What Happens if ETH Is Deemed a Security? | First Mover

What Happens if ETH Is Deemed a Security? | First Mover

I would never bet against the SEC in court I don’t think Robin Hood is likely to win in a full-on battle with the SEC there’s yet to be any crypto legislation passed in Congress and as we creep closer to the election here in the United States it becomes less and less likely that we’ll see any clear laws passed in regards to crypto this year all of this while the cop on the beat the SEC continues to regulate by enforcement yesterday we learned that Robin Hood received a Wells notice from the regulator and just a month ago decentralized exchange Unis swap received the same type of notice here to make sense of this all and tell us what’s going on is attorney at bansa law and former SEC branch chief Lisa bansa Lisa welcome to First mover good morning it’s great to be here it’s great to have you here there’s been a lot going on I’ve been so looking forward to this conversation because it’s kind of hard to make sense of what’s going on when we hear about these Wells notices so let’s start um at the beginning I believe you’ve done this for us before but just humor me uh unpack what a Well’s notice is and what that actually means for people sure it’s such a foreign concept uh a Wells notice is uh the notice that the the Securities and Exchange Commission enforcement division gives to a company or an individual when they have concluded that they are going to recommend that the commit commission those five um you know appointed people uh who are the commission when they’re going to recommend that that commission authorize an action so it’s sort of a heads up like hey these are the charges these are the violations we think you’ve engaged in you get a chance now to try and convince us otherwise and maybe to submit something that might convince those five Commissioners that that’s not true How likely is it that a company gets a Wells notice and that they’re actually able to convince uh the Commissioners that whatever is in that notice is not true and the reason I ask you that is because often in crypto we’ve seen the wild notices come and then very soon after comes a lawsuit right typically you know I think the the process is uh can often work to change what the the charges are or what enforcement thinks the real violation is very often there’s that’s a way to uh move toward a settlement there are times when those charges change what the enforcement division decides to charge will change but in this kind of situation I don’t see there being any change I think this is just uh this is what the enforcement division has concluded the charges will be there’s very little that Robin Hood or consensus or anybody can say to change their minds were you surprised to hear that Robin Hood received a Wells notice I mean they only offer 15 cryptocurrencies they seem to be very set on being compliant and working with Regulators was this surprising for you to hear at this point nothing surprises me that nothing about what the SEC is doing in crypto can surprise me anymore uh you know I I think Robin Hood is a registered broker dealer I mean it’s other entities or it serves as a registered broker dealer uh it clearly has compliance people professionals overseeing what it’s doing I think Robin Hood was trying to be very compliant but then coinbase was trying to be very compliant too and and certain of the other exchanges so it doesn’t surprise me what do you think happens from here um I I think the SEC is looking to get by determinations from the courts about what their view is validating or rejecting their view of what crypto constitutes a security and I think what’s interesting here is that uh the consensus lawsuit I think lays out pretty clearly uh the problem of the SEC shifting from believing that ether which we all kind of thought based on what the SEC said was not a security how that has now um in the sec’s estimation become a security somehow but we don’t know exactly what that what specifically about ether caused it now to be a security and I think that’s all going to go in front of the courts you know Gary chor has asked Congress to weigh in on this Congress doesn’t weigh in the SEC the part of the problem is the SEC is trying to fit crypto the square peg into the round hole of its existing Securities laws and not surprisingly it doesn’t fit it’s interesting that you you bring up this the fact that the SEC has asked Congress to come up with clear legislation but that’s not really happening Gary Gensler has been somewhat of a target for this industry and that’s not to say that the industry isn’t also looking at Congress and saying come on please give us some legislation uh please do something here do you think it’s maybe uh unfair to to have this view of Gary Gensler when he’s just working with what what he has um I I think what’s happened most recently with ether I I think results from Gary gansler being between a rock and a hard place I I I do hate to really um dump on him over that um he is not allowed to comment um on what investigations are going on within the SEC until that you know until the commission has uh voted on them and authorized them and they become public via lawsuit or a settlement so when Congress asks him well is ether a security or not if his statement would reveal something that he’s not allowed to reveal he he can’t really say anything by the same token boy was uh the industry Gob smacked by this it was basically a 180 you know we all believed based on statements in 1990 uh 2019 and um 2020 2021 that ether was not considered a security by the SEC and and certainly by the cftc which everything it’s done has been based on the fact and and its statements that U ether is a commodity and yet here we are so break this down for me if ether is deemed a security what does that mean for firms that are operating in the United States that are offering ether to retail investors to trade and buy and what does that mean for products that have already been authorized by the cftc like The Ether Futures ETF oh the ether’s Futures ETF is definitely a a conundrum for me I don’t know exactly what’s going to happen with that that that’s a real kind of mess at this point I with respect to other uh products like what consensus is offering or the basic you know consensus uh lawsuit says look we’ve set up a a product that they’ve got two parts to it they’ve got their metamask swap or their metamask stake I think with respect to the metamask swap you know they’re saying look we’re like the eBay of ether you know if if people want to buy or sell we’re just going to bring those people together we’re going to charge a commission for that for the cost of having a platform and that’s that’s what we’re doing unfortunately that you know if the thing that you’re selling on eBay is a security you now have turned into a brokerage firm that the SEC regulates and will shut down if you’re not complying with their regulation so everything turns on whether ether has changed and I think what is really at work here is that when the SEC initially was commenting on ether that was pre merge and now post merge we have a a different kind of animal and um we also have um this idea of staking this metamask staking is something that you know the SEC has gone after otherwise they have brought other cases and they they just don’t like SK staking staking is like a co-op and you know everybody puts their stuff together and then there’re you know we’re all going to our fortunes will all rise and fall together somebody is kind of managing that that staking pool and whether it’s uh you know a piece of software that’s managing it or it’s a person that doesn’t make a difference I think to the SEC and I think to the the you know Community it does but to the SEC it doesn’t you know a bunch of people have gotten together they have put their assets they put their ether into a pool and that then turns it into something that under the Howie test which I know that your listeners have have heard many many times uh that now turns those orange groves into a security Turns The Ether into a security yeah it’s it feels very it just feels like wow I wish that there could be legislation and I wish that we didn’t have to talk about this the time it’s like you know we talk about the Howe test we talk about applying it so often on the show and it feels like we’re getting nowhere so we have consensus that is suing the SEC the SEC has issued Wells notices to uh Robin Hood and Unis swap two very different entities right Unis swof is a decentralized exchange Robin Hood is a centralized exchange do these factors actually make a difference when we’re looking at um applying what applying the laws that currently exist does it matter if something is centralized or decentralized in the eyes of the law at this point I don’t think so I think if if a decentralized exchange is used to facilitate staking I I think it’s the staking itself that the SEC is going to go after I’m not convinced I did think previously that that centralized versus decentralized might matter because who is the SEC going to go after there’s no Mr Bitcoin or M Bitcoin that they can bring an action against but they have done that uh they have kind of just named a platform or named participants uh not specific like control participants but uh so I don’t think the fact that it’s decentralized is is going to matter and I think a lot of what is driving the SEC rethinking this is the discussions about AI we can’t have ai sort of stepping in um and taking the place of the person so you know if we have software that’s really AI or it’s it’s uh just programs running on the blockchain uh that can’t be used to get around this idea that when people pull assets and then have something or somebody manage them and generate revenues from them that uh that isn’t a security oh that’s really interesting I haven’t thought about the introduction of AI so what you’re saying is maybe they’re trying to nip this in the bud get some kind of clarity in the courts if they’re not getting it from Congress so that before um Things become autonomous and it’s harder to pinpoint centralized points in these ecosystems there there’s some kind of precedent set is that what you’re saying I I just think it’s changing the way they’re thinking um because what happens if you have um you know the SEC regulates investment advisors and uh Brokers will investment advisors make decisions and and um exercise discretion over an account well what if you have ai an AI program doing that well who’s responsible for those investment recommendations and rebalancing and all of that and what happens when it all goes wrong um I think the SEC would look at that and say wait a minute we we want to hold somebody responsible we can’t just have you know somebody turning loose this uh AI program that does investment management for people that acts as an investment adviser and then have nobody to go after so here I think staking is is really the lightning rod I think that is what has brought the SE back to and you know we’ve moved away initially ether ethereum was a proof of work Network and that was just like Bitcoin proof of work now after the merge it’s become more proof of stake well that’s a problem proof of work while it’s very energy intensive and you know is is not something that I I think people love at this point um proof proof of stake is very much uh like a co-op we are going to put our stuff to you know we’re going to take all our our toys we’re going to put them into one basket then we’re going to loan them out people are going to pay to use them and then they’re going to uh all those funds are going to go back into a bucket and it’s all going to be distributed now that’s looking a lot like an Enterprise and that’s something that the SEC considers to be a security now I asked you if eth is deemed to be a security what that means for firms that have tethers to the US or that are operating in the US what does that mean for people in the US who are holding eth that’s a real problem it’s going to make a big difference at some point I think it’s interesting I you know I was just looking at the price and and um at Charlie gasparino comments about like why hasn’t Bitcoin skyrocketed and eth you know plummeted I I think everyone knows this is going to take a long time there’s going to be quite a bit of time uh for people to see how the court looks at this um certainly in the consensus case I think it’s the consensus case against the secc was filed in a location and Fort Worth Texas that is likely to be less favorable to SEC regulation than many other jurisdictions so that was a very Savvy move certainly uh you know when you have wtel Lipton representing you that you’re getting the best representation around uh you know was was quite a Savvy move and you know that’s it the the Fort Worth district is within the fifth circuit and that’s just not a circuit that’s terribly friendly to um SEC regulations so we may see rulings you know in 2025 let’s say uh from the the district court but then that’s going to go to the Appellate Court the fifth circuit and then that’s going to take a little while and then you know likely things will go to the Supreme Court so it’s going to be a long time before we really have a ruling there we may have rulings in the Ripple case before that we may have rulings in other cases coinbase before that so um you know there’s there’s time for people who hold eth um and you know I I’m not saying that everybody who’s a big holder of eth should move offshore right now but um you know it’s going to potentially become more difficult for people to sell it buy it do anything with it before I let you go I want to get your opinion on two different things uh there was a report that came out yesterday by KBW and they said that Robin Hood would likely win in a court case against the SEC because of their strict listing standards we spoke a little bit about that earlier in our conversation do you think that’s true I as a rule I don’t bet against the SEC they are wrong sometimes they have made some significant mistakes and also they will abide by whatever the court says so um you know I think to the extent that they they’re not sure uh the court could Court could provide Clarity um but I I don’t know that just the fact that Robin Hood has strict standards is going to be enough if the SEC has very clearly said at least for you know for the LA since 2019 they’ve been very clear that the only two digital coins that they considered to be outside the realm of um a security were Bitcoin and ether and so if you’re listing something other than that I I I think you know you you’ve been on notice that that you’re uh you have a risky proposition and I think I know the answer to this one but humor me do you think there’s going to be an approval for a spot ether ETF soon how could there possibly be I don’t think so um I it’s it’s really quite puzzling and I don’t know what’s going to happen with you know the the existing uh uh ETFs or not ETFs etps that are out there I just don’t know

Lisa Bragança, Bragança Law attorney and former SEC enforcement branch chief, joins “First Mover” to discuss Robinhood’s Wells notice from the SEC and the agency’s approach to crypto regulation. Plus, why the SEC will likely go after ether staking, and what happens to ETH holders if ether is deemed a security in the U.S.

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