to actually take the deposits as an empowering. Okay, so that's, that's just actually a piece of code, you can just copy it exists on the blockchain, you can do it, it's not hard.
01:05:04
Speaker
In order to get that, though, you need to incentivize people and let's say you create a token which is given out for the first 100 days to people who make liquidity deposit and keep their money in there and to people who make borrow. Both sides of the deal get tokens. Now, this is just a thing. It's just a digital ticket. That's still fine. I think nobody has any problems with it.
01:05:32
Speaker
Now let's say this whole lending platform will create a reserve fund for some form. In case something goes wrong, you pay out of the reserve fund to make sure that you make people whole. That is still something which is perfectly fine to do. But now you say this token that you issue that comes automatically through this protocol is a claim on this reserve fund. Essentially, that's what it is.
01:05:59
Speaker
Now, what you've created here is essentially is a bank, right? Because the bank, essentially, the equity of a bank is the reserve fund. But without a- Can I ask you first, why do you call that a loan? Pardon? Why did you call that a loan?
01:06:16
Speaker
What do I call loan? It's a reserve fund, not a loan. No, no, no, no. The original transaction, there's no loan. And let me tell you why there's never a loan. There's not a loan. That's the problem. There is no loan. And that is because what people do on these ostensibly lending platforms is they send one digital asset to an address, lock it there and get another digital asset. And if they never come back for their digital asset, it doesn't really much matter. They lose their digital asset. That's not a loan.
01:06:42
Speaker
OK, that's how I've ever seen. What do you call it? You lose a lot of terms, but I'm just saying we're trying to map because where you want to go. And I understand that Andreas is say, oh, this looks like a bank, but it doesn't look like a bank because there's fundamental economic differences of what's going on here.
01:07:01
Speaker
So this is what I want to bring out. But I think also partially one important point here is this what the Lewis has been talking about with the difference between rights and abilities in that part of what he's getting at is look, if it's just that I send an instruction in the network and then this sort of action occurs.
01:07:19
Speaker
That's different than me saying, look, I will give you, like, Andreas, even as you were framing the question, you were referring to an entity doing things. But I think, and Louis, correct me if I'm right, I think in what you're saying, it matters whether the entity is sort of actually obliged as the entity itself to do something, where you can like take them to court and say like, no, you didn't give me this, or whether it's, you know, they just wrote some code that is going to generate the action that you're thinking of.
01:07:48
Speaker
It's just the code generating the action. I believe that's what Lewis is referring to as an ability, that the token is giving you an ability to do this or that. Whereas a right is the case where I'm saying, no, no, look, you do whatever and I will give you this. And as an entity, I will give you this. And, you know, yeah, you can take me to a judge if I don't do it. And you can say like, no, no, look, you said you were going to do this and you didn't do it. So do it, you know.
01:08:12
Speaker
Right. Well, I actually had a point which was coming two sentences later, if I still may. I fully take the point about, you know, I'm casually referring to something as a bank. I know a bank actually does something else. It's a little bit like what, you know, goldsmiths have been doing if you really want, right? So in the 15th and 13th century and so on in the UK. But what I was getting is the following. So you have the reserve fund, you have created, let me just call it a bank for whatever reason. It doesn't really matter, right? For the purposes of what we're talking about.
01:08:42
Speaker
And there is no entity doing it. Everything runs on the decentralized network. You have created this token. This token is created within the smart contract system. There is still no entity in charge. It's all fine, right? So given your description of what constitutes a security, this is not a security. I agree. But now I want to say what happens now if
01:09:02
Speaker
In the creation, there is a firm that created the original code and these tokens that are given out as incentives, they retain a certain fraction which allows them, which is enough for them to take control of these reserve assets. Under what circumstances does that all of a sudden become a security? Is there a threshold rule? Is there a fact that they retain any of these tokens or is there none of it that makes it a security? That's kind of what I was getting after.
01:09:34
Speaker
Sure. And I, you know, again, I think it really is, it goes to.
01:09:40
Speaker
this critical distinction between is there a relationship between two people and it doesn't have to be, I don't personally fall into the camp of thinking you need to have an actual contract, but you have two people, I'm telling you something and you're giving me something that you were induced to do that, as opposed to I'm a developer, I'm updating and writing code and I'm doing different things and you're using that code
01:10:11
Speaker
There may be other principles of law that makes the developer responsible. There may not be, but they're not securities law principles. The securities law principles apply when there is an affirmative investment transaction that involves one person giving an identifiable other person value and expecting something from that other person because it's not a gift.
01:10:35
Speaker
in those, you know, extensible lending programs, generally speaking, that is not the case. People are giving various instructions to computers and hoping that outcomes are the way they are anticipated.
01:10:49
Speaker
And in most cases, they are. But if they're not, unless, and again, and this is an important point, and we've seen these exploits with mango markets being the most notable, perhaps, when we see these exploits, we have someone who at least ostensibly is misusing the protocol. And this is a very, very controversial issue.
Protocol Misuse and Regulatory Implications
01:11:13
Speaker
But how that person used, at least at that point, you have an identifiable actor
01:11:19
Speaker
we have to consider has what the inventiviable actor done sort of in some way created some other legal liability under our current principles. But that's very different from just the nature of the protocol. There we have a clear and identifiable actor.
01:11:35
Speaker
Another way, I would say, Andreas, is that we don't have a principle of securities in the air. That's another way of saying it. There's this not-security-ness around something. It's not kind of a Hyundai sauce that you can sort of pour over something and say, well, it would taste so much better. Put some Hyundai sauce. It's a little dry.
01:11:58
Speaker
And I think the approach here is that where there are legitimate policy concerns and there's nothing else better around and people look around the kitchen and they see some Hyundai sauce, they say, well, you know, I know it doesn't really go on this, but it's close enough and I don't have anything else there.
01:12:18
Speaker
And the problem is we start to create distortions by treating something as a security, which is just not a security, and rather, as we argue, there are legitimate reasons why we could use more regulation in the space. I think almost everybody in the crypto space would advocate for that, but it needs to be thought through and applicable at the time, rather than sort of jerry-rigging a regulatory scheme
01:12:44
Speaker
that doesn't apply and say well, can't we just shove it into this box? I think that's really the point I'm trying to make.
01:12:52
Speaker
Well, and I appreciate that point for sure. So if I can come back to my point, so if I take the layperson's perspective, and so the way I describe this particular scheme, it seems really obvious that what this token would be, that it would count as a security.
01:13:14
Speaker
If I oversimplify what you say, it's basically, no, that's actually not true because even though I may have some say over the reserve pool, which is sort of like ultimately representation of what we hope this, you know, this letters and numbers that we shift around in the blockchain universe,
01:13:32
Speaker
will generate something that could be construed as having value. Because you have actually no impact on it, because you have nothing to do with the administration and the running of this, therefore, this is not a security. Is that too much of an oversimplification? No, it's not. But let me ask you a different question. Let's do the other direction. Let's assume it is a security.
01:13:55
Speaker
Well, that's a completely different question, which I actually want to get to later. But this is how I'm thinking through, because we do spend what seems like an inordinate amount of time with the deliveries. Security is not security. God knows the poor people who watch all my podcasts. They must be sick of it already.
01:14:12
Speaker
You know but let's just say it was a security just like screw the whole thing you know right what would be different you know what would be different the main thing that would be different. Is that under current principles there would be no practical way.
01:14:29
Speaker
of people to create marketplaces for those crypto assets that are accessible, at least in the United States. There's no practicable way to do that. Effectively, it wouldn't stop the protocols from acting. It would just mean that there would be no legal way. One example I like to look at, which I think is very relevant from an economics point of view,
01:14:54
Speaker
is the situation prior to the constitutional amendment that adopted prohibition of alcohol in the last century.
01:15:01
Speaker
there were very, very good societal reasons why people would be concerned about the use, sale, and consumption of alcohol in the United States. By creating a prohibition, the net result of that was simply they didn't stop alcohol. What they did was make it less transparent, more outside the US, and it was a terribly failed experiment. So I guess one of my points would be, let's just say, OK, let's stop with all this.
01:15:30
Speaker
Let's just say these are all securities.
01:15:33
Speaker
What is the outcome of that conclusion? And I think it's important to follow that train of thought through. It doesn't magically create people who are liable and make everything better. It just eliminates the activity on a legal basis and creates a black market for this stuff where people use VPNs and they just keep doing this stuff, perhaps less so. But nevertheless, it doesn't... So I think it's important, what end result is the law seeking to achieve?
01:16:03
Speaker
Actually, I want to come to that because I think this is actually a critical question around this. Ultimately, let's say security laws all encompass and attaches on everything. Fine, fair enough. What you're really saying is a question of how can you comply? What does compliance mean? Is compliance compatible with usage?
01:16:27
Speaker
I think this is the key problem that we're all facing here. Can you run us very briefly to actually what the compliance requires? I think it starts with the fact of if you are deemed to be in some form an issue of a security, it seems like you need a physical address and you need to be a company. I think this is where this whole thing starts. This is the first problem.
01:16:53
Speaker
And then what kind of submissions have to be done? What does this mean for transfers of assets? Who can transfer assets? Run us through us. Go wild. Yeah. Well, the short of it is, yes, exactly as you say, Andreas, there are two broad set of rules. There are some other rules too, but there are two broad sets of rules. The rules found in the Securities Act of 1933, which I alluded to before, and the Securities Act
01:17:19
Speaker
of 1934, which followed. And broadly speaking, conceptually, the 33 Act relates to raising money through the sales of securities, and the 34 Act deals with issues around existing securities and their trading. So taking them one at a time
01:17:37
Speaker
Compliance, in theory at least, with the 33 Act is occurring today because the framework of the 33 Act says if you offer a security to the general public, you must go through an SEC registration process. The SEC has made it very clear that that process is going to be time-consuming, painful, costly, and impractical.
01:17:59
Speaker
A couple of people tried something like that in 2019, a company called Blockstack and another company called YouNow, neither of which projects, you know, they suffered.
01:18:10
Speaker
They suffered for their sins. But our securities laws also provide, as I referred to before, exemptions. So if you sell tokens to people without a public offering, in effect, then you can have a very legitimate security sale and not have to register with the SEC. And in fact, that's what's been going on for the most part.
01:18:34
Speaker
for the last three or four years since kind of people figure that one out. So in terms of raising money, there's really a perfectly legal path to raising money. The issue really becomes what happens when those tokens get traded. And that's why the lawsuit of the SEC against the three major exchanges, one of which has been
01:18:57
Speaker
resolve to Bitrix, but the two that remain Binance and Coinbase are so critical because that's really, and those are under the 34 Act, not the 33 Act, and that's where the compliance really becomes problematic.
Regulatory Challenges for Crypto Compliance
01:19:10
Speaker
A company that has issued securities and has more than, I think, 2,000 total holders or 500 or 300 non-accredited holders must register with the SEC. So there's a general rule. If you've issued securities and they're widely held, you need to register as what we call a reporting company with the SEC and file all kinds of reports and do all kinds of things which are completely reasonable.
01:19:35
Speaker
and appropriate, but exactly as you say, Andreas, a project cannot do that. The development company that created the token cannot necessarily file those forms or take that responsibility because that's simply not their role. So becoming a reporting company becomes somewhere between difficult or impossible. In addition, we have rules around three particular areas, and they're the three particular areas that were raised as a concern by the SEC in these lawsuits with the marketplaces.
01:20:03
Speaker
one, acting as an exchange, number two, acting as a broker-dealer, and number three, acting as a clearing agency, all of which require federal registration.
01:20:13
Speaker
none of which can be practically complied with under our current system. So independently of any problems that a quote-unquote issue or whoever that might be might have in registering their securities, there are fundamental limitations on the ability of marketplaces to behave as a securities exchange because they're fundamentally not securities exchanges and none of the rules really apply, including in particular
01:20:37
Speaker
If you take the position that the tokens are securities but they're unregistered, then you shouldn't be trading unregistered securities. Likewise, on the broker-dealer front, you need to register with the self-regulatory organization for broker-dealers, known as FINRUN, the United States.
01:20:53
Speaker
And you need to comply with a whole bunch of other things that as a practicality don't really function. And finally, if you're providing clearing agency services for securities, you need to register as a clearing agency and comply with a whole other set of regulations. Again, all are as a practical matter, not possible. So if it were a security, you would have to just largely stop, absent some fundamental change in the way our current regulations work.
01:21:19
Speaker
Just very briefly, those rules that you have, are they the result already of the Securities Act from 1934 and 1933? Yes. Is that merely a question of implementation or is this a fundamental problem with the act itself?
01:21:39
Speaker
I'm going to say it's a problem with the act itself. It's the proverbial square peg round hole problem. It's that the rules work just fine for things that actually are securities. They don't work at all for things that are not actually securities, and that's why we have these problems. Right. Because what I'm wondering is, at the end of the day,
01:22:00
Speaker
You know, Congress, I mean, now correct me if I'm wrong here, but Congress usually establishes a regulatory agency, gives them a mandate, and then the regulator makes up their own rules to stay within this mandate and to fulfill this mandate. And there's a question of whether or not there is a set of rules that the SEC or policies the SEC could
01:22:18
Speaker
could envision and could implement and create such that crypto asset issuers of some form or other could actually comply. In just very broad, do you think that it's actually conceptually possible for the SEC to do this, or do we really need a different act?
01:22:35
Speaker
It is conceptually, I mean, it is possible to do, once you have a pen, you know, you could kind of do anything you want. If you wanted the SEC to be the primary regulator of marketplaces in crypto assets, you could do that. That would almost certainly require an act of Congress because the nature of the changes.
01:22:54
Speaker
are very significant but you could do that there has been a debate because we have two market regulators we also have the cftc and you you could either choose one the other or some combination of the two or in theory create a third one that those are your available options there are definitely reasons why you might in the abstract at least say the sec is the appropriate
01:23:16
Speaker
regulator because they're more familiar with matters relating to disclosure and markets and other things. Commodities markets tend to be much more institutional for the most part, and they're designed differently. But on the other hand, there are more similarities between crypto assets and commodities. In any event, these have been debated in Congress. And at this point in time, we've had some great legislation introduced both in the House and the Senate. But given the current state of affairs, they're unlikely to move forward anytime soon.
01:23:45
Speaker
I see. In a sense of looking ahead, let's say for the sake of the argument, people get enlightened, take your advice and say they are not crypto assets, sorry, they are not securities. Therefore, what happens now? At the end of the day, you still want an environment in which when people give money to some
01:24:11
Speaker
Give away their money in some form that they that they have some certainty that the money is used in a responsible way that seems not to be possible in the. Fundraising i think is indisputable the securities transaction.
01:24:28
Speaker
So to the extent someone got a wild hair and after one too many planters punches, put up a website and tried to sell tokens that way, they would be regulated. That is a regulated transaction. What the issue here really is not the fundraising or the protection of investors that way.
01:24:49
Speaker
It's the secondary trading in something that already exists. And that's a much more pernicious sort of issue because you're not protecting investors directly from any one person in particular. Let's take Ethereum as a paradigm. What disclosure would you want to give investors about Ethereum that would be equivalent to the kind of disclosure that a public company would provide?
01:25:16
Speaker
It's a constantly changing ecosystem with all sorts of things and all kinds of people doing differently. There's a degree of control, and obviously there are projects in which there is much more clearly one person or entity that's active than there is an Ethereum. But it's a continuum, and you can't really say because, as we've said many times,
01:25:35
Speaker
That one entity that's more active doesn't have any obligation to do that and may cease doing that. You can't say, well, you have to say everything that you're doing. The framework in the Senate bill I alluded to, I believe, is the most effective one. And that framework, what it says is
01:25:52
Speaker
If a company raises money by selling crypto assets, even in private transactions, once you have sold those assets, if you continue to promote the project and provide what in Howie terms we call the essential managerial efforts,
01:26:09
Speaker
then you have to continue providing ongoing disclosures to the market as long as you're providing those essential managerial efforts. That links the fundraising, which is a securities transaction, and the benefit of that to say, look, hey, you're going to give me money because I'm going to create a jelly bean that's really good and do all these cool things or a strong seed, right?
01:26:32
Speaker
But I, you're placing the economic burden, which is something you mentioned earlier, Andreas, you're placing the economic burden on the party that's most able to bear that burden, the party that raised the money. And so in this framework, it's not so much that the token is a security such that it has to trade on a securities market. We're just saying that someone sold an object, a non-security object, and continues to drive the value of that object and therefore should provide
01:27:01
Speaker
disclosure to the marketplace based on what they
North American Regulatory Obsession
01:27:04
Speaker
know. Those are two very different frameworks and I think the latter, which is in the Senate bill, makes a ton of sense and would be the right one to adopt.
01:27:12
Speaker
Interesting. All right. Well, so I mean, one thing I will note is this has just come from somebody with a European background. There is a certain sense in which in North America, it's always an obsession with holding a particular person accountable. And if that person, you know, if something goes wrong, that person has to go to jail, right? So that's kind of the, there's something in the American mindset about this, right? Something goes wrong, somebody has to get punished.
01:27:38
Speaker
Right? That's not necessarily the case elsewhere. Well, we also have a good thing of forgiveness too, because like in the Martha Stewart of the world, she did something wrong, she got punished, and now she's back and even stronger than ever. So it's kind of a weird dynamic where we both punish people and then forgive them.
01:27:54
Speaker
You could make that happen. Just to clarify a little bit, you're not saying that non-accredited investors who end up holding these tokens shouldn't ideally get some level of disclosure about what they're holding. You're really making a point about the fact that let's call it the natural entity that you would normally burden with that disclosure requirement doesn't really exist.
01:28:20
Speaker
And maybe it's not a good idea to just sort of shoehorn kind of the entity that people, to shoehorn somebody in there who's not actually there, who doesn't necessarily fit the initial ideas of securities laws. And I think what you were alluding to with some of the recent legislation was sort of trying to identify who could provide the disclosure, who would most reasonably sort of bear that burden.
01:28:49
Speaker
There's also then a question about, for example, given that, let's talk about the developers who are, say, supporting the code, who are continuing to, was it the managerial efforts, you made some reference to a term like that, who are sort of engaging these ongoing managerial efforts, and then you sort of burden them with the disclosure requirements.
01:29:11
Speaker
There's sort of a natural economist question here, which is that that, of course, affects the incentive problem of these developers who are now engaging these managerial efforts. And it's quite possible that they were doing good work to actually sort of reduce, let's say, the bugs, et cetera, in the code. But now that they have a disclosure requirement, they would actually just prefer not to do anything and they can just shut down and the tokens will continue to trade.
01:29:38
Speaker
I guess I want to ask a little bit then, is that framework that you were describing sort of thinking fully about the economic implications and to the extent that it's not, how do you think about sort of assigning that burden?
01:29:54
Speaker
Yeah, it's a great question, and I think the right one. And I think what you bring out, Fahad, is the inherent balancing when it comes to policy matters. There are trade-offs, and there are both incentives and disincentives. And I think economists would love a world in which everybody ultimately was cosying and took into account transaction costs and worked everything out.
01:30:18
Speaker
And that is a world. It's just a world that has a lot of adverse consequences along the way. And I think that's the kind of thing we want to balance out.
01:30:28
Speaker
So yes, imposing that burden, and I just wanna emphasize, you imposed the burden in the Senate bill on those who actually raised the money. So they got the benefit from that money they probably wouldn't have raised had they not been able to create this tradable non-security asset. I would also observe that- Yeah, just to clarify. So if I raise the money, but then I don't do anything thereafter, wouldn't that Senate bill burden me with any requirements?
01:30:58
Speaker
Okay. No. So it would import the Howie test. It would say, well, you know, is your, you know, Fahadco, you know, exercising the essential managerial efforts that drive value to this? Or did you, you know, do the Bahamas test, as another scholar, Todd Henderson said, and just, you know, move on from the project?
01:31:18
Speaker
And if it's moved on, then there's nothing to disclose, because for better or worse, you're not doing anything. So there isn't anything to disclose. The difference, I want to really hone in, this is a very subtle but critical point, because I think the SEC and their current framework would agree or would assert that, yes, it's the person who raised the money that has to do the disclosure. So it's not that, it's that their only way of getting to that conclusion under the laws that stands today
01:31:45
Speaker
is by saying that the token is a security. That way you can back into an obligation of the person who raised the money as having disclosure obligations. That's the only way you can do that today under the laws that stands. That's why you need Congress to change the law and say, even though those tokens are not securities, we're still going to impose
01:32:05
Speaker
disclosure burdens in a certain way, right? So that's the key difference. Right now, the only way we can get there is to back into that conclusion by sticking the label security on something that's not a security and then getting the outcome that you want, hey buddy, you have to provide disclosure.
01:32:23
Speaker
In the Senate bill, you would not have to apply that label because we're changing the rules. And we're saying if you raise money, it doesn't have to be. You could be selling Louis Vuitton bags and driving the value of that or any which other thing. It actually only applies to intangible
Marketplace Regulation and Developer Liability
01:32:38
Speaker
assets, but whatever.
01:32:39
Speaker
It doesn't have to be a token, but it just has to be something. We need to change the law to get to a more appropriate policy outcome. That's the critical thing. That's because by treating the tokens as securities, you get into this complete conundrum of marketplaces and how you regulate marketplaces, and you would have to regulate marketplaces
01:33:01
Speaker
as if they were securities exchanges, but the whole framework of our securities laws just does not fit. And that's why we have this grinding of the gears. That's how we backed ourselves into this problem. So you want the disclosure, but the only way you can get the disclosure is by making this inappropriate framing of tokens of securities to get the policy outcome that you want. But the baggage that that brings is a framework that fundamentally doesn't work. That's our inherent problem.
01:33:29
Speaker
I see in some sense, is it fair to say that the European MICA rules actually do exactly that? Because I think one of the requirements there is the white paper requirement and the like. So that seems to be exactly aiming at what you're describing. Is that correct?
01:33:43
Speaker
It is, and we'll do another show on Mika. I've got a lot to say about that, but not this time, because we do probably have to wrap up. Yeah, we shall, we shall. We're close to the end here. So one thing I want to, and Fad and I actually had a discussion around this, because there's the question also on the obligation of developers. Now, this is a little subtle, and because it goes actually at the, it goes to the regulation at the US,
01:34:09
Speaker
or the sec has proposed on marketplace in the definition of a marketplace because they were going quite overboard in some sense right where they basically said if you are. Writing the code for a decentralized application which could serve as a marketplace then you are also liable to the sec.
01:34:27
Speaker
Which, of course, for people like Fahad and me is a concern, because we are in the business of coming up with ideas for the economics of these marketplaces. And if you think about it one step further, the developer is the person who actually implements somebody else's ideas. So that kind of, at some point, makes academics liable too, if you really go through the various different strings.
01:34:48
Speaker
Which is a concern and which, you know, I mean, I'm in Canada, so I'm safe from you. But in the US, it's a first amendment concern, at least in my understanding, because I thought code is and writing is protected by first amendments. And it would not be appropriate, I think, for the SEC to regulate speech.
01:35:09
Speaker
But maybe you have a view on that one. Those are great questions, I would say. The question about what speech is or is not protected gets complicated quickly. And especially when it's commercial speech, which is for the purpose of making money, that gets very complicated. But I don't think you need to get to that level of complexity. I think, again, in a perfect cosian world, transaction costs would be balanced out.
01:35:36
Speaker
marketplace actors in an open marketplace would allocate those costs in a way that is fair and balanced and due course. The issue that we have is we're not in that perfect world, and we have an unlimited number of, as a practical matter, schemers and scammers who can create, there's virtually no barrier to entry, as we said earlier. Anyone can create a token, anyone can pitch a scheme,
01:36:03
Speaker
And especially as crypto prices perhaps are going up again, it becomes hot and there are many, many people to be taken advantage of. And of course, people have been taken advantage of since time immemorial, but this internet scam
01:36:17
Speaker
creates concerns, and I think it appropriately raises a regulatory interest in how do we prevent that to the greatest extent possible while still promoting innovation. One
Illicit Finance and Societal Dialogue
01:36:30
Speaker
issue would be imposing liability on anybody who ever creates a smart contract that can deploy a token.
01:36:37
Speaker
as you rightly observe, that can be way, way overbroad in terms of imputing that liability. For, among other reasons, someone can deploy code and then walk away, not have anything to do with it, or they can
01:36:54
Speaker
do GitHub commits for the code for a while and then take a break for six months while they go find themselves. Is that because they did a rug pull or they just decided, I'm kind of bored with this, right? We need to have a societal dialogue about now that this technology is available to us, how is it used? We spent the entire hour and 40 minutes
01:37:23
Speaker
talking without even touching on illicit finance, which is perhaps the most difficult issue, the facilitation of illicit finance. There were hearings in Congress earlier this week on this subject, and it's one of the most thorny issues. When people can move value around at scale without permissions, somebody is going to start to say, well, hmm, maybe I could do that for, and what even is illicit, right? So we think we have an idea of what illicit is, but it's often pointed out one person's
01:37:53
Speaker
Freedom Fighter is another person's terrorist. So these are all very, very difficult societal questions that no one's really going to answer. And I just I regret only that we don't see policymakers engaging enough in the sort of human elements of what is happening here and sort of focusing on, you know, what are really ultimately technicalities is a token of security.
01:38:15
Speaker
sort of whatever, you know, what are we doing about all this? And how does this work? And what does this mean as a society, right? We gotta come to terms with
Conclusion and Reflections
01:38:24
Speaker
that.
01:38:25
Speaker
Yeah, I fully agree. I think this is a great conclusion and a great summary of actually the path forward. I do believe that this discussion is important though, and particularly for anybody who wants to create anything in this space, you need to want to have some form of certainty that you cannot be punished several years down the road for an idea that you had and that you actually probably implemented to make the world a better place. And I think this is a concern that some people actually do have.
01:38:54
Speaker
Now, and it's a legitimate concern. Absolutely. Yeah. Yeah. And so with that, I think I think this is probably a good point for us to wrap up because we're already at the close to the two hour mark for our own discussions here. And I want to thank you, Lewis, and for an incredibly insightful discussion. I learned an awful lot and I hope the the audience did too. Thank you.
01:39:17
Speaker
Well, thank you both. It's a pleasure being here. I'll just say, you know, I have done a number of podcasts on these topics. It's rare that I get to dive so deeply with two such well-informed, you know, colleagues as you guys. So great credit to you both to the Owl Explains team for hosting and for making this possible. So thank you.
01:39:40
Speaker
We hope you enjoyed this podcast. Thank you for listening. As a reminder, you can find additional materials on OWLExplains.com and can stay updated by following us on social media. That's all for today.