Veteran Crypto Lawyer Warns The SEC Is Coming For Venture Capitalists

Introduction

In this section, Michael Doug Castillo introduces Joshua Ashley Clayman and they briefly discuss the purpose of the show.

Introducing Joshua Ashley Clayman

• Michael Doug Castillo introduces Joshua Ashley Clayman, a lawyer at Linklaters and an expert in blockchain.

• They discuss the purpose of the show and how they will go back in time to learn more about Joshua's background.

Early Life

In this section, Joshua talks about her early life, including where she was born, her parents' professions, and her upbringing.

Childhood

• Joshua was born in Bloomington, Indiana.

• Her parents were divorced when she was young. She grew up with her mother and moved around a lot.

• Her mother went back to school while raising three kids as a single mom. She eventually got a PhD in education.

Family Background

• Joshua's father had meat packing companies which he inherited from his family.

• Her mother was also a Playboy bunny before going back to school.

Love for Game Theory

In this section, Joshua talks about her love for game theory and how it led her to become interested in blockchain technology.

College Years

• While studying at Penn State University, Joshua became interested in game theory after reading books on the subject during her free time.

Connection to Blockchain

• Although she didn't know about blockchain technology at that time since it didn't exist yet, her love for game theory reignited later when she encountered blockchain technology.

• Joshua talks about how blockchain technology could automate a lot of what lawyers do, which initially made her worried about being supplanted by the technology.

Conclusion

In this section, Joshua concludes her discussion with Michael Doug Castillo and reflects on her journey to becoming an expert in blockchain.

Reflection

• Joshua reflects on how she initially worried about being supplanted by blockchain technology but eventually became fascinated by it.

• She discusses how blockchain has the potential to revolutionize many industries and change the way we think about trust.

Introduction to Blockchain and Cryptocurrency Law

In this section, the speaker introduces herself as a former finance lawyer who became passionate about blockchain and cryptocurrency. She talks about her experience with Jay Kwan of Cosmos and how he described his vision for what later became Cosmos.

Becoming a Full-Time Blockchain Lawyer

• The speaker became a full-time blockchain lawyer in 2015.

• She has been a full-time blockchain and cryptocurrency lawyer for roughly eight years.

• Some law firms have courted her as a way to show they were serious about blockchain and crypto.

• The speaker is currently the U.S head of fintech and head of blockchain and digital assets at Linklaters.

Clients Represented by the Speaker

• The speaker represents layer one companies, which are foundational layers of blockchains with native crypto assets, as well as layer zero companies that connect other blockchains.

• Her clients include public companies, e-tailers looking into the space, banks considering custody, funds, video game companies, etc.

The Difficulty of Using Crypto for Purchases

This section discusses the difficulty of using cryptocurrency to buy goods and services due to the lack of sellers. As a result, it has become more of an investable asset than a currency.

Crypto as an Investable Asset

• It is difficult to buy things with cryptocurrency because there aren't many people selling.

• This has made cryptocurrency look more like an investable asset than a currency.

E-tailers and the Future of Buying with Crypto

This section explores whether e-tailers will change the landscape for buying goods and services with cryptocurrency.

Potential Changes in Buying with Crypto

• E-tailers may be changing the space for buying goods and services with crypto.

• However, it is unclear if this change will happen soon or in 10-15 years.

Digital Collectibles and Brand Expansion

This section discusses digital collectibles, brand expansion, and how they relate to blockchain technology.

Digital Collectibles and IP Law Development

• Some companies are offering digital collectibles instead of purchasing goods with crypto.

• Reddit did well with its NFTs by not calling them that.

• IP law is developing alongside brand expansion, such as in The Meta Birkin case.

• Getty Images has a lawsuit regarding AI training ownership.

Metaverse and Retail Stores Enabled by Blockchain

• Luxury brands are facilitating secondary markets using tracking technology on blockchain.

• Retail stores may look different in five or ten years due to blockchain technology enabling physical or digital versions of their goods traded on secondary markets.

• People are becoming avatars, so brands want to be part of that through metaverse technology adoption.

Future Retail Store Trends Enabled by Blockchain Technology

This section explores how retail stores may look different in the future due to blockchain technology.

Changes in Retail Store Trends

• Partnerships between brands and video games are becoming more common.

• Luxury brands are facilitating secondary markets using tracking technology on blockchain.

• Producers are getting into the idea of being able to see either physical or digital versions of their goods traded on secondary markets.

• People are becoming avatars, so brands want to be part of that through metaverse technology adoption.

Regulatory Clarity in the Crypto Industry

In this section, the speakers discuss the need for regulatory clarity in the crypto industry and how it has evolved over time.

The Problem with Regulatory Clarity

• People have been asking for regulatory clarity from lawmakers and regulators in the crypto industry for years.

• The term "clarity" has become a buzzword, but some people believe that it sounds disingenuous when used by those outside of the industry.

• There are certain things we do know about how to treat tokens when capital raising, such as how to sell securities.

Evolution of Regulatory Clarity

• In 2015, people were publicly asking for regulatory clarity on how to interpret new blockchain technology.

• Over time, there have been developments in understanding how to treat tokens that were illegally issued securities.

• The Howey test is used by the SEC to determine if something is a security or an investment contract.

• Even before the Dow report came out in July 2017, people were aware that U.S law applied if dealing with U.S people.

• The Dow report was significant because it was the SEC's first real line in the sand regarding virtual venture funds.

Challenges with Regulatory Clarity

• There are still challenges around what to do with existing tokens that were illegally issued securities.

• It is unclear who will be able to trade these tokens within the US.

US Laws and Token Trading

This section discusses the need for platforms trading tokens that are securities to register as an ATS or national security. The lack of clarity in regulations has caused confusion, but there have been opportunities to figure out how to do it right.

Virtual Venture Fund and Paradigmatic Example

• A virtual venture fund is the paradigmatic example of a security.

• There has been guidance on what constitutes a utility token versus a security token.

SEC Enforcement and Clarity

• The SEC is enforcing through action, not through clarity.

• There has been plenty of clarity, and this action is not surprising.

Finhub's Role

• Finhub has been available for years to provide guidance.

• Telegram was one example where people could ask questions about regulations.

Smart Contracts and Legal Community

This section discusses how smart contracts got involved with the legal community. It also talks about how VCs got excited about the crypto space after the DAO report.

Impact of DAO Report

• The DAO was a venture firm without venture capitalists that got investors interested in cryptocurrencies.

• After they got interested, things changed.

VC Excitement About Crypto Space

• VCs got excited about the numbers in the crypto space.

• The Saft white paper allowed large investors to invest in something that they thought would be given a second why this didn't turn out to be a simple agreement for future tokens.

Technology Functionality Before Capital Raise

• If you want to have a chance at saying that your token is not a security, then you shouldn't be selling it to fundraise.

• The SEC put out a framework in April 2019 that talks about when something initially issued as a security may no longer be a security.

Telegram Court Case and VC Impact on Crypto

This section discusses the Telegram court case and the impact of venture capitalists (VCs) on the crypto industry.

Telegram Court Case

• The SEC argued that Telegram's plan for micropayments and millions of new users a month was not going to land, as it was not going to finish with the initial purchasers.

• The court agreed with the SEC that there was a plan to sell on to the public market and get it into the hands of retail, making those initial purchasers Underwriters.

VC Impact on Crypto

• VCs brought significant funds towards marketing in crypto, which is remarkable compared to pre-VC and crypto epoch.

• Best tech wasn't always winning as a result of VCs.

• There are two types of VCs: crypto-native VCs who use tokens and have portfolio companies, and traditional VCs who invest in companies but want them to add tokens after investing.

• The exit strategy for early-stage companies used to be an IPO registered security with disclosures, risk factors, etc., but now it's often a six-month token exit with heavy marketing.

• Retail investors may not know that they're buying into an unregistered token without disclosures or liquidity.

Legal Fallout Surrounding VCs

• If these tokens are deemed securities, then there may be regulatory or legal fallout surrounding VCs who invested in them for almost a decade.

• The SEC would likely view VCs as Underwriters if they were selling huge amounts back with a SAFT or some convertible note, which could affect their reg D exemption.

Understanding the Long-Term Implications of Regulatory Violations

In this section, Josh discusses the long-term implications of regulatory violations and why companies should take a long-term view when it comes to compliance.

The Cost of Doing Business vs. Bad Actor Status

• Companies may think that paying a fine is just the cost of doing business, but they need to be aware that regulatory violations can lead to bad actor status.

• Taking a short-term view can be detrimental in the long run as there can be a long tail for regulatory violations.

• Telegram couldn't deliver outside of the US because it was deemed to be a bad actor by regulators.

Registering Tokens and Valid Exemptions

• Companies may not have to register their tokens if they sell them pursuant to a valid exemption like Reg D.

• If underwriters' piece comes to fruition, then what Gensler has been saying about tokens needing to be registered makes more sense.