Cryptocurrency: The Regulator’s Perspective (Podcast) – Fin Tech

Christopher Gerold:  Hi, Rachel, thanks
for having me, happy to be here. Yes, I do. And I have been hanging
out with a lot of regulators over the last four or five years. My
colleagues and folks that had my job in states across the country,
and in fact, NASAA was an organization which was all of North
America. So includes the provinces and territories of Canada and
Mexico as well. So really was able to see what regulators in the
securities area are doing from all over North America.

Rachel Maimin:  So global, not just the
United States?

Christopher Gerold:  Correct.

Rachel Maimin:  Well, let’s get into
it. I’m curious because I previously had a career in public
service. What led you to public service, and in particular to the
bureau?

Christopher Gerold:  So interestingly
enough, I started my career, my legal career, I should say, because
prior to law school, I was actually a broker Series 7, Series 63. I
had clients, I was a broker for two years after undergrad. Then I
went to law school. And when I came out of law school, like so many
others, I wasn’t sure exactly what I wanted to do, but I wanted
to stay in finance, having been in that field before. And my first
job was as a deputy attorney general representing the New Jersey
Bureau of Securities as an attorney. And so I did that for five
years, because of my background, having had licenses and been in
the securities industry, I was able to do that and catch on. And I
mean, there was a learning curve in the legal aspect of it, but
understanding the products and the services and what brokers did, I
had already experienced that.

And so starting my career, I was representing the Bureau of
Securities, did that for five years, I prosecuted cases on behalf
of the agency. We went after people that were violating the
securities laws, people committed fraud, Ponzi schemes, other
things in that area. And then I went to private practice for seven
years, and had the opportunity to go back as the chief of the
agency, and I did that in 2017. Now what actually made me go to
this field is relatively interesting in that my parents were
victims of a Ponzi scheme when [crosstalk 00:04:45] I was in high
school. And I could honestly not say whether that led me to what I
did for a living as a regulator, I never really thought about it,
but it would make sense, at least subconsciously, that that led me
there, because I could see the devastating impact of securities
fraud on people, including within my own household.

And fortunately my folks at the time were probably in their late
’40s and they lost a portion of their nest egg, but they had
time to grow it again and didn’t impact them long term, but for
a lot of people it does. And we see a bunch of that, or I saw a
bunch of that as the regulator, seniors being victims, losing life
savings, having to make difficult choices cause they lost all their
money to a fraudster. So I had a chance to try to remedy some of
that doing public service, protecting innocent investors,
prosecuting bad actors. And I did that for five years. And it was
very rewarding work getting to do that and trying to make a
difference.

Rachel Maimin:  That’s incredible. So
you basically have experience as a victim of a crime, in so far as
your parents were victims of a crime, and also as a broker. So I
guess there’s no area of this that you haven’t actually
been firsthand involved in.

Christopher Gerold:  I’ve seen the
financial industry from a bunch of different angles.

Rachel Maimin:  Yeah.

Christopher Gerold: And so I guess maybe
it’s time now for me to become an investor myself.

Rachel Maimin: That’s true, I forgot
about investor. So was there something about happened with your
parents in particular, I know you said it might be subconscious,
but do you think that their case was handled the way you
would’ve handled it had you been in charge of the
prosecution?

Christopher Gerold:  So it’s
interesting, they were part of a national Ponzi scheme, at the time
it was probably the largest Ponzi scheme in history as $900 million
emanated at Massachusetts. The SEC brought a action, it ended up in
a receivership. And I do recall my folks getting checks from time
to time from that receivership. Interestingly, it was sold through
legitimate broker dealers, or at least registered broker dealers.
And my recollection is that they did not actually prosecute the
broker dealers that sold it, whether it’s lack of due
diligence. Lack of due diligence is probably what they could have
gone after them for. And I think when I was at the state and I had
that ability, I did look to broker dealers that sold, whether it
was unregistered products or fraudulent products, to make sure that
they were doing their job of as gatekeepers before they sold it on
their platform. So I don’t want to cast stones, and…

Rachel Maimin:  You can cast some
stones.

Christopher Gerold:  Well, because of my
age, and I did at one point go back and look at how it was handled
and did some research on it when I was older and had a law degree
and saw what came out of it, I think I would’ve looked a little
harder at the folks that sold it than they may have.

Rachel Maimin:  And having that unique
perspective, and I guess maybe even a destiny in public service,
what was it like being a broker?

Christopher Gerold:  It was interesting, I
was 22 at the time, I just graduated college, I didn’t know
anything, I knew what a stock was, and really had this huge
responsibility thrust upon me to try to advise people how they
should save for, most times it’s retirement, but what they
should do with their investing. And it’s a very challenging
job, and I appreciated that. I mean, there’s the sales aspect,
but then there’s also the analyst aspect. And the industry
[has] changed a lot since I was in it, where firms generally have
more say in what the broker puts their clients in. And I actually
think that’s a good thing, because do you really want a
22-year-old who just graduated college, who doesn’t know
anything, who’s never experienced downturn in the economy or
loss or what have you, any of the number of things that could come
up, picking and choosing stocks for you? So it is a job that is a
big responsibility.

I think the folks that take it seriously do well and have long
careers and clients that probably become friends. Then I think
there are others that don’t last in business. I did not last
obviously, I did it for two years and then decided I wanted to go
to law school. And that’s what I did, but it’s a
challenging job.

Rachel Maimin:  Yeah. Well, I’m sure
it played a very helpful role when you ended up regulating some of
your former colleagues.

Christopher Gerold:  Well, it has played a
role throughout my career, whether as a regulator, but also in
private practice where I’m advising, whether it’s broker
dealers or individuals who are being investigated by regulators, I
know how difficult that job is. And sometimes my clients had no
intent and things just went south. In those cases it’s easy to
sympathize with them, because that could happen, they have a good
idea, doesn’t work out, and all of a sudden the regulator’s
looking at them, I could sympathize. So it’s played a role
throughout my career. It was one of the most challenging jobs I
had, back then everything was on the phone. So I got very
accustomed to calling 100 or 200 people a day. They used to refer
to it as dialing for dollars. I got over any shyness I had at the
time, but it wasn’t for me long term.

Rachel Maimin:  Well, you mentioned in
their regulatory scrutiny and catching the attention of regulators.
Something that I think is really fascinating about your background
is you seem to be interested in the crypto space before it became
the hottest topic for every single regulator and prosecutor in the
country. How did you begin to focus on that?

Christopher Gerold:  So crypto was on
state securities regulators going back to as early as 2014 or
’15. In fact, even before my time, they identified it as a
trend in enforcement, where it was a product, that it was evolving
and could be a problem. But when it really jumped onto my radar,
again, I have to blame my parents, I’m always blaming them, but
it was November, Thanksgiving 2017, my mother, and you’ve
already heard about my parents, how good they are at investing,
asked me whether she should be buying crypto, whether she should be
buying Bitcoin or not. And at the time I had just become the chief
of the Bureau of Securities. And I said, “If my mother’s
asking me if she should buy this product, there might be a problem
here.” And by Christmas she said, “Chris, I really think
we should be buying it, people are getting rich.”

At the time it just got up to the level of about $20,000 per
Bitcoin. And very shortly thereafter, we brought our first case,
and we started looking around, started talking to my colleagues in
other jurisdictions. And we came to realize, like many,
historically whenever a product or commodity becomes all the rage,
we saw it with the dot-com bubble, we saw it with gold when gold
was up at $2,000 ounce, we saw it with oil when it was trading
around $150 a barrel, what happens is the product is on the front
page, and then out come bad actors to try to monetize that. And so
we brought our first case against the Steven Seagal-promoted, it
was called Bitcoiin with two eyes for instead of Bitcoin, Bitcoiin.
We brought that in the late winter of 2018, it was one of our first
cases, it made national headlines because of the celebrity
associated with it.

After that it snowballed because the fraudulent ICO, initial
coin offering, market was all the rage at the time. And as a
regulator, we saw there were problems, there were fraudsters out
there. And so we took the initiative, I say we, myself, my office
in New Jersey, and we brought our first case. And other
jurisdictions reached out to me, and we put a task force together.
And we started looking at all of these different websites that were
promoting different cryptocurrencies and ICO offerings and alike.
And really it was to stop those that were doing it, but it was also
to raise awareness. I’m a firm believer, at least in my old
role, a good enforcement case is better than a lot of investment
education. If you could get it in the newspapers, people will read
it and hopefully take notice that that’s an area they should
have heightened due diligence or be suspect of.

Christopher Gerold:  And we did exactly
that, we brought a number of cases, New Jersey did. We partnered
with my colleagues in other jurisdictions. I was the head of
NASAA’s enforcement committee. So we put a multi-jurisdictional
task force together. And we went out and enforced and issued 100s
of investigations and enforcement actions, became known as
Operation Crypto Sweep. And from then on, we were off and running.
And so my phone would ring from colleagues in other jurisdictions,
federal counterparts would reach out, and start coordinating and
bringing more actions in that space.

Rachel Maimin:  Anything about crypto
inherently, other than the fact that you can disguise the ultimate
owner and it prevents people from really following a paper trail,
is there anything about crypto other than that that makes it a
particularly fertile place for fraudsters?

Christopher Gerold:  Well, I certainly
don’t want to say all crypto is bad, I think crypto does have
very legitimate and a lot of promise. Unfortunately, early on we
saw a lot of fraudsters come out and try to capitalize on that. But
yeah, it does. I mean, the transactions are instantaneous, it has
lower fees in a lot of cases, it can be used in a lot of good ways.
And, well, oftentimes crypto and blockchain are confused.
Cryptocurrency’s on a blockchain, blockchain is the technology.
And so the technology itself has a lot of potential uses, and
we’re seeing more of them now and we’re seeing them evolve,
and it’s really an area that has a lot of promise. The best
comparison I heard was, folks used to say, “the Internet’s
going to change the world.” They didn’t know how, but it
was going to change the world. And we’re seeing that same type
of thinking and evolving in the crypto and blockchain space, along
with DeFi, as you mentioned earlier, decentralized finance.

Rachel Maimin:  Well, so obviously promise
and the opportunity for positive transactions to take place in the
crypto space, but if a company is considering getting into it right
now, can you do it without a massive regulatory risk, given all the
focus on the industry?

Christopher Gerold:  So it depends what
area of they’re going into. Obviously you still need a good
idea, you can’t just go out and say, “We’re a crypto
company.” You have to have an idea, you have to provide some
service, there has to be something tangible behind it. And
comparing it to the dot-com bubble, if you remember back in
’99, if you had a company, you put .com at the end of it and
all of a sudden your stock would go way up. And now 20 years later,
people realize you have to have a service. And the people or
companies that were winners early on doesn’t mean they’re
going to be winners later on. And we see it with AOL, if you
remember AOL-

Rachel Maimin:  I seem to remember AOL,
yes.

Christopher Gerold:  … or Netscape, or
those early, early companies that were all the rage. Yahoo,
it’s still around, but it’s not what it once was. And now
we have these other companies, Google and alike. So there are lot
of opportunities with blockchain and crypto. We’re seeing a lot
of money going into that space, a lot of talent, a lot of smart
people going into that space, and it’s evolving. It’s still
in its infancy in my opinion. So you talked about regulatory risk.
There is a lot of regulatory risk in that space. Keep in mind, I
was the chief of the Bureau of Securities, if it wasn’t a
security and wasn’t investment advice, it was outside of my
lane. And so same goes for the SEC. And then there are others, the
CFTC is in there, is it a commodity? Is it a currency? You have the
Fed, you have the White House weighing in. So there’s a lot of
regulation to come, and being in it early, even before the
regulations, there is regulatory risk.

Rachel Maimin:  Well, now that you are on
the other side and you’re able to advise companies, having had
this perspective of focusing on their industry, what do you think
is the number one most important thing for a company considering
getting into the crypto space to take into account? What’s the
biggest compliance problem that you’ve seen that you think
needs to be dealt with right away?

Christopher Gerold:  Right now, it’s
the absence of regulation, that’s the problem? We’ve seen a
lot of enforcement cases, both at the federal level and at the
state level. There are very few state jurisdictions right now that
have anything specific to blockchain, crypto, crypto exchanges. New
York has a BitLicense, that’s been around for a while. Federal
government’s talking about coming out with regulations, you
have the Congress talking about it. So the number one risk is
regulatory risk. Now, how do you minimize that when you don’t
have regulations necessarily to follow? Well, you comply with the
ones you can comply with, AML for instance, and then you do your
best to build whatever product you’re building, or company
you’re building, to think about what regulators are going to be
concerned with and try to reduce those risks.

And I think for companies in that space, having attorneys advise
them, that have that knowledge and experience to anticipate what
regulators might be looking at is very important, and then build
that company’s, the internal compliance in anticipation of
that, or what regulators might be looking at or will look at in the
future. You also want to make sure you’re protecting your
clients, and making sure to the best you can, that they don’t
become victims of fraud or hacks, or any number of things that can
arise in this space.

Rachel Maimin:  You mentioned AML, and
that’s definitely an area where there’s been a lot of
discussion by regulators, and there’s some more understanding
of what is expected of companies in that area. In your experience,
what’s the thing companies make the biggest mistake in AML
compliance programs, what’s their biggest thing that
they’re missing or doing wrong?

Christopher Gerold:  Well, we’re
seeing a lot of companies starting to do it right, know your
customer, I say AML, reporting AML issues when they occur, making
sure you have proper money-transmitter licenses which are issued by
the states. And so we’re seeing many companies, starting
company compliance where they hadn’t before. And I think for
companies to succeed, they’re going to have to stay on top of
that, they’re going to have to make sure that they’re doing
what they can now to anticipate what the issues might be on later
on, but certain certainly protecting their own clients is really a
big one. When I was on the other side, we used to get, and they
weren’t really even in our jurisdiction, but we would get
individuals calling and filing complaints with state government,
with the Bureau of Securities about its customer service.

Christopher Gerold:  And it’s
interesting, I say that and I mention it because that will put a
company on a regulator’s radar. If you get five calls about the
same company and their customer service, and my money’s tied
up, or my crypto or my Bitcoin’s tied up and I can’t get an
answer from them, and it’s been three or four weeks,
immediately the antennas are going up, “All right, what is
this company doing wrong?” Now, it might just be that they
grew too quickly, they’re having growing paints, they don’t
have enough customer support, but all of a sudden they have
regulators looking at them. And that’s something that’s
avoidable. It’s very interesting what triggers regulators to
look at companies, and something like that can. And so companies
have to be mindful of that.

Rachel Maimin:  So in that regard, one of
your jobs in the private sector is going to be protecting companies
and keeping your eye on what’s coming in the future. Do you
have any predictions about what’s going to happen in terms of
the regulation of cryptocurrency? I know regulation is needed, what
do you think it’s going to be, at least in the near term?

Christopher Gerold:  So I think we’re
going to see a lot more enforcement actions. We’re going to see
a very, very active Securities and Exchange Commission. As you
know, I worked with the former director of the SEC enforcement, he
was the attorney general in New Jersey, I worked with him for four
years, and then he went down to Washington to become the director
of enforcement at the SEC. I anticipate the SEC to be extremely
active in enforcement of crypto that crosses into their lane, or
DeFi. And then I would also expect the CFTC, now that they have
leadership, their chairperson was confirmed just before the
holidays, I expect them to really be ramping up enforcement. And
then I think Chairman Gensler at the SEC is going to be coming out
with rules in that space. The SEC is taking criticism from the
industry that they are regulating by enforcement. And I think
we’re going to see a lot more coming out on the rule-making
side.

I also do anticipate that Congress is going to act at some point
and change statutes, whether it means giving more authority to the
SEC or CFTC, or coming out with something different, but that’s
certainly something that the industry has to keep its eye on,
what’s going on in Washington.

Rachel Maimin: I’ll definitely be
looking to you when those changes happen, for your viewpoints and
how companies can best implement those changes to stay in
compliance with these ever-changing laws.

Christopher Gerold:  It’s an exciting
and evolving space. And I’m excited for that opportunity to
advise companies and make sure that they don’t end up in some
regulator’s crosshairs.

Rachel Maimin:  Well, I agree, we share
the same goal. Thank you so much, Chris, for being here with us
today and the time to tell us about your fascinating intro into
public service, and all of your predictions and [inaudible
00:23:06] about what’s going on in the crypto space right now.
We’re looking forward to hearing your insights going
forward.

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