Name: Balancing The Ledger: Blockchain's Marco Santori Talks Regulation, SIM-Swap Hacks, and Binance's New Toy
Uploaded: 2018-08-03
Duration: 12 min 10 s
Description: Marco Santori, president and chief legal council for Blockchain, is considered by many to be 'the first crypto lawyer.'

[ MUSIC ] Hello and welcome to Balancing the Ledger, where tech and finance intersect. I'm Robert Hackett. And I'm Jeff Roberts. And today we're here with Marco Santori, the president and chief legal officer of block chain. The company, not the technology. Thanks for coming here Marco. Thanks for having me, I appreciate it. So, let's kick things off getting to the news of the week. First off, Binance, the world's biggest cryptocurrency exchange, just completed an acquisition. They bought a company called Trust Wallet, which Makes decentralized wallets and it's also a decentralized app browser. Jeff, you actually spoke to CZ, who's the head of Binance, about this and he talked about how it's key to the future of their exchange. Is that right? Yeah. I mean this guy is like Had and I'm still trying to get my head around it. But he seemed to think the worlds can be decentralized and that these things are gonna have a dual function of both storing your currency and navigating the future of the internet. Yeah, and I should say the wallet that Finance bought was not a custodial wallet, right? Custodial wallets were convenience that was, I think, very valuable over the last few years to a lot of people. Looking forward, custodial wallets can't do the things that non- custodial wallets can do. Some users feel safe giving their coins to a third party to hold on to, especially users in the Western world. Most of the world doesn't feel that way. And a decentralized, or a non- custodial wallet, is one way to both keep control of your money yourself. And also to position yourself to be able to have a private key that allows you to interact with all these distributed applications. Let's switch gears and talk about sim swapping, whcih is this new attack that's been going around. Actually, it's not very new, but it's been targeting cryptocurrency holders for a while now. A hacker has just been indicted for waging these attacks against people, at consensus, the biggest event In the blockchain industry in New York. What is happening, how are people getting their funds stolen and how can they protect themselves Marco? Yeah, I'm not a security specialist, but I dabble in common sense, I try, and most of the The hacking that goes on is a result of people relying on their telephone numbers as a credential. Which is not the most secure way to go about it. And two, then giving their valuable possessions, their coins, to a third party to hold on for them. When you combine those two, You've given somebody else the authority to process a transaction on somebody else's behalf. And that's a dangerous thing. It's something that we caution our users against. We offer two factor validation, but you can do so using Using an app. Well this sounds like a good segue into blockchain, which has been around for a long time. Tell us a little bit, how does it work, someone who hasn't used their own private keys before. What do you use instead of authenticating with your phone number. Well you can authenticate with an app. There's email based authentication. There's all different Varieties of authentication ranging from very secure to very convenient to we don't live in a perfect world. So we try to offer choice to our users. And that's really one of the theories that underpins the companies offering that choice, putting the power of personal finance in people's hands instead of Demanding that they give their power to a third party who holds on to their money for them. That's the [ UNKNOWN ] But on a practical level, you still put on a passwords, is that right? Yeah. And serve as your private keys? Yeah, absolutely. So when you open a BlockChain wallet, you go to a website, it's simple, it's blockchain. com. Go to the website. Open up a free wallet, and what appears in front of you looks like every other wallet. It's just as easy and convenient as a custodial wallet, but you keep the keys. You hold onto those key. We never have custody of your funds, so you can have the very same BitCoins of Blockchain wallet at the very same time as they're in any other industry standard wallet. You can spend the same bitcoins, save the same bitcoins, transact with the same bitcoins. And it's not just bitcoin either. It's ether and bitcoin cash 2 with more on the way. So Blockchain sort of started off working with decentralized wallets. That was its major kind of product. But it's also been getting into a bunch of other products lately. Can you tell us about some of those? Yeah just last month we launched our institutional suite of products called BPS, Blockchain Principle Strategies. Pretty straightforward, had the blockchain. com / bps. And you can sign up. It's an institutional product, we have been the leader In consumer wallets that's where we've made a name for ourselves, we've built a level of trust worldwide in the none custodial consumer space, we're taking that same know how, that same brand, and that same team, And building a best- in- class institutional process. Tell us a little bit about how you got into crypto in the first place. We were talking backstage a little bit, you said that you actually argued a case that involved Bitcoin mining. [ LAUGH ] I did, I argued the very first Bitcoin mining case in the Southern District of New York before a 90 year old judge. Who was very smart, and I have no doubt understood every details of the case but after an hour of arguing over whether as a matter of law BitCoin was money or not, took us back to chambers, looked both lawyers straight in the eye with impatience and said counsel. Settle this case, he wanted nothing to do with it. Mark, you're kind of a well known figure in the crypto world, in part because you're sort of I think the first crypto lawyer. You were sort of the one who promulgated the so called sale off agreement and put out a model contract to help, you know, companies issue tokens and sell them eventually as securities and stay on the right side of the lock. However some say you have might been a little ahead of your time with that and that you moved a bit to quickly. How do you feel now? Do you think you are right? What is the state of play in that world? The staff is a simple agreement for future tokens. It's become a market standard, especially on the west coast of the US. And people have added things to it, SAFT plus equity, SAFT plus whatever it might be. But we didn't create the SAFT. When we first found it it was a very simple instrument. And the team of lawyers at Cooley, we looked at it, we re- worked it into something we thought was better. The SAFT project was a self regulatory reaction to this rash of ICOs, these sales of pre- functional tokens to the public. We looked at that and we thought, we think there is something better. We think we can do better than an ICO. And we did. And we published the SAFT project white paper that essentially says, look, you can use this agreement, treat this agreement like a security, sell it only to a credited investor or go and register the [ INAUDIBLE ] plus we're gonna do an IPO for the [ INAUDIBLE ] agreement, and we already did that of course but You could if you wanted to, but then this is the important part. Once the token is functional, once it does what the creator said it should do, at that point, the thing is really a consumer good. It's a functional device like A functional thing like gold or bananas or wheat or other commodities. That wasn't a fundamental innovation in the SAFT framework. It stopped doing ICOs essentially, and we saw the SEC have a similar reaction to ICOs saying well this is just not right, most of these things are sales and securities. And when we published the white paper there were people who supported it and lauded it. They said this is the best thing for crypto since sliced bread. And there other people who said there are some real risks here. And frankly, I personally agree with people on both sides. We identified some real risks. Most recently, the punch line to all of this is that just last month Bill Henman Head of the division of Corporation of Finance at SCC. In fact said, look, if your tokens are prefunctional, that's a pretty good indicator that there is security. And he also said that some tokens could change from security when they're prefunctional To a non- security when they are functional. [ CROSSTALk ] We view this piece too, yeah. Him and the SEC official said, was referring to these, that are sort of in a gray area and he referred to how much activity of third parties is supporting them and the less, the more decentralized they are, the more likely it's gonna not be a security, ie Ethereum. I had the feeling he was talking about XRP. Did you get that feeling too? [ LAUGH ] No, I didn't. No? I didn't get that feeling. I have great respect for the people at Ripple. I'll say that what Hinman did, and this was of course not the official position of SEC, but he's an important guy there. He said look, what the saff project said is line, the dividing line, functionality It's close, but it's not the whole dividing line, there's more to it. It's functionality plus a few other factors, and we call all of the decentralization. A big factor in decentralization is how many people have these tokens in their hands, how many people are using them? We think that's something that we're pretty well positioned to facilitate at Blockchain. Well applying that test to where does XRP fit it's just security or not? I won't opine on whether a particular token is a security or not. But I will say that XRP has demonstrable functional use. At the same time, Ripple or its sister companies, its affiliates, have also advertised it in ways that, well in a whole variety of ways. So it's a question, really, of Weighing, this is a facts and circumstances based analysis. So if you listen to what Bill Hinman said, he said look, here are all these factors that could weigh in favor of security status. He says but Ether is not a security. If you look at the Etherium crowd sale, there's a lot of those factors present, was that a security? Who knows, it's a facts and circumstances analysis. So if I had to fault the current status quo for anything it's that there's still a little bit of a question mark in the air about what is and is not a security. But we do know a big factor of it is Well, exactly what we said it was in our white paper. Functionality. Reading the tea leaves, what do you think is going to be the next major sort of legal action that comes down? Or next sort of decision or clarification that happens from the regulatory authorities in the crypto world? I gotta tell you. I think that most people are expecting some big pronouncement from the SEC or some big pronouncement from the CFTC or some federal regulator. I don't think that's the way it's gonna go down. I think that the very first things we're gonna start seeing are civil law suits, civil suits. We're gonna see decisions in private litigations where somebody, some plaintiff, maybe a class action plaintiff, is suing a purported issuer. And that's gonna result in decisions. Binding precedent in some jurisdictions. And that may be where we get our law, that may be where what draws the line between security and non- security. It might not be FCC, it may not in fact be the regulators tasked with making that decision, because after all, we're all To hold them to the courts. And where specifically, are you referring to that state court action in California or is there a more prevalent one? There are a number of actions right now. I mean dozens and dozens of them. Some against the major US exchanges that are full on class action suits that could be catastrophic for some of those exchanges if they were in fact found to be. Doing whatever they alleged to be doing. But one of the things that court has to decide before getting to these questions is, what law applies? Is it securities law? Is it the law of commodities? Just common law fraud. Since that's one of the first questions that has to be answered, I think we all might be surprise to see that The first federal pronouncement on this issue doesn't come from the regulators, it comes from one of these major lawsuits. That's all we've got time for, thank you so much for being on this show, Marco. Thanks for having me. I'm Robert Hacket. And I'm Jeff Roberts. For more Balancing the Ledger please go to fortune. com. See you next time.

Balancing The Ledger: Blockchain's Marco Santori Talks Regulation, SIM-Swap Hacks, and Binance's New Toy

Finance

Marco Santori, president and chief legal council for Blockchain, is considered by many to be 'the first crypto lawyer.'