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GARY GENSLER: We're going
to turn back to ICOs

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00:00:25,080 --> 00:00:27,480
and spend a little bit
more time on initial coin

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00:00:27,480 --> 00:00:32,820
offerings in the markets and
the regulation of initial coin

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00:00:32,820 --> 00:00:35,920
offerings today.

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But before I did
that, I was going

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to talk about one short
announcement that happened.

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In the US, we've talked
about how fiat currencies are

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accepted for taxes.

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AUDIENCE: Ohio!

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GARY GENSLER: Ohio.

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James, what do you want
to tell me about Ohio?

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AUDIENCE: They're taking
Bitcoin for taxes, right?

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00:00:54,977 --> 00:00:55,560
AUDIENCE: Yes.

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AUDIENCE: Yep.

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GARY GENSLER: Yeah.

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What's that?

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So do you want to
say a little bit more

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about it, Hugo, or Ross?

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AUDIENCE: Go ahead.

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AUDIENCE: Sure.

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00:01:03,760 --> 00:01:07,170
Yeah, so they're accepting
Bitcoin for taxes

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through BitPay, which
means that it's instantly

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transferred into fiat.

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But still, that's
a pretty big thing.

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You know?

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GARY GENSLER: Yeah, so the state
of Ohio, I guess it was the--

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AUDIENCE: Treasurer.

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GARY GENSLER: --treasurer.

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Tom, you're shaking your head.

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AUDIENCE: Oh, as an Ohioan,
just Ohio today breaks my heart,

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00:01:26,227 --> 00:01:27,560
not related to this-- unrelated.

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00:01:27,560 --> 00:01:29,652
GARY GENSLER: So Ohio
breaks your heart

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00:01:29,652 --> 00:01:31,485
because they're accepting
Bitcoin for taxes?

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00:01:31,485 --> 00:01:32,318
AUDIENCE: Unrelated.

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00:01:32,318 --> 00:01:34,730
GARY GENSLER: Unrelated.

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Do you want to share
for the class, or?

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AUDIENCE: I'll let [INAUDIBLE]
and his next four years

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of policy speak for itself.

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AUDIENCE: Oh, yes.

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GARY GENSLER: Oh, I see.

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So the state of
Ohio has announced,

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the state treasurer-- is this
an elected office, the state

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00:01:49,200 --> 00:01:50,380
treasurer?

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So he saw that it would be good
for Ohio, for the economics

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and for the job creation
in Ohio, and maybe

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for his politics,
to move forward

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and say the state of Ohio
would accept Bitcoin for taxes.

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It's the only US jurisdiction
that I know that has done that.

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Now, you can think
of them as a vendor,

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like they're saying
they will take it.

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And they've arranged it, as
Hugo said, through BitPay.

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BitPay is an application
where, whether you're Starbucks

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or the state of Ohio, you can
take a cryptocurrency like

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Bitcoin, and they will
take that Bitcoin,

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sell it quickly on an
exchange, take some price risk-

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BitPay takes a little
bit of price risk--

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and for a 1% fee, give
you fiat currency.

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Now, it's 1% and
whatever exchange rate,

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because I don't know how
much VIG, or margin, is

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in the exchange
rate transaction.

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But their stated fee is 1%.

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Hugo?

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AUDIENCE: I think the big
question is whether or not

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that's a taxable event, too.

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GARY GENSLER: Is a
taxable event for who?

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AUDIENCE: For the person who's
paying their taxes in Bitcoin,

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if any transaction from Bitcoin
to fiat is a taxable event.

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GARY GENSLER: All right.

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So Hugo's raised the
question, is the sale

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of the Bitcoin to fiat--

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because the fiat is,
in essence, being

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used to pay the
state of Ohio taxes--

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is the sale of that
Bitcoin a taxable event?

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And I think somebody
in the class will know.

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It's knowable.

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AUDIENCE: If you sold Bitcoin
to acquire fiat, it would be.

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But if you use fiat
to acquire Bitcoin,

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which I think the
big application here

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is the marijuana
industry in Ohio,

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if they're not able to back the
bank-- if they are acquiring

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00:03:41,970 --> 00:03:45,718
Bitcoins and then paying
them to the government,

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I think they don't
have to pay taxes.

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GARY GENSLER: What if you
bought Bitcoin at $3,700,

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and the day that you
sent in your taxes

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it's valued at $3,800 bitcoin?

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AUDIENCE: Congratulations.

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AUDIENCE: Yeah.

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00:03:57,325 --> 00:03:59,330
AUDIENCE: You would pay
taxes on the profit.

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GARY GENSLER: That's correct.

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So at least here in the US--

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the IRS has spoken to this--
if you acquire Bitcoin

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and then you use the
Bitcoin in commerce,

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00:04:11,090 --> 00:04:15,870
if you're using it to fulfill
an obligation, in this case

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a debt to the Ohio government,
and if it moved from $3,700

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to $3,800, you would, yes.

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You would have a
short-term capital

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gains on the $100 difference.

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Whether everybody will
comply and report properly

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is another thing.

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But that is certainly my
reading of US law at this time.

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Ross?

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AUDIENCE: This rate--

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00:04:40,530 --> 00:04:44,340
I saw this, and I looked
up a couple of things--

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00:04:44,340 --> 00:04:45,840
it strikes me it
would be taxable

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given what you've said
about the US thing.

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And it really is just
changing it for fiat.

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It's just the structure, really.

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But what might make it
seem more interesting

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or gain a little
traction is if, Ohio,

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00:05:02,190 --> 00:05:07,290
if they have a state income
tax, agreed not to tax the gain.

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Ohio could agree not to do it.

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You split the pay
on the federal side.

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00:05:11,370 --> 00:05:14,038
But then they could make it
more like a real transaction

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00:05:14,038 --> 00:05:15,080
if you're paying Bitcoin.

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00:05:17,515 --> 00:05:18,890
GARY GENSLER: And
how many of you

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00:05:18,890 --> 00:05:21,964
are from Ohio here
other than Tom?

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00:05:21,964 --> 00:05:24,490
Tom, as an Ohioan,
would you want

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00:05:24,490 --> 00:05:27,930
them to not charge the taxes?

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00:05:27,930 --> 00:05:29,411
You're one voter, I know.

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AUDIENCE: So
there's [INAUDIBLE]..

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GARY GENSLER: Oh, [LAUGHS] OK.

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AUDIENCE: So they charge
the state income tax.

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00:05:34,600 --> 00:05:37,080
But I don't know if they charge
a state capital gains tax.

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AUDIENCE: But
that's the question.

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00:05:38,497 --> 00:05:41,115
I'm just saying that's how they
could make it more real than--

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like Hugo was saying.

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It's not real right now.

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We're just converting it to
dollars and taking the dollars.

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GARY GENSLER: They did,
in this announcement--

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if you read the fine print as
I was want to do because I was

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fascinated by this--

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for the first three
months of the program,

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Ohio negotiated with BitPay
that BitPay would charge a 0%

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fee for the first three months.

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00:06:02,380 --> 00:06:05,200
But this was BitPay foregoing--

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00:06:05,200 --> 00:06:12,035
it appears that that was their
bonus to the state of Ohio--

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00:06:12,035 --> 00:06:15,100
0% fee for three
months, again, not

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00:06:15,100 --> 00:06:18,560
knowing exactly what
exchange rate you're getting

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and so forth.

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00:06:21,590 --> 00:06:24,565
And you think that it would
be the cannabis industry?

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AUDIENCE: Yeah, so Ohio passed
a state constitutional amendment

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two years ago.

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GARY GENSLER: We're talking
about Ohio that's now

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accepting Bitcoin for taxes.

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And Tom is our
resident Ohio expert.

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AUDIENCE: I guess so.

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00:06:38,030 --> 00:06:43,570
So yeah, Ohio will
legalize-- the state voters

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00:06:43,570 --> 00:06:48,056
passed an amendment to allow
marijuana legalization.

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It's subject to,
I think, some time

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delay or regulatory approval.

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But the expectation is
it will be approved.

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And the marijuana
industry is still

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restricted from accessing
the federal banking system.

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00:07:00,280 --> 00:07:04,420
So an alternate way
for them to avoid

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carrying large sums of cash--

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00:07:07,250 --> 00:07:10,840
GARY GENSLER: Is carry the
value in cryptocurrency.

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00:07:10,840 --> 00:07:13,270
And do you think that's what
motivated the Ohio State

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00:07:13,270 --> 00:07:14,990
Treasurer?

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00:07:14,990 --> 00:07:15,605
I see.

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00:07:15,605 --> 00:07:15,780
Shawn?

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00:07:15,780 --> 00:07:17,100
AUDIENCE: I was just curious.

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00:07:17,100 --> 00:07:19,740
So if that's the
case, and if I may--

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well, look, I don't
know of capital gains,

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00:07:21,500 --> 00:07:25,420
but if we can cut losses on
Bitcoin, does that part of loss

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get carried forward
that allows you

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to upset some of your income?

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GARY GENSLER: Yeah,
it's a capital loss,

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just as if you
bought Apple stock

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and had a loss on Apple stock.

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AUDIENCE: So this cannot be
carried forward to offset

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00:07:40,590 --> 00:07:41,180
the future--

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AUDIENCE: Yeah.

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00:07:42,455 --> 00:07:43,900
GARY GENSLER: Under US law--

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I can't speak to other
jurisdictions' tax--

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but you can apply
losses against gains.

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And to the extent you have
greater losses than gains,

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you can actually take
some of those losses

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00:07:56,765 --> 00:07:57,640
against your income--

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I don't remember the limit any
longer; it's 3,000 US dollars--

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00:08:03,180 --> 00:08:06,710
and then, otherwise,
carry it forward.

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00:08:06,710 --> 00:08:12,250
So for most citizens, they
would just take that loss.

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00:08:12,250 --> 00:08:16,640
If you had greater than that,
you would carry it forward.

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Any other thoughts on Ohio?

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00:08:18,210 --> 00:08:19,213
I mean--

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AUDIENCE: Yeah, I'm
just wondering, sort

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00:08:20,880 --> 00:08:22,830
of philosophically,
Ohio isn't actually

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00:08:22,830 --> 00:08:24,410
carrying the price for this.

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00:08:24,410 --> 00:08:28,490
But given they're converting
it to fiat instantaneously,

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philosophically are
they really accepting

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00:08:30,870 --> 00:08:33,179
Bitcoin as payment for taxes?

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00:08:33,179 --> 00:08:35,700
Or is it just a
marketing gimmick?

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GARY GENSLER: I don't know.

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00:08:36,840 --> 00:08:39,539
I mean, any other views on that?

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So the question
is, is Ohio really

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00:08:41,280 --> 00:08:44,550
taking cryptocurrencies,
Bitcoin,

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00:08:44,550 --> 00:08:47,916
or is it just marketing?

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00:08:47,916 --> 00:08:50,487
AUDIENCE: I think it's marketing
because if you have BitPay,

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00:08:50,487 --> 00:08:52,320
the whole point of
BitPay is turning it back

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00:08:52,320 --> 00:08:57,300
into fiat, which is why I think
they should pay taxes on it.

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00:08:57,300 --> 00:08:59,850
If the state of Ohio had
a wallet with Bitcoin

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00:08:59,850 --> 00:09:03,120
and they would accept those
bitcoins into their wallet

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00:09:03,120 --> 00:09:06,450
and hold those proceedings
in their wallet,

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00:09:06,450 --> 00:09:11,310
then they would be formally
accepting Bitcoin for taxes.

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00:09:11,310 --> 00:09:17,010
And you will not need to pay
taxes on that transaction.

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00:09:17,010 --> 00:09:19,830
GARY GENSLER: But I
would raise the question,

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00:09:19,830 --> 00:09:21,640
with all respect,
what's the relevance?

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00:09:21,640 --> 00:09:26,400
Why does it matter
to a taxpayer in Ohio

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00:09:26,400 --> 00:09:29,730
if this facilitates
my paying my taxes,

216
00:09:29,730 --> 00:09:33,840
whether it's in the cannabis
trade or some other trade?

217
00:09:33,840 --> 00:09:37,350
They're facilitating another
means of paying my taxes,

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00:09:37,350 --> 00:09:39,660
fulfilling my
obligation to society.

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00:09:39,660 --> 00:09:40,780
AUDIENCE: Yeah.

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00:09:40,780 --> 00:09:42,630
So my response to
that would be in how

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00:09:42,630 --> 00:09:44,370
we define what a currency is.

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00:09:44,370 --> 00:09:48,900
And one of those criteria is,
are they accepted to pay taxes?

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00:09:48,900 --> 00:09:51,807
I think it's relevant
to that distinction.

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00:09:51,807 --> 00:09:53,150
GARY GENSLER: All right.

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00:09:53,150 --> 00:09:55,560
Tom, do you want to defend
your fellow Ohioans?

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00:09:55,560 --> 00:09:57,910
AUDIENCE: No.

227
00:09:57,910 --> 00:09:59,160
I mean, I think it's relevant.

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00:09:59,160 --> 00:10:02,160
I mean, the Ohio State
Treasurer doesn't

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00:10:02,160 --> 00:10:08,138
take pork bellies or cotton or
even corn as paying for taxes.

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00:10:08,138 --> 00:10:09,430
I don't know if they take gold.

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00:10:09,430 --> 00:10:10,610
GARY GENSLER: No.

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00:10:10,610 --> 00:10:12,150
To the best of my knowledge, no.

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00:10:12,150 --> 00:10:15,390
AUDIENCE: Yeah, so even for
the short-term transfer,

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00:10:15,390 --> 00:10:18,010
I think it's relevant.

235
00:10:18,010 --> 00:10:19,680
GARY GENSLER: So it's
a bit of a hybrid,

236
00:10:19,680 --> 00:10:22,950
I guess, is what Tom's saying.

237
00:10:22,950 --> 00:10:24,925
Ross?

238
00:10:24,925 --> 00:10:27,280
AUDIENCE: There's a real
question about whether they

239
00:10:27,280 --> 00:10:30,490
could take it
directly for taxes,

240
00:10:30,490 --> 00:10:34,030
because under the Constitution,
the states cannot make anything

241
00:10:34,030 --> 00:10:34,750
legal tender.

242
00:10:34,750 --> 00:10:38,590
Only the federal government
can make that determination.

243
00:10:38,590 --> 00:10:42,050
Only the federal government
can establish legal tender, not

244
00:10:42,050 --> 00:10:45,620
the states, other than gold.

245
00:10:45,620 --> 00:10:47,170
So it would actually
be a question

246
00:10:47,170 --> 00:10:49,275
about whether Ohio could--

247
00:10:49,275 --> 00:10:51,430
who would object is
another question.

248
00:10:51,430 --> 00:10:53,650
But it's an issue.

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00:10:53,650 --> 00:10:55,740
What they're doing is
marketing, I think.

250
00:10:55,740 --> 00:10:57,190
But they could, for example--

251
00:10:57,190 --> 00:11:00,520
GARY GENSLER: Though
I'm not studied

252
00:11:00,520 --> 00:11:06,880
in the law of legal tender,
I could see a case that says,

253
00:11:06,880 --> 00:11:08,830
this is not making
it legal tender.

254
00:11:08,830 --> 00:11:11,710
This is just saying
you can pay your taxes

255
00:11:11,710 --> 00:11:14,266
in another form of property.

256
00:11:14,266 --> 00:11:15,625
AUDIENCE: That's the question.

257
00:11:15,625 --> 00:11:16,583
GARY GENSLER: You know?

258
00:11:16,583 --> 00:11:17,880
Does that make it legal tender?

259
00:11:17,880 --> 00:11:18,380
No.

260
00:11:18,380 --> 00:11:21,160
It just makes it that we,
the government of Ohio,

261
00:11:21,160 --> 00:11:23,380
will accept it for taxes.

262
00:11:23,380 --> 00:11:26,350
But it doesn't mean that we
are saying that Starbucks has

263
00:11:26,350 --> 00:11:28,400
to take it for a cup of coffee.

264
00:11:28,400 --> 00:11:30,010
AUDIENCE: I also
see it as a gateway

265
00:11:30,010 --> 00:11:33,490
as taking it in a few years,
having their own wallet.

266
00:11:33,490 --> 00:11:36,700
So testing it out, see how
many people actually use it.

267
00:11:36,700 --> 00:11:38,200
And if they want
to eventually avoid

268
00:11:38,200 --> 00:11:40,870
the fees of the
processing service,

269
00:11:40,870 --> 00:11:43,050
they could eventually
rule that out of it.

270
00:11:43,050 --> 00:11:45,490
If they set it is
a precedent now,

271
00:11:45,490 --> 00:11:48,770
and whether or not they're
converting it immediately,

272
00:11:48,770 --> 00:11:51,250
doesn't really have an
effect as to whether it

273
00:11:51,250 --> 00:11:53,990
sets a precedent
for future years

274
00:11:53,990 --> 00:11:55,340
to actually use it as legal--

275
00:11:55,340 --> 00:11:56,173
GARY GENSLER: Right.

276
00:11:56,173 --> 00:11:58,380
AUDIENCE: --tender,
as their own wallet,

277
00:11:58,380 --> 00:12:00,903
as [INAUDIBLE] was saying.

278
00:12:00,903 --> 00:12:03,070
GARY GENSLER: And they might
just be testing it out.

279
00:12:03,070 --> 00:12:03,570
James?

280
00:12:03,570 --> 00:12:06,612
AUDIENCE: I guess, reverting to
Ross's point, in legal tender,

281
00:12:06,612 --> 00:12:07,570
the money is different.

282
00:12:07,570 --> 00:12:08,260
Right?

283
00:12:08,260 --> 00:12:10,720
So the criteria here,
where you're talking money,

284
00:12:10,720 --> 00:12:12,970
you could pay taxes,
which, in this case,

285
00:12:12,970 --> 00:12:15,770
I think this is verging
on to the hybrid situation

286
00:12:15,770 --> 00:12:17,720
where it's not a cow.

287
00:12:17,720 --> 00:12:18,920
It's not some corn.

288
00:12:18,920 --> 00:12:22,550
But it certainly can pay
the taxes via [INAUDIBLE]..

289
00:12:22,550 --> 00:12:25,360
So they kind of make it
more and more like money.

290
00:12:25,360 --> 00:12:28,630
Where about this legal
tender, that's money,

291
00:12:28,630 --> 00:12:29,670
[? well, ?] [? 2.0. ?]

292
00:12:29,670 --> 00:12:30,670
AUDIENCE: I think it's--

293
00:12:30,670 --> 00:12:31,170
[INTERPOSING VOICES]

294
00:12:31,170 --> 00:12:32,860
AUDIENCE: --a question
of whether you

295
00:12:32,860 --> 00:12:34,965
can get to a hybrid using bits.

296
00:12:34,965 --> 00:12:35,998
I agree with that.

297
00:12:35,998 --> 00:12:36,790
GARY GENSLER: Yeah.

298
00:12:36,790 --> 00:12:38,140
And they're testing it out.

299
00:12:38,140 --> 00:12:40,000
And maybe this state
treasurer feels

300
00:12:40,000 --> 00:12:41,560
that it's good for
his politics, it

301
00:12:41,560 --> 00:12:45,610
will appeal to some
portion of the electorate,

302
00:12:45,610 --> 00:12:47,710
whether it's
millennials, whether it's

303
00:12:47,710 --> 00:12:52,390
Bitcoin maximalist, whether
it's the cannabis trade.

304
00:12:52,390 --> 00:12:55,358
Or maybe he just
looks more tech savvy,

305
00:12:55,358 --> 00:12:56,900
that they can put
out an announcement

306
00:12:56,900 --> 00:12:59,485
saying we are the only
state in the land.

307
00:13:02,350 --> 00:13:08,410
The website says that they're
promoting it to lower fees.

308
00:13:08,410 --> 00:13:09,910
Now, I don't know
how many people

309
00:13:09,910 --> 00:13:14,080
would pay their taxes in Ohio
using the credit card rails.

310
00:13:14,080 --> 00:13:15,610
But literally on
the website, they

311
00:13:15,610 --> 00:13:20,380
talk about, well, this has lower
fees than the 2 and 1/2% or 3%

312
00:13:20,380 --> 00:13:22,640
you get charged on
your credit cards.

313
00:13:22,640 --> 00:13:25,780
But I think that that would
only be a very small portion

314
00:13:25,780 --> 00:13:27,640
of taxpayers.

315
00:13:27,640 --> 00:13:29,830
And they're accepting
it for sales tax.

316
00:13:29,830 --> 00:13:32,650
They're accepting it
for all forms of tax.

317
00:13:32,650 --> 00:13:34,670
It's not just income tax.

318
00:13:34,670 --> 00:13:41,470
So it's all the small
transactional taxes as well as

319
00:13:41,470 --> 00:13:43,210
income tax and real estate tax.

320
00:13:43,210 --> 00:13:48,260
So it's just an
interesting thing.

321
00:13:48,260 --> 00:13:48,760
Jake?

322
00:13:48,760 --> 00:13:50,552
AUDIENCE: What's the
actual benefit for it,

323
00:13:50,552 --> 00:13:53,020
because can't they just go
sell the Bitcoin on the market

324
00:13:53,020 --> 00:13:54,955
and pay the taxes in cash?

325
00:13:54,955 --> 00:13:56,495
GARY GENSLER: So benefit for?

326
00:13:56,495 --> 00:13:57,620
AUDIENCE: For the taxpayer.

327
00:13:57,620 --> 00:13:59,190
GARY GENSLER: For the taxpayer?

328
00:13:59,190 --> 00:14:00,190
This is a good question.

329
00:14:00,190 --> 00:14:01,740
What's the benefit
for the taxpayer?

330
00:14:04,420 --> 00:14:05,860
It's the same
question of, what's

331
00:14:05,860 --> 00:14:10,360
the benefit for any consumer if
I want to use Bitcoin, maybe,

332
00:14:10,360 --> 00:14:12,430
to buy a Starbucks?

333
00:14:12,430 --> 00:14:18,880
So any vendor could say,
we'll accept Bitcoin here.

334
00:14:18,880 --> 00:14:23,140
The benefit for the
consumer or taxpayer

335
00:14:23,140 --> 00:14:24,820
is if they find it
more convenient,

336
00:14:24,820 --> 00:14:28,390
if it's lower fees, if this
is where they're storing

337
00:14:28,390 --> 00:14:30,070
their value rather than fiat.

338
00:14:30,070 --> 00:14:33,430
Not many people are.

339
00:14:33,430 --> 00:14:34,960
But that would be--

340
00:14:34,960 --> 00:14:38,710
and maybe as Tom
pointed out, that there

341
00:14:38,710 --> 00:14:42,460
is a specific
idiosyncratic thing in Ohio

342
00:14:42,460 --> 00:14:44,050
that they've just moved forward.

343
00:14:44,050 --> 00:14:48,055
And they legalized the
marijuana trade in Ohio?

344
00:14:48,055 --> 00:14:49,930
AUDIENCE: I don't think
it's fully legalized.

345
00:14:49,930 --> 00:14:51,745
It's been authorized
to be legalized.

346
00:14:51,745 --> 00:14:53,573
But I don't think that they--

347
00:14:53,573 --> 00:14:55,240
GARY GENSLER: So
they're in the process.

348
00:14:55,240 --> 00:14:57,700
And Tom has a theory
that maybe there's

349
00:14:57,700 --> 00:15:02,350
some that can't access the
banking system, the fiat.

350
00:15:02,350 --> 00:15:05,720
In essence, they're
off fiat rails.

351
00:15:05,720 --> 00:15:09,820
So here's, at least,
Tom's theory of the case.

352
00:15:12,650 --> 00:15:15,630
So those might be some of the--

353
00:15:15,630 --> 00:15:16,360
anyway.

354
00:15:16,360 --> 00:15:18,510
So what else happened
in the last week,

355
00:15:18,510 --> 00:15:20,870
by the way, since
we came together?

356
00:15:20,870 --> 00:15:23,885
Anything else in
the crypto space?

357
00:15:23,885 --> 00:15:26,330
AUDIENCE: 30% drop in Bitcoin.

358
00:15:26,330 --> 00:15:29,150
GARY GENSLER: 30% drop.

359
00:15:29,150 --> 00:15:32,630
I haven't checked
recently, but yeah.

360
00:15:32,630 --> 00:15:34,700
Do you have any theories
on that before we

361
00:15:34,700 --> 00:15:39,598
go to crypto exchanges
and ICOs and everything?

362
00:15:39,598 --> 00:15:41,074
AUDIENCE: Not that come up.

363
00:15:41,074 --> 00:15:41,782
GARY GENSLER: No.

364
00:15:41,782 --> 00:15:43,790
No theories.

365
00:15:43,790 --> 00:15:45,800
Oh, well, Brotish we
haven't heard from Brotish.

366
00:15:45,800 --> 00:15:49,250
You have a theory
as to the 30% drop

367
00:15:49,250 --> 00:15:50,450
since we were last together?

368
00:15:50,450 --> 00:15:51,150
AUDIENCE: I have
a different point

369
00:15:51,150 --> 00:15:52,550
about what happened recently.

370
00:15:52,550 --> 00:15:54,890
We saw the news
article [INAUDIBLE]

371
00:15:54,890 --> 00:15:57,635
postponing the launch
of the Bitcoin future

372
00:15:57,635 --> 00:15:59,885
to February, which was
supposed to happen in November.

373
00:15:59,885 --> 00:16:02,302
GARY GENSLER: Do you think
that was because they were here

374
00:16:02,302 --> 00:16:03,670
to talk with us?

375
00:16:03,670 --> 00:16:05,045
I mean, your
questions were good.

376
00:16:07,980 --> 00:16:09,980
Do you have any views on--

377
00:16:09,980 --> 00:16:12,724
Sean, we'll come
back to the back.

378
00:16:12,724 --> 00:16:14,420
AUDIENCE: Because
of the hard fork,

379
00:16:14,420 --> 00:16:17,890
there was a hard fork that
happened last Saturday,

380
00:16:17,890 --> 00:16:19,635
a week ago, on Bitcoin Cash.

381
00:16:19,635 --> 00:16:23,150
And then people, kind of, caused
the skepticism in the market

382
00:16:23,150 --> 00:16:26,900
to say which is going to be
the majority of the consensus

383
00:16:26,900 --> 00:16:29,990
for the currency.

384
00:16:29,990 --> 00:16:33,590
GARY GENSLER: So there was
a hard fork in Bitcoin Cash,

385
00:16:33,590 --> 00:16:37,790
that Bitcoin Cash split
into, yet, Bitcoin Cash.

386
00:16:37,790 --> 00:16:41,157
And is it now settled
as Bitcoin SV?

387
00:16:41,157 --> 00:16:42,935
S-- what's that?

388
00:16:42,935 --> 00:16:44,060
AUDIENCE: Satoshi's Vision.

389
00:16:44,060 --> 00:16:46,370
GARY GENSLER: Satoshi's
Vision, so SV.

390
00:16:51,330 --> 00:16:55,370
I couldn't make this stuff up.

391
00:16:55,370 --> 00:17:00,380
But that hard fork
was, timing wise,

392
00:17:00,380 --> 00:17:05,597
right at the center of
a break in the markets.

393
00:17:05,597 --> 00:17:07,430
And so there's some
that have written, well,

394
00:17:07,430 --> 00:17:10,280
is that the reason?

395
00:17:10,280 --> 00:17:12,440
I've been around
markets long enough

396
00:17:12,440 --> 00:17:15,930
to think that might
be a news event.

397
00:17:15,930 --> 00:17:17,930
But I don't think that
was the reason there

398
00:17:17,930 --> 00:17:22,190
was such a softness in demand,
that a news event like that

399
00:17:22,190 --> 00:17:28,085
comes along, and then the market
breaks and finds no support,

400
00:17:28,085 --> 00:17:32,230
and it drops from,
what was it around,

401
00:17:32,230 --> 00:17:36,950
$6,300 all the way through
to $3,700 or $3,800?

402
00:17:36,950 --> 00:17:38,700
I don't know where
it's trading right now.

403
00:17:38,700 --> 00:17:40,075
But it's somewhere
in that range.

404
00:17:40,075 --> 00:17:41,570
AUDIENCE: $3,714.

405
00:17:41,570 --> 00:17:42,570
GARY GENSLER: I'm sorry.

406
00:17:42,570 --> 00:17:43,560
AUDIENCE: $3,714.

407
00:17:43,560 --> 00:17:46,360
GARY GENSLER: The
Ohioan has spoken--

408
00:17:46,360 --> 00:17:50,000
$3,714.

409
00:17:50,000 --> 00:17:54,710
So that type of not
finding a price support,

410
00:17:54,710 --> 00:17:59,150
there's other reasons,
I would think,

411
00:17:59,150 --> 00:18:02,280
which really goes back to the
heart and soul of valuation.

412
00:18:02,280 --> 00:18:02,780
Yes.

413
00:18:02,780 --> 00:18:05,155
AUDIENCE: What about, we were
talking about tax stability

414
00:18:05,155 --> 00:18:05,690
earlier.

415
00:18:05,690 --> 00:18:09,588
It is approaching December,
so tax-loss selling for people

416
00:18:09,588 --> 00:18:10,880
in taxable [? jurisdictions. ?]

417
00:18:10,880 --> 00:18:13,030
GARY GENSLER: So maybe
tax-loss selling.

418
00:18:13,030 --> 00:18:13,530
[INAUDIBLE]

419
00:18:13,530 --> 00:18:14,905
AUDIENCE: [INAUDIBLE]
[? for a ?]

420
00:18:14,905 --> 00:18:16,940
company and news about
Visa and MasterCard

421
00:18:16,940 --> 00:18:20,390
[INAUDIBLE] anything
related to cryptocurrencies

422
00:18:20,390 --> 00:18:24,600
and initial coin offering,
so any transaction related

423
00:18:24,600 --> 00:18:25,317
to them.

424
00:18:25,317 --> 00:18:27,150
So there was something
in the news about it.

425
00:18:27,150 --> 00:18:28,700
GARY GENSLER:
There is also news,

426
00:18:28,700 --> 00:18:31,190
which we're going to review
today, that the Securities

427
00:18:31,190 --> 00:18:35,920
and Exchange Commission
took two additional actions

428
00:18:35,920 --> 00:18:38,480
in the initial coin
offering space.

429
00:18:38,480 --> 00:18:41,600
But these actions were
a little different

430
00:18:41,600 --> 00:18:42,760
than the past actions.

431
00:18:42,760 --> 00:18:47,000
So they've already taken about
a dozen enforcement actions,

432
00:18:47,000 --> 00:18:49,410
or settlements, or orders,
in the initial coin offering

433
00:18:49,410 --> 00:18:49,910
space.

434
00:18:49,910 --> 00:18:52,070
But these two, Paragon and--

435
00:18:52,070 --> 00:18:52,830
AUDIENCE: Airfox.

436
00:18:52,830 --> 00:19:00,590
GARY GENSLER: --Airfox were
different in that, one, they

437
00:19:00,590 --> 00:19:07,400
weren't surrounded by
obvious scam or fraud.

438
00:19:07,400 --> 00:19:10,110
I'm not going to speak
to their motivations.

439
00:19:10,110 --> 00:19:13,910
But they were more traditional,
$12, $15, $18 million

440
00:19:13,910 --> 00:19:18,140
raised in each of
them, situations.

441
00:19:18,140 --> 00:19:20,330
Two, they're about a year old.

442
00:19:20,330 --> 00:19:23,570
And here they are finally
coming to a settlement

443
00:19:23,570 --> 00:19:27,650
where the entrepreneurs, the
venture capitalists behind it,

444
00:19:27,650 --> 00:19:30,210
said, all right, we get it.

445
00:19:30,210 --> 00:19:33,170
We're going to come
into compliance.

446
00:19:33,170 --> 00:19:35,480
We're going to do an
offering statement.

447
00:19:35,480 --> 00:19:38,810
We're going to put out the
full and fair information

448
00:19:38,810 --> 00:19:39,900
about this.

449
00:19:39,900 --> 00:19:45,560
But also, we're going to be
willing to give back money

450
00:19:45,560 --> 00:19:48,060
to people who were--

451
00:19:48,060 --> 00:19:50,300
so they're not
fighting in a court.

452
00:19:50,300 --> 00:19:53,360
Some have gone into
court against the SEC.

453
00:19:53,360 --> 00:19:55,820
But here, also, the other
thing was the first time

454
00:19:55,820 --> 00:19:57,380
they paid penalties,
I think they

455
00:19:57,380 --> 00:20:00,890
were modest, relatively modest--
quarter million dollars,

456
00:20:00,890 --> 00:20:03,330
if I saw.

457
00:20:03,330 --> 00:20:06,290
But that also happened
in the midst of this.

458
00:20:06,290 --> 00:20:10,070
The SEC for the first time
actually assessed penalties,

459
00:20:10,070 --> 00:20:11,500
had settlements.

460
00:20:11,500 --> 00:20:14,980
They were also not
the, sort of, clear,

461
00:20:14,980 --> 00:20:17,200
obvious scam and fraud cases.

462
00:20:17,200 --> 00:20:19,570
They were simply, hey,
you didn't register,

463
00:20:19,570 --> 00:20:21,400
and you were
supposed to register.

464
00:20:21,400 --> 00:20:25,690
You're, in essence, an
illegal securities offering.

465
00:20:25,690 --> 00:20:30,040
But now, come into compliance,
pay a penalty, move forward,

466
00:20:30,040 --> 00:20:31,610
as well.

467
00:20:31,610 --> 00:20:34,400
So a lot going on.

468
00:20:34,400 --> 00:20:39,010
So today, we already did
Ohio, which was more fun

469
00:20:39,010 --> 00:20:40,270
than the rest of this stuff.

470
00:20:40,270 --> 00:20:42,820
We're going to talk a little
bit about the Howey Test

471
00:20:42,820 --> 00:20:45,100
again, which we talked
about about a month ago.

472
00:20:45,100 --> 00:20:47,890
But I wanted to bring it
back into the discussion

473
00:20:47,890 --> 00:20:50,860
about initial coin offerings.

474
00:20:50,860 --> 00:20:53,110
We're going to talk a little
bit about some realities.

475
00:20:53,110 --> 00:20:55,090
Ernst & Young put
out a recent report

476
00:20:55,090 --> 00:20:56,380
that wasn't in your readings.

477
00:20:56,380 --> 00:20:57,640
It just came out last week.

478
00:20:57,640 --> 00:21:00,680
But I want to review some of the
findings that Ernst & Young did

479
00:21:00,680 --> 00:21:04,780
on, what they call,
the class of 2017.

480
00:21:04,780 --> 00:21:08,920
They look at the top
140 ICOs from 2017,

481
00:21:08,920 --> 00:21:13,180
and where are they as of the
end of September of this year,

482
00:21:13,180 --> 00:21:17,080
not even speaking about the
last six or eight weeks.

483
00:21:17,080 --> 00:21:19,600
Some SEC enforcement
actions I want

484
00:21:19,600 --> 00:21:22,660
to walk through just to give
you a flavor for, at least,

485
00:21:22,660 --> 00:21:26,560
this country's approach
to initial coin offerings,

486
00:21:26,560 --> 00:21:29,890
how you can actually
comply with securities law.

487
00:21:29,890 --> 00:21:33,880
I promise you that I'm not
going to go deep diving.

488
00:21:33,880 --> 00:21:37,990
But I want to give you a
little bit of a flavor for,

489
00:21:37,990 --> 00:21:40,780
if you were to be involved
in an initial coin offering,

490
00:21:40,780 --> 00:21:43,070
how to do it in a compliant way.

491
00:21:43,070 --> 00:21:46,920
And some personal thoughts
on the path forward

492
00:21:46,920 --> 00:21:48,310
in ICO [INAUDIBLE].

493
00:21:48,310 --> 00:21:50,770
So that's what
we're going to do.

494
00:21:50,770 --> 00:21:54,570
The study questions,
we'll get to.

495
00:21:54,570 --> 00:22:00,160
But I just want to ask the
class the middle question,

496
00:22:00,160 --> 00:22:03,730
which is the easiest,
or maybe the hardest.

497
00:22:03,730 --> 00:22:08,440
Why is this market so rife with
scams and fraud, whether it's

498
00:22:08,440 --> 00:22:10,090
Christian Catalini's
work that said

499
00:22:10,090 --> 00:22:14,560
25% of the market or
the smaller survey

500
00:22:14,560 --> 00:22:19,390
status group that was part of
today's readings, up to 80%?

501
00:22:19,390 --> 00:22:21,530
Why do you think this
market has so many scams?

502
00:22:21,530 --> 00:22:22,990
Aline what do you--

503
00:22:22,990 --> 00:22:25,292
AUDIENCE: It's so easy to con.

504
00:22:25,292 --> 00:22:26,470
GARY GENSLER: What's easy?

505
00:22:26,470 --> 00:22:28,857
The question's easy, or
scamming the market's easy?

506
00:22:28,857 --> 00:22:30,440
AUDIENCE: It's so
easy to scam people.

507
00:22:30,440 --> 00:22:31,690
Like, why wouldn't you do it?

508
00:22:31,690 --> 00:22:34,680
It's so damn easy.

509
00:22:34,680 --> 00:22:35,680
GARY GENSLER: I'm sorry.

510
00:22:35,680 --> 00:22:37,210
The first part I got.

511
00:22:37,210 --> 00:22:40,220
Remember we're on video.

512
00:22:40,220 --> 00:22:40,720
All right.

513
00:22:40,720 --> 00:22:42,440
AUDIENCE: It's a
rhetorical question.

514
00:22:42,440 --> 00:22:44,148
GARY GENSLER: It's a
rhetorical question.

515
00:22:44,148 --> 00:22:45,700
It's so easy.

516
00:22:45,700 --> 00:22:48,440
And thus, it's easy
for bad actors.

517
00:22:48,440 --> 00:22:49,095
Jihee.

518
00:22:49,095 --> 00:22:51,140
AUDIENCE: I thought there
were two main reasons.

519
00:22:51,140 --> 00:22:53,080
One is because it's
such a new thing,

520
00:22:53,080 --> 00:22:56,410
there is lack of the
regulatory environment

521
00:22:56,410 --> 00:23:01,460
that happens with the IPO and
other ways of raising funds.

522
00:23:01,460 --> 00:23:05,260
And I think the second one
is it's, as Alin pointed out,

523
00:23:05,260 --> 00:23:08,770
I think it's very easy to
just go say, I'm going to do

524
00:23:08,770 --> 00:23:12,490
ICO when there is only an idea.

525
00:23:12,490 --> 00:23:16,540
So I think that's why a lot
of investors or consumers

526
00:23:16,540 --> 00:23:19,146
just fall into these
scams and fraud.

527
00:23:19,146 --> 00:23:22,570
AUDIENCE: And I mean,
the fact that you're just

528
00:23:22,570 --> 00:23:26,560
publishing a white paper, that
no one actually is interacting

529
00:23:26,560 --> 00:23:29,158
with you unless it's on a
blog or something like that,

530
00:23:29,158 --> 00:23:30,700
they're publishing
a white paper that

531
00:23:30,700 --> 00:23:33,790
could have this grandiose
idea, and then all of a sudden

532
00:23:33,790 --> 00:23:34,660
they just run.

533
00:23:34,660 --> 00:23:38,050
And there's really nothing
stopping them from doing that.

534
00:23:38,050 --> 00:23:40,215
So it's just difficult.

535
00:23:40,215 --> 00:23:42,700
GARY GENSLER: So
I've heard it's easy.

536
00:23:42,700 --> 00:23:46,220
It's not yet in a
regulatory space.

537
00:23:46,220 --> 00:23:48,650
It's at a distance.

538
00:23:48,650 --> 00:23:51,033
It's just the publishing
of a white paper.

539
00:23:51,033 --> 00:23:53,450
AUDIENCE: And there's simply
demand because of immediate--

540
00:23:53,450 --> 00:23:54,210
GARY GENSLER: So demand.

541
00:23:54,210 --> 00:23:55,430
AUDIENCE: Yeah, there's
just a lot of demand.

542
00:23:55,430 --> 00:23:58,240
With the media around Bitcoin
going up towards $20,000

543
00:23:58,240 --> 00:24:01,960
last year, there's demand to
get into the bottom of one

544
00:24:01,960 --> 00:24:04,210
of these ICOs to hope to get
the same kind of returns.

545
00:24:04,210 --> 00:24:07,060
GARY GENSLER: So there is
tremendous demand and, related

546
00:24:07,060 --> 00:24:14,410
to demand, fear of missing
out, so whether it's greed--

547
00:24:14,410 --> 00:24:17,170
the animal spirits, the
human spirits of market's

548
00:24:17,170 --> 00:24:18,355
around fear and greed.

549
00:24:18,355 --> 00:24:22,270
So the greed of participating
or the fear of missing out

550
00:24:22,270 --> 00:24:28,540
was certainly part of
late 2017 and into 2018.

551
00:24:28,540 --> 00:24:29,040
Kelly?

552
00:24:29,040 --> 00:24:29,620
AUDIENCE: We could
talk a little bit more

553
00:24:29,620 --> 00:24:31,120
about what Jihee
said about the lack

554
00:24:31,120 --> 00:24:33,190
of a regulatory environment.

555
00:24:33,190 --> 00:24:37,060
That sort of leads to--
because a lot of these ICOs

556
00:24:37,060 --> 00:24:40,810
are not in compliance
with securities acts

557
00:24:40,810 --> 00:24:44,220
and regulations that allows
them to sort of skirmish

558
00:24:44,220 --> 00:24:45,680
around investor protection.

559
00:24:45,680 --> 00:24:48,790
So investors, they're
not necessarily

560
00:24:48,790 --> 00:24:52,450
privy to material information
about the financing

561
00:24:52,450 --> 00:24:55,240
and what they might
reasonably expect as a return.

562
00:24:55,240 --> 00:24:55,920
So it kind of--

563
00:24:55,920 --> 00:24:56,530
GARY GENSLER: Right.

564
00:24:56,530 --> 00:24:59,142
AUDIENCE: They're just taking
advantage of it a little bit.

565
00:24:59,142 --> 00:25:01,450
GARY GENSLER: I agree,
but I think the court--

566
00:25:01,450 --> 00:25:03,260
Kelly is touching
on one other thing.

567
00:25:03,260 --> 00:25:03,760
Guillermo.

568
00:25:03,760 --> 00:25:06,005
AUDIENCE: I had one
question on this.

569
00:25:06,005 --> 00:25:07,960
The scams are
defined as a company

570
00:25:07,960 --> 00:25:09,970
that you can no
longer reach or see

571
00:25:09,970 --> 00:25:11,440
if they came out with a product.

572
00:25:11,440 --> 00:25:13,420
But I was wondering,
given that this

573
00:25:13,420 --> 00:25:15,610
is a very early-stage
venture, how much, really,

574
00:25:15,610 --> 00:25:19,570
do people maliciously
run away with the money,

575
00:25:19,570 --> 00:25:23,250
or just tried
something and failed?

576
00:25:23,250 --> 00:25:26,917
Do they just raise money,
and because they did it

577
00:25:26,917 --> 00:25:28,750
with a PowerPoint, they
realized this is not

578
00:25:28,750 --> 00:25:30,340
going to be a good
business case,

579
00:25:30,340 --> 00:25:32,890
and they just abandon
it, not as a scam

580
00:25:32,890 --> 00:25:35,490
but as a new
venture that failed?

581
00:25:35,490 --> 00:25:39,270
GARY GENSLER: I think Guillermo
raises the right question.

582
00:25:39,270 --> 00:25:43,600
It's why one study says it's
5% to 25% scams or frauds,

583
00:25:43,600 --> 00:25:46,640
and another study says 80%.

584
00:25:46,640 --> 00:25:48,850
It's what's in the definition.

585
00:25:48,850 --> 00:25:53,790
A good-faith actor could
say this is easy money.

586
00:25:53,790 --> 00:25:56,590
A good-faith actor could
say this is cheap money.

587
00:25:56,590 --> 00:25:59,140
I can raise money
fast just on the backs

588
00:25:59,140 --> 00:26:05,530
of a white paper in the middle
of a bull market, maybe even

589
00:26:05,530 --> 00:26:09,790
a bubble, and then find
out three months later

590
00:26:09,790 --> 00:26:12,690
that their idea
doesn't work out.

591
00:26:12,690 --> 00:26:15,970
And I accept that
there are probably

592
00:26:15,970 --> 00:26:19,450
a lot of good-faith actors
that raised tens of millions

593
00:26:19,450 --> 00:26:22,010
of dollars.

594
00:26:22,010 --> 00:26:25,900
And I wouldn't necessarily
personally call that a scam.

595
00:26:25,900 --> 00:26:28,990
But nonetheless, somebody
else might call that a scam.

596
00:26:28,990 --> 00:26:35,560
So Telegram raised $1.7 billion
in February of this year.

597
00:26:35,560 --> 00:26:38,140
I don't know-- how
many people have ever

598
00:26:38,140 --> 00:26:42,395
read the white paper, I mean,
not that it was ever assigned?

599
00:26:42,395 --> 00:26:43,270
All right, all right.

600
00:26:43,270 --> 00:26:45,490
So all right, I've
read the white paper.

601
00:26:45,490 --> 00:26:47,650
I couldn't figure
out in February

602
00:26:47,650 --> 00:26:49,690
when they raised the
money what they were going

603
00:26:49,690 --> 00:26:52,880
to use that $1.7 billion for.

604
00:26:52,880 --> 00:26:55,420
Now, it's a
remarkable technology.

605
00:26:55,420 --> 00:26:57,790
And they have, I think,
somewhere around 200 million

606
00:26:57,790 --> 00:27:02,710
users in their
non-blockchain use.

607
00:27:02,710 --> 00:27:06,080
And so they were able
to raise a lot of money

608
00:27:06,080 --> 00:27:08,990
with a lot of fancy words.

609
00:27:08,990 --> 00:27:12,210
But they still
haven't gone live.

610
00:27:12,210 --> 00:27:17,800
They haven't taken the $1.7
billion and created a network.

611
00:27:17,800 --> 00:27:23,800
Filecoin seemed
to be a good-faith

612
00:27:23,800 --> 00:27:28,060
concept about using
a token to motivate

613
00:27:28,060 --> 00:27:32,320
the exchange of file storage.

614
00:27:32,320 --> 00:27:35,320
Assume for a moment
it's good-faith actors.

615
00:27:35,320 --> 00:27:38,050
They raised the money
in October of 2017.

616
00:27:38,050 --> 00:27:39,410
It's 13 months later.

617
00:27:39,410 --> 00:27:42,730
They still do not
have a live network.

618
00:27:42,730 --> 00:27:45,430
And the latest
announcement says it

619
00:27:45,430 --> 00:27:50,470
will come either in the first
or second quarter of 2019.

620
00:27:50,470 --> 00:27:52,610
Some people might
call that a scam.

621
00:27:52,610 --> 00:27:53,500
I wouldn't.

622
00:27:53,500 --> 00:27:55,400
But so I think you're right.

623
00:27:55,400 --> 00:27:59,600
There's a range of activity.

624
00:27:59,600 --> 00:28:01,300
But there's one
other thing about why

625
00:28:01,300 --> 00:28:05,800
I think this has been an easy
place for scams and frauds.

626
00:28:05,800 --> 00:28:10,580
And it's the technical
nature of it, as well.

627
00:28:10,580 --> 00:28:12,575
Like, I hope at the end
of this class, whatever

628
00:28:12,575 --> 00:28:14,450
you think of the lectures,
whatever you think

629
00:28:14,450 --> 00:28:15,825
of the assignments,
you come away

630
00:28:15,825 --> 00:28:19,520
with some critical reasoning
skills, that the 80 or so

631
00:28:19,520 --> 00:28:22,940
of you who have been on
this journey together

632
00:28:22,940 --> 00:28:25,530
will leave and say,
all right, I get it.

633
00:28:25,530 --> 00:28:29,120
But for most, for the
hundreds of thousands

634
00:28:29,120 --> 00:28:33,030
or even millions of
people that have invested,

635
00:28:33,030 --> 00:28:35,300
there's a lot of technical--

636
00:28:35,300 --> 00:28:39,560
whether it's hash functions
or digital signatures.

637
00:28:39,560 --> 00:28:44,600
And so I think it's
easier to scam the public

638
00:28:44,600 --> 00:28:49,300
when it's shrouded in jargon.

639
00:28:49,300 --> 00:28:51,860
And so maybe it's a
lesson for all of us

640
00:28:51,860 --> 00:28:55,130
to always be careful
about our own investments

641
00:28:55,130 --> 00:28:57,620
when something is
shrouded in jargon.

642
00:28:57,620 --> 00:29:00,620
And it doesn't have to
be cryptographic jargon.

643
00:29:00,620 --> 00:29:02,900
It could be other types
of jargon, as well.

644
00:29:02,900 --> 00:29:05,840
I think that's also
one of the reasons

645
00:29:05,840 --> 00:29:09,980
why it's been easier
to scam and fleece

646
00:29:09,980 --> 00:29:13,400
the public in the midst
of a bubble, in the midst

647
00:29:13,400 --> 00:29:16,040
of a nonregulated
space, in the midst of,

648
00:29:16,040 --> 00:29:19,420
just throw a white paper up.

649
00:29:19,420 --> 00:29:19,920
Jake?

650
00:29:19,920 --> 00:29:21,635
AUDIENCE: It's also the
nature of it just being,

651
00:29:21,635 --> 00:29:23,320
we're investing in
such an early stage.

652
00:29:23,320 --> 00:29:27,260
So plenty of tech that
ends up IPOing and has

653
00:29:27,260 --> 00:29:31,850
public investors when it's early
on, it's only VCs investing.

654
00:29:31,850 --> 00:29:33,210
And they understand the tech.

655
00:29:33,210 --> 00:29:35,503
But you don't have regular
consumer retail investors

656
00:29:35,503 --> 00:29:37,670
actually putting money into
those really early-stage

657
00:29:37,670 --> 00:29:39,770
companies, where
with ICOs, we're

658
00:29:39,770 --> 00:29:41,050
investing at the white paper.

659
00:29:41,050 --> 00:29:43,490
So regardless of
whether it's blockchain

660
00:29:43,490 --> 00:29:45,500
or a robotics
company or whatever,

661
00:29:45,500 --> 00:29:48,056
it is very confusing
that early on.

662
00:29:48,056 --> 00:29:48,950
GARY GENSLER: Right.

663
00:29:48,950 --> 00:29:51,540
So it's also very
early-stage investing,

664
00:29:51,540 --> 00:29:53,970
which is a good point.

665
00:29:53,970 --> 00:29:55,730
So I'm going to skip
over the reading.

666
00:29:55,730 --> 00:29:57,500
So investor protection.

667
00:29:57,500 --> 00:30:03,470
I found in a conference in
Paris, an OECD conference--

668
00:30:03,470 --> 00:30:04,520
we got into a debate.

669
00:30:04,520 --> 00:30:06,230
And there were regulators--

670
00:30:06,230 --> 00:30:07,760
I was not a regulator
at the time;

671
00:30:07,760 --> 00:30:09,500
this was earlier this year--

672
00:30:09,500 --> 00:30:11,450
regulators from 30
or 40 countries.

673
00:30:11,450 --> 00:30:13,310
And we got in a
debate of, what's

674
00:30:13,310 --> 00:30:15,920
the difference between investor
protection and consumer

675
00:30:15,920 --> 00:30:17,240
protection?

676
00:30:17,240 --> 00:30:19,160
And so these are
just some thoughts.

677
00:30:19,160 --> 00:30:23,390
But investor protection, which
has been the hallmark of the US

678
00:30:23,390 --> 00:30:27,050
markets that's in the 1930s,
and in other jurisdictions,

679
00:30:27,050 --> 00:30:29,540
other decades it's
been adopted, I

680
00:30:29,540 --> 00:30:34,610
think is part of why the US
capital markets were really

681
00:30:34,610 --> 00:30:38,240
at the forefront of this
incredible economy for 70

682
00:30:38,240 --> 00:30:39,770
or 80 years here in the US.

683
00:30:39,770 --> 00:30:42,720
And it's helped other
economies subsequently.

684
00:30:42,720 --> 00:30:43,970
But it's four big things.

685
00:30:43,970 --> 00:30:47,450
Investors do take risk.

686
00:30:47,450 --> 00:30:50,930
But they get full and fair
disclosure from an issuer.

687
00:30:50,930 --> 00:30:55,800
And there's a concept that
there's asymmetric knowledge,

688
00:30:55,800 --> 00:30:58,580
that an issuer has a
bunch of information

689
00:30:58,580 --> 00:31:00,890
and an investor does not.

690
00:31:00,890 --> 00:31:03,500
Through the laws
of the land, can we

691
00:31:03,500 --> 00:31:05,750
balance that a little bit?

692
00:31:05,750 --> 00:31:09,020
Investors still have every
opportunity to take risk.

693
00:31:09,020 --> 00:31:12,680
But can we address the
asymmetry of information?

694
00:31:12,680 --> 00:31:18,540
And that's really a core
part of investor protection,

695
00:31:18,540 --> 00:31:20,540
a little bit different
than consumer protection.

696
00:31:20,540 --> 00:31:23,960
You still want to be protected
that a crib that you buy

697
00:31:23,960 --> 00:31:26,810
is not going to hurt your
child or that the clothing you

698
00:31:26,810 --> 00:31:29,840
put on an infant isn't
instantly flammable.

699
00:31:29,840 --> 00:31:32,000
Those are important
consumer protections.

700
00:31:32,000 --> 00:31:35,420
And often, we protect
them in the laws, as well.

701
00:31:35,420 --> 00:31:38,630
But information asymmetry
and the difference

702
00:31:38,630 --> 00:31:41,630
between information between an
issuer, somebody raising money,

703
00:31:41,630 --> 00:31:43,550
and an investor is
something we try

704
00:31:43,550 --> 00:31:47,890
to embed in securities
laws around the globe.

705
00:31:47,890 --> 00:31:51,680
Two is the concept
of sales practices.

706
00:31:51,680 --> 00:31:54,740
Various fraud and sales
practices are prohibited.

707
00:31:54,740 --> 00:31:56,720
Sometimes you hear this
around securities laws

708
00:31:56,720 --> 00:31:59,510
about the marketing
information, what information

709
00:31:59,510 --> 00:32:02,120
you need to provide.

710
00:32:02,120 --> 00:32:05,090
So the first and
second are principles

711
00:32:05,090 --> 00:32:08,390
that go into why there's
information statements.

712
00:32:08,390 --> 00:32:11,990
Or securities offerings come
with all that boilerplate,

713
00:32:11,990 --> 00:32:15,920
and sometimes you might
say it's too much.

714
00:32:15,920 --> 00:32:19,820
But all of that is to address
information asymmetries

715
00:32:19,820 --> 00:32:22,040
and try to lessen
or make it harder

716
00:32:22,040 --> 00:32:25,220
to have fraud and
deceptive practices.

717
00:32:27,970 --> 00:32:30,810
Then we have something called
secondary markets, where

718
00:32:30,810 --> 00:32:34,110
buyers and sellers meet, like
on the New York Stock Exchange

719
00:32:34,110 --> 00:32:39,150
or on a crypto exchange,
and the concept being,

720
00:32:39,150 --> 00:32:41,850
can we promote market integrity?

721
00:32:41,850 --> 00:32:46,990
Can we promote those markets
either through transparency--

722
00:32:46,990 --> 00:32:50,640
transparency is really being
able to see what buy orders

723
00:32:50,640 --> 00:32:51,525
and sell orders--

724
00:32:54,450 --> 00:32:58,920
what's the price that
people are willing to pay?

725
00:32:58,920 --> 00:33:02,560
What's the amount they're
willing to buy or sell?

726
00:33:02,560 --> 00:33:04,800
So pre-trade
transparency says, I'm

727
00:33:04,800 --> 00:33:06,430
going to share in
the marketplace,

728
00:33:06,430 --> 00:33:09,420
that there's not somebody
over here, some high frequency

729
00:33:09,420 --> 00:33:12,150
traders, that get
transparency, but retail public

730
00:33:12,150 --> 00:33:15,180
does not get transparency.

731
00:33:15,180 --> 00:33:17,670
It brings it into one market.

732
00:33:17,670 --> 00:33:20,430
And some rules
against manipulation.

733
00:33:20,430 --> 00:33:24,210
Now one person's manipulation's
another person's market

734
00:33:24,210 --> 00:33:25,380
practice.

735
00:33:25,380 --> 00:33:28,950
I respect that, too, just
like the word "scam."

736
00:33:28,950 --> 00:33:31,800
But there's traditional
things about manipulation

737
00:33:31,800 --> 00:33:35,460
that have come to
be, no, we should

738
00:33:35,460 --> 00:33:38,430
forbid certain practices.

739
00:33:38,430 --> 00:33:41,400
Front-running is one,
where a customer gives you

740
00:33:41,400 --> 00:33:44,280
a sell order, and you say,
well, the customers sell order,

741
00:33:44,280 --> 00:33:46,320
good, I'll sell in
front of them because I

742
00:33:46,320 --> 00:33:48,920
know that when they
sell, it's going

743
00:33:48,920 --> 00:33:54,135
to be market pressure, either
up pressure with a buy order

744
00:33:54,135 --> 00:33:57,640
or down pressure
with a sell order.

745
00:33:57,640 --> 00:34:02,940
So one is address asymmetries
through information.

746
00:34:02,940 --> 00:34:06,600
Prohibit or limit fraud and
deceptive sales practices

747
00:34:06,600 --> 00:34:08,010
and marketing--

748
00:34:08,010 --> 00:34:09,929
lying, sort of.

749
00:34:09,929 --> 00:34:12,840
Promote the integrity
of the secondary markets

750
00:34:12,840 --> 00:34:16,060
through, first,
price transparency

751
00:34:16,060 --> 00:34:18,690
and, secondly, antimanipulation.

752
00:34:18,690 --> 00:34:21,540
And then, lastly, recognizing
that all financial markets

753
00:34:21,540 --> 00:34:23,219
have conflicts.

754
00:34:23,219 --> 00:34:25,739
And we are not going
to repeal conflicts.

755
00:34:25,739 --> 00:34:28,380
Anytime any one of
you goes to a broker,

756
00:34:28,380 --> 00:34:30,690
that broker does
want you to transact

757
00:34:30,690 --> 00:34:34,210
so that they earn more money.

758
00:34:34,210 --> 00:34:36,330
But by the way, when you
sit down at a restaurant

759
00:34:36,330 --> 00:34:39,100
and they ask you if you want
a drink before you order,

760
00:34:39,100 --> 00:34:41,969
there is a bit of
a conflict, too.

761
00:34:41,969 --> 00:34:44,489
They want you to buy the
drink because your tip

762
00:34:44,489 --> 00:34:50,790
amount is a percent of your
final bill, well, in most

763
00:34:50,790 --> 00:34:51,409
countries.

764
00:34:51,409 --> 00:34:54,570
I can't speak for
every country here.

765
00:34:54,570 --> 00:34:56,820
But in finance,
those conflicts are

766
00:34:56,820 --> 00:35:02,190
so evident that there are
sets of rules, usually, that

767
00:35:02,190 --> 00:35:04,327
promote some transparency
that you know

768
00:35:04,327 --> 00:35:06,840
what the advisor is getting.

769
00:35:06,840 --> 00:35:09,460
But some practices
are prohibited.

770
00:35:09,460 --> 00:35:13,410
So these are some of the
core things that, at least,

771
00:35:13,410 --> 00:35:17,850
I think are embedded as
concepts in our securities laws,

772
00:35:17,850 --> 00:35:20,970
and not just here in the
US but around the globe.

773
00:35:20,970 --> 00:35:23,070
Any questions on that before--

774
00:35:23,070 --> 00:35:24,000
Brotish?

775
00:35:24,000 --> 00:35:26,490
AUDIENCE: So on the
first point, if we

776
00:35:26,490 --> 00:35:29,160
are saying that we have some
sort of a minimum disclosure

777
00:35:29,160 --> 00:35:33,385
requirement for ICOs, do you
think in this kind of a field,

778
00:35:33,385 --> 00:35:35,880
do we have the regulators
who have the expertise

779
00:35:35,880 --> 00:35:39,338
to judge whether those
requirements are met or not?

780
00:35:39,338 --> 00:35:40,380
Like, they can say that--

781
00:35:40,380 --> 00:35:42,360
GARY GENSLER: Are you
asking whether the investors

782
00:35:42,360 --> 00:35:44,250
will have the expertise,
or the regulators?

783
00:35:44,250 --> 00:35:45,921
AUDIENCE: Regulators.

784
00:35:45,921 --> 00:35:47,500
GARY GENSLER: It's
a good question.

785
00:35:47,500 --> 00:35:53,910
I think that the concept is
that issuers should share

786
00:35:53,910 --> 00:35:57,240
a certain level of
material information

787
00:35:57,240 --> 00:36:01,470
with potential investors, and
then investors assess the risk,

788
00:36:01,470 --> 00:36:05,620
not that the regulator assesses
the risk but the investors.

789
00:36:05,620 --> 00:36:08,220
So the question is,
what is material?

790
00:36:08,220 --> 00:36:11,820
And what needs to be shared
in what readable fashion?

791
00:36:11,820 --> 00:36:16,380
And maybe it's the
case in this ecosystem

792
00:36:16,380 --> 00:36:19,530
that the information should
be a little different.

793
00:36:19,530 --> 00:36:22,500
Historically, you'd have to
share three years of financials

794
00:36:22,500 --> 00:36:24,270
or two years of financials.

795
00:36:24,270 --> 00:36:29,170
But what do financials mean if
it's a new concept, a new idea?

796
00:36:29,170 --> 00:36:31,530
So I think you
raise a good point

797
00:36:31,530 --> 00:36:34,410
that it might need to
shift a little bit.

798
00:36:34,410 --> 00:36:38,610
But the core concept is that
the material information

799
00:36:38,610 --> 00:36:41,880
to make an investment
decision should be shared,

800
00:36:41,880 --> 00:36:43,590
and then investors
have an opportunity

801
00:36:43,590 --> 00:36:45,342
to assess that risk.

802
00:36:45,342 --> 00:36:46,050
And you're right.

803
00:36:46,050 --> 00:36:50,500
The regulators are less
experienced in this space

804
00:36:50,500 --> 00:36:55,580
to say what is a material bit
of information beyond here's

805
00:36:55,580 --> 00:36:57,575
the team, and
here's the concept.

806
00:37:02,570 --> 00:37:04,510
The Howey Test.

807
00:37:04,510 --> 00:37:08,740
So there is an
individual in Florida.

808
00:37:08,740 --> 00:37:10,750
He ran for governor
twice in Florida

809
00:37:10,750 --> 00:37:13,390
and lost twice, just
a little background--

810
00:37:13,390 --> 00:37:15,670
William Howey.

811
00:37:15,670 --> 00:37:17,560
He was also very
successful in real estate,

812
00:37:17,560 --> 00:37:18,610
and he had a hotel.

813
00:37:18,610 --> 00:37:21,520
And he had something
called Howey on the Hills.

814
00:37:21,520 --> 00:37:23,470
And he started buying
a bunch of land.

815
00:37:23,470 --> 00:37:25,870
And then he thought, well,
I'll sell some of the land

816
00:37:25,870 --> 00:37:31,060
and grow orange groves.

817
00:37:31,060 --> 00:37:34,300
And when he sold the land,
he gave the opportunity

818
00:37:34,300 --> 00:37:36,850
to investors in
the land to enter

819
00:37:36,850 --> 00:37:40,210
into a separate
contract with a company

820
00:37:40,210 --> 00:37:41,950
he had, but it was not required.

821
00:37:41,950 --> 00:37:46,300
You could buy the land, you
know, an acre, three acres.

822
00:37:46,300 --> 00:37:48,460
But he said, if
you want, you can

823
00:37:48,460 --> 00:37:52,040
enter into a contract
with my affiliate--

824
00:37:52,040 --> 00:37:55,390
Howey on the Hills, I think,
was the affiliate, as well--

825
00:37:55,390 --> 00:37:57,910
and we'll grow your
oranges for you

826
00:37:57,910 --> 00:38:03,110
and give you the revenues
from growing the oranges.

827
00:38:03,110 --> 00:38:08,650
So there was a new law
in the US in the 1930s.

828
00:38:08,650 --> 00:38:11,080
He was doing this
in the late 1930s.

829
00:38:11,080 --> 00:38:15,640
And the new law was called the
Securities Laws of '33 and '34.

830
00:38:15,640 --> 00:38:18,730
The question was, was what
William Howey was doing--

831
00:38:18,730 --> 00:38:21,235
and then he passed
away-- was his estate

832
00:38:21,235 --> 00:38:25,540
and what they were doing
a security under the US

833
00:38:25,540 --> 00:38:27,220
Securities Law?

834
00:38:27,220 --> 00:38:29,560
Well, in the US,
the word "security"

835
00:38:29,560 --> 00:38:36,410
was defined by our Congress to
include equity, bonds, options,

836
00:38:36,410 --> 00:38:40,150
and there was a comma, and
said, "investment contracts."

837
00:38:40,150 --> 00:38:42,070
So the real question
was, what was

838
00:38:42,070 --> 00:38:45,790
the definition of this, two
words, "investment contracts?"

839
00:38:45,790 --> 00:38:49,360
In 1946, it went to
our US Supreme Court.

840
00:38:49,360 --> 00:38:51,580
And this was the four-part test.

841
00:38:51,580 --> 00:38:55,510
And this four-part test is going
back to the US Supreme Court

842
00:38:55,510 --> 00:38:57,550
three or four times since then.

843
00:38:57,550 --> 00:38:59,790
And it's been
affirmed every time,

844
00:38:59,790 --> 00:39:03,010
in the Edwards case and
other cases and so forth

845
00:39:03,010 --> 00:39:04,870
over 70 years.

846
00:39:04,870 --> 00:39:09,220
This same four-part test went
to the Taiwanese high court

847
00:39:09,220 --> 00:39:12,130
in 2011, and they adopted it.

848
00:39:12,130 --> 00:39:15,040
I don't know enough
about Taiwan law.

849
00:39:15,040 --> 00:39:17,650
But it was adopted
in Taiwan in 2011.

850
00:39:17,650 --> 00:39:20,260
And it's a similar
test as in Canada.

851
00:39:20,260 --> 00:39:23,430
So there's three jurisdictions
that basically have this.

852
00:39:23,430 --> 00:39:25,840
Is it an investment
of money or assets?

853
00:39:25,840 --> 00:39:28,390
Is the investment in
a common enterprise?

854
00:39:28,390 --> 00:39:31,060
Do you have a reasonable
expectation of profits?

855
00:39:31,060 --> 00:39:34,970
And is it based on
the efforts of others?

856
00:39:34,970 --> 00:39:40,490
So they determined that William
Howey, and then his estate

857
00:39:40,490 --> 00:39:43,580
afterwards, was basically
a common enterprise growing

858
00:39:43,580 --> 00:39:47,240
all these oranges, and so it
was the expectation of profits.

859
00:39:49,850 --> 00:39:52,840
That's the Howey Test.

860
00:39:52,840 --> 00:39:55,390
I've talked to you before
about the Duck Test.

861
00:39:55,390 --> 00:40:01,630
But when I see an investment
that walks like a duck,

862
00:40:01,630 --> 00:40:03,730
swims like a duck, and
quacks like a duck,

863
00:40:03,730 --> 00:40:07,420
I call that investment
a security, in a way.

864
00:40:07,420 --> 00:40:12,150
But that's really it, you
know, using your common sense.

865
00:40:12,150 --> 00:40:17,910
Ethereum, when it was
first promoted in 2014,

866
00:40:17,910 --> 00:40:22,430
I believe passed this test.

867
00:40:22,430 --> 00:40:26,510
And the word "passed" means
that you are a security, just

868
00:40:26,510 --> 00:40:28,460
a little vocabulary thing.

869
00:40:28,460 --> 00:40:31,660
You want to fail the
Howey Test, by the way.

870
00:40:31,660 --> 00:40:34,370
Like, if you are a
venture capitalist

871
00:40:34,370 --> 00:40:37,640
and don't want to be regulated,
you want to fail this test.

872
00:40:37,640 --> 00:40:43,400
But to pass the Howey
test, Ethereum, in 2014,

873
00:40:43,400 --> 00:40:48,050
exchanged Bitcoin for an ETH.

874
00:40:48,050 --> 00:40:49,910
It was an investment
in a common enterprise

875
00:40:49,910 --> 00:40:53,990
at that point in time, a 20-
or 21-year-old Vitalik Buterin

876
00:40:53,990 --> 00:40:58,860
running Ethereum Foundation
out of Switzerland.

877
00:40:58,860 --> 00:41:02,270
It was one group.

878
00:41:02,270 --> 00:41:04,280
An expectation of profits--

879
00:41:04,280 --> 00:41:05,900
they had no functioning network.

880
00:41:05,900 --> 00:41:09,230
It was just an idea and a white
paper-- a really good idea--

881
00:41:09,230 --> 00:41:12,620
and good-faith actors.

882
00:41:12,620 --> 00:41:18,200
And it was reliant on whether
Vitalik and his team of coders

883
00:41:18,200 --> 00:41:21,500
were going to stand
this project up.

884
00:41:21,500 --> 00:41:23,720
To me, I don't even think
there's much doubt what

885
00:41:23,720 --> 00:41:27,890
this was in 2014 when they
raised the $18 million.

886
00:41:27,890 --> 00:41:31,640
Now, it was the largest
ICO done at the time.

887
00:41:31,640 --> 00:41:35,526
There hadn't been anything
of its size, at $18 million.

888
00:41:35,526 --> 00:41:40,070
And our US Securities agency
and others around the globe

889
00:41:40,070 --> 00:41:42,260
really weren't
looking and watching

890
00:41:42,260 --> 00:41:49,340
until the DAO happened in 2016
and raised $160 or so million.

891
00:41:49,340 --> 00:41:51,850
And then that sort of
caught the attention.

892
00:41:51,850 --> 00:41:57,890
So regulators start to wake up
and think about it after that.

893
00:42:00,540 --> 00:42:03,200
So initial coin offerings,
we've already talked about this.

894
00:42:03,200 --> 00:42:05,960
But the proceeds are
used to build networks.

895
00:42:05,960 --> 00:42:08,690
And purchasers anticipate
profits through appreciation.

896
00:42:08,690 --> 00:42:12,350
So that's like the
core of the Howey Test.

897
00:42:12,350 --> 00:42:14,690
Now, some jurisdictions
don't have the Howey Test.

898
00:42:14,690 --> 00:42:16,790
And some jurisdictions
don't have those two words

899
00:42:16,790 --> 00:42:21,440
in the definition of security--
"investment contract."

900
00:42:21,440 --> 00:42:24,500
So I actually think, in
a lot of jurisdictions,

901
00:42:24,500 --> 00:42:27,560
an initial coin offering may not
be a security because it's not

902
00:42:27,560 --> 00:42:30,080
defined in their statutes.

903
00:42:30,080 --> 00:42:33,350
It's not some legislative
body like ours in the 1930s

904
00:42:33,350 --> 00:42:36,380
included it in a definition.

905
00:42:36,380 --> 00:42:38,783
But I believe if this
market were to grow,

906
00:42:38,783 --> 00:42:40,700
and it might not grow,
but if it were to grow,

907
00:42:40,700 --> 00:42:43,070
other countries might want
to address that and change

908
00:42:43,070 --> 00:42:46,220
their statutory language
because investors still

909
00:42:46,220 --> 00:42:51,530
have an asymmetry and could
benefit with more disclosure.

910
00:42:51,530 --> 00:42:53,180
As we've talked
about, the tokens

911
00:42:53,180 --> 00:42:55,700
are usually prior
to being functional.

912
00:42:55,700 --> 00:42:56,960
What was the statistic?

913
00:42:56,960 --> 00:42:58,880
Does anybody remember?

914
00:42:58,880 --> 00:43:02,180
In the third quarter
of 2018, what

915
00:43:02,180 --> 00:43:05,370
was the percent
that was functional?

916
00:43:05,370 --> 00:43:06,790
Anybody?

917
00:43:06,790 --> 00:43:08,460
What's that, Alpha?

918
00:43:08,460 --> 00:43:09,235
5%?

919
00:43:09,235 --> 00:43:10,110
You're a little high.

920
00:43:10,110 --> 00:43:12,175
AUDIENCE: 2%-- 2% or 3%?

921
00:43:12,175 --> 00:43:13,110
GARY GENSLER: Yeah.

922
00:43:13,110 --> 00:43:19,550
1.4%-- 1.37% was
fully-ready product.

923
00:43:19,550 --> 00:43:23,270
Or 1.7 was code,
so we'll round up.

924
00:43:23,270 --> 00:43:25,940
But 76% were on ideas.

925
00:43:25,940 --> 00:43:32,040
And this is in the third quarter
of 2018 by CryptoCompare.

926
00:43:32,040 --> 00:43:35,250
And here are some
large tokens offerings

927
00:43:35,250 --> 00:43:38,410
that have yet to go live.

928
00:43:38,410 --> 00:43:42,600
And I just picked
five really big ones.

929
00:43:42,600 --> 00:43:45,570
That doesn't mean that all
big ones haven't gone live.

930
00:43:45,570 --> 00:43:51,450
But you were asking me about
Filecoin in our last class.

931
00:43:51,450 --> 00:43:52,865
I think Filecoin--

932
00:43:55,695 --> 00:43:57,570
I went back, and I looked
at the white paper;

933
00:43:57,570 --> 00:43:59,445
I've looked at a lot of
things about Filecoin

934
00:43:59,445 --> 00:44:01,130
since last Tuesday--

935
00:44:01,130 --> 00:44:03,330
Filecoin is basically
coin that says

936
00:44:03,330 --> 00:44:08,340
you can use this coin when we
go live, which hopefully will be

937
00:44:08,340 --> 00:44:13,110
by the second quarter of '19,
to buy file storage from others

938
00:44:13,110 --> 00:44:16,350
that are on the network.

939
00:44:16,350 --> 00:44:21,100
Their business model--
Filecoin sold 10% of the token.

940
00:44:21,100 --> 00:44:25,920
So if it was truly worth
$257 million at the time,

941
00:44:25,920 --> 00:44:30,860
they, in essence, had a total
value of $2 and 1/2 billion.

942
00:44:30,860 --> 00:44:35,060
Some of the tokens were
kept by the company.

943
00:44:35,060 --> 00:44:37,290
Some of the tokens
were kept by founders.

944
00:44:37,290 --> 00:44:43,340
But it, in essence, capitalized
the total stock 10 times that.

945
00:44:43,340 --> 00:44:48,320
So in that model,
the usage of the coin

946
00:44:48,320 --> 00:44:52,430
was amongst the
community, to answer--

947
00:44:52,430 --> 00:44:54,980
I think that was a question
you asked me to go back.

948
00:44:54,980 --> 00:44:58,580
But that's not the
case for every ICO.

949
00:44:58,580 --> 00:45:00,470
There's two stark variations.

950
00:45:00,470 --> 00:45:04,310
One is one where you use the
token to buy a good or service

951
00:45:04,310 --> 00:45:06,660
from a service provider.

952
00:45:06,660 --> 00:45:08,870
Let's, in the case
of Filecoin, say

953
00:45:08,870 --> 00:45:11,330
it's directly from Filecoin.

954
00:45:11,330 --> 00:45:14,150
Or you use the token to
buy a good or service

955
00:45:14,150 --> 00:45:16,400
from other people
in the community.

956
00:45:16,400 --> 00:45:18,470
The Filecoin white
paper suggests--

957
00:45:18,470 --> 00:45:21,010
it's a year since
they wrote it--

958
00:45:21,010 --> 00:45:26,940
that it's a token to be used
amongst the community, which

959
00:45:26,940 --> 00:45:28,440
I think was your--

960
00:45:28,440 --> 00:45:32,430
it's a little confusing
because they haven't gone live.

961
00:45:32,430 --> 00:45:34,020
We don't really know.

962
00:45:34,020 --> 00:45:34,520
Hugo?

963
00:45:34,520 --> 00:45:36,395
AUDIENCE: So I have a
question about Ripple--

964
00:45:36,395 --> 00:45:37,260
GARY GENSLER: Yes.

965
00:45:37,260 --> 00:45:38,910
AUDIENCE: --and if
you have an opinion

966
00:45:38,910 --> 00:45:43,610
on whether XRP is a security
that was sold by Ripple,

967
00:45:43,610 --> 00:45:46,080
or currently continuing
to be sold by Ripple,

968
00:45:46,080 --> 00:45:50,100
as they own, like, 55
billion of the clients,

969
00:45:50,100 --> 00:45:53,910
because, also,
their product, what

970
00:45:53,910 --> 00:45:57,740
they want XRP to be used on,
xRapid, isn't really live.

971
00:45:57,740 --> 00:46:00,548
xCurrent is the thing that
they're using most right now.

972
00:46:00,548 --> 00:46:02,965
And that's just an alternative
for SWIFT that doesn't even

973
00:46:02,965 --> 00:46:04,470
use their coin.

974
00:46:04,470 --> 00:46:08,760
GARY GENSLER: So Hugo has
asked about the token XRP

975
00:46:08,760 --> 00:46:11,130
and whether I think it's
a non-compliant security.

976
00:46:11,130 --> 00:46:12,210
I've spoken publicly.

977
00:46:12,210 --> 00:46:16,200
Yes, I do think it's a
non-compliant security.

978
00:46:16,200 --> 00:46:18,560
But this will not be resolved
just by the Securities

979
00:46:18,560 --> 00:46:19,560
and Exchange Commission.

980
00:46:19,560 --> 00:46:21,540
It will be resolved
by some courts,

981
00:46:21,540 --> 00:46:24,300
whether it's appellate
courts or the Supreme Court.

982
00:46:24,300 --> 00:46:27,600
So what I believe is just that.

983
00:46:27,600 --> 00:46:28,830
It's a belief.

984
00:46:28,830 --> 00:46:31,680
But why would I say that?

985
00:46:31,680 --> 00:46:33,600
I think back to the Howey Test.

986
00:46:33,600 --> 00:46:36,310
I think they are exchanging XRP.

987
00:46:36,310 --> 00:46:38,190
Ripple, the company,
is exchanging

988
00:46:38,190 --> 00:46:41,220
XRP for something of value.

989
00:46:41,220 --> 00:46:42,930
And they're using it right now.

990
00:46:42,930 --> 00:46:44,300
They sell it every month.

991
00:46:44,300 --> 00:46:45,460
It's in a lock-up.

992
00:46:45,460 --> 00:46:46,530
It's in an escrow.

993
00:46:46,530 --> 00:46:49,890
And they sell XRP every month.

994
00:46:49,890 --> 00:46:54,540
Ripple, the company, initially
did the genesis block back

995
00:46:54,540 --> 00:46:58,720
in 2013 but kept
80% of the tokens.

996
00:46:58,720 --> 00:47:02,460
Now they have about
60% of the token.

997
00:47:02,460 --> 00:47:07,050
But they sell it on a continuous
100 million to 200 million

998
00:47:07,050 --> 00:47:10,980
or so a month of value.

999
00:47:10,980 --> 00:47:14,100
Two, I think it is reliant
on a common enterprise.

1000
00:47:14,100 --> 00:47:17,830
I think Ripple, the company--

1001
00:47:17,830 --> 00:47:23,710
XRP investors are very much
reliant on Ripple, the company,

1002
00:47:23,710 --> 00:47:27,590
and that if Ripple, the company,
went away, as you noted,

1003
00:47:27,590 --> 00:47:29,440
there's not much use of XRP.

1004
00:47:29,440 --> 00:47:33,010
In fact, for the first
three or four years,

1005
00:47:33,010 --> 00:47:34,990
or five years even,
there was no use.

1006
00:47:34,990 --> 00:47:41,410
And then they prototyped
something called xRapid.

1007
00:47:41,410 --> 00:47:44,590
xCurrent, the main product
of Ripple, the company,

1008
00:47:44,590 --> 00:47:48,790
is a messaging-- and
apparently a clever one

1009
00:47:48,790 --> 00:47:51,220
that's competing with SWIFT.

1010
00:47:51,220 --> 00:47:59,410
But xRapid, the prototype,
doesn't have a large community

1011
00:47:59,410 --> 00:47:59,950
right now.

1012
00:47:59,950 --> 00:48:05,050
So it's highly centralized
around Ripple, the company.

1013
00:48:05,050 --> 00:48:07,600
The development,
the node network--

1014
00:48:07,600 --> 00:48:12,650
the ownership is 55%
or 60% owned by them.

1015
00:48:12,650 --> 00:48:15,280
They're promoting it as such.

1016
00:48:15,280 --> 00:48:19,310
But it will be settled in some
court at some point in time.

1017
00:48:19,310 --> 00:48:21,310
And there might be
regulatory forbearance.

1018
00:48:21,310 --> 00:48:23,830
And maybe they'll be
determined not to be.

1019
00:48:23,830 --> 00:48:27,340
But I've expressed my thoughts.

1020
00:48:27,340 --> 00:48:28,750
I don't own any of this stuff.

1021
00:48:28,750 --> 00:48:30,710
I don't have any
particular conflict.

1022
00:48:30,710 --> 00:48:34,420
I'm just speaking as I believe.

1023
00:48:34,420 --> 00:48:35,440
Catalina?

1024
00:48:35,440 --> 00:48:38,120
AUDIENCE: Regarding
how do you determine

1025
00:48:38,120 --> 00:48:39,990
where the ICO took place--

1026
00:48:39,990 --> 00:48:41,165
GARY GENSLER: Where, what?

1027
00:48:41,165 --> 00:48:44,050
AUDIENCE: Where
the ICO took place,

1028
00:48:44,050 --> 00:48:45,520
what is the jurisdiction?

1029
00:48:45,520 --> 00:48:48,320
Like, which will
be the regulator

1030
00:48:48,320 --> 00:48:52,990
if they are under the laws
of the US or everywhere else,

1031
00:48:52,990 --> 00:48:54,167
because the blockchain--

1032
00:48:54,167 --> 00:48:55,000
[INTERPOSING VOICES]

1033
00:48:55,000 --> 00:48:56,990
GARY GENSLER: No, it's
a very good question.

1034
00:48:56,990 --> 00:48:59,125
So jurisdiction.

1035
00:48:59,125 --> 00:49:01,930
When does any country
have jurisdiction?

1036
00:49:01,930 --> 00:49:03,730
Or maybe I should
ask it differently.

1037
00:49:03,730 --> 00:49:08,410
When do you think countries
try to exert their jurisdiction

1038
00:49:08,410 --> 00:49:10,660
in the context of
capital markets?

1039
00:49:10,660 --> 00:49:16,330
We're not talking about the
context of consumable goods.

1040
00:49:16,330 --> 00:49:18,610
But in terms of the
capital markets,

1041
00:49:18,610 --> 00:49:21,460
where do jurisdictions usually
exert their jurisdiction?

1042
00:49:21,460 --> 00:49:24,530
AUDIENCE: I think that this
should be a [INAUDIBLE]

1043
00:49:24,530 --> 00:49:29,750
which investor
will take the ICO.

1044
00:49:29,750 --> 00:49:30,620
GARY GENSLER: OK.

1045
00:49:30,620 --> 00:49:32,870
AUDIENCE: So even if they're
not majority of investor,

1046
00:49:32,870 --> 00:49:34,400
it will be a US person.

1047
00:49:34,400 --> 00:49:37,820
So it should be a US
regulator who handles this.

1048
00:49:37,820 --> 00:49:40,030
GARY GENSLER: So
one approach theory

1049
00:49:40,030 --> 00:49:42,210
is it's where the investors are.

1050
00:49:42,210 --> 00:49:44,680
And you even used the word
a "majority" of investors,

1051
00:49:44,680 --> 00:49:46,150
or just where the investors are?

1052
00:49:46,150 --> 00:49:47,910
AUDIENCE: Yeah, that's correct.

1053
00:49:47,910 --> 00:49:48,910
GARY GENSLER: All right.

1054
00:49:48,910 --> 00:49:50,297
So where the investors are.

1055
00:49:50,297 --> 00:49:52,630
And then the question is, how
many investors-- minority,

1056
00:49:52,630 --> 00:49:55,600
majority, de minimis, so forth.

1057
00:49:55,600 --> 00:49:59,975
Another point of view,
any, just, counter--

1058
00:49:59,975 --> 00:50:01,850
AUDIENCE: Where the
company was incorporated.

1059
00:50:01,850 --> 00:50:02,850
GARY GENSLER: All right.

1060
00:50:02,850 --> 00:50:05,200
So where the company's
legal jurisdiction is.

1061
00:50:05,200 --> 00:50:07,630
Maybe the company's
incorporated somewhere.

1062
00:50:07,630 --> 00:50:10,780
So in essence,
where the issuer is.

1063
00:50:10,780 --> 00:50:12,340
And there's a third one.

1064
00:50:12,340 --> 00:50:13,557
AUDIENCE: Tax considerations.

1065
00:50:13,557 --> 00:50:14,640
GARY GENSLER: What's that?

1066
00:50:14,640 --> 00:50:15,848
AUDIENCE: Tax considerations.

1067
00:50:15,848 --> 00:50:18,380
GARY GENSLER: Tax
considerations, you know,

1068
00:50:18,380 --> 00:50:19,720
can you collect taxes?

1069
00:50:19,720 --> 00:50:21,730
AUDIENCE: Where the team
is physically located.

1070
00:50:21,730 --> 00:50:22,690
GARY GENSLER: Where the, what?

1071
00:50:22,690 --> 00:50:23,650
AUDIENCE: Where the
team is physically--

1072
00:50:23,650 --> 00:50:25,350
GARY GENSLER: The team,
the physical team.

1073
00:50:25,350 --> 00:50:27,642
So you might legally incorporate
in the Cayman Islands,

1074
00:50:27,642 --> 00:50:30,805
but your executive team might
be in New York or in Beijing.

1075
00:50:34,270 --> 00:50:37,300
And the one other, which I
think all of these go in--

1076
00:50:37,300 --> 00:50:38,550
AUDIENCE: The exchange.

1077
00:50:38,550 --> 00:50:39,790
GARY GENSLER: The exchange.

1078
00:50:39,790 --> 00:50:40,290
All right.

1079
00:50:40,290 --> 00:50:42,380
The secondary markets.

1080
00:50:42,380 --> 00:50:46,210
So all of these things
somehow influence

1081
00:50:46,210 --> 00:50:49,600
the concept of jurisdiction.

1082
00:50:49,600 --> 00:50:50,890
And there's various laws.

1083
00:50:50,890 --> 00:50:53,260
And each country has
their own different--

1084
00:50:53,260 --> 00:50:56,830
I'm not going to do a
whole review of this.

1085
00:50:56,830 --> 00:51:01,265
But usually countries want
to exert their jurisdiction

1086
00:51:01,265 --> 00:51:04,030
if their citizens
somehow are affected

1087
00:51:04,030 --> 00:51:07,810
or if their tax base
is somehow affected.

1088
00:51:07,810 --> 00:51:13,870
So in the US securities laws,
if it's affecting US citizens

1089
00:51:13,870 --> 00:51:16,240
or if the exchange
or secondary markets

1090
00:51:16,240 --> 00:51:19,690
are in our physical
jurisdiction, in the 50 states

1091
00:51:19,690 --> 00:51:27,400
and so forth, or the issuer, so
it's all three of these, often

1092
00:51:27,400 --> 00:51:31,060
there's some exertion
of jurisdiction.

1093
00:51:31,060 --> 00:51:33,670
And it's upheld in the courts.

1094
00:51:33,670 --> 00:51:35,650
And then you get
to some issuers who

1095
00:51:35,650 --> 00:51:38,050
have to deal with
multiple jurisdictions.

1096
00:51:38,050 --> 00:51:40,780
And almost every
large corporation

1097
00:51:40,780 --> 00:51:43,600
that has investors in
multiple jurisdictions

1098
00:51:43,600 --> 00:51:48,260
has to deal with the investor
laws in multiple jurisdictions.

1099
00:51:48,260 --> 00:51:51,910
So initial coin
offerings, if they

1100
00:51:51,910 --> 00:51:56,575
want to tap into US 328 million
people to buy some of these,

1101
00:51:56,575 --> 00:51:58,420
it's more than a de minimis.

1102
00:51:58,420 --> 00:52:00,010
It's not a majority.

1103
00:52:00,010 --> 00:52:02,507
US law doesn't need a majority.

1104
00:52:02,507 --> 00:52:04,090
It just has to be
more than a handful.

1105
00:52:08,050 --> 00:52:10,210
US Securities and
Exchange Commission

1106
00:52:10,210 --> 00:52:11,575
might exert its jurisdiction.

1107
00:52:11,575 --> 00:52:12,535
It doesn't always.

1108
00:52:15,270 --> 00:52:16,915
So please.

1109
00:52:16,915 --> 00:52:20,440
AUDIENCE: So some of these
ICOs, Filecoin, I think,

1110
00:52:20,440 --> 00:52:23,650
included, only sold to
accredited investors.

1111
00:52:23,650 --> 00:52:25,360
In my mind, that
doesn't really change

1112
00:52:25,360 --> 00:52:29,085
the definition of security or
highly taxed or jurisdiction.

1113
00:52:29,085 --> 00:52:31,810
So what is the benefit
of only selling

1114
00:52:31,810 --> 00:52:32,820
to accredited investors?

1115
00:52:32,820 --> 00:52:34,570
GARY GENSLER: Can I
hold that, because I'm

1116
00:52:34,570 --> 00:52:35,528
going to slide on that?

1117
00:52:35,528 --> 00:52:38,800
But it's a very good question.

1118
00:52:38,800 --> 00:52:41,380
So the Ernst & Young study--

1119
00:52:41,380 --> 00:52:42,760
and I promise we'll get to it.

1120
00:52:42,760 --> 00:52:49,462
So one year later, they looked
at the top 141 ICOs of 2017.

1121
00:52:49,462 --> 00:52:50,920
I haven't looked
at the whole list.

1122
00:52:50,920 --> 00:52:55,100
But I think they pretty
much got the top end.

1123
00:52:55,100 --> 00:53:00,580
86% are trading below listed
price as of September 30.

1124
00:53:00,580 --> 00:53:03,610
This does not take into
consideration the last week.

1125
00:53:03,610 --> 00:53:05,130
But the number would go up--

1126
00:53:05,130 --> 00:53:07,930
86% nine months later.

1127
00:53:07,930 --> 00:53:13,450
30% have lost substantially
all their value, and not

1128
00:53:13,450 --> 00:53:15,320
necessarily scams and frauds.

1129
00:53:15,320 --> 00:53:18,040
But it's interesting to compare
that to Christian Catalini's

1130
00:53:18,040 --> 00:53:20,380
25% scam or fraud number.

1131
00:53:20,380 --> 00:53:23,650
But these are the
top 141 in size.

1132
00:53:23,650 --> 00:53:28,630
These aren't the
small riff-raff size.

1133
00:53:28,630 --> 00:53:32,230
Collectively, the
portfolio is down 66%.

1134
00:53:32,230 --> 00:53:34,450
I didn't go back to
compare what that

1135
00:53:34,450 --> 00:53:38,050
would be versus Bitcoin
because some of these

1136
00:53:38,050 --> 00:53:41,470
were issued in
October, some December.

1137
00:53:41,470 --> 00:53:44,350
But collectively, if you
invested in the port--

1138
00:53:44,350 --> 00:53:46,680
it's not January
1 to September 30.

1139
00:53:46,680 --> 00:53:49,840
It's from investment day.

1140
00:53:49,840 --> 00:53:53,770
And only 13% have
working products and 16%

1141
00:53:53,770 --> 00:53:57,240
have prototypes.

1142
00:53:57,240 --> 00:53:59,580
Another interesting
thing is the 13%

1143
00:53:59,580 --> 00:54:04,170
that have working products,
which is about 25 of these.

1144
00:54:04,170 --> 00:54:05,370
Is that right?

1145
00:54:05,370 --> 00:54:08,985
Roughly, yeah, about
25 or so, 20 to 25.

1146
00:54:11,510 --> 00:54:15,020
Seven of them have decided
subsequent to launch

1147
00:54:15,020 --> 00:54:20,920
to accept fiat currency to
get the good or service.

1148
00:54:20,920 --> 00:54:24,870
So literally, if you dig into
the Ernst & Young report,

1149
00:54:24,870 --> 00:54:28,630
they've chosen to
take something else.

1150
00:54:28,630 --> 00:54:33,630
And Hugo, back to your question
about XRP, as I understand it

1151
00:54:33,630 --> 00:54:40,890
and as I studied it, I might
be mistaken, but xRapid,

1152
00:54:40,890 --> 00:54:43,770
you can actually use
something other than XRP

1153
00:54:43,770 --> 00:54:44,730
as the bridge currency.

1154
00:54:48,550 --> 00:54:50,290
It has to be another crypto.

1155
00:54:50,290 --> 00:54:56,620
But 7 of 25 live projects
that Ernst & Young followed

1156
00:54:56,620 --> 00:54:59,710
have decided subsequently
maybe to take a fiat currency

1157
00:54:59,710 --> 00:55:03,600
for the good or
service, as well.

1158
00:55:03,600 --> 00:55:05,460
So that kind of
gives you the sense

1159
00:55:05,460 --> 00:55:09,720
this was a note about the
Catalini report and that status

1160
00:55:09,720 --> 00:55:13,500
report, as well.

1161
00:55:13,500 --> 00:55:15,930
What's going on on Ethereum?

1162
00:55:15,930 --> 00:55:18,150
This is the most recent report.

1163
00:55:18,150 --> 00:55:21,360
I summarized
something from a site.

1164
00:55:21,360 --> 00:55:25,350
These are exchanges.

1165
00:55:25,350 --> 00:55:27,840
There's 179 DApps.

1166
00:55:27,840 --> 00:55:33,120
This is just
looking at Ethereum.

1167
00:55:33,120 --> 00:55:41,880
But there's only 25,000
uses a day for 179 sites.

1168
00:55:41,880 --> 00:55:43,650
17,000 in gambling.

1169
00:55:43,650 --> 00:55:48,100
But it's exchanges, gambling,
games, finance fourth.

1170
00:55:48,100 --> 00:55:50,260
And then you can go down.

1171
00:55:50,260 --> 00:55:55,990
The other category, which
only has 275 daily uses,

1172
00:55:55,990 --> 00:55:59,080
covers governance, identity,
security, energy, insurance,

1173
00:55:59,080 --> 00:56:00,510
and health.

1174
00:56:00,510 --> 00:56:03,510
Of six of those use cases--

1175
00:56:03,510 --> 00:56:08,410
218 DApps, which means they're
all being used zero or once

1176
00:56:08,410 --> 00:56:08,910
a day.

1177
00:56:11,970 --> 00:56:15,540
I believe I pulled this
for the month of October.

1178
00:56:15,540 --> 00:56:17,100
I think all these stats are--

1179
00:56:19,830 --> 00:56:23,270
yeah, this was for
the month of October.

1180
00:56:23,270 --> 00:56:28,863
So it might be September, but
it's all current information.

1181
00:56:33,030 --> 00:56:36,180
So what has the SEC
done in this space?

1182
00:56:36,180 --> 00:56:39,790
Well, they brought the DAO
report in July of 2017.

1183
00:56:39,790 --> 00:56:45,650
If you remember, this was
the big $150, $160 million

1184
00:56:45,650 --> 00:56:48,200
big ICO in 2016.

1185
00:56:48,200 --> 00:56:50,450
A third of it was hacked.

1186
00:56:50,450 --> 00:56:53,450
It led to the break in
the Ethereum network

1187
00:56:53,450 --> 00:56:56,045
between Ethereum Classic,
the hard fork, and Ethereum.

1188
00:56:58,700 --> 00:57:01,960
DAO actually shut down.

1189
00:57:01,960 --> 00:57:05,640
It didn't take off.

1190
00:57:05,640 --> 00:57:07,940
And a year later,
the SEC did not

1191
00:57:07,940 --> 00:57:09,590
bring an enforcement action.

1192
00:57:09,590 --> 00:57:12,960
They chose not to
penalize anybody.

1193
00:57:12,960 --> 00:57:16,850
But they laid out in pretty
good detail as to why

1194
00:57:16,850 --> 00:57:19,700
these things were securities.

1195
00:57:19,700 --> 00:57:21,428
I don't think they
had planned for what

1196
00:57:21,428 --> 00:57:22,470
was going to happen next.

1197
00:57:22,470 --> 00:57:26,690
But the ICO, boom, took off, I
don't think because of the DAO

1198
00:57:26,690 --> 00:57:27,710
report.

1199
00:57:27,710 --> 00:57:29,540
But it's an
interesting coincidence

1200
00:57:29,540 --> 00:57:31,818
whether this kind of
gave a bunch of lawyers

1201
00:57:31,818 --> 00:57:33,360
and entrepreneurs
a sense, all right,

1202
00:57:33,360 --> 00:57:36,980
if I avoid doing what
they did specifically--

1203
00:57:36,980 --> 00:57:42,170
and the DAO, they actually
paid part of the revenues

1204
00:57:42,170 --> 00:57:47,310
to the token holders, and they
gave a sense of voting rights.

1205
00:57:47,310 --> 00:57:50,120
So it was so security-looking
because there

1206
00:57:50,120 --> 00:57:53,330
were a form of
participation in governance

1207
00:57:53,330 --> 00:57:56,030
and a form of
participation in profits

1208
00:57:56,030 --> 00:57:57,760
that everything took off.

1209
00:57:57,760 --> 00:58:00,030
Then then the SEC
did two other things.

1210
00:58:00,030 --> 00:58:07,580
One was-- the REcoin complaint
was a real fraudulent player,

1211
00:58:07,580 --> 00:58:11,360
and the Munchee order
in December last year.

1212
00:58:11,360 --> 00:58:13,460
I read that in
January or February.

1213
00:58:13,460 --> 00:58:15,440
And I thought, well,
that's pretty clear.

1214
00:58:15,440 --> 00:58:17,630
And Jay Clayton,
who runs the SEC,

1215
00:58:17,630 --> 00:58:19,880
has said in congressional
testimony in February

1216
00:58:19,880 --> 00:58:23,660
that he hadn't met an ICO that
he didn't think was a security.

1217
00:58:23,660 --> 00:58:25,400
His words were a
little different.

1218
00:58:25,400 --> 00:58:29,320
But I thought between
the Munchee order

1219
00:58:29,320 --> 00:58:31,760
and Chairman Clayton's
statement in February,

1220
00:58:31,760 --> 00:58:35,390
he had really said it.

1221
00:58:35,390 --> 00:58:38,980
But it wasn't quite enough.

1222
00:58:38,980 --> 00:58:41,450
And the Munchee order, again,
they didn't assess penalties.

1223
00:58:41,450 --> 00:58:42,980
But it was an offering--

1224
00:58:42,980 --> 00:58:46,040
I can't remember the
size-- $20 to $30 million.

1225
00:58:46,040 --> 00:58:49,010
They knocked on Munchee's--

1226
00:58:49,010 --> 00:58:51,810
Munchee, by the way, does
anybody know what the coin did?

1227
00:58:51,810 --> 00:58:54,350
It was for restaurant reviews--

1228
00:58:54,350 --> 00:58:55,910
munchie, food.

1229
00:58:55,910 --> 00:58:56,660
Yeah.

1230
00:58:56,660 --> 00:59:00,110
But they knocked on the
Munchee folks' door right

1231
00:59:00,110 --> 00:59:01,470
as they were doing the offering.

1232
00:59:01,470 --> 00:59:03,230
And they basically
shut down the offering.

1233
00:59:07,410 --> 00:59:09,920
But then they did
a whole bunch of--

1234
00:59:09,920 --> 00:59:12,320
there's five or six of
these, almost all of which

1235
00:59:12,320 --> 00:59:15,630
are really scammy,
fraudy-type things.

1236
00:59:15,630 --> 00:59:17,060
I mean, I can't
speak to each one.

1237
00:59:17,060 --> 00:59:19,760
But they'd have some celebrity
that was paid a lot of money

1238
00:59:19,760 --> 00:59:21,890
to go out to hawk the coins.

1239
00:59:21,890 --> 00:59:27,080
And there wasn't much
behind it, and so forth.

1240
00:59:27,080 --> 00:59:30,490
Asset freezes, filing
complaints in courts,

1241
00:59:30,490 --> 00:59:34,460
emergency court orders,
one settlement--

1242
00:59:34,460 --> 00:59:36,530
it takes a long time
to build a case.

1243
00:59:36,530 --> 00:59:40,250
Having been the chairman of
a smaller regulatory agency,

1244
00:59:40,250 --> 00:59:43,790
I can tell you it just takes
a long time to build cases.

1245
00:59:43,790 --> 00:59:46,610
It's not, like, three months.

1246
00:59:46,610 --> 00:59:47,780
Sometimes it's a year.

1247
00:59:47,780 --> 00:59:49,430
Sometimes it's even three years.

1248
00:59:52,260 --> 00:59:56,370
But the last two, Airfox
and Paragon orders,

1249
00:59:56,370 --> 01:00:01,080
were two offerings that were
done 12 to 15 months ago,

1250
01:00:01,080 --> 01:00:03,180
so a long time to
bring it together.

1251
01:00:03,180 --> 01:00:04,920
But they were settlements.

1252
01:00:04,920 --> 01:00:07,470
And Paragon and Airfox,
which each raised,

1253
01:00:07,470 --> 01:00:10,920
I don't know, $12 or $18 million
each or $15 or $18 million

1254
01:00:10,920 --> 01:00:14,940
each, appeared on the surface
to be more good-faith actors.

1255
01:00:14,940 --> 01:00:17,850
I can't speak-- I
don't know for sure,

1256
01:00:17,850 --> 01:00:21,172
but the first time the
SEC has gotten penalties,

1257
01:00:21,172 --> 01:00:22,755
the first time they've
gotten somebody

1258
01:00:22,755 --> 01:00:26,430
to say yes, if somebody wants
their money back a year later,

1259
01:00:26,430 --> 01:00:27,840
we'll do that.

1260
01:00:27,840 --> 01:00:29,640
And yes, we'll come
into compliance,

1261
01:00:29,640 --> 01:00:33,447
and we'll do offering documents.

1262
01:00:33,447 --> 01:00:35,280
So now I'm going to
talk a little bit about,

1263
01:00:35,280 --> 01:00:37,350
what can you do?

1264
01:00:37,350 --> 01:00:41,572
And I think Zhenyu asked this
question, what can you do?

1265
01:00:41,572 --> 01:00:43,530
And I'm going to do it
in two different charts.

1266
01:00:43,530 --> 01:00:47,070
But the first one is called
restricted offerings.

1267
01:00:47,070 --> 01:00:49,060
And this is not a
securities law class.

1268
01:00:49,060 --> 01:00:52,670
This is just to give you a sense
of what are the potentials.

1269
01:00:52,670 --> 01:00:58,440
A restricted offering,
which came out 30-plus years

1270
01:00:58,440 --> 01:01:01,880
ago at first, was
the concept of,

1271
01:01:01,880 --> 01:01:04,830
I'm not doing a public
offering, I'm only

1272
01:01:04,830 --> 01:01:08,268
selling these securities
in a private placement.

1273
01:01:08,268 --> 01:01:09,810
In my day, when I
was on Wall Street,

1274
01:01:09,810 --> 01:01:12,210
we called these
private placements.

1275
01:01:12,210 --> 01:01:16,020
But a restricted offering-- and
there's three different ones.

1276
01:01:16,020 --> 01:01:21,180
The most likely
one is the 506(c)

1277
01:01:21,180 --> 01:01:26,700
which came out of a recent law
passed in 2012 called the JOBS

1278
01:01:26,700 --> 01:01:28,605
Act in Congress.

1279
01:01:28,605 --> 01:01:31,350
Don't you love how we
name our laws in the US?

1280
01:01:31,350 --> 01:01:32,460
The JOBS Act.

1281
01:01:35,790 --> 01:01:37,420
Accredited investors only.

1282
01:01:37,420 --> 01:01:39,930
And an accredited investor--
and every jurisdiction

1283
01:01:39,930 --> 01:01:42,990
is different--
the concept is you

1284
01:01:42,990 --> 01:01:46,410
have a little bit of net
worth, or a lot of net worth,

1285
01:01:46,410 --> 01:01:48,870
depending upon your
view about money,

1286
01:01:48,870 --> 01:01:52,470
but you have enough net
worth that you supposedly

1287
01:01:52,470 --> 01:01:56,430
are sophisticated or
accredited or you can have less

1288
01:01:56,430 --> 01:01:59,130
protection under
this securities law,

1289
01:01:59,130 --> 01:02:03,450
unless you need
less information.

1290
01:02:03,450 --> 01:02:09,780
So 506(c) says,
"accredited investors."

1291
01:02:09,780 --> 01:02:12,780
If that's all it is, it's
a restricted security,

1292
01:02:12,780 --> 01:02:16,740
"restricted" meaning you cannot
sell it publicly for either six

1293
01:02:16,740 --> 01:02:19,720
months or 12 months depending
upon how you structure these

1294
01:02:19,720 --> 01:02:20,220
things.

1295
01:02:22,940 --> 01:02:26,420
And the big thing about all
of the restricted offerings

1296
01:02:26,420 --> 01:02:29,450
is you don't have to do one
of those detailed information

1297
01:02:29,450 --> 01:02:31,580
statements.

1298
01:02:31,580 --> 01:02:34,200
So the SEC says, all right,
if you keep it restricted,

1299
01:02:34,200 --> 01:02:36,080
it's only accredited investors.

1300
01:02:36,080 --> 01:02:38,810
Or the 506(b)--
accredited investors,

1301
01:02:38,810 --> 01:02:42,260
but 35 people can be
sophisticated rather than

1302
01:02:42,260 --> 01:02:43,130
accredited.

1303
01:02:43,130 --> 01:02:45,200
Please don't challenge
me on the definitions

1304
01:02:45,200 --> 01:02:47,480
of what's sophisticated
and not accredited.

1305
01:02:47,480 --> 01:02:50,420
It's basically, you
can show sophistication

1306
01:02:50,420 --> 01:02:51,710
even if you don't have money.

1307
01:02:51,710 --> 01:02:54,980
Accredited is about how
much money you have.

1308
01:02:54,980 --> 01:03:01,800
Sophisticated is knowledge but
not money, roughly speaking.

1309
01:03:01,800 --> 01:03:04,410
And then there's a small
thing for small offerings.

1310
01:03:04,410 --> 01:03:06,150
Regulation D is
what most of them--

1311
01:03:06,150 --> 01:03:11,070
Telegram did a Regulation D.
[INAUDIBLE],, to let you know,

1312
01:03:11,070 --> 01:03:14,370
I think Filecoin did
a Reg D offering.

1313
01:03:14,370 --> 01:03:19,500
Generally speaking, it's, quote,
"accredited investors," meaning

1314
01:03:19,500 --> 01:03:20,580
they have enough money.

1315
01:03:20,580 --> 01:03:22,080
They have over,
I can't remember,

1316
01:03:22,080 --> 01:03:26,500
a million bucks or
whatever that number is.

1317
01:03:26,500 --> 01:03:30,300
Regulation A is
offering statement.

1318
01:03:30,300 --> 01:03:31,890
So you have to give a statement.

1319
01:03:31,890 --> 01:03:35,530
You have to give something
with the financials.

1320
01:03:35,530 --> 01:03:39,490
Not many ICOs want to
do a Reg A offering.

1321
01:03:39,490 --> 01:03:41,950
But if you were doing a startup,
if you're thinking about,

1322
01:03:41,950 --> 01:03:44,980
like, you're in one of
the wonderful venture

1323
01:03:44,980 --> 01:03:48,220
classes, fintech ventures
or other venture classes,

1324
01:03:48,220 --> 01:03:52,840
you might consider doing a Reg
A offering rather than a Reg D.

1325
01:03:52,840 --> 01:03:55,960
The benefit of Reg
A, Regulation A,

1326
01:03:55,960 --> 01:03:58,160
is you can go to any investors.

1327
01:03:58,160 --> 01:04:01,030
You don't have to only limit
to accredited investors.

1328
01:04:01,030 --> 01:04:05,090
So Regulation D, only
accredited investors, generally,

1329
01:04:05,090 --> 01:04:07,980
with a little footnote about
sophisticated investors.

1330
01:04:07,980 --> 01:04:12,760
Regulation A, you've got to
give them more information.

1331
01:04:12,760 --> 01:04:15,790
You have to address some of
that information asymmetry.

1332
01:04:15,790 --> 01:04:20,050
There's two tiers-- $20
million and $50 million.

1333
01:04:20,050 --> 01:04:23,440
The $50 million offering,
you have ongoing reporting

1334
01:04:23,440 --> 01:04:24,250
obligations.

1335
01:04:24,250 --> 01:04:27,100
The $20 million, you
just have to get yourself

1336
01:04:27,100 --> 01:04:30,120
around doing something
at the beginning.

1337
01:04:30,120 --> 01:04:33,600
But how do you do financials
for an ICO when there's--

1338
01:04:33,600 --> 01:04:36,760
oh, I guess you just say you
have no revenues, no income,

1339
01:04:36,760 --> 01:04:38,550
et cetera.

1340
01:04:38,550 --> 01:04:42,050
There's something very
new called Regulation CF,

1341
01:04:42,050 --> 01:04:43,920
or crowdfunding.

1342
01:04:43,920 --> 01:04:47,580
Unless you're raising less
than a million dollars,

1343
01:04:47,580 --> 01:04:49,950
you wouldn't put
it on your list.

1344
01:04:49,950 --> 01:04:52,020
So almost no initial
coin offerings

1345
01:04:52,020 --> 01:04:53,880
are looking at Reg CF.

1346
01:04:53,880 --> 01:04:56,640
They're basically
looking mostly at what

1347
01:04:56,640 --> 01:05:01,050
we used to call private
placements or restricted

1348
01:05:01,050 --> 01:05:04,110
offerings, Regulation D.
That's where most of them are.

1349
01:05:06,830 --> 01:05:08,930
And you have to use
good-faith efforts

1350
01:05:08,930 --> 01:05:12,170
to make sure that every
one of your investors

1351
01:05:12,170 --> 01:05:16,120
is, in fact, an
accredited investor.

1352
01:05:16,120 --> 01:05:17,080
And that's where it is.

1353
01:05:17,080 --> 01:05:17,650
Questions.

1354
01:05:17,650 --> 01:05:20,266
AUDIENCE: Do all of
these regulations, D, A,

1355
01:05:20,266 --> 01:05:24,370
and CF, entail KYC and AML?

1356
01:05:24,370 --> 01:05:25,840
GARY GENSLER: Yeah,
so the question

1357
01:05:25,840 --> 01:05:31,010
is, do you have to know
your customer and any money

1358
01:05:31,010 --> 01:05:31,510
laundering?

1359
01:05:31,510 --> 01:05:35,320
And the answer is yes because
over the last couple of decades

1360
01:05:35,320 --> 01:05:39,190
what's happened is finance
ministries around the globe,

1361
01:05:39,190 --> 01:05:41,140
and this is not
just here in the US,

1362
01:05:41,140 --> 01:05:43,510
have kind of layered
on top of securities

1363
01:05:43,510 --> 01:05:45,610
laws, hey, we need
your help here

1364
01:05:45,610 --> 01:05:48,850
because there's this public
policy goal of making sure

1365
01:05:48,850 --> 01:05:51,730
that you can't money launder.

1366
01:05:51,730 --> 01:05:56,360
So yes, but in varying degrees.

1367
01:05:56,360 --> 01:05:58,835
So in the Regulation
D requirements,

1368
01:05:58,835 --> 01:06:00,460
you have to make the
good-faith efforts

1369
01:06:00,460 --> 01:06:03,550
when you do the initial sale.

1370
01:06:03,550 --> 01:06:05,270
And purportedly,
it's restricted.

1371
01:06:05,270 --> 01:06:08,210
And it's not supposed to be
resold for either six or 12

1372
01:06:08,210 --> 01:06:09,680
months.

1373
01:06:09,680 --> 01:06:11,960
But on the resale,
the issuer doesn't

1374
01:06:11,960 --> 01:06:17,280
have the same obligations,
where some of the others, you

1375
01:06:17,280 --> 01:06:20,940
would have more continuing
obligations on the resale.

1376
01:06:20,940 --> 01:06:23,340
So I think that some
have tried to get around

1377
01:06:23,340 --> 01:06:25,830
this in doing a Reg D
offering and then said,

1378
01:06:25,830 --> 01:06:30,180
can I get some crypto
exchange to list this ICO?

1379
01:06:30,180 --> 01:06:33,060
And I'm going to
turn a blind eye--

1380
01:06:33,060 --> 01:06:35,670
I think it's bad legal
advice they're taking--

1381
01:06:35,670 --> 01:06:39,210
but turn a blind eye as to
where it gets sold on that.

1382
01:06:39,210 --> 01:06:40,340
I wouldn't recommend it.

1383
01:06:40,340 --> 01:06:45,030
But I think some are doing
that on the resale and not,

1384
01:06:45,030 --> 01:06:49,170
maybe, doing KYC or
AML on the resale.

1385
01:06:49,170 --> 01:06:52,600
At least that's
what some tell me.

1386
01:06:52,600 --> 01:06:53,180
Please.

1387
01:06:53,180 --> 01:06:55,480
AUDIENCE: I've heard
some crypto folks argue

1388
01:06:55,480 --> 01:06:57,920
that the definition of
the accredited investor

1389
01:06:57,920 --> 01:07:00,730
is not particularly
relevant in this ICO space.

1390
01:07:00,730 --> 01:07:03,220
And actually, having
investable assets

1391
01:07:03,220 --> 01:07:05,955
doesn't make you well-placed
to understand whether an ICO is

1392
01:07:05,955 --> 01:07:06,580
a good product.

1393
01:07:06,580 --> 01:07:08,260
And actually, having
technical skills

1394
01:07:08,260 --> 01:07:09,970
and being able to
read a white paper

1395
01:07:09,970 --> 01:07:13,390
is a more relevant qualification
to allow you to invest

1396
01:07:13,390 --> 01:07:15,820
and that by having these
regulations, in a way

1397
01:07:15,820 --> 01:07:17,170
you're restricting access.

1398
01:07:17,170 --> 01:07:19,518
And that promotes inequality,
that only rich people

1399
01:07:19,518 --> 01:07:21,310
are getting these
investment opportunities.

1400
01:07:21,310 --> 01:07:23,268
So I've heard crypto
people make this argument.

1401
01:07:23,268 --> 01:07:25,630
So I guess, what would
your response to that be?

1402
01:07:25,630 --> 01:07:29,080
GARY GENSLER: And I will hear
your classmate's response.

1403
01:07:29,080 --> 01:07:31,690
AUDIENCE: Yeah, I would
say that rich people don't

1404
01:07:31,690 --> 01:07:34,180
know how to handle money,
necessarily, anyway.

1405
01:07:34,180 --> 01:07:36,370
So there isn't a
direct correlation

1406
01:07:36,370 --> 01:07:38,630
between having wealth and
knowing how to use it.

1407
01:07:38,630 --> 01:07:41,850
The law exists the way it does
because of diversification

1408
01:07:41,850 --> 01:07:44,740
and because of asset allocation
theory and the idea that people

1409
01:07:44,740 --> 01:07:46,180
don't understand that.

1410
01:07:46,180 --> 01:07:48,600
And I think that even if
you have technical expertise

1411
01:07:48,600 --> 01:07:51,760
in crypto, you may not
understand asset allocation

1412
01:07:51,760 --> 01:07:54,940
theory and be able to
balance what you need when.

1413
01:07:54,940 --> 01:07:57,250
And basically, the
law is set up such

1414
01:07:57,250 --> 01:07:58,910
that you can lose all of that.

1415
01:07:58,910 --> 01:08:02,080
And even if you're very
savvy, you can be very savvy

1416
01:08:02,080 --> 01:08:05,160
and still be wrong, and
you've lost more than you own.

1417
01:08:05,160 --> 01:08:06,710
And that wouldn't be OK.

1418
01:08:06,710 --> 01:08:10,440
So I think from the government's
perspective, it is what it is.

1419
01:08:10,440 --> 01:08:12,070
AUDIENCE: I would
just respond to say

1420
01:08:12,070 --> 01:08:14,028
that I don't know if it's
the government's role

1421
01:08:14,028 --> 01:08:15,180
to police that.

1422
01:08:15,180 --> 01:08:16,970
GARY GENSLER: Sorry,
can you speak up?

1423
01:08:16,970 --> 01:08:20,710
AUDIENCE: I think both
of the points are right.

1424
01:08:20,710 --> 01:08:23,319
It's my opinion that it's
not the government's role

1425
01:08:23,319 --> 01:08:26,350
to decide that you don't get
to invest in something that you

1426
01:08:26,350 --> 01:08:31,060
believe in or worked on
because you may not understand

1427
01:08:31,060 --> 01:08:33,279
portfolio theory,
just because you

1428
01:08:33,279 --> 01:08:36,359
don't have a two-year
track record of making

1429
01:08:36,359 --> 01:08:37,939
$200,000 a year.

1430
01:08:37,939 --> 01:08:41,560
GARY GENSLER: No, it's
a very good question.

1431
01:08:41,560 --> 01:08:44,649
And there's this public
policy debate as to,

1432
01:08:44,649 --> 01:08:49,540
if you have a belief that
investor protection helps

1433
01:08:49,540 --> 01:08:55,000
promote markets and investor
protection is about addressing

1434
01:08:55,000 --> 01:08:59,270
some information asymmetries
and protecting against fraud

1435
01:08:59,270 --> 01:09:04,290
and bad actors, do you tier it?

1436
01:09:04,290 --> 01:09:10,170
Now, in the US, we've decided
on some multiple-decade--

1437
01:09:10,170 --> 01:09:12,600
Republicans and Democrats
alike, somehow we've

1438
01:09:12,600 --> 01:09:16,319
come to a tiered system,
meaning that there's

1439
01:09:16,319 --> 01:09:20,550
more investor protection,
more rules and regulations,

1440
01:09:20,550 --> 01:09:27,880
for what's usually called the
retail public than some tiering

1441
01:09:27,880 --> 01:09:30,649
of usually higher net
worth individuals,

1442
01:09:30,649 --> 01:09:33,250
this term "accredited investor."

1443
01:09:33,250 --> 01:09:35,620
And that tiering, you could
come to a point of view

1444
01:09:35,620 --> 01:09:39,069
that we shouldn't have any
tiering, that everybody should

1445
01:09:39,069 --> 01:09:42,399
have the same protections, and
it should be, maybe, somewhere

1446
01:09:42,399 --> 01:09:44,140
in the middle of the two.

1447
01:09:44,140 --> 01:09:46,359
Or you might be
more pro-protection

1448
01:09:46,359 --> 01:09:49,180
or less pro-protection.

1449
01:09:49,180 --> 01:09:51,340
But we have come to
a place in the US

1450
01:09:51,340 --> 01:09:54,370
over multiple decades
of this tiering, where

1451
01:09:54,370 --> 01:09:57,805
the, quote, "accredited
investors" get a little less.

1452
01:10:00,490 --> 01:10:05,960
They're allowed to risk their
capital with less information.

1453
01:10:05,960 --> 01:10:09,680
That's, in essence, what
happens in the system.

1454
01:10:09,680 --> 01:10:13,580
And Congress even pressed
harder because the Regulation

1455
01:10:13,580 --> 01:10:17,750
D, restricted
offerings, the 506(c)

1456
01:10:17,750 --> 01:10:25,430
was added in this thing
called the JOBS Act in 2012.

1457
01:10:25,430 --> 01:10:28,760
Some of the politics behind
it was a venture capital space

1458
01:10:28,760 --> 01:10:32,300
and a lot of entrepreneurial
space were saying,

1459
01:10:32,300 --> 01:10:39,720
we'd like a less-regulated,
restricted offering exemption.

1460
01:10:39,720 --> 01:10:42,270
Remember, these are all called
exempt security offerings.

1461
01:10:42,270 --> 01:10:46,380
They're exempt from
the traditional roles.

1462
01:10:46,380 --> 01:10:50,640
And there was a coalition
that came together in Congress

1463
01:10:50,640 --> 01:10:53,460
with the support
of President Obama,

1464
01:10:53,460 --> 01:10:56,330
actually not with the support
of the head of his Securities

1465
01:10:56,330 --> 01:10:57,330
and Exchange Commission.

1466
01:10:57,330 --> 01:11:00,640
Mary Shapiro at the time was
not in favor of some of this.

1467
01:11:00,640 --> 01:11:05,760
So it was an interesting
event in 2012.

1468
01:11:05,760 --> 01:11:08,100
But I think 506(c),
if I remember,

1469
01:11:08,100 --> 01:11:11,422
was either expanded or
was added, to say, well,

1470
01:11:11,422 --> 01:11:12,880
if it's accredited
investors, there

1471
01:11:12,880 --> 01:11:16,110
will be no limitation
on general solicitation.

1472
01:11:16,110 --> 01:11:18,570
If you see, 506(b),
traditionally, there

1473
01:11:18,570 --> 01:11:21,420
was a limitation on
general solicitation.

1474
01:11:21,420 --> 01:11:24,000
And the thought was, in
2012, now with the internet,

1475
01:11:24,000 --> 01:11:25,530
we should be able to--

1476
01:11:25,530 --> 01:11:29,460
and crowdsourcing had started.

1477
01:11:29,460 --> 01:11:32,730
And Kickstarter and
GoFundMe had started.

1478
01:11:32,730 --> 01:11:37,290
So maybe we can have, quote,
"general solicitation" if it's

1479
01:11:37,290 --> 01:11:38,820
only accredited investors.

1480
01:11:38,820 --> 01:11:43,505
So it was a bit of a legislative
and policy compromise.

1481
01:11:43,505 --> 01:11:44,880
But you could take
the other side

1482
01:11:44,880 --> 01:11:50,380
and say everybody should have
the same, one way or the other.

1483
01:11:50,380 --> 01:11:53,367
But whether you're
thinking about blockchain

1484
01:11:53,367 --> 01:11:55,950
or you're thinking about all the
other wonderful things you're

1485
01:11:55,950 --> 01:12:00,120
thinking about as startups,
these are your three main ways.

1486
01:12:00,120 --> 01:12:03,330
And really, probably,
Regulation D and Regulation A

1487
01:12:03,330 --> 01:12:05,787
more than the small million.

1488
01:12:05,787 --> 01:12:07,620
I have high hopes for
all of you that you'll

1489
01:12:07,620 --> 01:12:10,905
be raising more than a million
dollars in your startups.

1490
01:12:13,470 --> 01:12:14,850
This is a much more detailed--

1491
01:12:14,850 --> 01:12:15,820
I'm not going to go through it.

1492
01:12:15,820 --> 01:12:17,112
But it's going to be in Canvas.

1493
01:12:17,112 --> 01:12:19,500
I decided to throw it in the
slide deck so you have it.

1494
01:12:19,500 --> 01:12:23,130
But this really is a
much more detailed review

1495
01:12:23,130 --> 01:12:25,800
of the CrowdCheck put together.

1496
01:12:25,800 --> 01:12:28,050
And I thought it was a
good review of all these.

1497
01:12:28,050 --> 01:12:30,390
So what do I think
the path forward is?

1498
01:12:30,390 --> 01:12:33,570
And then we'll wrap.

1499
01:12:33,570 --> 01:12:35,250
So I think we're
going to continue

1500
01:12:35,250 --> 01:12:36,990
to see high failure rates.

1501
01:12:40,750 --> 01:12:45,100
Something like 3,000 ICOs have
raised some bits of money.

1502
01:12:45,100 --> 01:12:47,530
I mean, some of them
only raised $200,000.

1503
01:12:47,530 --> 01:12:51,370
But you can only
find about 700 or 800

1504
01:12:51,370 --> 01:12:53,470
of them listed on
various websites,

1505
01:12:53,470 --> 01:12:56,200
if you want to see
where they're traded.

1506
01:12:56,200 --> 01:13:01,270
But there's probably more than
700 that are still around.

1507
01:13:01,270 --> 01:13:02,860
But I think you're
going to continue

1508
01:13:02,860 --> 01:13:08,980
to see high failure rates like
the Ernst & Young study showed.

1509
01:13:08,980 --> 01:13:12,310
I think it's going to lead to
a further decline in funding

1510
01:13:12,310 --> 01:13:13,210
totals.

1511
01:13:13,210 --> 01:13:16,810
We've already seen
that we were running

1512
01:13:16,810 --> 01:13:21,110
$1 and 1/2 to $3 billion
a month earlier this year.

1513
01:13:21,110 --> 01:13:23,920
And now we're less than a
billion dollars a month.

1514
01:13:23,920 --> 01:13:26,650
But I think high failure
rates will probably

1515
01:13:26,650 --> 01:13:31,600
lead to lower funding totals.

1516
01:13:31,600 --> 01:13:33,370
It's just Gensler's view.

1517
01:13:33,370 --> 01:13:37,240
Predicting markets is always
a treacherous thing to do.

1518
01:13:40,242 --> 01:13:42,700
I think that there'll be an
increased number of enforcement

1519
01:13:42,700 --> 01:13:44,380
cases and private litigation.

1520
01:13:44,380 --> 01:13:47,200
We've seen only 11 or
12 actually at the SEC.

1521
01:13:47,200 --> 01:13:49,590
These cases are hard
to put together.

1522
01:13:49,590 --> 01:13:50,980
They take a long time.

1523
01:13:50,980 --> 01:13:52,690
A lot of evidence
and a lot of paper

1524
01:13:52,690 --> 01:13:55,620
trails to put
together and so forth.

1525
01:13:55,620 --> 01:13:59,513
And even a civil law enforcement
agency like the SEC--

1526
01:13:59,513 --> 01:14:01,180
I don't know their
headcount right now--

1527
01:14:01,180 --> 01:14:03,460
the whole agency might
be about 4,000 people.

1528
01:14:03,460 --> 01:14:06,310
Their enforcement arm
might be 1,000 people.

1529
01:14:06,310 --> 01:14:08,830
They can't dedicate--
you know, what are they

1530
01:14:08,830 --> 01:14:09,890
dedicating to this?

1531
01:14:09,890 --> 01:14:10,890
I don't know the number.

1532
01:14:10,890 --> 01:14:12,440
It's not a public figure.

1533
01:14:12,440 --> 01:14:15,820
But could it be 50
or 100 people at most

1534
01:14:15,820 --> 01:14:19,960
to this whole world, which
probably has hundreds of frauds

1535
01:14:19,960 --> 01:14:26,420
and scams and a couple thousand
of unregistered, basically

1536
01:14:26,420 --> 01:14:30,230
illegal, offerings?

1537
01:14:30,230 --> 01:14:34,520
But I do think the enforcement
actions will pick up,

1538
01:14:34,520 --> 01:14:37,760
and also private
litigation, which is also

1539
01:14:37,760 --> 01:14:39,560
what you have in the XRP case.

1540
01:14:39,560 --> 01:14:42,770
But you have it in
other cases, as well.

1541
01:14:42,770 --> 01:14:45,380
I think regulators and courts
will bring greater clarity

1542
01:14:45,380 --> 01:14:46,670
to the security definition.

1543
01:14:46,670 --> 01:14:49,370
At some point in time, things
like XRP will decide it.

1544
01:14:49,370 --> 01:14:51,340
It might be decided
it's not a security.

1545
01:14:51,340 --> 01:14:53,420
You know?

1546
01:14:53,420 --> 01:14:55,220
But I think that's
going to roll out

1547
01:14:55,220 --> 01:14:57,440
over the next 18 to 36 months.

1548
01:14:57,440 --> 01:15:00,740
It's not like the next
three weeks or six weeks.

1549
01:15:00,740 --> 01:15:04,430
But I think that even the
Securities and Exchange

1550
01:15:04,430 --> 01:15:09,590
Commission will speak more
definitively than Bill Hinman's

1551
01:15:09,590 --> 01:15:13,040
speech he gave in, was it June?

1552
01:15:13,040 --> 01:15:14,120
Yeah, June.

1553
01:15:14,120 --> 01:15:15,740
That was one of the
readings, right--

1554
01:15:15,740 --> 01:15:17,550
Director Hinman's.

1555
01:15:17,550 --> 01:15:20,960
I like that he used my name
in his speech, the title.

1556
01:15:20,960 --> 01:15:24,620
He was talking about
Gary, Indiana, though.

1557
01:15:24,620 --> 01:15:28,800
But I do think, just like
what happened with Airfox

1558
01:15:28,800 --> 01:15:32,390
and Paragon, more ICOs will
be brought into compliance

1559
01:15:32,390 --> 01:15:36,230
either by registering in
the US under Reg D, or maybe

1560
01:15:36,230 --> 01:15:39,410
Regulation A. Or they'll just
come into compliance even

1561
01:15:39,410 --> 01:15:43,160
if they didn't earlier
come into compliance.

1562
01:15:43,160 --> 01:15:47,690
I think that the
early tokens will

1563
01:15:47,690 --> 01:15:51,260
be tested as some platforms
become functional.

1564
01:15:51,260 --> 01:15:53,670
Most will fail.

1565
01:15:53,670 --> 01:15:55,920
Most we'll never hear from.

1566
01:15:55,920 --> 01:15:58,080
But what happens when
Filecoin actually-- they

1567
01:15:58,080 --> 01:15:59,715
raised a quarter of
a billion dollars.

1568
01:16:02,751 --> 01:16:06,060
Let's at least for now presume
they will become functional

1569
01:16:06,060 --> 01:16:09,410
sometime in 2019, or Telegraph.

1570
01:16:09,410 --> 01:16:11,010
That will be
interesting to see what

1571
01:16:11,010 --> 01:16:15,140
the test of these
large-cap ICOs are.

1572
01:16:15,140 --> 01:16:16,500
We'll learn from that.

1573
01:16:16,500 --> 01:16:21,100
I also think markets will
better differentiate viability.

1574
01:16:21,100 --> 01:16:22,750
They'll go through,
when do you need

1575
01:16:22,750 --> 01:16:28,380
an append-only log, consensus
among multiple parties,

1576
01:16:28,380 --> 01:16:33,810
and a native token on
a distributed ledger?

1577
01:16:33,810 --> 01:16:36,240
That wasn't happening,
probably, enough

1578
01:16:36,240 --> 01:16:39,470
in late 2017 and early 2018.

1579
01:16:39,470 --> 01:16:41,970
I don't think they had to take
this class, even though we'll

1580
01:16:41,970 --> 01:16:45,070
put it out live, and people
will be able to see it.

1581
01:16:45,070 --> 01:16:48,090
But I think markets will start
to differentiate viability

1582
01:16:48,090 --> 01:16:51,210
by CO use cases a little better
than they have the last 12

1583
01:16:51,210 --> 01:16:53,620
months.

1584
01:16:53,620 --> 01:16:56,130
So any questions?

1585
01:16:56,130 --> 01:16:56,630
Eric?

1586
01:16:56,630 --> 01:16:57,940
AUDIENCE: Yeah.

1587
01:16:57,940 --> 01:17:00,990
There's a bunch of startups
we've been checking out.

1588
01:17:00,990 --> 01:17:03,390
They're going through
a new approach.

1589
01:17:03,390 --> 01:17:06,210
There is actually a lot
of venture capital firms

1590
01:17:06,210 --> 01:17:10,740
that are doing a
financing stage pre-ICO

1591
01:17:10,740 --> 01:17:14,060
to help these startups
build the actual network.

1592
01:17:14,060 --> 01:17:18,420
And in that case, when
they go to post-ICO,

1593
01:17:18,420 --> 01:17:22,740
you could argue that that helps,
building the network before

1594
01:17:22,740 --> 01:17:27,060
the ICOs can actually make
them fail the Howey Test,

1595
01:17:27,060 --> 01:17:29,010
because there's no--

1596
01:17:29,010 --> 01:17:33,030
in a sense, you have a network,
a decentralized arrangement,

1597
01:17:33,030 --> 01:17:35,830
that you don't have
the single enterprise--

1598
01:17:35,830 --> 01:17:38,970
GARY GENSLER: So I think, Eric,
you're raising two questions.

1599
01:17:38,970 --> 01:17:42,540
Are there ways to
stage your financing

1600
01:17:42,540 --> 01:17:48,600
to help build a network, just
as a pure money and finance?

1601
01:17:48,600 --> 01:17:51,480
And secondly, what is the
regulatory implication,

1602
01:17:51,480 --> 01:17:54,630
because I think it's two-part.

1603
01:17:54,630 --> 01:17:57,570
I think, like in
any form of venture,

1604
01:17:57,570 --> 01:18:00,790
you might stage your
financing and, in this case,

1605
01:18:00,790 --> 01:18:04,770
sort of address the
network possibility

1606
01:18:04,770 --> 01:18:07,320
before you do the regulatory.

1607
01:18:07,320 --> 01:18:08,950
And it may be enough.

1608
01:18:08,950 --> 01:18:11,340
I mean, the US Securities
and Exchange Commission

1609
01:18:11,340 --> 01:18:15,600
and Hinman's speech sort of
said you could be sufficiently

1610
01:18:15,600 --> 01:18:19,056
decentralized as Ethereum.

1611
01:18:19,056 --> 01:18:22,800
They, in essence, had some
regulatory forbearance.

1612
01:18:22,800 --> 01:18:26,250
And there's a key sentence
in that speech as to,

1613
01:18:26,250 --> 01:18:29,110
I think the words were,
regardless of what Ethereum

1614
01:18:29,110 --> 01:18:31,460
might have been in 2014--

1615
01:18:31,460 --> 01:18:34,260
like, Hinman kind of pushed
that to the side and said,

1616
01:18:34,260 --> 01:18:38,670
I'm not going to address
that question implicitly.

1617
01:18:38,670 --> 01:18:40,890
But it's sufficiently
decentralized.

1618
01:18:40,890 --> 01:18:42,780
That's the debate
that's going on now

1619
01:18:42,780 --> 01:18:46,260
between a bunch of
venture firms and the SEC.

1620
01:18:46,260 --> 01:18:48,210
When are you sufficiently
decentralized?

1621
01:18:48,210 --> 01:18:55,720
And so that form that you
just mentioned might get us

1622
01:18:55,720 --> 01:18:56,900
there-- might.

1623
01:18:56,900 --> 01:18:58,308
I don't know.

1624
01:18:58,308 --> 01:18:59,600
Did you have one last question?

1625
01:18:59,600 --> 01:19:00,283
And then we're going to--

1626
01:19:00,283 --> 01:19:02,700
AUDIENCE: Maybe, just on the
second point about likelihood

1627
01:19:02,700 --> 01:19:05,667
of [INAUDIBLE],, [? which I ?]
obviously agree,

1628
01:19:05,667 --> 01:19:06,750
is there any research on--

1629
01:19:06,750 --> 01:19:08,417
GARY GENSLER: This
is just a prediction.

1630
01:19:08,417 --> 01:19:09,745
AUDIENCE: Yeah.

1631
01:19:09,745 --> 01:19:11,620
I'll bet on it.

1632
01:19:11,620 --> 01:19:14,950
How much of the ICO
funding was crypto to fiat

1633
01:19:14,950 --> 01:19:20,385
to crypto, people selling
appreciated bitcoins--

1634
01:19:20,385 --> 01:19:21,820
GARY GENSLER: Terrific question.

1635
01:19:21,820 --> 01:19:29,530
Almost all ICOs are
priced crypto to crypto.

1636
01:19:29,530 --> 01:19:31,900
So if you look at
whether the initial ones,

1637
01:19:31,900 --> 01:19:34,510
all the way back when the
Ethereum was priced vis-á-vis

1638
01:19:34,510 --> 01:19:40,620
Bitcoin or, the most recent,
iOS that raised $4.2 billion,

1639
01:19:40,620 --> 01:19:43,180
their actual pricing mechanism--

1640
01:19:43,180 --> 01:19:48,820
I'm not familiar with any
that priced versus fiat.

1641
01:19:48,820 --> 01:19:53,940
Their pricing mechanism in
their auction or offering,

1642
01:19:53,940 --> 01:19:56,950
it's almost always
crypto to crypto.

1643
01:19:56,950 --> 01:19:59,938
But somebody might be
funding it fiat to crypto.

1644
01:19:59,938 --> 01:20:01,480
But I think, to
answer your question,

1645
01:20:01,480 --> 01:20:06,920
you should assume 99% the actual
exchange is crypto to crypto.

1646
01:20:06,920 --> 01:20:08,890
AUDIENCE: So I mean,
just the decline

1647
01:20:08,890 --> 01:20:13,460
in the price of Ethereum to
Bitcoin, Bitcoin to cash almost

1648
01:20:13,460 --> 01:20:13,960
has to--

1649
01:20:13,960 --> 01:20:16,270
GARY GENSLER: It has
to put pressure on it.

1650
01:20:16,270 --> 01:20:20,020
But I also think it is likely
that the decline in the ICO

1651
01:20:20,020 --> 01:20:24,360
market has put price pressure
downward on Ethereum, for sure.

1652
01:20:24,360 --> 01:20:29,470
And so Ethereum was the
second-most valued crypto.

1653
01:20:29,470 --> 01:20:31,900
And now it's third.

1654
01:20:31,900 --> 01:20:37,030
And it's had more price
decline than Bitcoin or XRP.

1655
01:20:37,030 --> 01:20:38,950
And I think part of
that's narrative.

1656
01:20:38,950 --> 01:20:42,940
Part of that story is
the decline in ICO space

1657
01:20:42,940 --> 01:20:46,260
is likely to put a
little decline on that.