Fireside Chat: Colorado Securities Commissioner Tung Chan | Russell Castagnaro, Tung Chan

Welcome back everybody. The next session is a fireside with Colorado Securities Commissioner Tung Chong moderated by Russell Castaniro, board member of Sporkdow and founder of Unicorn. Hello, ETH Denver.

Aloha.

Aloha. That's right. Aloha. Come on, everybody. We can't even see you out there, so you have to let us know you're there.

Um, so I I want to say that um, you know, as a resident of Colorado and as a a previous uh, uh, employee of the state, uh, that I feels really proud to be up here on the stage that that we have the commissioner of securities here who has more experience probably in blockchain and web 3 than uh, than any other state and many people in the world. Um, you may or may not know that Tung was in the past the general counsel for the Ethereum Foundation. And I I just think we are so lucky to have had her since 2019, right?

2020.

2020.

Um, and it's it's absolutely amazing. Now you're in a really kind of unique position um because of your past experience with um with ICOs and with Ethereum Foundation and how you know how is actually building and working inside the foundation changed the way that you approach securities because you used to be commissioner of securities in Hawaii and it be interesting to see how that's changed things.

Well, I think it's changed uh along with my work in business. So I was a general coun in the general counsel's office for a number of companies as well. And I think what that really does is it makes you understand that businesses have to run and regulation is a an expense line. It's not revenue generating. So each business that's trying to be regulated, especially small small businesses, they're trying to be get in compliance, but you're not, you know, they're trying to keep the business running.

And basically to keep a business running, you have to have a revenue line. And I think that that generally has impacted the way I regulate that I understand that um it's like it's like in a sports contest like an NFL or something. The regulators are refs. They're really important, but they're not the reason why everyone's there. You guys are the reasons why everyone's there, the business, the commerce.

And so it is symbiotic in that way. But I think being part of the business side of it and being inside businesses really makes me think about that a lot that we're here to ref. But at the same time we need the business and the commerce to innovate and be successful because without the business what we we wouldn't even be here. So uh I think that that has impacted the way I regulate and the way I think of regulations. uh in p in terms of being part of the Ethereum Foundation at the launch of the Genesis block.

I think it probably makes me more um interested and welcoming of technology of that technology than folks who didn't have um exposure. So I think those two things probably play in the way I regulate.

Great. So so it's sort of like crypto world has been yelling saying let them play, let them play.

Look uh I don't know how many you know we're watching the Olympics. are watching the uh Super Bowl or whatever sports you might be watching and uh people love it. We want to watch it, but it's really no fun if one side gets to break all the rules and the other doesn't. Right? That's and it and with commerce, it's not about fun.

It's just about trying to give some certainty to the marketplace so that it runs efficiently. uh and and that's you know it's really important and I think my experience with both the Ethereum Foundation and working inside um pretty successful businesses also creates an overlay of that every time I'm making regulatory decisions.

Well, you mentioned commerce of course and I'm a payments wonk and e-commerce wonk. Um there's a lot of confusion around stable coins or any sort of coin that acts like a stable coin. Um and and when are stable coins or when might be stable coins considered securities and when might they not?

Okay, so we just had the great and good luck of having Commissioner Pur up here and uh and I think you've had a lot of folks from the SEC speak. So you probably already know that there's a different there's a different regime at the federal level and then the state. So, I'm the Colorado Securities Commissioner and I think really that means that I can talk about what's happening at the state and I can say generally uh with the historical uh reach of uh regulation has said historically that a security is something basically that folks might invest in to make a profit. And the reason why we have regulation on that is we want regular people who are investing in something that might make a profit who's who are incentivized to put in money to get something more. We want to make sure those people are getting fair disclosure.

That means you don't lie, you don't puff so much, you don't misrepresent, you don't omit. So this is a long way of saying basically historically a security has been something where you you can get a profit. you can there's a profit motive for the people invest and a stable coin is supposed to be one that does not have that incentive. So a stable coin that is um tied one to one to fiat to a dollar or to a yen or to a pound or to euro means that you could go back and forth between that currency and there's no profit motive that that that coin's going to um increase in value. So you're not there's no profit motive there.

So a stable coin should be stable in the sense that it doesn't offer that kind of investment incentive. That is historically how it's been uh been working. Now I guess you all probably know that in I think in July uh the Genius Act was passed which uh deals with the regulation of stable coins in more depth and we will see as those rules develop and how that uh statute uh gets implemented. We'll see what the, you know, how this all really plays out. But those are the general principles of what a security is and what essentially a stable coin is.

And even before that passage of that legislation, a tradition a stable coin that was just one to one fiat with no uh investment incentive would not have fallen in my view under the Howie test as a security. So even before the legislation, but of course the legislation adds clarity and has nuance and so we'll see what those rules look like. But I think that is the difference in your mind. Something that has a investment incentive is more likely to be a security and something that doesn't one-on-one less likely and probably not a security.

Great. I know that like from a from from a payments implement and and somebody who's using it, what I don't want to have is a thousandpage addendum to my to my tax forms because I use stable coins as payments. Right.

Right.

Um so for we have a lot of founders bidders here. Um they're making wallets, their loyalty systems, NFTts, tokens, chains. What you know what sort of guidance and some of the published guidance that's been out there? what should they pay particular attention to um when they're developing so that they don't like run a foul of of things from the get-go?

Okay, I have two answer. I have two things I want to touch on for this uh an uh question. The first one is I would just say in the in terms of what's trending in all of fintech, I think the one thing you guys all have to think about is cyber security. whatever you're building, make sure it's, you know, got some kind of cyber security protection. I I think it's so obvious, but I would imagine every serious regulatory scheme is going to be concerned about that.

Okay. The second thing that I would recommend because a lot of what's happening is happening at the SEC federal level and I again I'm the state commissioner. I would tell you to there's a division in the SEC called Corporation Finance. Corp fin is what we in the regulatory space call it. And they have a great website.

If I were a builder, I would go there. There's a website. It's if you just put in uh in your search engine, Google um SEC Corp Fin, their website will come up and it'll say Corporation of Finance SEC. And if you get on that page on the lower left hand side, it says crypto assets and then every single one of their recent guidances and there are a lot um are there right proof of work, what they think about proof of stake, how that is or isn't part of a uh securities analysis. These are uh they've been incredibly active and these are really helpful guidances.

If I were a builder and I wanted sort of a a quick sort sorting out of what they of what is important at the federal level and what kind of guidance is coming out, I would go there. Uh the third thing I guess I said two, but the third thing is you know a lot of legislation conversations are happening at Congress. You got to keep an eye on that but but honestly if you you don't want to wait you're building right now. I would go to that page. So that those are the two probably tips that I would give to a builder right now.

They don't even need to go to AI. They can just go straight to that.

I would go there. I would not use the AI overview. I would go right there and read from the horse's mouth.

Great. Now um in talking in the past, we've you've talked about how uh certainty is king in financial markets. So how much you know how much more certainty do we have now um than we did in previous years? Um and and do you feel like things are getting more certain or we're in for a similarly rough road until we have completely rocksolid concrete certainty from legislation and regulation standpoint?

Uh so I think that that's a really tough question. Uh it's a tough question because there are a lot of things that one could say about that. I think that certainty for institutionals really really important institutional big organizations with a lot of transactions they'll pay a premium for certainty so it is really critical but if you think about your own lives and as builders certain amount of certainty from the regulatory side is also you you feel it right it's really important because then you don't know which way you can go and which way you can't go um so I think there's a lot more uh there's a lot more maturation both on the regulator military side and in the ecos. So I think as both areas mature, I think there is more certainty. The ecos has a sense of what of what's happening better than they did before.

They have a better sense of how regulation plays into it and the regulators have a better sense of what the impact of the technology can be in markets and in other areas. So I think there is more s certainty through the maturation and that's I guess that's soft power in the sense that's not written down but um but the thing to remember about laws and the way we work as a society is that a lot of the stuff we do is not written down and there's still certainty. Okay. So I think that's that's that's the idea that certainty comes from both the statutory and regulatory words that are written and the maturation of the industry and the regulators. It's more complicated and I think it it actually has to have that side to it.

Um I like to give examples. So I'll give you example. um when we have a stoplight or a stop sign in uh in the US generally and I'm saying generally because I know out there you guys are running them just like others but like generally we stop even if there's nobody there we are like okay well we need to stop but I've been in other jurisdictions where a stop sign is more like guidance people don't stop right they don't they cross the lane they drive all over the place so they have the same rule but the culture and the way the evolution of that rule is implicate implicated and implemented is different. So again, I think that it's we have more certainty both because uh a maturation of the ecospace, maturation of the regul regulators uh regarding the technology and because we're about to get a market restructure bill that will write a bunch of this down. I have heard from people in the eco space that they want they don't want rules.

They want the SEC to write every single thing down in the statute. Uh I'm going to suggest to you that uh that is a bad idea and not only is it a bad idea for the regulators, you actually don't want that either. You want and people I know they struggle with this, but you want some judgment and some flexibility in how things are interpreted to reflect like I said the maturation and the evolution of the space. So I would say um the short answer is more certainty. The longer answer is that's not just because of the rules and the statutes, but it's because of the the the growing understanding in society o overall.

This is a long answer. Sorry. Okay. Yeah.

No, that was that was a great answer and that's really important. So, I'll give you a little easier question this time. So, what did you think of the onboarding experience um for ETH Denver this year through Unicorn?

Um, good. So easy. Just push a button. Um, you know, I I think that makes it great for people in the space uh who are busy and it also makes it great for people who aren't in the space who are like overwhelmed by technology. So, I thought it was great.

Congratulations.

Thank you. Sorry, I had to throw that in there. Now, we're seeing um more like firms like JP Morgan launching tokenized platforms. Um I guess in some countries it's not allowed like the UK. Um but um but do you see that as a validation of the um of the technology or does it risk sort of flipping the financial systems out on on on their head?

I think this goes back to your first question of what does it, you know, how does it impact um the way I see regulation and the development of the EOS of the ecosystem and financial systems uh with the overlay of having been the first general council for Ethereum at its genesis block. And the answer to this question is that I have since the beginning um after I had the really incredible privilege of having Vitalic Bdderin actually explain to me what the Ethereum blockchain does. Uh you know I thought about it first. He explained it and I was like I I don't get it. And I slept on I thought about it and I thought this is this is really pivotal.

It's going to be really important in so many ways. And so the answer to that is not a validation but that I think I could already in my view see how important and how integral it would this kind of smart contracts and the blockchain would be to so many aspects of how we transact and do things in society going forward. Like I could just see. So, I don't think that I'd need validation because, you know, there just going to be so many use cases and that's just going to be one of the a significant one uh when it plays out. I think that um Commissioner Pur and Commissioner Atkins have talked about on this stage about uh a plan uh that's going to be imminent, I guess, to tokenize securities.

um that you know that these use cases are going to be abundant and I don't think it's really a validation in for me in the sense that I you know I just really could see that there would be so many use cases and I uh think that this would be a significant one. Um you know the NYSE I think last month uh said that they were going to allow custody on the blockchain. You know, all of these use cases are really big deal in how society functions and I think something in the early days that I thought would happen. Not exactly. I'm not a prognosticator, but you know, I I knew it was going to be I knew there were a lot of use cases that could uh leverage the efficiencies of the blockchain.

I'm happy to see it. I think security once again cyber security cyber security will be top of mind for those kind of things though.

Great. Great. Well, if if you could give one piece of advice to the founders and builders that are here um launching a project in the next 12 months in blockchain um from obviously from your from your seat from where you sit in the security side, what would you uh what advice would you give them?

Well, I wouldn't let's say it's not just for financial, it's for any kind of builder. I think the first thing is to make sure whatever you're building is something that is actually something people want to use. Like I know that's really obvious, but make sure it's something people really want to use. And then um and then I would just say go forth, innovate, make lots of money, and do it legally. That would be my advice.

So that Yeah.

Great. Well, um thank you so much. Um you've been coming to Eat Denver every year since 21 or 20.

21, I think.

21,

right?

Pandemic.

Because the pandemic, right? Um and and we really appreciate it and we appreciate you and your wisdom and I feel great that you're here watching over the state that we all live in.

Thank you very much. And to all the visitors, welcome to V Denver. Have a great time.