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Governing An Algorithm? The DeFi And Crypto Enforcement Landscape (Podcast) – Fin Tech –


The regulatory framework for cryptocurrency and DeFi in general
is still a little murky. That hasn’t stopped regulatory bodies
from bringing enforcement actions against players in this space.
What’s on the horizon when it comes to investigation and
enforcement activity in the decentralized finance space?


1256508.jpg

Aaron Kouhoupt: My name is Aaron
Kouhoupt
and I am a Member in our consumer financial
regulatory section out of Cleveland. And I do a lot of work with
FinTech companies and banks in the consumer finance space,
including issues that they might be having when trying to get into
the cryptocurrency and decentralized finance space.

Today, we’re very fortunate to have time to sit down with
Bob Driscoll, who’s a Member in our Washington
DC office. He’s the co-chair of our government and internal
investigations practice. Bob is a former DOJ official. Having
served as deputy assistant attorney general during the George W.
Bush administration, he has decades of experience representing
corporations and individuals before Congress and various regulatory
bodies.

Aaron Kouhoupt: So I thank you again for being
with us today, Bob and I’ll jump right into our first question.
We’ve all witnessed the news coverage that’s been out there
about cryptocurrency and this generalized fear that cryptocurrency
is really just a tool for illicit money movement or illicit
activity. Have you seen an uptick in the regulatory enforcement
actions, whether allegations of either Bank Secrecy Act
[violations] or money laundering or other actions by the regulatory
bodies or the government in this space?

Crypto can serve many different purposes, and has many different
use cases. It could be a store of value, can help facilitate
transactions, can do lots of things. Those things traditionally are
regulated separately under separate laws by the government.

Bob Driscoll: I think certainly it’s been
unquestionable in the last couple years, Aaron, that various people
in the crypto space have been subject to, not only regulatory
action by [Dept. of] Treasury or by FinCEN (Financial Crimes
Enforcement Network) or by the FTC (Federal Trade Commission), but
also prosecutions by DOJ (Dept. of Justice) for money laundering.
And I saw it and thought was very helpful, the intro to DeFi that you and Robert Savoie
did. And you know, I think when you understand the basics, you
understand kind of what the problem is, because decentralized
finance and crypto can serve many different purposes, and has many
different use cases. It could be a store of value, can help
facilitate transactions, can do lots of things. Those things
traditionally are regulated separately under separate laws by the
government. And so, depending on what you think this
“good” is that people are trading in or are using to
facilitate a transaction, colors your view of it.

So from the DOJ perspective, which is something I have some
familiarity with, DOJ is very concerned when they think crypto
might be being used for money laundering purposes, to hide the
proceeds of illegal activity. The SEC might be concerned that, are
some of these things securities? Are they being used as stores of
value, and therefore have to make certain disclosures and only
registered brokers can sell them? All these things are out there
and they’re kind of conflicting all the time. So there’s
definitely been an uptick. And people in this space, I think more
so the people that are really the players in the space and
facilitating, and the FinTech companies that are involved in crypto
are issuing their own tokens, are the ones most at risk. But I
think anybody who’s playing in the space at all, be it to
facilitate transactions or on behalf of customers, needs to be
paying attention. Because the regulatory landscape’s changing
the time and it’s going to be very disruptive. Regardless of
whether you think you’re involved in crypto at all, it’s
going to disrupt the space you’re in.

Aaron Kouhoupt: I think that’s a really
good point, Bob. And I think it’s one of the things that we
really want to highlight to everybody out there. I think that there
are sort of two false senses of security that people are thinking
about. One is thinking about the fact that, well, there really
isn’t a lot out there on cryptocurrency right now, and the
government’s maybe been a little bit slow. So does that give me
the ability to sort of go out and do what I want? I think the
answer is pretty clearly no, that people are paying attention to
this space. But then the second is, I love what you said about,
this isn’t just for somebody that’s out there, mining
cryptocurrency, right?

Two false senses of security that people are thinking about: one
is thinking about the fact that, well, there really isn’t a lot
out there on cryptocurrency right now… The second is, this
isn’t just for somebody that’s out there mining
cryptocurrency.

Bob Driscoll: Right.

Aaron Kouhoupt: I mean, this is affecting
people that are ancillary, or maybe just, it’s not their
primary business, but they’re in this space. So you do see some
risk and you see some activity even in that ancillary space?

Bob Driscoll: Oh, yeah. And to give you a
concrete example, Tornado Cash. And I don’t want to get too
technical cause I know this is a basic kind of thing, but Tornado
Cash was essentially, on the blockchain, Tornado Cash was used as
kind of a mixer. And so it could be used to have privacy for your
Bitcoin transactions or your crypto transactions. And it was just
put on the OFAC (Office of Foreign Assets Control) list by
Department of Treasury. And that didn’t just affect –
there’s a couple things that are amazing about that from a
legal perspective, for those of us used to regulation. Because as
you explained last time, something like Tornado Cash is simply,
it’s an algorithm that’s independent, that’s out there
on the internet. It’s autonomous. It is not a person. It is not
a company. It is an address. And OFAC just essentially banned
Americans from using this address. And so that is having all kinds
of knock-on effects that people are trying to figure out.

For example, a lot of companies that are holding crypto for
different customers, or people finding accounts frozen if they took
payment from Tornado Cash at some point. Or if they’re on
Tornado Cash on the blockchain, how’s that all going to work?
Can the government block an algorithm? It’s almost like
regulation hits philosophy at some point. How you can do this? So I
think that is why one has to be paying attention, even if
you’re not setting up; you and I probably aren’t going to
set up our own coins. Although, I actually just had a friend in the
industry who’s going to set up a Driscoll coin for me just to
show me how easy it is to do!

But people like us and our clients aren’t necessarily going
to be setting up our own BitMex. But it’s still important to
know that BitMex got prosecuted and their founders got prosecuted
because they were treated like a financial institution. They
didn’t have “know your customer” protocols that were
sufficient, and those are criminal violations. And the founders and
a couple of high up executives were criminally prosecuted and have
pled guilty to crimes under the Bank Secrecy Act (BSA) related to
failure to implement efficient compliance protocols. And I think
that sometimes you’re not going to be thinking of that. If
you’re talking about a DeFi contract in the art space or in
some other space, you’re not necessarily thinking yourself as a
financial institution. But I think that all of these things are
worthy of paying attention to, for anyone who even has a toe in the
water here.

How’s that all going to work? Can the government block an
algorithm? It’s almost like regulation hits philosophy at some
point.

Aaron Kouhoupt: I appreciate that. And I think
it’s an important point that you made at the end, especially if
you’re in the Bank Secrecy Act/Anti-Money Laundering space.
It’s not just civil, there’s some criminal implications
there.

You’ve already touched on this a little bit, Bob, but you
know, the Bank Secrecy Act/Anti-Money Laundering, some statements
that have come out from the government about this implication that
there’s illicit activity when you’re in crypto is getting a
lot of the headlines. But there are other enforcement actions and
things to worry about. And I know earlier you talked a little bit
about securities. Can you talk about a little bit more? Are we
seeing enforcement actions where there are allegations that the
crypto activity is moving its way into licensed securities, and
that businesses are dealing with unlicensed securities as a
result?

Bob Driscoll: Yes. And there is a very
important case working its way through the system, and I want to
break it down for people so they understand likely what is going to
happen. And why it’s significant. There’s obviously been a
debate for a long time among the industry, among regulators, as to
whether or not different crypto tokens are a security that needs to
be registered under the securities and exchange act by the SEC. The
SEC, if you listen to Gary Gensler, the head of the SEC, talk, you
get the feeling that’s coming, that they feel like these things
are essentially stores of value. And so I think what people in the
industry would say is that you’re taking something that is many
things at once, and you’re making it one thing by saying
it’s a regulated security.

If it’s a regulated security, it can only be traded on
certain exchanges. You need creditor/investor kind of regulations.
You need certain public disclosures. It would change the entire
character of what crypto and the blockchain is supposed to be
about.

If it’s a regulated security, it can only be traded on
certain exchanges. You need creditor/investor kind of regulations.
You need certain public disclosures. It would change the entire
character of what crypto and the blockchain is supposed to be
about.

On the securities front, one case that’s moving is an
insider trading case against former employees for a crypto exchange
that allegedly purchased certain tokens prior to the tokens being
listed on the exchange, which caused a run up in price. And frankly
from the DOJ perspective, it’s a straightforward case. It’s
just mail fraud and wire fraud. And the former employees of the
exchange are being prosecuted. And it’s not great news for
them, but there’s nothing particularly controversial about the
prosecution.

But what’s interesting is a parallel SEC case. And the SEC
case is truly an insider trading case. And one of the predicates
for the SEC to bring an insider trading case, which is a civil case
in this instance, is that the item being traded is a security, or
should be a registered security.

The government, in classic fashion, has put itself in…



Read More: Governing An Algorithm? The DeFi And Crypto Enforcement Landscape (Podcast) – Fin Tech –

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