What It's Like to Be Sued by the SEC w/ Oliver Linch

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1:29Oliver Lynch, CEO of Bittrex Global Exchange. Welcome to Crypto Daily Briefing. Thank you very much for having me. Well, pleasure to be here. Lots to talk about from a regulatory perspective. Lots to talk about from a global business perspective. Of course, the SEC case against Bittrex. But first, let's take a look at price action. Bitcoin right now trading at$26 ,223. A lot of red on the screen. On a 24-hour basis, it's down about three-tenths of 1%, trailing seven days off 3%. Ethereum trading right now at 1 ,791. It's about flat on a 24-hour basis. On a 24-7-day basis, excuse me, it is off a little less than 1%.

2:13Oliver, lots to talk about. I've been looking forward to having you on the show to talk about, as I said at the top, what's happening from a global regulatory perspective in the digital asset space, but also what's happening specifically with your shop. Bittrex obviously charged by SEC in April with a series of securities offenses and Bittrex US filing for bankruptcy as well. Let's talk a little bit about the big picture. Oliver, how do you see everything that's happening right now? What a question to start off with. Everything that's happening right now, look, it's never a dull day in crypto.

2:48And that's why it's such an interesting time for the sector as a whole. But let's split these things into two separate areas of development. I think what we're seeing in the regulatory environment on a global scale is a move towards a two-speed world. On the one hand, you have a series of jurisdictions who are really trying to get to grips with crypto, understand that the most successful regulatory regimes, the most successful ways of handling this new technology is to create a bespoke framework that actually seeks to grapple with what crypto is, how it works, what the risks are, and how to manage them and say, okay, this is how you do it safely.

3:32And so we see regimes like that led initially by Bermuda and by Liechtenstein, who are still the two countries leading the pack, But we now have the EU with Mika, the UK consultation paper released in February of this year, adopting a similar approach, Barrow with Dubai, Hong Kong, the list goes on. And what those jurisdictions are saying is, okay, there's something actually quite important here about crypto, about digital assets. This stuff is not going anywhere because people now realize just how useful, just how valuable, and just how productive a part of the wider financial markets it can be.

4:10So they're saying to themselves, well, okay, how do I get a piece of that action? But how do I do so safely? How do I do so in a way that protects customers, protects markets, and inspires confidence? And as I say, the most respected, the most successful regimes are the ones that embrace crypto as crypto and say, right, here is a path to success for what that looks like. The second speed are those jurisdictions that are not doing that at all and are trying to analyze crypto through the lens of traditional finance and are instead saying, you know, let's have a look at what this stuff is. Is it kind of like a security, kind of like a commodity or a derivative?

4:53The answer is no, right? It's actually none of those things. It's crypto and it's brand new technology, and you're never really going to be able to fit the square peg in that round hole. especially when that round hole was created 90 or 100 years ago because the fact is this technology is moving on and is so um disruptive i mean everything's disruptive these days right i mean i stubbed my toe on my bed this morning and someone described it as disruptive but but blockchain technology seems to me genuinely to be disruptive and so trying just to pretend that it's that it's not that it's nothing new and that you can analyze it and regulate it in the same way as you have done traditional securities or traditional commodities, but are getting on for 100 years, it seems doomed to failure.

5:43And that failure looks like confusion. It's not dramatic failure. It's just a fog of confusion that descends on a situation where the only appropriate response is to say, I just don't know what to do in this scenario. Well, I mean, you sort of sketched this framework out here, whereby it's worth remarking that the securities laws here in the United States were formed 90 years ago or thereabouts, 1933, 1934, some small adjustments along the way. But the principal regulatory framework for the securities architecture of the United States dates back to the 1930s to the Franklin Delano Roosevelt administration.

6:21Clearly, blockchain technology and digital assets were not in mind at the time. And yet there is this question, or at least this thesis that's put forth by Chair Gary Gensler at SEC, that the fundamentals of the protections of investors have not changed. This is a question that is obviously hotly disputed, as you say. Other jurisdictions are trying to come to grips with this in a way that attempts to modernize what's been happening from a securities regulation perspective and to understand and to encompass everything that's happened in digital assets. With that said, the challenge now exists that if you're operating in a jurisdiction such as the United States, those laws are the law of the land and must be followed.

7:03Let's talk a little bit about the specifics of what happened with Bittrex and the suit with SEC, just so folks understand what the principal issues at stake are. I know I spent some time reading the criminal complaint this morning. I am not a lawyer. I know you're a lawyer. You're not a U.S. lawyer, important to point out. But let's talk about what actually is contained in the complaint, what the allegations are, so people understand what the issues at stake, at least here in the U.S., are. I want to read this. This is actually from the press release. It's a quote by Mr. Grewal, who is the director of SEC's Enforcement Division, which sketches out, I think, the principal points.

7:38Quote, as laid out in our complaint, Bittrex's business model was based on three things. Circumventing the registration requirements of the federal securities laws. That's number one. Counseling issues of crypto asset securities to do the same by altering their offering materials. And number three, combining multiple market intermediary functions under one roof to maximize profit. For folks who don't understand what that means, they're talking about combining essentially the functions of a broker-dealer, an exchange, and a clearing agent that holds assets for customers. What's your take on that?

8:11Do you think that's an appropriate summation of the challenges that SEC has seen with Bittrex's U.S. entity now in bankruptcy? So an all-encompassing question. Let me just pick apart a few of them. Firstly, this is a purely civil complaint that's been brought by the SEC, and you referred to it as criminal, and it's not, and there's no allegation of criminal action. I think I said charged. SEC doesn't file criminal complaints in the United States. Exactly, exactly. So I just wanted to clarify that word. The second thing, and the really important thing, is Bitrix US and Bitrix Global are entirely separate, legally and operationally distinct companies.

8:51Bitrix Global never has and never will have any US customers, does not offer its services into the US. And so the vast majority of the issues raised in the SEC's case actually do not relate to Bitrix Global. and so I'm not the right person to speak to them because they just don't apply to us. And this is not a case of a division or a separate department. These are just entirely separate companies. And so I can't speak to the detail of the allegations against British US. What I can say is that they very strongly dispute these and are looking forward to demonstrating it now looks like in a court that those allegations are not correct.

9:38And the allegations, again, it's just global, are much more narrow and actually just quite confusing. Because as I say, we do not operate in the US. We don't have a single US customer, never have. It's important to point out, as you say, these are allegations made in the SEC's civil complaint. Obviously, they can be adjudicated. This is not a final ruling or decision. These are just the charges, the civil charges from SEC. But could you do us a favor and explain the relationship between Bittrex Global and Bittrex US? Obviously, the same name, separate operating entities. What's the relationship between those two organizations today and historically?

10:17So Bittrex US was the first to be established. Bittrex US was set up in 2013, 14 in the US serving US customers and indeed rest of world customers. And as that global footprint got big enough, it stopped making sense to service the rest of the world out of the US, not least in part because of the lack of regulatory clarity that exists across the board. In the same way as if you go to J.P. Morgan in Europe, you're likely not to be serviced by J.P. Morgan out of New York. You'll be done out of the London branch. if you have Citibank or Goldman, you know, traditional finance as well often has this divide between the U.S.

10:58entity and the global entity. So back in 2018, 19, the global footprint of the exchange had gotten so big that the decision was taken to essentially spin it out into its own separate company. So the ultimate shareholders are the same people. but in terms of legal and operational running of the company, they're just two separate exchanges. And in fact, then in 2020, the global footprint of the global company had gotten so big that in addition to being regulated in Liechtenstein to service EU, UK, Swiss customers, we also then got ourselves regulated in Bermuda under the Pioneering Digital Assets and Business Act to service Restor, Restor world.

11:48So still not servicing any U.S. customers, but we operate these two regulated exchanges to this day. Hey, everyone, we're going to take a quick pause and hear a word from our partners. We'll be right back.

12:04So I know there's a lot of nuance and complexity there, but essentially you're saying it's the same shareholders, but different operating entities regulated in different jurisdictions and servicing essentially different customer bases. That's exactly right. Entirely separate customer bases. That's exactly right. And so, you know, that's been the setup for Bittrex Global ever since we were established. And so Bittrex Global has no view on the charges against the U.S. entity, Bittrex U.S. Well, I mean, the statements of Bittrex U.S. to defend itself in court But I echo those of Bitrix Global, and Bitrix Global similarly is now in a position.

12:46We wish we had been able to engage with the SEC, actually, before they started their proceedings. But the very first time that Bitrix Global heard from the SEC in any manner was when they served us with the Wells Notice, saying that they'd already reached their conclusion. That's extremely unusual. I'm not a U.S. securities lawyer. I'm not a U.S. lawyer at all. But I've not met anybody that thinks that that is not an extraordinary first thing to hear from the SEC. We then asked for a reasonable period of time to respond to those allegations because, you know, it's brand new. Both as a matter of law and there were some facts and we wanted to understand what their position was.

13:26And we were essentially told, don't bother. We're just going to go straight to court. So we're now in a position where actually there's just confusion layered on confusion, both about the rules that we were supposed to have followed, which is well known across the industry, but also increasingly there's awareness in the wider world. These rules lack any kind of transparency, lack any kind of detail as to what it is we were even supposed to have done. but there's this additional layer of confusion for Bidships Global, which is we don't operate in the United States. So how are we drawn into this?

14:05And it's just not been the level of engagement with the SEC that you would normally expect, where we can say, oh, we understand what they're saying. They're saying A because of B, C because of D. We've just never had that level of engagement. So confusion abounds confusion. So what happens next? How does this get resolved? Is this something that Bitrix US plans to take to trial? Absolutely. Both Bitrix US and Bitrix Global have said, you know, we think that we've done nothing wrong. On the Bitrix Global side, we would have welcomed the opportunity to have that discussion with the SEC. But if they won't have the discussion with us, then we'll make those explanations to a judge.

14:46And that's all you can do. And ultimately, as a lawyer, I spent over a decade practicing financial regulatory law out of the UK. I did some work in the Middle East, and I've engaged with a lot of regulators over the years. It's very unusual to be in a position where you have to rely on the formal legal process of going through the courts, not to ultimately vindicate your case, which often regulators will disagree with you, but actually as a first port of call, just to immediately launch into these kind of proceedings is really very unusual. But if it's a judge that we've got to tell our story to, then we'll tell our story to the judge.

15:32So let's talk. I know it's an ongoing legal case, and you're limited in what you can say, but I want to talk about some of the concepts that underlie this. Essentially, there really are two. I think it's this question of whether or not digital assets are securities and then whether they were listed on an exchange in violation of the law and whether or not there was a relationship then between those offering the securities and the exchange. I would think that is one piece. And then the second piece is the combination of market intermediary functions. Let's talk a little bit about those two ideas broadly.

16:03In terms of the first, this notion of whether or not digital assets or securities, how do you think about it? It's a question here in the US. It's a question more globally abroad. How do you think about that question of what is and is not a security? Obviously, in the US, we have the Howey test. But from a broader perspective, what's your view? Well, by far, the best answer to that question would be to be able to point to specific detailed rules that are designed with crypto in mind to tell you what is or is not a security or is or is not within the scope of regulatory regime. That is exactly what you have under the TVTG, the Blockchain Act in Liechtenstein.

16:44That's exactly what you have under the Digital Assets Business Act in Bermuda. That's what you will have under MECA is you can say, here is a bright line distinction. And so every single token that is listed on Bitrix Global comes with a formal legal opinion that says this is not a financial instrument. A financial instrument is the term used under EU law that effectively means security. It covers a few other things as well. But it essentially means not a utility token. Every single token that we list comes with that formal legal opinion. So we know exactly what it is that we're listing and exactly how we can be certain that we don't fall under this prohibited list of financial instruments.

17:30So what you never have is the unedifying spectacle that we saw of the chair of the SEC sitting before Congress refusing to answer whether a given token was a security or not. Yeah, in this case, Ethereum specifically is what you're referring to. I am referring to Ethereum, but it's not just Ethereum because look at the public statements of Bitrix US and other exchanges that are going through similar processes. They have been crying out for clarity. Tell us which ones you think are securities, they say, and they get nothing in response. They get a resounding silence in response. That cannot happen when you've created a regular shoe regime that is fit for purpose.

18:11So it's all very well saying we've got the Howey test, which, again, is very old and relates to citrus fruit plantations. And, you know, it's not – FDR was a genius, but I don't think he really saw blockchain coming in the 30s. Well, maybe he did, and he's clever, and we all give him credit. Probably, probably not. Probably not. I know that this gets confusing. You mentioned the TVTG, that's the Token and Trusted Technology Services Provider Act in Liechtenstein. You're not going to try and get me to say it in German, are you? It must be about 65 letters long. Oh, at least. I know this gets confusing.

18:58Liechtenstein is not a member of the European Union and therefore not included in the MECA Act. But let's talk a little bit about this. Sorry, that's not right. Go ahead, please. Liechtenstein is in the European Economic Area, and so it is within MECA. So the framework of MECA is not just exclusive to the EU. It's also the European. Correct. So pretty much all financial legislation in the EU applies to the EEA. Important distinction. Great. It's really important. And what it means really importantly is that Mika was based on the CBTG. In some cases, explicitly just borrowed the concept. So the pioneering aspect of the CBTG or the Blockchain Act was what's called the token container model.

19:47That was adopted into Mika. And Mika says if you are operating under a regime that is recognizably similar to Mika, you'll be grandfathered in. So you get certain additional rights. You basically get credit for having been doing Mika before Mika came along. And Lichtenstein counts as that, and Bitrix Global will count for those purposes. So when people say, you know, there's X, Y, and Z problems with Mika, or we can't do this, or we can't do that, we're here to say, actually, you can. And we know that because we've been doing it for three years already. So essentially, there's a mechanism that exists to harmonize national regulation with broader European regulation in a way that can essentially harmonize those two legislative frameworks.

20:35Yeah, up until now, it's been up to member states to decide whether they want to create a framework for crypto or not. And so some, like Lichtenstein or Malta or France, have decided to, but the vast majority have not. So there just hasn't been a comprehensive regulatory framework for crypto in most of the EU. And so for those who have not, then Mika applies. But those who have, okay, this is very interesting, very helpful, actually. For those that have, exactly. It's a transition period for those that have. They're basically recognizing that they've already got substantive protections in place.

21:11Okay, so let me ask you this. Under Mika and the law on Lichtenstein, this idea of financial instruments, roughly somewhat, I guess, analogous to a security in the United States, what makes something not a financial instrument other than the fact that the issuer says it's not? Well, in the EU, it's defined the other way around. So there are comprehensive rules about what are financial instruments. And actually those rules apply and predate MECA, and they're in a separate regulation called MIFIR, Markets and Financial Instruments Regulation, Markets in Financial Instruments. And so there's a whole load of detail telling you what constitutes a financial instrument.

21:53And you can go to any EU lawyer. As I say, when I was in private practice at a law firm, we would regularly produce opinions. And you do a deep dive into, in the case of crypto, you do a deep dive into the token, into the token team, the white paper, how it operates in practice. You know, there are lots of criteria and lots of checks that you do. And you can say with certainty, this is a financial instrument or this is not a financial instrument. So, you know, that test has existed for a while. and now leveraging the advantage of that in the cryptosphere, you say, well, if it's not a financial instrument and it's not e-money, which is a separate regime, again, actually quite weird and confusing and most lawyers don't particularly like e-money, but it's there.

22:44If you say it's not either of those two things, then it's what the TVTG will call a utility token, which is sort of everything else category. Hey, everyone. We're going to take another quick break and hear a word from our partners. We'll be right back to the Real Vision Crypto Daily Briefing.

23:06Well, let me ask you this more generally. I know that obviously these securities laws get immensely complicated, particularly as we talk across multiple jurisdictions here. But the spirit of securities laws, we talk about how much the technology has changed since the 1930s. But the spirit of securities laws effectively is to protect investors and the general public from deceptive practices to facilitate fair markets and hopefully to aid in capital formation as well on the opposite side of the ledger. Talk a little bit about investor protection, some of the risks. God knows in our space we've seen our share of fraud, unscrupulous actors, rug pulls as they're known in the space.

23:41Talk a little bit about how you think the protections for that are served or not served under Mika and TVTG. Absolutely. And those things are critical. They're absolutely crucial. And the important thing to remember is that under the way it works in Liechtenstein and in Bermuda and under the EU MECA rules, if you are a utility token, you're not a security, that in no sense means that you're in a free-for-all. That doesn't mean you can do whatever the hell you want. Quite the opposite. Actually, that then shoves you into the robust regulatory framework for crypto that has been designed precisely to ensure that within the context of crypto, there is transparency and fairness in markets.

24:28There are robust standards and principles that apply to service providers. Being a TBTG regulated exchange is, in many cases, it can even be more robust than being a traditional markets exchange because your obligations are tailored to crypto, but the principles underpinning them are just as robust or just as forceful. And the supervisory oversight, the enforcement and the constant oversight is tailored to crypto. So fit for purpose, but no less intense for it. So it's important not to get the idea, which does exist in the US, right? And it does exist wherever there aren't actual fit for purpose regimes, that if you are not falling within the definition of security or financial instrument, then it's a free fraud and you subject yourself to the worst elements of society.

25:25That's precisely the point. That's why we need robust, fit-for-purpose regulation for crypto because we say, well, these things aren't financial instruments, but people are still exposed to them. We still want fair markets. We still want transparency. We still want to avoid market abuse. We still want to avoid fraud and manipulation of all kinds. How do you do that? Well, go look at the TVTG. Go look at the DABA in Bermuda. Go look at Mika. That tells you how to do that. So let's talk about a different aspect of this and probably the one that's gotten less attention of the two that I was talking about.

26:04The securities aspect of this I think is pretty well covered. The other interesting point, I think, from the complaint from SEC is this idea that of the combination of multiple market intermediary functions, It's important to point out that this complaint was filed by SEC less than six months after the collapse of FTX. It is interesting to think about the crypto ecosystem. I'm someone who spent some time in banking myself. The idea that functions like broker-dealers, exchanges, and clearing agents are segregated is a given in the traditional financial services space. And one of the challenges that we saw in the FTX collapse was the fact that those multiple functions were housed under a single entity or a series of related entities, Alameda and FTX specifically.