My Exclusive Conversation with David Hirsch – Head of SEC Crypto Enforcement

The SEC’s position on Binance and Coinbase

Ric Edelman: It's Friday, June 16th. You've heard of the SEC's new lawsuits against Binance and Coinbase. Today, you'll hear my conversation with David Hirsch, the SEC's chief of the crypto asset and cyber unit in the SEC's enforcement division.

All this week, I've been sharing with you information about video games. This is a huge industry and a growing source of power and influence and maybe even espionage worldwide. The US produced 17 of the top 20 films last year. China made the other three. Even though China has four times the population we have we've got 17 of the top 20 movies. But in video games the US is lagging of the top 20 games. They came from nine different countries. Number nine was made in Japan and it grossed $800 million last year. And that video game, by the way, is only available in Japan.

Guess what happens when they make it available worldwide? China made six of the top 20. So you can imagine the incredible influence that the Chinese are having when they're distributing this massively popular series of video games around the world. Developers in the US and Europe who want to sell their games in China, well, they've got to abide by Chinese government rules. For example, the chat function blocks certain words like Taiwan developers and other countries also say that when Chinese games go global, the data on the players goes back to the Chinese government. This is the whole TikTok story all over again. Only now we're talking about it as a video game, not a social media platform. 

And let me ask you this: Are you playing a Chinese made video game on your phone or on your PC? Yeah. What data is being collected? And how about Riot Games or Epic Games? Two of the biggest video game producers, They are both owned by Tencent, which is, you guessed it, a Chinese company.

You know, Hollywood's got the very same issue. But everybody in Congress goes to the movies. How many members of Congress play video games? We could have a situation where our government legislators, our government regulators, our nation's leaders are not acutely aware of the issue regarding video games, the incredible popularity, the broad global reach, and the fact that most of the biggest selling video games are coming from China. I'm Ric Edelman.

We've been talking about video all this week. One of my favorite ETFs in this category is called Hero. That's the symbol HERO. It's the Global X Video Gaming and Esports ETF. Definitely worth consideration for your diversified portfolio as you talk with your financial advisor about it.

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Exclusive Interview: David Hirsch, SEC's Chief of Crypto Enforcement

A wide ranging conversation about crypto, cyber security, Binance, Coinbase and more

Ric Edelman: This past week, I hosted the fifth annual VISION Conference in Austin presented by my company, the Digital Assets Council of Financial Professionals. Vision is the longest running Digital Assets Investment Conference specifically for financial advisors and accredited investors, and this year's conference was our biggest ever. More than 125 financial advisors and investment professionals from all over the country. One of our keynote speakers was Dave Hirsh, chief of the Crypto Asset and Cyber Unit in the SEC's enforcement division. I spoke with Dave for about an hour on stage and given the new enforcement actions that the SEC has filed against Binance and Coinbase, I wanted to share that entire conversation with you today.

Here it is, unabridged and uncensored:

Ric Edelman: Good morning. Thanks for joining us early this morning. I hope you enjoyed yesterday. We have a robust agenda today. I think it was fair to say that regulation was the dominant theme of yesterday. It is clearly what is dominating the crypto conversation. And so we're very much looking forward to today. And in fact, what I'm supposed to do this morning for the first 15 minutes is recap what happened yesterday. I don't know that we really need to do that. We were all here. I think we know what happened. I thought it would make much more sense and much more valuable use of everybody's time if we fold these next 15 minutes into the next 45 minutes where we're supposed to have a conversation with David Hirsch. So why don't we do exactly that? So let me with great pleasure, invite up here to join me. David Hirsch. He is the head of the SEC's crypto enforcement division. He flew in from Washington to join us today. And so please give a warm welcome to Dave Hirsch. Good morning. Good morning. Thanks for joining us. Thank you. David. As you know, I told you yesterday that David can't take questions off the fly from the audience. So you submitted questions in advance and David has reviewed those and has agreed to answer most of them. And there are a few wacky questions you submitted, let's admit it. So I'll mention those just because they were fun and wacky, but we'll skip all those. So as a prelude, David, and thank you so much for joining us for this event, it's really vitally important that government be responsive and open, communicative with citizens. And that is one of the things that makes America great and what we love about this country. So let me just ask first off, what the hell are you doing wrong?

David Hirsch: Before I get into that, I first have to acknowledge that while I'm here today in my official capacity, the views that I'm going to share are those of my own only and do not necessarily reflect the views of the Commission, the Commissioners or my fellow members of the staff.

So with that disclaimer out of the way, what we are attempting to do is establish and require a uniform set of expectations and requirements for everyone who is selling securities to investors, and that there is a one set of expectations, which is if you are going to be taking money from investors, if you are offering a product with speculative benefits, if people are buying your product with the expectation that they are going to receive more money from having owned it as a result of something that the promoter, the issuer, the developer or some other discrete group of people are doing, that falls under the securities laws in the US under the 1946 case, Howey and its progeny. And we can talk more about that. But that whether that is an instrument that is referenced on a blockchain or on some issuers internal ledgers or sold through a transfer agent, it's the same set of rules, it's the same set of expectations, which is if you're going to be issuing a security, you either need to register or satisfy an exemption that releases you from the obligation to exemption. 

Ric Edelman: And we're going to talk a lot about that. Let me take a little quick step back, though, because you're not a career SEC employee. You've only been with the agency a few years now. You were here in Texas before moving to Washington. Talk about your journey through crypto because nobody grew up in crypto. It's all too new. So talk about how you got involved in crypto and led you to joining the SEC. 

David Hirsch: Sure, absolutely. So I've been with the SEC since 2015. Late 2015, I joined here in Texas in the Fort Worth Regional Office. Prior to that, I was a practicing attorney for several years, and then I left to start my own private investigation business with a good friend from law school, which we ran and operated for ten years. So I had ten years plus where I was a small businessperson, struggling with all the things that all small businesspeople struggle with, like what licenses do I need, what regulators control me? How do I navigate banking and financing relationships?

And so I often think about that experience, that entrepreneurial experience and we grew to be about a 12 person shop. So we were never huge. But you had employees, you had HR, you had IT, you had all the things you need to do to run a business. And I think for me, that was very instructive in how I approached my work at the SEC. The SEC has a three-part mission. Protect investors, ensure fair and efficient markets and facilitate capital formation. In enforcement, which is where I work in the SEC, we tend to focus on protecting investors and market integrity more than the third prong, which is facilitate capital formation. But when I joined the SEC and in the work I do every day, I always keep that third prong in mind. Having lived the life of an entrepreneur, facilitating capital formation is one of the things that makes this country great, and it's one of the obligations of the SEC. And so it's a balance that we always have to pursue. 

Ric Edelman: And you're not you're a young guy. You're not, I think, going to spend a career at the SEC. You came in the midst of your career. And I won't call this a way station, that's not quite right. But you're going to move on at some point as government service generally your future, or will you go back to the private sector? 

David Hirsch: I think time will tell. I'm relatively ambitious person like I think we all are. And so traditionally in my career path, I've thought about the job I have and also about what I would want to do next. Less so when I was running my own business because that seemed like a marathon at a sprint pace that had no beginning or middle or end. But every other job I've had, I've thought about like, how is this job going to prepare me? What is it I want to do next and what things should I be doing in this job to prepare me for that? This is the first job I've had in a long time that has no element of that. I'm the chief of the crypto asset and Cyber unit within the Division of Enforcement at the SEC. It's a huge job. It's a very big team. We interact with industry, with academics, with fellow regulators, criminal and civil, and it just does not really afford me significant time to think about what's next. And isn't really the right way for me to try and do this job because, it might lead me to make decisions that are more in my future professional interest than the interests of the people I'm trying to serve. So really enjoying my government service time. I think it's fair to say it's probably not forever, at least in my current capacity. This is a very intense job. Crypto is active, we are active in crypto and that's not necessarily done at a pace that is sustainable for decades. But really, I've only been in the job since October and while I joke about it being five dog years since then, it's a really fun job and one I want to keep doing for a good long time. 

Ric Edelman: So I wanted to provide just a little bit of the humanity behind this, that this is a you've got a wife and children. And so I just want to provide a little bit of humanity as I go back to my question of what the hell are you doing? Why is the SEC engaged in crypto in the first place? I mean, at the SEC, you're not paying any attention to comic books, comic book dealers or gold dealers. Why the focus on crypto? 

David Hirsch: So for me at the SEC, I got into crypto in 2015, right when I joined the agency, I when my private investigation business was no longer growing in a way that I wanted it to and I was looking for my next opportunity. I applied at the SEC in Fort Worth. I was hired and there's like a very sensible month to six week period between when they give you the offer and when they let you set foot in the door while they run through your security background and otherwise. And so during that time, I reached out to what would soon be my manager and said, I've been out of the full time practice of law for some time while I was running this private investigation business. Like, I want to hit the ground running, what should I be preparing for? And she said, “Well, I think the skills you have as an investigator will translate to the things you're going to be doing as an enforcement attorney. So I'm not too worried about that. But are you interested in Bitcoin at all? We have a bunch of cases involving Bitcoin.” I said, “Sure, no, very interested in Bitcoin. That sounds great.” And then went to Google and said, “What is Bitcoin?” 

Ric Edelman: So in other words, as a lawyer, you did what lawyers do. You lied.

David Hirsch: Well, I had interest in Bitcoin. I was an avid reader of Wired Magazine and other technology magazines. I had paid attention to it, but I had never engaged in a deep dive. And so maybe Ethereum was just coming out in 2015. Yeah, so maybe embellish rather than lie, but similar paths. So and then early on, the cases that we were looking at originally were. Old fraud, new wrapper. So we were looking at the types of offering frauds we see in all sorts of areas. But now with the miracle of blockchain being the thing that was going to generate outsized profits or was going to allow people to deliver 100% monthly returns or all of the other things we see in some of the offering frauds, it seemed deeply problematic. It was also the era just post Silk Road where there was still a lot of activity. Investments in otherwise dark web and that otherwise people were using bitcoin as an anonymity-providing device that they would transact bitcoins that made it harder to trace them. And in that era, it very much did. At the time, we did not have commercial or in house attribution and tracing software. So I would go to blockchain explorers and download the series of transactions where I thought might contain things of interest and put them into Excel and then just bang away on pivot tables and otherwise trying to figure it out. And I spent that time because people were losing real money, investors were being harmed, and also because I recognized at the time, this may not be the size that this thing grows to. 

And we need to be ready to protect investors and markets should this thing continue to grow. And I've been telling this story lately because I think it is both ridiculous, but also somewhat. Indicative of where my head was at the time is I went to the senior most leader in that office to get approval to continue pursuing these investigations. And I was very candid with him. I guess unusually in that regard and said, “I don't know that these will ever turn into cases like we are resourced from a technology perspective. We're just learning what we're doing.”

It's very difficult for us to attribute conduct. So I can see that a transaction happened. I can trace it back to a specific address. I don't yet have a great way to identify the person behind the keyboard who was executing that transaction and who ultimately bears accountability for that conduct. But we need to get there because right now these are two and $5 million problems. And God forbid five years from now they could be $100 million problems. I was off by like multiple levels of magnitude.

Ric Edelman: FTX was like $60 billion...

David Hirsch: Yeah. These are huge, huge organizations and offerings and ecosystems at times and so we are involved in crypto because that's where investors are putting their money. We are involved there because well... 

Ric Edelman: But now that's not in and of itself, David, necessarily fair? Because just because a lot of people are investing in something isn't of itself a reason to engage. Gold's market is multiple times bigger than the crypto market. You're not going after gold dealers.

David Hirsch: That's correct. We are neither the worldwide investment police nor are we the United States universal investment police. We are jurisdictionally bounded to. Look after securities markets and securities investments. And so the distinction between gold, as you've mentioned, and some other investments is we are focused on those areas where crypto assets bleed over into the securities markets. And the way we assess whether or not we have jurisdiction, whether we have that connection between the instrument or the service being provided and our jurisdiction.

The securities markets is a couple of tests. One is the Howey Test, which I alluded to earlier and which you likely may have heard about, but it's an investment of money in a common enterprise with an expectation of profits based on the efforts of a third party. And the idea is if you as an investor are giving your money to somebody else with the idea that it is going to turn into more money because of something that they are going to do or something that some other identifiable third party is going to do. So you're basically taking a passive position with the idea that other people are going to honor what they've indicated they plan to do and in the process will make you more money. They take on additional obligations. We treat that as a securities offering. And absent an exemption, when you are the person doing the promoting and doing the issuing, it's not the same thing as just trying to sell a product to somebody. You're now taking their money and they're expecting to get something bigger back in return because of your efforts. That won't always be successful. Investments fail, we recognize that. But it does create additional obligations on the part of the person who's taking the money, like the obligations of a businessperson who seeks outside financing to those people who are providing the financing is different than the obligations they owe to themselves as a single party. 

Ric Edelman: But if that's the case, then you're trying to or not trying. You are making the determination independently through your own office that X out there is a security and you're going to hold them accountable for not having registered as a security. But they may be beginning from a premise where they dispute the fact that they need to be a security, and that's where the butting of heads comes in. 

David Hirsch: That is true. And there is an established and effective method for resolving those disputes. And that's our judicial system that we do not ultimately determine what is or isn't a security. But we do have the authority and the obligation from Congress, from the securities laws, to carry out our mission to protect investors and markets. And in doing so, we first have to establish jurisdiction. We have to decide is this an area that the SEC should be allocating resources to? Is this where our mission takes us? And we have to make our best assessment about that. And the people who we are seeking to regulate may say, no, we disagree. We are outside the regulatory envelope. And if we are not able to reach a resolution informally, and often we can we reach settlements with people all the time, if we can't, if we think you're a security and you think you're not, then we have to go to court and then let the judges decide that. 

Ric Edelman: And so one of the paths that this has wandered, meandered through the past couple of years is that the SEC has complained that some of these organizations are engaging in the sale of unregistered securities. And you have said you the agency has said we want you to register. The complaint, though, from the crypto community is that, okay, fine. And the example that that seems to be most significant here are the Bitcoin ETFs. There have been 40 plus applications of fund companies, some of whom are in the exhibit hall next door, who have attempted, who have filed applications, only to be rejected. So on the one hand, the SEC is saying we're unhappy with you for not registering and then on the other hand, rejecting the registration applications. It seems like it's heads I win, tails you lose. We can't have it both ways.

David Hirsch: So the issue as to whether or not a spot Bitcoin ETF should be approved is presently in litigation in D.C. District Court. And so I'm limited in what I can talk about because I don't want to impact that litigation in any way that is properly before the court. And we are going to make our arguments in court as to globally the idea of sometimes people want to register things and are disappointed that we determine that they have not yet satisfied their burden of establishing that this is a market that's subject to adequate surveillance, or that this is an instrument that is sufficiently exempt from manipulation. Is a kind of a facts and circumstances-based analysis. And I think the fact that we're in court is probably supportive of the functioning of the system or is indicative of a functioning system where we have a dispute. We say we don't think you've satisfied the legal burden you have to meet in order to be able to register this product. The entities that are trying to promote the products disagree with us, and one of them has said we can't resolve this directly. We have not been able to resolve this directly. So let's put it in front of a court and let the court decide. We have approved other Bitcoin exchange traded products that are based on futures. And the distinction we've drawn is because there's a Chicago Mercantile Exchange, there are other established registered trading venues for those instruments and that it provides the necessary level of surveillance that the spot products don't have to offer, which is counterintuitive, right?

Ric Edelman: Because you've approved a product based on a derivative, but you won't approve the product based on the product. And that just doesn't seem to make sense. 

David Hirsch: And I think that is part of the argument that is in front of the court. And so we'll see what the court has to say about that. I think we're doing our best to interpret the rules as they have been written and apply them. 

Ric Edelman: Or is there any other motivation or reasoning in the SEC's thinking emanating from starting with the chair as to why there is not acceptance of a Bitcoin ETF? It seems to me that this is not a black and white issue. This is a judgment call. You could say yes to a Bitcoin ETF if you wanted to. 

David Hirsch: I could not. Not my department. 

Ric Edelman: The SEC could say yes to a Bitcoin ETF if it wanted to. 

David Hirsch: I think that is probably right. I think they probably could. But also, we all work incredibly long hours. I assume that's a given for everybody who's here on their free time trying to learn more about a complex area. I am in that crowd. The people in the SEC are in that crowd. Like we work very long hours. We're very committed to the mission. I've never had one of my colleagues say I would like to spend an extra 8 or 10 hours working this week on something just because it's my personal preference for how things should work. The people I go to work with every day virtually and in person, are deeply committed to the betterment of American investors and markets. And I think to the extent, they think that this product or they say publicly, this product hasn't satisfied the base legal requirements for approval, it's because they sincerely believe that I can understand how a court could come to a different conclusion. I can understand how the application of our rules in some ways can seem. Anomalous when looked at in. Isolated circumstances. And that's a good time to go to court and say, hey, I think this is coming from a good place, but we just disagree with where you came out. 

Ric Edelman: Sometimes the concern about lawyers, I'm not one, so I can always I can tell lots of lawyer jokes if you like. 

David Hirsch: No, that's fine. 

Ric Edelman: You know, any good ones? 

David Hirsch: Not good ones. 

Ric Edelman: I do. I know a lot of good lawyer jokes. The problem that often occurs with lawyers is that they focus on the law. They're so focused on let's get it right that they sometimes lose sight of the practical implications of what it is they're doing. Let me give you a daisy chain scenario and tell me your thoughts of this. That you begin with the premise that the agency isn't convinced that the Bitcoin ETF applications are approvable within the rules. Kind of what you just said, right?

[To audience] Raise your hand if you would recommend a Bitcoin ETF to a client if it were available in the marketplace.

All the industry surveys of financial advisors reflect that same result. Virtually every hand went up, as you saw. Now, this is, of course, a little bit of a biased group. This is a group of financial advisors who are attending a crypto conference. Naturally, you would see that. But even in other industry surveys, more generally of financial advisors, the last one I saw was 77% of financial advisors said they are not recommending crypto to clients because there is not a Bitcoin ETF. We all know the ETF marketplace; ETFs are the most popular favored investment vehicle. They're low cost, they're transparent, they're liquid, they're highly diversified. And so that is the favored most common vehicle, as you know. And the absence of a Bitcoin ETF is keeping lots of financial advisors on the sidelines in the crypto space as a result of financial advisors not engaging in crypto because there isn't a Bitcoin ETF. 

The result of that is that when a client calls their advisor and says, “What do you think about Bitcoin?” The advisor is forced to say, “Sorry, can't help you because there isn't an investment vehicle that my firm will let me use because there are no Bitcoin ETFs out there.” That doesn't dissuade the client from investing in bitcoin. It dissuades the client from investing in bitcoin via the advisor. So the client goes out on their own to buy it independently. We know that many consumers are not very good at the investment world. That's why there is so much fraud and abuse. And it's because the advisors and the clients aren't able to work together. So is it possible that an unintended side effect of the SEC's refusal to accept the registration applications of Bitcoin ETF providers. The result is clients are actually being harmed rather than helped because the most popular product is being denied to them and interfering in their ability to get the advice they want from advisors. Is that a potential daisy chain scenario that perhaps you folks are not paying a lot of attention to? 

David Hirsch: So again, because this is subject to litigation, I'm walking a delicate path here as to what I can say and what would potentially get in front of the judge or get in front of, more importantly, my litigators who are making the best arguments on behalf of the agency and responding to the arguments being made by the opposing counsel. I have a couple of thoughts about that. Personally, again, these are all my personal views. I mentioned I was going to be repeating that it appears I'm going to be repeating that a lot. I think that there is a potential that if there is no approved Bitcoin ETF, that there are people who will, instead of recommending a Bitcoin futures ETP will just say, I can't help you because there are some small subgroup of investors therefore who will not buy a Bitcoin ETF. Presumably it's some even smaller subgroup of that will then go out to try and find how they go about buying bitcoin directly. And some smaller group than that may suffer some detriment as a result. 

Ric Edelman: It's not a very small group. The FBI says 46,000 Americans lost $1 billion over the past two years to Bitcoin or crypto frauds. A lot of those folks, because they went directly on their own searching on the Internet and getting caught up in Lord knows What as opposed to being able to be served by their financial advisors. It's not a small subset, David, we're talking about a huge number of people. 

David Hirsch: What I don't know is the percentage of people who would otherwise buy an ETF who instead first go and find a financial professional and say, I would like to buy this thing, and when that is unavailable, then go out and buy something that's dramatically risky or that or that, or therefore in the cohort who lose money to crypto frauds because crypto frauds is extremely broad, that is well beyond Bitcoin. There's a lot of rug pulls and other things that are separate and apart from that. And I think the thing that we have said in our denials has been. There is not an adequate system of surveillance that is comparable to trading on a registered exchange. It seems to me that a business that wanted to try and establish that bitcoin is sufficiently resistant to manipulation might be able to accumulate data that would satisfy that criteria. That issue that we have pointed out is like an inadequate level of surveillance. We haven't seen that necessarily, or at least we've deemed whatever we got back is not adequate to establish adequate surveillance. But that's one of the things that we are motivated by, is to what extent could this instrument be subject to manipulation? And that would, therefore, expose a large group of investors to a shared harm experience. 

Ric Edelman: Well, it's almost sounds a little reminiscent of prohibition in the 30s. That didn't stop people from drinking. It just chased them into speakeasies where they drank rotgut at very expensive prices. Are you sure that denial of a Bitcoin ETF is the best way to protect investors as opposed to accepting a Bitcoin ETF, which gives you the regulatory oversight by having them under the tent of SEC jurisdiction? 

David Hirsch: It gives you regulatory oversight of that issuer, but not over the market overall. And we don't claim surveillance or direct supervision or regulatory oversight over bitcoin. 

Ric Edelman: But isn't it better to at least bring some under the tent because there would be a huge number of consumers who would obtain the Bitcoin ETF to satisfy their desire to gain exposure to the asset class as and less likely, therefore, to fall victim to the frauds and abuses that exist, especially through the engagement and involvement. I mean, if Merrill Lynch ran an ad saying we'll provide you with a Bitcoin ETF, a lot of people who might otherwise go to shady organizations will be very happy to go to a big brand name like Schwab or Fidelity or Invesco or Global X, as opposed to - Lord knows who that they've never heard of because they're willing to give them a product that the established brands won't. So are we sure that we're serving investors the best way possible? That maybe we need to choose priorities a little bit different, that although it's an imperfect world, that it perhaps price transparency is an ideal. The alternative is worse. 

David Hirsch: I mean, that is a policy consideration that I'm confident our commissioners are making and that our policy divisions are making. I am relegated to the division of enforcement. And so I tend to get involved when somebody has broken a clear rule or I'm concerned they may have broken a clear rule. So it's possible. I mean, I can't say where that tradeoff is. I've not done the analysis. It has not been on my plate somewhat happily. I'm happy to stay outside of the policy realm because it's really challenging and because I don't know that there are great clear answers like what you've said is true potentially. Like let's credit you and say, yes, if Merrill Lynch came out and they offered one that there would be a huge upswing in adoption. And some portion of that adoption would probably be better served because they were going to adopt anyway. And you'd rather have them outside of the speakeasy and into a licensed pub, a regulated place to buy alcohol where there's hopefully some greater degree of scrutiny over things. Though limited, they still don't control the market overall for bitcoin, don't have universal views into it and whether it is subject to manipulation here or abroad. But also you're going to have some group who are like, Oh, let's take happy hour down to the pub. I was never going to go into a speakeasy, but as long as there's this brightly lit pub, maybe I'll go in there. And so you have some group that's going to be exposed to. To the extent that bitcoin is subject to manipulation, you're going to have some additional group of investors who are open to potentially more harm than they otherwise might have experienced. 

Ric Edelman: Yeah, but now you've got the role of the advisor as the gatekeeper suitability rules, fiduciary standards that are going to be in place as with every other. Asset class to help protect the investor from investing who shouldn't invest from investing more than they should invest properly. Managing that investment through rebalancing tax loss, harvesting dollar, cost averaging and so on. Wouldn't it be better to have the financial advisory community engaged in the crypto market than excluded? Because that's how pretty much everybody's feeling right now. They're excluded. 

David Hirsch: Yeah, I think adding layers of expertise and professionalism to investing is very beneficial. And so to the extent that decisions we make interfere with that, that is on the debit ledger debit side of the ledger of but in the way that the rules are written like that is not one of the criteria. And so I don't know if that's a rule writing problem or a Congress problem, but the way that the criteria are developed for what ETFs can be approved looks very much at the underlying instrument itself. So in this case, bitcoin and whether it is subject to adequate surveillance to give us confidence that it's not subject to and the fact that you could have additional levels of confidence short of adequate surveillance. I think is an improvement, but it doesn't address the ultimate issue that's in the rule itself. 

Ric Edelman: So would you be willing to commit to this group that you'll take back this concept to your colleagues at the agency when you return to Washington?

David Hirsch: 100% happy. The reason I'm here and it's at some personal risk, probably too strong a word, but being out and speaking candidly is, I think, part of my responsibility working for government, trying to share the views and give you some insights into where we are coming from and the way we are approaching these issues. But I also have to be careful that there's a lot of great work being done, and I'm not aware of all of it. I'm not keyed into all of it. A lot of it exists well outside of my purview or areas of expertise and don't want to speak for anybody else, But being willing to bring messages back from market, from investors, from investment professionals, from developers and other professionals like I consider that to be core to my function is that I can help provide a coordinating function I have. Probably more confidence and optimism about the technology than some in government. As far as underlying blockchain and digital asset technology, I just recognize it can't be and doesn't need to be, in my mind, developed at the expense of the same levels of investor protection and market integrity protections that exist for other types of investments in this country. 

Ric Edelman: As you know, yesterday we had a long conversation about Binance and Coinbase and the recent enforcement actions. A few questions regarding that. First, in the Coinbase case, particularly, there were 13 securities. There was a bunch of others in the Binance case, 13 not securities, 13 coins that the SEC is complaining are unregistered securities. And you're taking to task Coinbase for buying and selling trading those securities on their platform. What was really notable is that neither bitcoin nor Ethereum were on that list struck us as conspicuous in their absence. 

David Hirsch: So the chair has been out publicly, I think, since his confirmation hearing a couple of years ago, saying that he does not view bitcoin as a security, but that he's got questions about everything else. I would not focus too much on addition by subtraction or by looking and focusing on those things that we did not include. We typically aren't going to allege anything as a security until we have both conducted a full investigation and come to the conclusion that it appears to be an unregistered security. And more importantly, our five-person Commission has voted on that. I can think whatever I want and it has zero impact on the world outside until the Commission has decided to authorize some sort of action. So I would not be so focused on what isn't on the list and think more about what it is on the list and even on the things that are on the list. All we need to do to establish jurisdiction over Coinbase's conduct, in our view, is to establish that they have been in the business of transacting in at least one security, unregistered or otherwise. And if they are transacting in securities and they are performing the functions of a broker of a clearing agency: that they take money from one party and hands it to the other and takes a token from one party and gives it to the other classic clearing agency conduct or acting as an exchange where they're bringing together buyers and sellers to match them on a non-discretionary basis, typically based on price than time. 

Those are all traditional market functions that require registration, separate registration. You have to register as a broker. You have to register as an exchange. You have to register as a clearing agency. And there are rules about how much overlap you can have on those functions. And the rules are there to reduce conflicts of interest, to better position investors and to enhance accountability. And traditionally there has been some degree of competition where if you're a broker, you're not going to want to route your client's transactions to a shady exchange. Like if you don't have confidence that that exchange has legitimate listing requirements and is in compliance with its self-regulatory organization and its larger regulatory obligations and is handling its business in an appropriate way and surveilling for manipulative trading and otherwise keeping a clear book. Like, if you're a broker, why would I route my transactions there? I'd rather route them to a legitimate and registered exchange. And similarly, if you're an exchange, you're not going to want to have your transactions cleared by an unreliable clearing agency. People are going to get mad at you. They're going to come sue you. It's going to be bad. And like when you collapse all those functions under one roof, you give up on that level of competition. You no longer have brokers looking out for conflicts at exchanges and exchanges looking out for conflicts of interest. 

Ric Edelman: But within that context, it's interesting that one of the 13 coins on the list was Solana. Just to pick an example, why sue Coinbase for selling Solana as a as an unregistered security as opposed to suing the Solana Foundation for issuing Solana in the first place? It it's strikes me as very reminiscent of the share class scenario where the SEC allows mutual fund companies to issue B shares and C shares and then goes after financial advisors who sell B shares and C shares. If you're going to allow the product to be manufactured, what's the problem with using the product in business? 

David Hirsch: So what we have alleged against Coinbase, in regard to Solana, is unregistered broker activity, unregistered clearing activity, unregistered exchange activity. We have not alleged that they violated the law, which is Section Five of the 1933 Securities Act. We have not alleged that Coinbase violated the law by issuing or offering or selling Solana under the Section Five. We have alleged that they were performing exchange functions and that would be true whether it's Solana as a security or any of the other tokens or securities. We just need to identify those things that we think are securities in order to establish our jurisdictional hook. 

Ric Edelman: But wouldn't that start with the issuer? Why not go after Solana first rather than Coinbase? Coinbase can't be selling a coin that doesn't exist. So if the if the coin is unregistered, why not go after the issuer? 

David Hirsch: We retain the right and the jurisdiction to allege that Solana or anybody else who we think are issuing unregistered securities violated Section Five and doing so there. 

Ric Edelman: Are you suggesting that Solana is your next target? 

David Hirsch: Not certainly, not previewing any. We don't use the word target. That's a DOJ use, DOJ word. But I'm not previewing who else might be on our list of people to speak with at all, but I am saying that... 

Ric Edelman: But it's conceivable that filing enforcement cases against issuers is on your list of potential to dos. 

David Hirsch: It has been on our list. It remains on our list. We recently won a case against Library (LBRY). We brought a case against Kraken for an unregistered offering relating to their staking as a service project like we are pursuing claims for the unregistered offer and sale of securities, whether that's by an issuer or an intermediary that's providing a service like that. We did allege that Coinbase, through their staking as a service product, are violating Section Five. This is about different sections of the Securities Code where basically they are offering exchange functions. And in order for us to have jurisdiction over that, we have to establish that there's a security on their platform. 

Ric Edelman: So there's a conspiracy theory that the reason that the SEC is going after Coinbase, as opposed to the Solana Foundation, is that Coinbase is a big prominent company. 100 million accounts reportedly multi-billion dollar revenue business. And by going after Coinbase, the goal is, this is the conspiracy theory, the goal is to shut down Coinbase and use this as a way to discourage investors and consumers from engaging in crypto as part of their investment strategy and by extension, driving the crypto industry out of the US. Coinbase has already said that they're talking with London. They've already established licenses in other countries. Other Gemini is doing the same thing. Bittrex has shut down its US operations. Andreessen Horowitz has announced they're opening a London office for crypto startups, which they previously have done in San Francisco. Is the SEC trying to get the digital assets industry out of the US?

David Hirsch: No, we are not trying to get the digital assets industry out of the US.

Ric Edelman: Does the agency realize that there might be a byproduct of its actions? 

David Hirsch: My view personally is, it's probably a better way to phrase it because these are my personal views, allowing a liquid fully functioning financial system to exist in parallel with our regulated financial system is perilous in my mind. I think it is eroding of trust for those players within the digital asset space and those people in a larger financial space who take seriously their compliance obligations and their regulatory obligations. I have had people come to me and say in this role and in prior roles, I would like to do things the right way. I would like to come and have the consultations with the SEC and get feedback and hire the lawyers and the accountants and the auditors. They might not have mentioned liking hiring auditors, but they recognize that's one of their obligations. They want to do things the right way and be regulated and be compliant and.

Unfortunately for them, they feel like they're at a 40% plus economic disadvantage if they choose to go that route because they are going to be competing against people who can set up shop next door, reach liquid markets immediately and start making revenue day one without any regard for incurring those extra costs or taking the extra time to try and do things the right way. And so if you allow large industry spanning players to continue to act in a way that we believe to be non-compliant with their regulatory obligations, what we are saying to those folks who want to do things the right way is there to do so is already a difficult path and now you're at a significant additional disadvantage. 

And that does not seem like a proper way to promote a fully functioning financial system in this country. And I think it creates additional risk, which is crypto, although it takes a lot of oxygen and bandwidth within the SEC and certainly within my group takes almost all of it. It's only a small part of what we do. There's $115 trillion of capital markets that the SEC oversees. And if you reduce the regulatory obligations for a particular sector, if you say, well, crypto, you built everything non compliantly and now it would be too expensive or too difficult to do the work to retrofit it and make it compatible with our regulatory system. Or you don't want to go out and create new versions of what you've built that would be regulatory compliant. That's fine. You can have a lower burden. I mean, what does that say to ExxonMobil and the other huge issuers in this country and the stock exchanges and everybody else about their willingness to continue to engage with us and honor their legal and regulatory obligations? Why wouldn't I just create a token sell that without any oversight, hope for the best and reduce my costs today? 

Ric Edelman: I think that's interesting because there are a lot of tokens being issued. Starbucks is issuing tokens as part of its loyalty rewards. Nike is issuing NFTs and selling them in the marketplace. You have a 16 year old son, Ike, who plays Roblox, and he buys Robux, which is the Roblox Digital Token. At what point is the SEC going to say Robux is a security, Nike's NFTs are securities, Starbucks loyalty rewards are securities? Is that the daisy chain that we're going to see following next? 

David Hirsch: I don't think that's a daisy chain, but I think it is with any of those things. It is not the fact that you have created it that determines whether or not it's a security. It's not the entity that creates it. It's not the fact of its existence. It's the economic and it's not what you call it. It's the underlying economic reality that would determine whether or not we would take a look. 

Ric Edelman: So moving back to the Howey Test...

David Hirsch: Getting back to the Howey test. So for instance, big venture capital funds were buying up billions of dollars in Robux with the intent that they're going to resell them into the market at a profit. The use of Robux is minuscule compared to the financial transactions, the speculative conduct, the trading of Robux that the people who buy Robux primarily do so with the idea that if they just hold on to it, it'll be worth more in the future because of all the great work Robux is doing to make theirs a popular platform. Well, now that starts to look a lot more like an investment and a security and less like an analogous payment system to the US dollar. So if you set your costs at a fixed amount so that people who are buying your token know that they're doing so because they can only use it on their platform, but you're divorcing it from the speculative intent that is present and so much of digital assets. I don't think you're going to be getting a phone call from us or much less likely, the times when people run afoul of the SEC laws are when they are offering investments without going through the process of either qualifying for an exemption or satisfying the regulatory obligation by registering. 

Ric Edelman: You've acknowledged that some of the decision making at the SEC is based not necessarily on the letter of the law, but on the SEC's interpretation or judgment on that law. For example, you mentioned that SEC Chair Gary Gensler has long held the view that bitcoin is not a security and that virtually all the others probably are at one point there was a wide acceptance that Ethereum was not a security, but its transfer from proof-of-work to proof-of-stake has caused some in the agency to revisit that question as to whether it a security after all. So some of this is judgment and viewpoint. Clearly, last week on CNBC, the chairman made the following statement. He said, “We don't need more digital currency.” I equate that to the chair of the FAA saying we don't need any more airlines. Why would the chair of the SEC be in a position to determine what the marketplace needs? 

David Hirsch: So a couple of things there. First, I would, I think, take mild issue with the idea that we don't always take action based on the letter of the law, that everything we do has to fit within the letter of the law. But within that umbrella, we have finite resources. And so we have to make allocation decisions. We have to make prioritization decisions. But at no point do I think any of my colleagues say this is outside the letter of the law, but I'm going to do it anyway. That's just not a conversation I've ever heard. I would be appalled if that happened. That's not the way we approach our jobs. As to what the chair said - and that's my boss's boss, maybe boss's boss's boss - so I'm reluctant to get too involved in trying to interpret what was said in a live television interview. I've had some time speaking with him. My view of what I think he was trying to communicate - but again, I wouldn't want to speak for him, he's much more accomplished than I am - is he views the world often through economic terms and he has talked in prior interviews, including on CNBC I think about the kind of old wildcat currency days of the 1800s where lots of people, lots of banks were issuing their own scrip. They would each have their own dollars. And those would be popular for a time, but typically had no staying power. Eventually the US dollar won out because of economies of scale, because of reliability, because of trust, because of lots of conditions, and people who were left holding wildcat scrip were probably worse off for having done so. There wasn't really a use case for it. It didn't make economic sense. 

Ric Edelman: That's kind of the point, isn't it? The market solved this issue. 

David Hirsch: Well I think that in his conversation, he was trying to say, I don't see a use case we don't need because there is not a market purpose for a currency that exists only to replicate the US dollar, but to do so digitally because so much of what we can do with the with the dollar can already be done digitally. So it doesn't make economic business sense. But we are merit neutral. Like I would not tell anybody, don't create a new digital product. It's not my place to say. In fact, I would say part of my job is to facilitate that. If you can do it in a way that is consistent with investor protection and market integrity protection. 

Ric Edelman: So you're walking back the chairman's comments? 

David Hirsch: I'm not walking back. I'm attempting to interpret it based on context I have from other things I've heard him say, but he may well have meant as he said it. I've also heard him say multiple times, we are a merit neutral. So that leads me to think that it wasn't his intent to say we are suddenly not merit neutral, which could be one interpretation of the words as quoted. But I would not. I'm not here to tell you what he meant. That's certainly his job. 

Ric Edelman: We have a few minutes left and one of the things I want to deviate from our conversation on crypto, if okay with you all, is that what doesn't get a lot of attention for you, Dave, because there's so much focus on crypto gets all the headlines. It's the sexy subject if nothing else, is the other half of your job title. It's not just crypto asset enforcement, it's cyber, generally cybersecurity. That is a huge deal as well. And financial advisors are right at ground zero of dealing this because all of our client assets are held online and we're dealing with online apps and so on. And so talk about what else is going on in your world that is very germane and relevant to financial advisors in the world of cybersecurity. 

David Hirsch: I appreciate that. And that's right. Like crypto does take up a lot of oxygen, particularly over the last 5 or 6 months. But cyber is a huge part of what we do, what my unit and my team does and it's of pressing importance. I'm often asked to speak on it almost as much as crypto, which sometimes surprises me because crypto is so much in the national conversation. But the way I think about cyber is as a universal constraint for all of us. It's a universal consideration. Like you have to opt into crypto, you have to decide that I want to be involved in this space and I want to take some of the risks that are associated with it. All of us are automatically opted in to cyber. It's going to impact all of us. And so we are really active in trying to ensure that cyber regulations are there to protect investors and markets. And we look at it through basically two prisms. The first is our registrant community. So if you're a registered investment advisor or a broker dealer, you're a self-regulatory organization, exchange somebody else who registers with us, then you have certain obligations to try and protect the personally identifiable information and the assets of the people who trust their assets with you, work with you. 

And then on the issuer side, we. Are less about those kind of policies and procedures that we require you to take on, like Reg SID and Reg SCI and some of the other kind of computer protection rules and more about. Your policies and procedures have to be reflective of your lived risk experience. You have to follow your policies and procedures, whatever they may be, and you have to disclose to investors accurate and timely material information when it comes to your possession. We brought a case maybe about 3 or 4 months ago called Blackbaud, involving a publicly traded company that existed to help service folks in the nonprofit world. And originally they came out and said know we've been subject to an attack. They did get a little bit of data, but it was very constrained. It was limited what they got. Then they issued their typical periodic financial report, their 10-q, and said if we were subject to an attack that did access personally identifiable information for our donors and vendor community, that would have a significant impact potentially on our on our ability to attract new customers and to stay at the same level of profits. 

And they offered a lot of other kind of or several other warnings in the hypothetical if we were to suffer these consequences, here are some of the things that would then result. And we brought a case against them because they had suffered those consequences already. They just had a breakdown internally in communication between those folks who are in charge of doing the analysis of intrusions and the consequences of those intrusions. And the people at the top who were in charge of providing disclosures out to their investors, those two sides aren't talking. You're going to have an information breakdown and you're going to give information out to investors that is not accurate and that's going to cost people money. They're not going to be able to accurately price for risk. So we brought an enforcement action. We held them accountable, and they settled with us. They paid a penalty. They instituted new policies and procedures. And they basically, you know, we alleged you didn't follow your policies and procedures. You didn't have adequate disclosure process in place to make sure your investors got timely and accurate information and that caused harm. 

Ric Edelman: And is the approach that you brought an enforcement action? I mean, those are words that bring chills to everybody's minds. The notion, the allegation that is very frequently cited is that the SEC engages in regulation by enforcement, that rather than helping firms understand what the rules of the road are, that the analogy I've often used, and I'm sure you've heard me say this, that we don't know what the speed limit is until after we get pulled over for speeding. Is that the approach that the SEC is consciously, deliberately choosing to take, or is that a byproduct of the way it's working or not? This is a very frustrating element for the financial services industry, not just in the field of crypto, particularly in crypto, but it's happening broadly in the advisory field. Talk about this philosophical approach. 

David Hirsch: I will restrict my comments to crypto, though acknowledged they may exist well beyond it. It's just beyond my kind of level of expertise and I tried to stay as much over my skis as possible. I don't think that what I do or the people that I lead engage in is regulation by enforcement. I've often heard the criticism when we wake up and go to the office every day. It is about enforcing regulations. It is about we have rules on the books that have existed since the 1940s. I'm out speaking regularly. We have published guidance on this in 2017 and 2019. And since then, we stood up an entire office called our Strategic Office for Financial Innovation. It's the hub where people can come and consult with us and ask questions and say, What have I tweaked this? What have I do it this way?

Our offices of Corporation Finance and Trading and Markets and Investment Management regularly take consultations in from people who have questions about like, “How can I do this the right way?” The things that I see from the professionals that I interact with is a sincere effort to try and provide guidance where we can. But we are also constrained and that we can't. We're not your lawyers. It would be inappropriate for us to give you legal advice. And so that puts us in a bit of a constraint as the people were coming in to talk to us are like, you have to hire attorneys. We are an agency of attorneys and accountants and other professionals, and then we have to try and have a dialog that's productive. But we can't tell you what the law is because that's just not our role. 

Ric Edelman: And how do you respond to Coinbase's complaint that they have met with the SEC dozens of times, more than 30 asking the question, what are which coins are securities not getting answers and instead getting an enforcement action? 

David Hirsch: With respect, I'm not sure that is exactly an accurate retelling of what they've said. Like, I'm a little reluctant to get too involved in what Coinbase has alleged because we are actively litigating against Coinbase. And so I don't, again, want to try and preserve those conversations between the lawyers and the and the judge and less about what I personally think about these things. But I will say they have Coinbase has publicly said we had more than 30 engagements with the SEC. But we didn't get any process. And like for me, as somebody who actually attends not necessarily those meetings, but every meeting I attend is process. And if I attend 30 meetings with somebody, that seems like a lot of process and to the extent that you don't get the answer you're looking for. Those discussions don't prove to get you what it is you want, which is presumably a clean bill of health that may say more about the conduct you're engaged in than about the other side's willingness to engage in the conversation. 

On the implication of litigation, Grayscale's got a lawsuit with the SEC. Coinbase is engaged in a couple of lawsuits. One, they have filed against the SEC, and now the enforcement action. Brian Armstrong, CEO of Coinbase, says they're going to fight this enforcement action. The courts, as you've mentioned, is how we adjudicate and resolve these differences. The downside is that this is time consuming.

Ric Edelman: What's your prediction regarding how long it will take to resolve these disputes? 

David Hirsch: It can't come soon enough from my perspective. But that's not something we can we control. The courts have their own schedules. These are complicated matters and they're matters of significant importance. 

Ric Edelman: We're talking years. 

David Hirsch: It is likely years. 

Ric Edelman: And in the meantime, what do you suppose the crypto is the impact on the crypto community, on the investment community in the world of crypto as a result of between now and those conclusions ultimately reached? What do we do? 

David Hirsch: I mean, what I hope happens and this is kind of my own pie-eyed optimism and I'm not sure how much it's shared by industry or others is that people say this is the window. Like now we have an opportunity to come in and spend the time to consult with the SEC and try and do things the right way and distinguish ourselves as the. And this hypothetical entity. I'm not saying any one person is pursuing this or any entity is pursuing it, but if it were me, it seems like there is a window of opportunity to say for the next year I can work really hard about developing a compliant marketplace that that will look after the interests of investors, that is focused on preventing and identifying market manipulation and scams and frauds. And that is going to be someplace that moms and dads and lawyers and teachers and cops and principals feel comfortable they can invest their money without becoming the victim of a fraud. And I don't know that any entity that exists outside the regulatory envelope over the long term is going to be able to provide that level of confidence. And I think without that level of confidence, the digital assets marketplace, the overall market cap within the US, is always going to be smaller than it otherwise could be. I think that there is room for a compliant player and I think that there is profits to be had if people are willing to go that route. 

Ric Edelman: If I interpret what you just said correctly, once this regulatory clarity, the resolution of the court cases, et cetera, are obtained, that the crypto marketplace will grow. 

David Hirsch: I think it's possible. I don't know. That is my hope is that by making it more expensive to be non-compliant than it is to follow the rules, more people will follow the rules and. 

Ric Edelman: The more people that follow the rules, the more people will be willing to engage and the more people who are willing to engage will result in a growth of the marketplace. 

David Hirsch: I think that possibility certainly exists. 

Ric Edelman: That sounds to me like you're bullish about crypto. 

David Hirsch: I mean, I think I'm bullish about the technology. I am agnostic and admittedly unclear on what exactly is going to look like. I mean, I think it is changing, but... 

Ric Edelman: It's here to stay. 

David Hirsch: I think it's here to stay. 

Ric Edelman: Do you personally own bitcoin? 

David Hirsch: I don't. I've never owned a crypto. I've worked closely with people. I've taken multiple courses on it. I've watched other people engage with it. But for me, there was a fraud case I brought back in 2018, on the same day that a bunch of other things happened and the price of bitcoin fell dramatically, even though the case I was handling wasn't directly about bitcoin. And I would never want to be in a position where people think that I'm taking an action or not taking an action because of my own personal financial interests. And so just stayed out of crypto. 

Ric Edelman: And after you leave the SEC and return to the private sector, assuming we'll just leave it at leaving the SEC or the role of this potential conflict, I appreciate you're very much avoiding such a conflict. Too many members of Congress and other government agencies in the news have failed to adhere to that that principle. Thank you for doing that. But once you are no longer in such a conflicted position, will you own bitcoin? 

David Hirsch: It's a good question. I've not actually thought of that. I don't have a principled objection to it. I think it will depend on my own analysis and the analysis of my financial advisor at the time as to the likely return and success of that investment. 

Ric Edelman: And if you were in need of a financial advisor, I don't think there's anyone in this room willing to take you on as a client. Ladies and gentlemen, give our thanks to David Hirsch for joining us today. That's Dave Hirsh, Chief of the Cryptoasset and Cyber Unit in the enforcement division at the US Securities and Exchange Commission on stage with me this past week at the fifth annual DACFP VISION Conference in Austin.

In coming weeks here on The Truth About Your Future, I'll be presenting you with additional conversations from the conference, including next week, the conversation I had with Congressman French Hill, Chair of the House Subcommittee on Digital Assets. Right now, you can check out the photos of the conference and other highlights. It's all on my Facebook, Twitter and Instagram pages.

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