Crypto startups have been exploding over the past year. But without a clear idea of what’s legal and what’s not, they are in an exceptionally risky business. Case in point is crypto lending. Some platforms allow investors to lend out crypto and earn interest or let crypto holders borrow money using their tokens as collateral.
U.S. regulators have taken a suspicious view of these practices, catching some people in the industry off-guard. In September, the U.S. Securities and Exchange Commission threatened to sue crypto exchange Coinbase over a proposed lending product, effectively putting a stop to the plan. CEO Brian Armstrong complained on Twitter, accusing the SEC of “sketchy behavior,” and saying that the company had tried to engage with the agency and had been ignored.
New York Attorney General Letitia James has also taken action against crypto lenders by invoking the state’s uniquely broad anti-fraud law to demand that some platforms stop doing business there. And this week, BlockFi reached a $100 million settlement with the SEC and 32 state officials over lending activities, and agreed to register its products with the regulator in order to continue doing business.
As enforcement agencies continue cracking down and crypto products expand, the industry is lawyering up and asking for more solid guidance about what rules do and don’t apply to it. One attorney who specializes in advising crypto startups, Grant Gulovsen, shared some of his views with us about the evolving regulatory landscape. A U.S. Army combat veteran, Gulovsen explains on his website that he “helps answer your legal and regulatory questions so you can focus on disrupting things.”
Among other comments, he saw some positives in BlockFi’s settlement because it helps to establish much-needed boundaries. Here is more of what he told us.
The interview has been condensed and edited for clarity.
The Business of Business: How did you get into representing crypto entrepreneurs?
Grant Gulovsen: I bought my first bitcoin in 2013 while I was still a partner at a civil and commercial litigation firm. The next year I decided to start my own practice, but it wasn’t until late 2017 that I started representing crypto entrepreneurs. I had never really considered making it a part of my law practice until I saw the madness that was happening around initial coin offerings during 2017 and felt that it was something I could help with. I started out with just a couple of crypto clients but that quickly grew to where I pretty much only represent individuals and startups active in the crypto space right now.
What are the most common issues you end up helping them with?
For current clients, I typically act as either their outside general counsel (handling everything from crypto-specific issues to more general intellectual property, corporate and employment questions), or I serve as sort of a crypto-legal consultant to help advise their existing corporate counsel with any crypto specific questions they aren’t comfortable handling on their own.
For new clients, the most common questions I get relate to U.S. securities laws as well as intellectual property questions (typically related to NFTs) and lately I’ve been getting a lot more questions related to Decentralized Autonomous Organizations (or DAOs).
What do you think needs to be regulated better in crypto?
I’d really like to see some version of “regulation crowdfunding” (which currently enables companies to offer and sell securities through an SEC-registered intermediary and raise up to $5 million in a 12-month period) applied to cryptocurrency fundraising. As long as crypto startups/founders are willing to make similar disclosures as required under Reg CF, then I don’t see the harm in letting them issue tokens that can eventually find their way onto secondary trading platforms.
"I strongly believe that lawmakers should avoid trying to statutorily define anything happening in the crypto space. This industry moves way too fast[.]"
What do you think regulators should stay away from (ideally)?
I strongly believe that lawmakers should avoid trying to statutorily define anything happening in the crypto space. This industry moves way too fast and every attempt I’ve seen (by states in particular) to define “blockchain” or “utility token” or “DAO” (as examples) is either incorrect, incomplete or simply no longer applicable by the time it finally gets published.
What agency do you think is best suited to be the main U.S. regulator of crypto? Is that the SEC or the CFTC [Commodity Futures Trading Commission] (or something brand new)?
I don’t think there is a single agency best suited to regulate crypto since “crypto” touches so many things. But I also think a new agency is a terrible idea. Regulatory capture is already an issue, and that would only be magnified if you had a single agency exclusively responsible for all of crypto.
What are the dangers of over-regulation or enforcement that's too heavy-handed?
The biggest problem facing the crypto industry in the United States is not over-regulation or over enforcement – it’s actually the opposite, in my opinion. We hear a lot of talk from the heads of various agencies and lawmakers about how crypto should or should not be regulated, but cryptocurrency has been around for over twelve years and we still have virtually nothing to use as guidance.
That’s why I support some sort of crowdfunding type exemption so that we at least have something to work with. Anything that gets passed is going to be objected to by somebody, but at this point I’d rather have something to work with as opposed to nothing.
"We hear a lot of talk from the heads of various agencies and lawmakers about how crypto should or should not be regulated, but cryptocurrency has been around for over twelve years and we still have virtually nothing to use as guidance."
Do you think the federal government actually wants to foster crypto innovation, or would it rather handcuff the industry and try to keep its size and scope limited?
The federal government doesn’t like the anonymous/pseudonymous nature of cryptocurrency, which is arguably the greatest benefit to those who regularly use it. It’s really difficult to collect taxes, prevent market manipulation or ensure that sanctions aren’t being evaded if you can’t identify who is actually moving the money around. I’m not sure how you resolve that tension.
What are your thoughts on the BlockFi settlement (as an outside observer) and do you think this will improve regulatory clarity?
I think it’s a totally reasonable settlement given the following: (a) the cooperation offered by BlockFi; (b) the amount of the penalty ($50,000,000); (c) BlockFi has to cease offering its BlockFi Interest Accounts to new investors in the U.S.; and (d) BlockFi will either need to register as an investment company or prove to the SEC that it is no longer required to be registered within the next 60 days. [Editor’s Note: The BlockFi settlement includes a $50 million penalty to the SEC and an additional $50 million in penalties to 32 states.]
It definitely clarifies how the SEC views centralized cryptocurrency lending platforms, but the question still remains how this settlement might apply to more decentralized protocols. I think those lending protocols which have turned over the operation and ownership of both the protocol and its assets to their community are going to be less likely to be impacted by the settlement. But that leaves a large number of both centralized and less decentralized platforms and protocols in the SEC’s purview. So, I don’t expect this to be the last settlement with a crypto lending protocol.