Crypto has 'enabled a digital crime wave of epic proportions,' former SEC officer says

Yahoo Finance Video

February 16, 2022 at 1:55 PM

John Stark, John Reed Stark Consulting president former SEC Office of Internet Enforcement chief, joins Yahoo Finance Live to discuss BlockFi's $100 million settlement with the SEC, the SEC investigating cryptocurrency exchange Binance, crypto regulation, and the outlook for cyberattacks using bitcoin following the arrest of a famous TikTok couple.

Video Transcript

BRIAN CHEUNG: Well, call it new cops on the block or perhaps just the cost of doing business, but the number of legal run-ins in the crypto world as of late, first off, crypto lending platform BlockFi coming to a $100 million settlement with the SEC over failing to properly register its crypto lending product. And then you have the SEC separately looking into cryptocurrency exchange Binance and its trading affiliates. So much to talk about, so let's bring in former SEC Office of Internet Enforcement Chief John Stark, also head of John Reed Stark Consulting.

I want to talk to you about that BlockFi story first. You know, it was interesting because I was seeing some commentary online that said, maybe this is a good thing for BlockFi, even though they may not have gotten their lending product properly registered. At least now there's kind of a path forward for other companies that hope to offer crypto lending products as well. What do you think?

JOHN STARK: Right, well, I don't see-- first of all, thanks for having me, Brian. It's great to talk about this. I'm going to try and be as objective as I can. I have no stake in Bitcoin or any other crypto. It's hard to be excited about having to pay a $50 million fine to the states, another $50 million to the SEC. Pretty much one of the largest fines in SEC history. They typically don't have large fines like that. Be charged with fraud which, you know, is also a crime, Brian. So if you commit fraud, you can also, under certain circumstances, go to jail.

And then being told to stop everything that you're doing is somehow a victory for regulatory clarity. And you see-- you hear the BlockFi spin on it. I worked in the SEC enforcement division for 11 years. Oh, pardon me-- for almost 20 years, 11 as chief of the Office of Internet Enforcement. I don't think I've ever seen anything like this before, this kind of spin after a settlement. And they have to register, which is what the SEC wanted all along. So I don't see the victory anywhere. I think the securities violations, it was like shooting fish in a barrel for the SEC. These products were clearly securities. I wrote about it in an article in September.

BRIAN CHEUNG: John--

JOHN STARK: And I'm not a genius when it comes to securities regulation, but I can tell you, any one of my law students-- I've been teaching law school for almost 20 years as well-- any one of my law students would have seen it.

BRIAN CHEUNG: I was going to say, I mean, it's not just crypto lending platforms and products that are the issue when it comes to registration. I mean, Gary Gensler, the head of the SEC, has made it very clear he wants all types of crypto platforms and products and stablecoins to register with the SEC. So do you think that handing down a heavy-handed fine like the one that we saw with BlockFi, which was, as you mentioned, pretty unprecedented, a really good warning shot from the bow that would actually get a lot of these crypto companies to get the message here?

JOHN STARK: I don't know. Maybe, maybe not. I mean, the legal advice that they seemed to be getting is it depends and better to beg forgiveness than seek permission. The problem with these digital asset platforms, whether you call them decentralized or centralized or whether they're peddling decentralized products or not, is, they're not regulated in any way, shape, or form. They offer no protections to the individual investor. And, you know, it was Mike Tyson who said, everybody's got a plan until they get punched in the mouth. The same goes for crypto. It's great that hey, there's all this decentralization, all this disintermediation. We're all going to benefit from it.

But then if your crypto is somehow lost or hacked or stolen or taken from insiders or manipulated, as many of these products are, you don't have anyone to turn to. There's no recordkeeping, no archiving requirements for operations, no-- nothing about order flow, nothing about the payment systems, no training or code of conduct requirements, no auditing, no examinations, no compliance procedures, no mandated documenting process for whistleblowers, no minimum financial standards for operations, liquidity, net capital, all of these things we take for granted when we make a credit card transaction or when we buy 100 or 50 or 1,000 shares of stock. That, hey, this transaction is going to happen and it's going to be OK, and there's lots of people there to help me if it doesn't go my way.

AKIKO FUJITA: John, it's Akiko here. You just mentioned the need for regulation, but also standardization. There's another case that I know you've been following, which is the SEC investigating Binance and its relationship with its market makers. And, you know, we're talking about Binance because of that investigation, but as the "Wall Street Journal" article points out, FTX, their owner, Sam Bankman-Fried, also owns one of its market makers. I mean, what do you make of what's playing out there? And what is the regulation that's needed?

JOHN STARK: Well, you know, first of all, it's funny because everybody calls for clarity and specifics with respect to regulation. And then the SEC comes out with a proposed rule that defines digital asset trading platforms very broadly, and the industry is totally against it. Or the Infrastructure Act actually contained a provision that defined what the digital asset platform was. And the industry wants to repeal that. So be careful what you wish for, crypto industry. You just might get it.

Now what's the SEC going to find when they investigate these digital asset trading platforms, or however you want to characterize them? I mean, remember, cryptocurrency, it has no intrinsic value. It provides no societal benefit. Especially in the US, there's lots of easier, quicker, faster, safer ways to move money without all of the volatility. And again, it's on no intrinsic value.

But I sort of think back to when I was younger, and-- going to be 60 soon. When I was younger, you took driver's education. And you have these movies that you'd see, and there would be every conceivable type of problem that you would encounter. Somebody would be crossing the streets, somebody would be tailgating you from behind, a flashing red light, a stop sign. That's what it's like when you visit these digital asset trading platforms. The violations are everywhere. So the SEC, if they get in there, they will find something. That, I can almost guarantee.

BRIAN CHEUNG: And then, John, I want to switch gears because I mean, let's be fair-- I think most average people might not be paying attention to crypto lending platforms or securities registration. But they may have noticed that headline from last week about the couple based out of New York that got busted as part of a money laundering scheme for Bitcoin that was stolen from the Bitfinex platform back in 2016, those proceeds apparently now worth about $4.5 billion. Now it seems like this is just the tip of the iceberg. It's not that they were the hackers themselves. So it implies that there's still some bad actors out there. I mean, is this the end of the story?

JOHN STARK: No, you're exactly right, Brian. That is absolutely the right question. Bitcoin and other cryptocurrencies have enabled a digital crime wave of epic proportions. I do a lot of ransomware response. Ransomware is a perfect example. It's running. It's evolving in different iterations. It's become a tremendous problem all over the world, especially in the United States.

And guess what? The ransomware payments are all in Bitcoin. And guess what? None of those ransomware attackers are ever caught. Maybe a few here and there, the government gets lucky. But generally, everybody pays the extortion demand. And no one is ever caught, no one is ever found because of the pseudo anonymity of the currency.

You can also think of terrorism, drug dealing. A friend of mine works for Customs and Border Patrol. They used to rely on the FinCEN suspicious activity reports to provide intelligence about the finances of drug dealers. Well, that doesn't matter anymore because the cryptocurrency is all done in a pseudo anonymous fashion. So there is no information about that available. So drug dealing, sex trafficking is awful the way Bitcoin is used. Bitcoin has become the killer app for so many different crimes, especially ransomware, sex trafficking, drug dealing, and terrorism.

AKIKO FUJITA: John, we could talk about this for another hour. We're going to have to have you--

JOHN STARK: Absolutely.

AKIKO FUJITA: --back on the show again soon. John Stark, former SEC Office of Internet Enforcement chief and John Reid Stark Consulting president.

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