Time now for our Wall Street week daily segment.
The question at the heart of the S.E.C. suits against Coinbase and finance is
which crypto assets are securities? Tim Massad, former CFTC chairman, spoke
earlier with Bloomberg's David Westin. But within lawsuits launched last week
are the best way to get to regulation. Take a listen.
They've finally brought cases alleging that crypto trading platforms have to
register as securities exchanges and that most of the tokens they're trading
should be classified as securities. Now, this is consistent with what Jeff
Gensler has been saying. But, you know, they've finally done it.
And in the case of finance, they've brought some additional allegations
essentially on manipulation, mishandling of customer funds.
And those really reflect the fact that these crypto trading platforms aren't
observing standards like we have in other markets on protecting customer
assets, on preventing fraud, on prohibiting conflicts of interest, for
example. And that's why, you know, we really do
need stronger investor protection standards at these exchanges, at these
trading platforms. The question is, you know, are these
lawsuits the best way to get us there before we get to whether it's the best
way to get there? How strong a way is it, period?
Even it was not the best way. I guess as a lawyer, I'm asking you, how
strong is Gary against his case, the fact these are securities under the
Securities Act as they exist now and I guess under what is called the Howey
Test? Yeah, I think it's very strong.
All they really need to prove is that at least one of these tokens is a security
now. And I think, you know, they've made
allegations about a couple dozen across the two cases are really allegations
about a couple dozen tokens, many of which are the largest trading tokens
after Bitcoin and a theorem. So I think the case is very strong.
You were, of course, chair of the Commodities Futures Trading Commission.
Is this you've got to be fish or fowl? I mean, can something be both a security
as well as a commodity or does it have to go one way?
David, it can be both. And that's something it's an excellent
question, David. That is something that people don't
understand. Let me give you a simple example of
that. The chairman of the Commodity Futures
Trading Commission has said tether is a commodity and he's right because there
are futures contracts traded on tether. Anytime you have a futures contract
traded on something, that something can be classified as a commodity.
But if Tether were to pay interest, it does it today.
But if the issuer of Tether said we're now gonna pay interest to holders, that
would make it a security. So it could be both.
Now, when it's both, then both agencies are involved in in regulating it.
So that is something people often don't understand about about this issue of
security versus commodity. Tim, let's come back to the issue you
raised. Is this the best way to handle this
situation? It's been an awful lot of talk up on
Capitol Hill about legislation to really address the question of regulation in
crypto currencies thus far. Nature abhors a vacuum.
Maybe Washington does as well. Would it be better if, in fact, Congress
stepped in that had the enforcement actions of Gary Gensler?
Well, I I've suggested that it would be great for Congress to direct the S.E.C.
and the CFTC to basically promulgate standards that would apply to the crypto
trading platforms today as they exist. That would improve investor protection
so we wouldn't require restructuring them immediately and we could do this
while we fight out these classification issues.
I'm not saying the S.E.C. is wrong.
I think these cases are very important. And they I think, as I said, they've got
a very strong case. But I do worry about the time it will
take to litigate these cases. Now, Congress
so far hasn't been able to agree on a path forward.
There have been different proposals. There was a recent one by some of the
House Republicans that I thought was very creative that
goes to this question of maybe we could classify these tokens initially as
securities and then over time they become commodities.
But it's very complicated. And I'm skeptical that Democrats will
support that, particularly as we move into an election year.
So, you know, I'd like to see Congress step in here.
In particular, Congress needs to designate one of these agencies as the
authority to regulate what we call the spot market in in things that aren't
securities like Bitcoin. We don't have any federal regulator
doing that today. But, you know, I am skeptical that will
happen in the near term. So, you know, we may be in a situation
where these cases get litigated out and we'll have to see how long that takes.
Tim, let me ask the ultimate question. Why do we need regulation?
What is the evil that we're trying to protect ourselves from?
Is it for consumer protection? As you just referred to, or is it
systemic risk? Well, I think it's both.
I think with the stable coins, it's potentially the kind of systemic risk or
at least prudential concerns as we have with banks, meaning with stable coins
because they are a payment mechanism. You could have a run like you have a run
on a bank. And that's why we need standards that
ensure that the reserves that stable coin issuers hold are properly invested
in very low risk assets and cash with the other types of crypto tokens that
aren't backed by anything. I think it's really investor protection
concerns. And the issue there is, look, people can
debate the merits of this technology, you know, and people can say, well, gee,
is this really useful at all? Shouldn't we just let it burn?
I don't think that's going to happen. And so my attitude has been, you've got
to put in place reasonable investor protection standards, insure integrity
in these markets. Transparency in these markets.
And then we'll see, you know, whether the market values these tokens.
I think the other thing that would do is it would take a lot of this kind of
speculative air out of the sails. It would reduce the sort of casino
quality that we've seen in this sector. If we had better investor protection,
you know, one of the big issues in these platforms is there can be watched
trading, meaning essentially people are trading with themselves or even the
exchanges trading to promote, you know, to push up the volume or price.
We've got to stop that. So we need better investor protection.
And then the market can decide, you know, what's the real use case?
What's the real value of these things?