Cryptocurrency: The Regulator’s Perspective (Podcast) – Fin Tech – United States – Mondaq

Rachel Maimininterviews LowensteinpartnerChristopher Gerold, former Chief of the NewJersey Bureau of Securities and former Chair of the North AmericanSecurities Administrators Association, on his career and hisperspective on securities regulation and cryptocurrency matters.Chris discusses his experience leading some of the nation'sfirst crypto-enforcement actions, including the March 2018 actionagainst the Steven Seagal-promoted ICO of Bitcoiin and the risksinvolved in this burgeoning area.

Christopher Gerold, Partner,Securities Litigation, Blockchain Technology & DigitalAssets

Kevin Iredell: Welcome to the LowensteinSandler podcast series. I'm Kevin Iredell, Chief MarketingOfficer at Lowenstein Sandler. Before we begin, please take amoment to subscribe to our podcast series atlowenstein.com/podcasts. Or find us on iTunes,Spotify, Pandora, Google podcast, and SoundCloud. Now let'stake a listen.

Rachel Maimin: Hello and welcome toRegulatory Matters, a podcast devoted to covering the ever-changingregulatory landscape affecting business to today. I'mtoday's host Rachel Maimin here with Chris Gerold. Chris,who's now one of our partners at Lowenstein, just left hisposition as chief of the New Jersey Bureau of Securities, positionwhich he held for about four years. Under his leadership the Bureauof Securities filed some of the earliest crypto enforcementactions, and was at the forefront of crypto and DeFi, filing morethan 23 crypto and DeFi-related enforcement actions, includingcases against BlockFi and Celsius in 2021. Chris rose to nationalprominence in the emerging crypto and DeFi spaces in 2018 when heled the North American Securities Administrators Associations,otherwise known as NASAA, but not to be confused with the otherNASA, Operation Crypto Sweep, as the chair of NASAA'senforcement committee. NASAA members from more than 40jurisdictions throughout North America participated in thisinitiative, which resulted in more than 330 inquiries andinvestigations and at least 85 enforcement actions related to ICOsor cryptocurrency investment products.

As the president, Chris engaged with SEC commissioners and FINRAleadership on various rule-making and policies, including theSEC's Regulation Best Interest. And when the pandemic struck,he led the organization's COVID-19 enforcement task force,consisting of more than 44 state and provincial securitiesregulators, which initiated more than 250 investigations andenforcement actions against fraudulent investment offerings seekingto profit from the pandemic. So, Chris, you were a regulator whoregularly hung out with other regulators, so you have a lot to tellus about today.

Christopher Gerold: Hi, Rachel, thanksfor having me, happy to be here. Yes, I do. And I have been hangingout with a lot of regulators over the last four or five years. Mycolleagues and folks that had my job in states across the country,and in fact, NASAA was an organization which was all of NorthAmerica. So includes the provinces and territories of Canada andMexico as well. So really was able to see what regulators in thesecurities area are doing from all over North America.

Rachel Maimin: So global, not just theUnited States?

Christopher Gerold: Correct.

Rachel Maimin: Well, let's get intoit. I'm curious because I previously had a career in publicservice. What led you to public service, and in particular to thebureau?

Christopher Gerold: So interestinglyenough, I started my career, my legal career, I should say, becauseprior to law school, I was actually a broker Series 7, Series 63. Ihad clients, I was a broker for two years after undergrad. Then Iwent to law school. And when I came out of law school, like so manyothers, I wasn't sure exactly what I wanted to do, but I wantedto stay in finance, having been in that field before. And my firstjob was as a deputy attorney general representing the New JerseyBureau of Securities as an attorney. And so I did that for fiveyears, because of my background, having had licenses and been inthe securities industry, I was able to do that and catch on. And Imean, there was a learning curve in the legal aspect of it, butunderstanding the products and the services and what brokers did, Ihad already experienced that.

And so starting my career, I was representing the Bureau ofSecurities, did that for five years, I prosecuted cases on behalfof the agency. We went after people that were violating thesecurities laws, people committed fraud, Ponzi schemes, otherthings in that area. And then I went to private practice for sevenyears, and had the opportunity to go back as the chief of theagency, and I did that in 2017. Now what actually made me go tothis field is relatively interesting in that my parents werevictims of a Ponzi scheme when [crosstalk 00:04:45] I was in highschool. And I could honestly not say whether that led me to what Idid for a living as a regulator, I never really thought about it,but it would make sense, at least subconsciously, that that led methere, because I could see the devastating impact of securitiesfraud on people, including within my own household.

And fortunately my folks at the time were probably in their late'40s and they lost a portion of their nest egg, but they hadtime to grow it again and didn't impact them long term, but fora lot of people it does. And we see a bunch of that, or I saw abunch of that as the regulator, seniors being victims, losing lifesavings, having to make difficult choices cause they lost all theirmoney to a fraudster. So I had a chance to try to remedy some ofthat doing public service, protecting innocent investors,prosecuting bad actors. And I did that for five years. And it wasvery rewarding work getting to do that and trying to make adifference.

Rachel Maimin: That's incredible. Soyou basically have experience as a victim of a crime, in so far asyour parents were victims of a crime, and also as a broker. So Iguess there's no area of this that you haven't actuallybeen firsthand involved in.

Christopher Gerold: I've seen thefinancial industry from a bunch of different angles.

Rachel Maimin: Yeah.

Christopher Gerold:And so I guess maybeit's time now for me to become an investor myself.

Rachel Maimin:That's true, I forgotabout investor. So was there something about happened with yourparents in particular, I know you said it might be subconscious,but do you think that their case was handled the way youwould've handled it had you been in charge of theprosecution?

Christopher Gerold: So it'sinteresting, they were part of a national Ponzi scheme, at the timeit was probably the largest Ponzi scheme in history as $900 millionemanated at Massachusetts. The SEC brought a action, it ended up ina receivership. And I do recall my folks getting checks from timeto time from that receivership. Interestingly, it was sold throughlegitimate broker dealers, or at least registered broker dealers.And my recollection is that they did not actually prosecute thebroker dealers that sold it, whether it's lack of duediligence. Lack of due diligence is probably what they could havegone after them for. And I think when I was at the state and I hadthat ability, I did look to broker dealers that sold, whether itwas unregistered products or fraudulent products, to make sure thatthey were doing their job of as gatekeepers before they sold it ontheir platform. So I don't want to cast stones, and...

Rachel Maimin: You can cast somestones.

Christopher Gerold: Well, because of myage, and I did at one point go back and look at how it was handledand did some research on it when I was older and had a law degreeand saw what came out of it, I think I would've looked a littleharder at the folks that sold it than they may have.

Rachel Maimin: And having that uniqueperspective, and I guess maybe even a destiny in public service,what was it like being a broker?

Christopher Gerold: It was interesting, Iwas 22 at the time, I just graduated college, I didn't knowanything, I knew what a stock was, and really had this hugeresponsibility thrust upon me to try to advise people how theyshould save for, most times it's retirement, but what theyshould do with their investing. And it's a very challengingjob, and I appreciated that. I mean, there's the sales aspect,but then there's also the analyst aspect. And the industry[has] changed a lot since I was in it, where firms generally havemore say in what the broker puts their clients in. And I actuallythink that's a good thing, because do you really want a22-year-old who just graduated college, who doesn't knowanything, who's never experienced downturn in the economy orloss or what have you, any of the number of things that could comeup, picking and choosing stocks for you? So it is a job that is abig responsibility.

I think the folks that take it seriously do well and have longcareers and clients that probably become friends. Then I thinkthere are others that don't last in business. I did not lastobviously, I did it for two years and then decided I wanted to goto law school. And that's what I did, but it's achallenging job.

Rachel Maimin: Yeah. Well, I'm sureit played a very helpful role when you ended up regulating some ofyour former colleagues.

Christopher Gerold: Well, it has played arole throughout my career, whether as a regulator, but also inprivate practice where I'm advising, whether it's brokerdealers or individuals who are being investigated by regulators, Iknow how difficult that job is. And sometimes my clients had nointent and things just went south. In those cases it's easy tosympathize with them, because that could happen, they have a goodidea, doesn't work out, and all of a sudden the regulator'slooking at them, I could sympathize. So it's played a rolethroughout my career. It was one of the most challenging jobs Ihad, back then everything was on the phone. So I got veryaccustomed to calling 100 or 200 people a day. They used to referto it as dialing for dollars. I got over any shyness I had at thetime, but it wasn't for me long term.

Rachel Maimin: Well, you mentioned intheir regulatory scrutiny and catching the attention of regulators.Something that I think is really fascinating about your backgroundis you seem to be interested in the crypto space before it becamethe hottest topic for every single regulator and prosecutor in thecountry. How did you begin to focus on that?

Christopher Gerold: So crypto was onstate securities regulators going back to as early as 2014 or'15. In fact, even before my time, they identified it as atrend in enforcement, where it was a product, that it was evolvingand could be a problem. But when it really jumped onto my radar,again, I have to blame my parents, I'm always blaming them, butit was November, Thanksgiving 2017, my mother, and you'vealready heard about my parents, how good they are at investing,asked me whether she should be buying crypto, whether she should bebuying Bitcoin or not. And at the time I had just become the chiefof the Bureau of Securities. And I said, "If my mother'sasking me if she should buy this product, there might be a problemhere." And by Christmas she said, "Chris, I really thinkwe should be buying it, people are getting rich."

At the time it just got up to the level of about $20,000 perBitcoin. And very shortly thereafter, we brought our first case,and we started looking around, started talking to my colleagues inother jurisdictions. And we came to realize, like many,historically whenever a product or commodity becomes all the rage,we saw it with the dot-com bubble, we saw it with gold when goldwas up at $2,000 ounce, we saw it with oil when it was tradingaround $150 a barrel, what happens is the product is on the frontpage, and then out come bad actors to try to monetize that. And sowe brought our first case against the Steven Seagal-promoted, itwas called Bitcoiin with two eyes for instead of Bitcoin, Bitcoiin.We brought that in the late winter of 2018, it was one of our firstcases, it made national headlines because of the celebrityassociated with it.

After that it snowballed because the fraudulent ICO, initialcoin offering, market was all the rage at the time. And as aregulator, we saw there were problems, there were fraudsters outthere. And so we took the initiative, I say we, myself, my officein New Jersey, and we brought our first case. And otherjurisdictions reached out to me, and we put a task force together.And we started looking at all of these different websites that werepromoting different cryptocurrencies and ICO offerings and alike.And really it was to stop those that were doing it, but it was alsoto raise awareness. I'm a firm believer, at least in my oldrole, a good enforcement case is better than a lot of investmenteducation. If you could get it in the newspapers, people will readit and hopefully take notice that that's an area they shouldhave heightened due diligence or be suspect of.

Christopher Gerold: And we did exactlythat, we brought a number of cases, New Jersey did. We partneredwith my colleagues in other jurisdictions. I was the head ofNASAA's enforcement committee. So we put a multi-jurisdictionaltask force together. And we went out and enforced and issued 100sof investigations and enforcement actions, became known asOperation Crypto Sweep. And from then on, we were off and running.And so my phone would ring from colleagues in other jurisdictions,federal counterparts would reach out, and start coordinating andbringing more actions in that space.

Rachel Maimin: Anything about cryptoinherently, other than the fact that you can disguise the ultimateowner and it prevents people from really following a paper trail,is there anything about crypto other than that that makes it aparticularly fertile place for fraudsters?

Christopher Gerold: Well, I certainlydon't want to say all crypto is bad, I think crypto does havevery legitimate and a lot of promise. Unfortunately, early on wesaw a lot of fraudsters come out and try to capitalize on that. Butyeah, it does. I mean, the transactions are instantaneous, it haslower fees in a lot of cases, it can be used in a lot of good ways.And, well, oftentimes crypto and blockchain are confused.Cryptocurrency's on a blockchain, blockchain is the technology.And so the technology itself has a lot of potential uses, andwe're seeing more of them now and we're seeing them evolve,and it's really an area that has a lot of promise. The bestcomparison I heard was, folks used to say, "the Internet'sgoing to change the world." They didn't know how, but itwas going to change the world. And we're seeing that same typeof thinking and evolving in the crypto and blockchain space, alongwith DeFi, as you mentioned earlier, decentralized finance.

Rachel Maimin: Well, so obviously promiseand the opportunity for positive transactions to take place in thecrypto space, but if a company is considering getting into it rightnow, can you do it without a massive regulatory risk, given all thefocus on the industry?

Christopher Gerold: So it depends whatarea of they're going into. Obviously you still need a goodidea, you can't just go out and say, "We're a cryptocompany." You have to have an idea, you have to provide someservice, there has to be something tangible behind it. Andcomparing it to the dot-com bubble, if you remember back in'99, if you had a company, you put .com at the end of it andall of a sudden your stock would go way up. And now 20 years later,people realize you have to have a service. And the people orcompanies that were winners early on doesn't mean they'regoing to be winners later on. And we see it with AOL, if youremember AOL-

Rachel Maimin: I seem to remember AOL,yes.

Christopher Gerold: ... or Netscape, orthose early, early companies that were all the rage. Yahoo,it's still around, but it's not what it once was. And nowwe have these other companies, Google and alike. So there are lotof opportunities with blockchain and crypto. We're seeing a lotof money going into that space, a lot of talent, a lot of smartpeople going into that space, and it's evolving. It's stillin its infancy in my opinion. So you talked about regulatory risk.There is a lot of regulatory risk in that space. Keep in mind, Iwas the chief of the Bureau of Securities, if it wasn't asecurity and wasn't investment advice, it was outside of mylane. And so same goes for the SEC. And then there are others, theCFTC is in there, is it a commodity? Is it a currency? You have theFed, you have the White House weighing in. So there's a lot ofregulation to come, and being in it early, even before theregulations, there is regulatory risk.

Rachel Maimin: Well, now that you are onthe other side and you're able to advise companies, having hadthis perspective of focusing on their industry, what do you thinkis the number one most important thing for a company consideringgetting into the crypto space to take into account? What's thebiggest compliance problem that you've seen that you thinkneeds to be dealt with right away?

Christopher Gerold: Right now, it'sthe absence of regulation, that's the problem? We've seen alot of enforcement cases, both at the federal level and at thestate level. There are very few state jurisdictions right now thathave anything specific to blockchain, crypto, crypto exchanges. NewYork has a BitLicense, that's been around for a while. Federalgovernment's talking about coming out with regulations, youhave the Congress talking about it. So the number one risk isregulatory risk. Now, how do you minimize that when you don'thave regulations necessarily to follow? Well, you comply with theones you can comply with, AML for instance, and then you do yourbest to build whatever product you're building, or companyyou're building, to think about what regulators are going to beconcerned with and try to reduce those risks.

And I think for companies in that space, having attorneys advisethem, that have that knowledge and experience to anticipate whatregulators might be looking at is very important, and then buildthat company's, the internal compliance in anticipation ofthat, or what regulators might be looking at or will look at in thefuture. You also want to make sure you're protecting yourclients, and making sure to the best you can, that they don'tbecome victims of fraud or hacks, or any number of things that canarise in this space.

Rachel Maimin: You mentioned AML, andthat's definitely an area where there's been a lot ofdiscussion by regulators, and there's some more understandingof what is expected of companies in that area. In your experience,what's the thing companies make the biggest mistake in AMLcompliance programs, what's their biggest thing thatthey're missing or doing wrong?

Christopher Gerold: Well, we'reseeing a lot of companies starting to do it right, know yourcustomer, I say AML, reporting AML issues when they occur, makingsure you have proper money-transmitter licenses which are issued bythe states. And so we're seeing many companies, startingcompany compliance where they hadn't before. And I think forcompanies to succeed, they're going to have to stay on top ofthat, they're going to have to make sure that they're doingwhat they can now to anticipate what the issues might be on lateron, but certain certainly protecting their own clients is really abig one. When I was on the other side, we used to get, and theyweren't really even in our jurisdiction, but we would getindividuals calling and filing complaints with state government,with the Bureau of Securities about its customer service.

Christopher Gerold: And it'sinteresting, I say that and I mention it because that will put acompany on a regulator's radar. If you get five calls about thesame company and their customer service, and my money's tiedup, or my crypto or my Bitcoin's tied up and I can't get ananswer from them, and it's been three or four weeks,immediately the antennas are going up, "All right, what isthis company doing wrong?" Now, it might just be that theygrew too quickly, they're having growing paints, they don'thave enough customer support, but all of a sudden they haveregulators looking at them. And that's something that'savoidable. It's very interesting what triggers regulators tolook at companies, and something like that can. And so companieshave to be mindful of that.

Rachel Maimin: So in that regard, one ofyour jobs in the private sector is going to be protecting companiesand keeping your eye on what's coming in the future. Do youhave any predictions about what's going to happen in terms ofthe regulation of cryptocurrency? I know regulation is needed, whatdo you think it's going to be, at least in the near term?

Christopher Gerold: So I think we'regoing to see a lot more enforcement actions. We're going to seea very, very active Securities and Exchange Commission. As youknow, I worked with the former director of the SEC enforcement, hewas the attorney general in New Jersey, I worked with him for fouryears, and then he went down to Washington to become the directorof enforcement at the SEC. I anticipate the SEC to be extremelyactive in enforcement of crypto that crosses into their lane, orDeFi. And then I would also expect the CFTC, now that they haveleadership, their chairperson was confirmed just before theholidays, I expect them to really be ramping up enforcement. Andthen I think Chairman Gensler at the SEC is going to be coming outwith rules in that space. The SEC is taking criticism from theindustry that they are regulating by enforcement. And I thinkwe're going to see a lot more coming out on the rule-makingside.

I also do anticipate that Congress is going to act at some pointand change statutes, whether it means giving more authority to theSEC or CFTC, or coming out with something different, but that'scertainly something that the industry has to keep its eye on,what's going on in Washington.

Rachel Maimin:I'll definitely belooking to you when those changes happen, for your viewpoints andhow companies can best implement those changes to stay incompliance with these ever-changing laws.

Christopher Gerold: It's an excitingand evolving space. And I'm excited for that opportunity toadvise companies and make sure that they don't end up in someregulator's crosshairs.

Rachel Maimin: Well, I agree, we sharethe same goal. Thank you so much, Chris, for being here with ustoday and the time to tell us about your fascinating intro intopublic service, and all of your predictions and [inaudible00:23:06] about what's going on in the crypto space right now.We're looking forward to hearing your insights goingforward.

Kevin Iredell: Thank you for listening totoday's episode. Please subscribe to our podcast seriesatlowenstein.com/podcasts, or find us on iTunes,Spotify, Pandora, Google podcasts, and SoundCloud. LowensteinSandler podcast series is presented by Lowenstein Sandler andcannot be copied or rebroadcast without consent. The informationprovided is intended for a general audience. It is not legal adviceor a substitute for the advice of counsel. Prior results do notguarantee a similar outcome. The content reflects the personalviews and opinions of the participants. No attorney clientrelationship is being created by this podcast and all rights arereserved.

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Cryptocurrency: The Regulator's Perspective (Podcast) - Fin Tech - United States - Mondaq