Grant Guluvson – Outline/Notes of Podcast July 2019
Sam: How did you get into Crypto Law?
Grant: I started practising law in 1998. I spent a couple of years working at an IT manager. Then I started practising law in early 2003. I worked at a commercial litigation firm for approximately 10 years before I went out on my own. I got out of Bitcoin in 2014 after Mt. Gox. I decided that I wasn’t ready for that. It was definitely a learning experience for me. At least I broke even.
I did my own entrepreneurial gig, starting my own law firm and looking at China – I wanted to do something different, that is the talent agency you mentioned. Crypto was gaining in popularity there. I went back to practising law to pay the bills. It was early 2017, and I noticed what was going on in the industry with ICOs. With my technical and IP background, I thought I would get in the game advising projects and throw my hat in the ring.
Sam: When did you see ICO projects taking off?
Grant: I think it was. I missed the beginning of it. There was a generally positive vibe in the room. I got into it November/December 2017, when I started picking up serious clients and working with them. Some of those ended up being successful — February 2018: When J Clayton had those fateful SEC’s words. The focus and attitude of people in the industry changed after this. Motivations changed.
The money not so much for me – but that money what was generating the excitement. December 2018 was the peak of the Bitcoin price trajectory then it started to go down. I am trying to think when my attitude to the industry changed.
Sam: The SEC finally came out on side after watching for two years and sitting on their hands.
Grant: One thing about the SEC, I have noticed, they are very methodical. They do everything for a reason; that statement had a chilling effect on the market. The cheapest way to enforce is to scare people into not doing it. They follow a standard play book, and I think based on the resources they have. They
Sam: It brought people back to earth. I spoke with a securities attorney a couple of episodes again. They have put all the money out on raising money and investments. The spirit is what matters to them. My biggest thing is their framework for ICO tokens/investments products, the more likely to be a security. To me, it seems even if you were selling airline points, then that has a possibility of being securities.
Grant: You are talking about the SEC’s guidance or framework for what is security? Then issued their No-Action Letter.
Sam: How do you design a token that fits into the US framework as we would like to sell it to US citizens? It will be interesting to see where it goes from here. You look at CEOs now – mainly Europe and Asia have not caught up to the USA. Look at Binance – they are still conducting CEOs on their platform.
Grant: That is one of the things… A lot of the legal guidance up to now has been very US-centric and every jurisdiction has its own rules that need to be followed, and it varies from bit to bit. One of the problems in the industry is an over-emphasis on the US, I do believe from my own experience with clients I have worked with they were able to raise plenty of money without touching the US at all. It is good they opted not to offer it to the US. At the same time, there was such a concern about – I always questioned was complaints from people in the US about the SEC. I had clients who were based in the US or Canada or other jurisdictions. They did not go anywhere; they just set up a company overseas with the appropriate rules for that jurisdiction to make sure they met their regulatory requirements. . I did not see the intellectual capital leaving the USA or Canada or going elsewhere.
Sam: They go to Malta or Gibraltar where they are more friendly in their regulatory structure.
Grant: One thing I have noticed Malta is friendly, but it is really expensive….I am not trying to bash on Malta as we are all in this together… but there was a problem with setting up a bank account. If you can’t do this in your jurisdiction, then it causes problems. I am not sure if they have fixed this or not. I do know a lot of people started looking at it – it is not a big country…the number of service providers is limited so they can charge premium rates.
One thing about Crypto people, I included. We hate spending money if we don’t have to; whether it’s taxed, paying a lawyer, no one likes paying a lawyer…. You hire an attorney to make you comfortable. To some extent, that is our job to provide that comfort.
Sam: Do you think the regulatory structures are going to catch up to IEO? But now it is on the exchanges.
Grant: IEOs are effectively the same thing as ICOs, but with a couple of bonuses which make it more attractive, make it seem more legitimate, I am not going to talk about any one exchange in particular… but the general benefit is because an exchange involved there is supposedly (1) a higher standard that projects need to meet – as an exchange would not put their brand on the line with crappy projects. There are a number of exchanges – their brand is very important to them. But there are a lot of exchanges could care less as long as you are willing to pay the money they will put their IEO up there. And I know a lot of them are doing very poorly. The IEO craze has been a compressed version of the ICO craze. A couple of months out the token values are declining quickly.
Sam: Exchanges that do not have to worry about cashflow can bring on IEOs at a fixed fee to increase their fees – but you have to pay to get listed.
Grant: The reason IEOs became a thing but the amount of money that exchanges were able to bring in from listing fees, they just dropped off to virtually nothing. They are not getting anything – the timing of IEOs was just right, they can use that supplement their cashflow. For exchange, it is great; it reinvigorates the excitement around IEOs.
The short answer is yes – as long as they do not allow purchasers from banned jurisdictions – it would be acceptable to proceed as an IEOs. By definition, the SEC’s criteria – the two biggest thing – do you have a product? Can you use it on your platform? Or just list it on an exchange? The SEC’s limited focus means that they could have gone after many many projects. Every single one of the IEOs would qualify as a security according to SEC rules.
SAM: REG D offering the investment has to be frozen for a year for private investors. That rule, for instance, would be an issue if you did not have a ready network.
GRANT: REG D is designed for when you are launching security to accredited investors. Except if you are doing a truly private sale, then it is limited to 35. But you are not going to get the type of retail investors – so that is why a project chose not to do this. Lots of projects telegram, Reg D, SAFT – they never did a public sale, it contradicts the democratisation of investment and economy and all those sorts of things. That’s why Reg D is like that.
SAM: Let’s say you are selling token, that would be purely utility token, the sale would be treated as a security, but the token itself can only be used as a utility token.
Grant: Academic discussion going on about whether or not the token should be treated as a security. The agreement for sale would be considered an investment contract and therefore, a security. But that does not mean that the token is, in fact, a security. There is a paper coming about this.
Sam: The other thing I wonder about. The SEC has not clarified this yet. At what point does the network become decentralised enough for the token NOT be considered a security? For example, Ethereum they said Ethereum is not a security. Because at some point it became decentralised enough not to depend on the company that sold the token. The majority of Ethereum is held by the original purchasers.
Grant: That is true. Bill Henham at the SEC. I don’t think he ever said it explicitly that it was not a security. My theory about that is that they could have proceeded against Ethereum based on the ICO, but they chose not because their remit is not just to get people in trouble, it is to promote new ways of capital raising and help the capital markets…. They weighed up the factors, and we want to see what it can do … if we deem them security now, we will devastate all those projects. They came up with a rational argument. It begs the questions when is it decentralised enough to meet that test? That is something a judge needs to decide.
Sam: Like in the KIN case.
Grant: That is an interesting case. It is interesting in several ways. The aggressive tone the project took – we are going to take on the SEC. The whole thing with raising money. It is a strange project to have as the leader or the vanguard against the SEC.
Sam: I saw the excerpts from the government's case. It was interesting to see how they talked about capital raising. The ICO was going to be the way for them to save the company. It will much harder for them to come to terms. It will probably just settle. It seemed like they did want to take it to court, though.
Grant: It is a great way to get people to give them donations because you are fighting the SEC, defend Crypto then. Having been in this space, I am very cynical about things — the raising money thing. No one knows where the $100 million is that they raised. We may never know. It could be gone. Kik had a lot of VC investors that wanted to exit. They may have some of it. At the end of the day, something will probably be worked out between the SEC and KiK. It would be nice to have a judicial opinion written that shows the SEC’s position and the projects position but also shows the judge’s analysing it – what laws apply. The judges make the final call. The SEC can interpret it. Because the case is so bad, they would be wise to settle it. I could be very wrong, but if legislation gets past about utility tokens, then things would be very different.
The SEC is accepting new opinions on whether or not securities law should be changed. The regulators are paying attention to it now and super interesting and intellectually challenging.
There is a wide variety of areas within the law. It has a lot of overlap between start-ups and securities and IP laws.
Sam: Did you work with Chinese start-ups?
Grant: That was my own start up. Last 2016/early 2017, I did pick up clients developing apps for the AppStore.
Sam: You have experience of working with China.
Grant: I have a lot of connections to keep track of what is going on in China. I don’t have a lot of crypto contacts there. There is a lot of activity –mining a big part of it. Given the capital controls the government has, it is hard to have cross border activity. As far as Security token offerings, China banned ICOs maybe we could do STOs. They don’t want their money leaving China.
Sam: The rise of stable coins, Facebook, is going to make it much harder to stop. China’s plan is to close the on-ramps in China. You won’t be able to buy Tether or Facebook coin on exchange in China.
Grant: I am sure you won’t be able to. One of the big questions no one has asked, what happens when China’s PBoC issues its own cryptocurrency – that is going to become a big issue. Especially Libra does not have a chance… they will have a very hard time.. it is not going to be a normal cryptocurrency, it is going to have a backdoor, make surveillance of people’s money easier for the government… it will increase surveillance. Facebook really wants to tap into the Chinese market. Anyone using Facebook in China is going to be monitored in China. LinkedIn monitors everything in China. Posts are blocked or censored in China in social media. Libra will be welcomed with backdoors for surveillance. Maintaining capital controls is what is paramount to China.
Sam: It will be interesting to see how Facebook’s coin Libra will pan out. I know they have created it as a separate association. They said that there is a transaction the information about is distributed to third-party service providers and Facebook itself. Calibra the wallet will be the primary one for now.
Grant: Hope for the best, expect the worst. Facebook does not have a good record of following the law. The fact that they are willing to pay $5 billion in fines for their data breach. This is just my opinion: that they did not know with their in-house legal team where the line was and that they made a conscious decision to cross that line and they are being punished for it, but it is cost of doing business … to think they would change their behaviour because it is crypto, but maybe I don’t know.
Sam: It will be interesting to see how the rollout goes. I can see that it would be interesting to be used where your national currency is not as stable as the dollar or the euro. At least here is Russia people here buy dollars. It would be a nice thing to be able to use. I worry about people having access cut off to their accounts. Do you want a mega-corporation (1) in charge of providing monetary policy and (2) policing the ecosystem that people are using, that they can just cut people off when they are violating their service terms? I don’t think you can be cut off from the US banking system.
Grant: You mean, completely? There is usually a way to get access. To me, that is my cynicism. On the one hand, it’s really great if that is their stated objective and it does have the potential to be beneficial and powerful to people without access to traditional banking services, but because of this, they pay a premium for transferring money across the border. I found it somewhat hilarious in a way that one of the most common terms in ICOs back in the day was Unbanked. A common provision for projects was a positive charitable aspect of this. If anyone can do it, they are the ones who can do it because they have the widest reach. Facebook has the possibility to realise the promises made by crypto and action the promises of ICOs.
Sam: If it was any other company, I would be positive, but they must have other intentions for rolling out this product. Obviously, it’s the data at the end of the day…
Grant: Obviously, it’s the Money. Data is valuable now.
Sam: How many non-Facebook wallets are built and allowed to function? If you have a company that wants to use Libra (the coin) in their wallet, do they have to share their payment information or data with Facebook?
Grant: I don’t know. As long as Facebook is collecting the interest, they are less concerned about that sort of thing. Their investors or partners are not concerned about that either. Facebook has 2 billion users. They are larger than any one country if you consider their population. And they have more data on their ‘citizens’ than any other country except maybe China, USA, Russia and a few others… and add to that… what are they missing? What makes them different from a nation-state? One is they don’t have a standing military. One is they don’t have a monetary system. Oh but wait, now they do. What makes them different from a nation stat? They are not physical, but otherwise, they are like nation-states. There is not a whole lot of difference between them and the definition of a nation-state.
What I find funny is people talk about, posting about the problem with centralisation in governments etc. but Facebook has probably more control over data than any other nation-state out there. But it is okay because it is not a government, it’s one guy in charge of the whole thing. Basically so that is the epitome of centralisation. But because it is private, that makes it okay. That does not make sense to me. At the end of the day, I am very sceptical.
Sam: Are you sceptical of a Chinese cryptocurrency?
Grant: Yes, I know the PBoC, the central bank for them, they have been working on a blockchain/national cryptocurrency for quite a while now. I think I first heard about in early 2018; it may have started before then. Facebook Libra may expedite the rollout of that. I don’t know but if they see it as a potential threat, they are absolutely going to ramp it up and I am curious to see what impact it has in China but generally what impact it has on other governments if they feel they also need to come out with their own version and then what happens to Facebook Libra if every nation has its own cryptocurrency.
Sam: Right essential Facebook Libra is trying to create a supranational SDR. What happens if the IMP comes out with their version with the backing of the countries who Facebook has been buying those short dates notes and currencies from.
Grant: It is going to be very interesting, and there is no way to predict what happens.
Sam: It will also be interesting to see what happens to Tether when Libra comes along. Will it take market share away from it? What will be the implications be once the Tether lawsuits start coming from the New York Attorney General?
Grant: I have been pretty down on Tether for awhile now. It took me a while to fully appreciate what a big deal it is, I think, when they announced their initial exchange offering after the New York AG’s office froze their assets. They raised a $1 billion dollars without any evidence that they did raise dollars. I don’t know – I feel a lot more sceptical about that than I do about Libra. If Libra helps what is going on with Tether, that would be a positive thing.
Sam: The Tether thing is crazy.
Grant: When you go to events, and you talk to the OG’s, they are just not talking about it. Some of it is indirect, everybody knows what is going on, but nobody wants to talk about it. Then as David Gerard would say then the number would go down. They are making a lot of money on it. It is going to take government action to make that stop. The sad thing is that Bitcoin does not need it (Tether) to do what it is designed to do. It is just being used to turn Bitcoin into a Ponzi scheme. I don’t believe that is what Bitcoin is, I am a true believer in it, and I love it, but it has been co-opted and turned into something that people claimed it was. I could be totally wrong, and everything could be on the up and up there.
Sam: I have my own theory. There is a bunch of Tether that was ‘printed’ recently, I don’t think that is what led to the price pump… I think there are political issues in China, which increased demand for Tether. But I am sure some of that money has to come back into BTC. Because the ideas that Asians have about crypto are vastly different from what Americans and Europeans have about Crypto, they see Cryptocurrency as gambling products, whereas Americans and Europeans see it as an investment product, you would keep it.
Sam: Rather than invest it. You would build up your wealth over time.
Grant: That’s why when I see Tron, I can’t believe he is doing that. That is just what you do. It’s just a cultural thing. I don’t think we should judge their behaviour by our standards or laws here. You are right they see it more – pump and dumps are encouraged there – that is how you make money, that’s how you do it. That is fine. That is their system. We have laws that prohibit that so if we participate in that, we get in a lot of trouble.
Sam: You have spent a lot of time in China.
Grant: Not really that long, a couple of months in total.
Sam: I think China is going to have a much larger role in world politics in the next few years.
Grant: It’s not going anywhere. China is the Bitcoin of governments. Everyone talks about how China is going to fall; it’s not going to be around; there is no way they can be like this.
Sam: You see Trump and the Democrats talking about this. They are starting to talk about China, but most of them are still soft on it. China is blatantly using its government powers to take advantage of the USA, and it’s not the Chinese people, it’s the Chinese government. It needs to be put to an end. Ever since they got favoured nation status at the WTO, things have been crazy. I hope that someone or somebody stands up to their rhetoric they have been pushing for the last 20 years.
Grant: My attitude – the best way to deal with China is to try to cooperate with them. And it’s because, let me qualify that, I am not suggesting that they are not going to try to take advantage. Again that is a cultural thing. I learned that. I am not trying to be dismissive or derogatory in any way, but our cultures are very different. The way we approach things, like doing business, contracts, agreements, especially as a foreigner, you are not treated the same as if you are Chinese basically. Considering they’ve spent decades becoming the nation they are now. There is certainly a feeling that their time has come. I certainly don’t consider them to be militaristic in any way, in an aggressive sense, there is no question that they are not going to let anyone take any action against them without retaliating. I think that is a bad outcome. I understand our economic interests are important, but at the same time, how hard do you push and at what cost?
Sam: I think to look at what they have done in the South China Sea, building these islands/reefs and turning them into artificial military bases using this as a means to project power into those areas, like Japan and Philippines.
Grant: They are using assertive / aggressive technics, but they are not causing casualties. They are less likely to do so than in other countries. But they are going to push it. They are going to expand their power. The question then becomes at least the spirit of cooperation is important, I am not saying to abandon the US position or anything like that….But I do think that taking a position, with everything going on over their politically, I think shaming them into doing something is not going to work.
Sam: I think when it comes to the south china sea, you need to take a hard position, or they will just continue building it out. There are islands that have been destroyed, and reefs need to go back to what they were originally. I worry about Crypto with the majority of mining being in China; there are significant risks from the Chinese Government, it opens up attack vectors having such centralisation in one country, especially one in which there is not a free market or properly regulated country. I am sure the Chinese know who is mining and how much and that they are getting their cut of the pie.
Grant: You mean the government? They need to do what they need to do; I don’t think they see cryptocurrency as something they are worried about now. They may stop miners from mining. In the spirit of decentralisation, that should shift the mining out of China to somewhere else. That is how it should work at least. I don’t see China getting any benefit from it. I don’t think they care that much; unless they see it as a threat. Unless it is encroaching on theirs, then it might change, but I think they would just keep it out of China. To a limited degree.
Sam: I will be interested to see how it goes. It is in the back of my head. I had this conspiracy theory; I guess conspiracy theories should always be taken into account and governments do conspire. So believing in conspiracy theories is not a bad thing. I worry about China using the past dip in price to essentially scoop up as much bitcoin as they can because they see the future potential it has and then coming out with their own cryptocurrency. Right?. If they own 40% of bitcoin, which can be down…. 30 to 40% Bitcoin is 4 to 5 million bitcoins then you come out with their Chinese currency which is based on their RNB or Yuan, and then you back it with Bitcoin. Here are our five million coins we are going to keep it in this wallet, and this is our reserves for our currency backing it. Then they can dominate and control the price of Bitcoin – because these shocks we saw coming down from $14k the other day don’t really change the higher we get. The shocks just become bigger. If you sell/dump 5,000 bitcoin into the market, it is going to drop the price. And that will always be the case regardless of the price.
Grant: I don’t see Bitcoin stopping. I think it will go on for eternity. There are no questions there could be massive loss of value if there are events in China or Tether, there are a lot of different ways it could lose value and part of me as someone who does have some holdings of cryptocurrency it would be nice to know that it is based on fundamentals, not Bitfinex or someone else messing around with it.
Sam: I think the next few years will be interesting to watch. I think Tether will be one to be cleared out and a lot of smaller Chinese exchanges. What happens when they start, including Bitcoin, making it more privacy focused? From a legal perspective, when a company like ChainAnalysis cannot provide services anymore. Does that change the legal status of companies or affect the government's ability to regulate?
Grant: What they will do, the same rules apply. It becomes an FINCEN, or money transfer issue and bank secrecy act. If you are regulated as a money transmitter, you are required to register but also to maintain very current accurate records of everyone transacting on your network, this wouldn't apply to Bitcoin HQ, but there isn’t a Bitcoin HQ.. .it will apply to people who are trading it, like OTC desks, etc. who are providing services, they have an obligation. Internationally AML requirements are not universal and differ by jurisdiction; they are relatively spread out. And as time goes on, I think some of the jurisdictions that currently don’t classify virtual currency as regulated, or to which the AML laws apply to will change. So it’s fine to provide that extra layer of privacy, but it does not get people off the hook if you are trading it in quantity. There is usually a $3000 minimum at which you have to ask who is trading it. There are several companies that got dinged by FINCENs. It may make it harder.
Sam: Does your legal background change your approach to Crypto investing?
Grant: I usually don’t talk about my investments, but I do acknowledge I do hold some crypto because I think it is important to demonstrate I do have a vested interest in it. So they can take that into their opinion, and I certainly don’t give any investment advice. I am totally unqualified to do so. I think It has definitely made me with my clients. I definitely don’t do ICOs or anything. It is such a rigged system; unless you are on the inside, there is no way to make money doing that. I think that was generally true for earlier purchasers.
Sam: I think it was more about meeting the teams.
Grant: I think getting to know the people and learn about the project and what their goals are. I think that is important if you want to have a better chance than a regular joe. Figure out how much money you can throw in the trash and only but that limit into Bitcoin or anything you invest. Don’t extend yourself.
Sam: 1% of your portfolio in Bitcoin and not worry about that in your portfolio.
Grant: Definitely. There are a lot of people who get into this space who have no investment experience. Those people are the ones we will support when they file for bankruptcy. Guess who is going to be paying for that? The Rest of Us.
Sam: I was convinced by the former SEC attorney I had who came on one of my previous podcasts. I asked her I don’t think we should have an accredited investor policy. When you reach $1,000,00, then you can take bigger risks with their portfolio.
Grant: How deeply do you want to look into people’s stuff, however much they have set aside? Invasion of privacy. These are all the same arguments.
Sam: You can apply for an exemption.
Grant: You can have 35 unaccredited investors for Reg D and B. As long as you provide them with a PPM. You can let people in who are not accredited. You can do a lot better with people who may need that protection because they are running a scam. It can be done legally.
One of the other host of CryptoLaw Podcast - She set up a crypto law group on telegram. Half of them are US/Canada based, but the other half are everywhere.
Sam: Where do you think is the most open and welcoming for the industry right now?
Grant: There are different ways to describe these areas, on the one hand, you have the well-regulated areas like Switzerland, Singapore, Malta would also qualify, they do have heavily regulated and generally pro… there are lots of steps, and you have to use professionals in those jurisdictions, but it costs more money, but you know you are not going to be breaking any laws. It also lets you sell and promote to retail investors too. In the US as long as you follow all the rules, it tends to be cheaper and more efficient to raise money the old fashion way through angel investors or VCs or whatever. There is no point in doing an STO, or you need to go outside the USA. It has been the conversation with clients for awhile. There are jurisdictions that are less regulated… Estonia is one of them. There are the US type Canada jurisdictions with stricter regulations, but it costs a lost less to do them compliantly, but it is not very attractive to most projects. The other jurisdictions are happy to very welcoming to crypto and are happy just to do it. The downside to that is that you may not be able to sell to many other jurisdictions.
Sam: Are companies going through Switzerland, Malta and Lichenstein? The lawyers there cost a LOT of money.
Grant: One of my clients wants to list on an exchange – they are working in an attorney in another jurisdiction, and it is so expensive.
Sam: We are trying to get licences in all these jurisdictions. Once it is done, once you have all these licences, you are free to get on.
Grant: Exactly. That is the thing. At the end of the day if you know the rules, and follow them, then you are not going to get in trouble. Even a year ago I don’t think you would have been as confident talking about setting up what you are doing now.