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Season 3, Episode 12: The Real and Present Regulatory Risk Facing Cryptocurrencies (Updated)

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With Jacob Ma-Weaver, Cable Car Capital

Updates with transcript, below. To get the transcript (and podcast) earlier, and take advantage of a host of other benefits, become a premium subscriber.

Jacob Ma-Weaver of Cable Car Capital Management joins the podcast to discuss the regulatory risk facing cryptocurrencies.

This podcast was recorded on May 19, a day bitcoin dropped some 15% after the People’s Bank of China published a report warning over the use of digital currencies. But even before the PBOC move, cryptos were dropping in value. Bitcoin has declined more than 30% from its high set earlier this month.

Ma-Weaver’s interest in cryptocurrencies originates with his work as an activist short-seller. He has held conversations with regulators on cryptocurrency exchanges in particular. That was much of the focus of the conversation.

Not intended as investment advice. Nothing on this episode should be taken as an endorsement for or criticism of cryptocurrencies in any form.

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Transcript

Nathaniel E. Baker 0:02
All right, crypto currencies, this is something that I have avoided, speaking about, or focusing on in the two plus years that I’ve had this podcast, despite repeated attempts by various people to get me to cover it. And the reason for that is that there’s really only two ways historically, that conversation about cryptocurrencies could go, number one, that these were the greatest thing since sliced bread, and we’re going to usher in peace on earth and brotherhood among mankind. or two, they were a complete scam, to enable criminality. And we’re not worth the algorithms and they were printed on even though algorithms don’t print but whatever. And so I historically have avoided them. For this reason, I didn’t want to come in on one side, or the other half of guests speak about one side or the other. But my guest today, Jacob Ma-Weaver, of Cablecar Capital, has a unique viewpoint on cryptos. And that’s the one thing I’ll get to that in a minute. But also, this is extremely timely. As we record this year, on Wednesday, a non chain crypto currencies have been taken out back and beaten to a pulp. I think they’re down about 20%. From their highs, just today, Bitcoin itself was down about 10%. And it’s just a question of, not only if, when the bleeding will stop, but if it’ll stop. And this is all precipitated by what we’re going to talk about, actually, which is the regulatory risk for cryptos, especially here in the US. I say that, because what precipitated this most recent drop, in cryptos, today, and last night, was the pboc, the Central Bank of China stepping in and coming in with some regulation that has hurt these assets. Anyway, that long intro out of the side, I’m now very pleased to welcome Jacob to the podcast. And maybe let’s start with the most recent news here. What do you think of the pboc move here today?

Jacob Ma-Weaver 2:56
Well, thank you for having me and Nathaniel, and let me just say off the bat that, you know, I tend to skew a little bit towards that second bias, you reference. And I’m going to do my best here to be balanced and not just call crypto an outright scam. Okay. But you know, where I’m coming from. So your listeners know is, first of all, I’m not an attorney, nor an investor in crypto. But I am going to express some opinions on both legal topics and topics that are of interest to people who do invest in those markets. Of course, everything I say is not financial advice in any way. And if I were to give financial advice that would probably be not to invest in cryptocurrency, okay. But with that bias, disclose, you know, my focus and reason for spending time on this over the years, has been a deep interest in investor protection issues. And we may talk later if there’s time a little bit about my fun than what I do. But I am primarily focused on on long and short investments in public companies, many of which touch on cryptocurrency. And it’s been important in studying micro cap fraud and retail investment schemes and things of the like to learn a lot about this emerging area of technology and investment. So that’s the perspective I come to it from. And with that in mind, I was very pleased to see the news coming out of China. I don’t think it’s very likely we’ll see something of the same order of magnitude here in the US will obviously get to some of those details later. But I think that it was likely the right thing to do.

Nathaniel E. Baker 4:45
Interesting, and I forgot to mention at the outset that you have been in touch with regulators. We don’t want to say who or which ones are in what capacity but you have been having conversations around crypto regulation with some regulatory regulatory folks. Here in the US, right?

Jacob Ma-Weaver 5:01
Yes. And so my perspective is informed both by private conversations, but enforcement stuff, as well as some public commentary that for those who are interested, you can see my public comments on, for example, the CFTC had a rulemaking process a few years back, regarding actual delivery in the context of commodities that are financed, which is the topic very relevant to exchange regulation.

Nathaniel E. Baker 5:31
Maybe let’s start a little bit, just, you know, on your background, which we usually leave for later, but I think to put it into context, where does your interest in cryptos come from? And what has kind of informed it over the years?

Jacob Ma-Weaver 5:46
Yeah, so as mentioned, I manage a long short equity strategy, it’s primarily equity focused, I do do some things in other parts of the capital structure through a fund called the funicular fund. And as you know, of course, we were initially introduced by a mutual friend to I think, had the idea that I could come on your podcast and talk about my investment business. I didn’t want to do another stock pitch episode. And I’m glad we have something more timely to talk about. But my business primarily is around on the short side, looking for wrongdoing in the capital markets. And that’s alongside a much longer term, you know, long time horizon investment portfolio on the long side, which frees up a lot of time and attention to go out and see if there’s some way I can be on the other side of stock promotion, fraud, market manipulation, and ultimately try to do something about that. But that’s where I found a lot of meaning and the work, despite the challenges of short selling, it’s meant that, you know, I could have productive conversations with regulators and members of the public and really try to where possible, at least stay, you know, affect some change. So some of that is, you know, publishing research, which I’ve done in the past, some of it is more behind the scenes. But I initially got interested in exchanges and the topic of, you know, sort of the business of public markets through a long investment and intercontinental exchange, at this point, now, seven years ago, and it was through my research on that, that I came across some less reputable exchanges, that were offering financial products, primarily to retail speculators. And I heard a published short report on a company called plus 500, which sells contracts for difference. There’s a gambling instrument, basically a swap. That’s illegal in Europe. And that experience led me down a really long rabbit hole that led to this conversation today. We’re basically over the last five or six years that I’ve spent a lot of time digging into that industry. So alongside CFD brokers like plus 500, that are publicly traded, there was a darker industry of unregulated broker dealers that sold a related financial product called a binary option. And that’s been a major enforcement focus for the SEC. It was outlawed in Israel, where a number of the operators were base. And as you can likely guess, a number of the people involved in that business. After previously selling CFDs, or binary options or leveraged, forex pivoted, quite naturally to cryptocurrencies. And I see many of the same techniques in terms of marketing, customer acquisition, the functionality of the exchanges themselves present in cryptocurrency exchanges, and I view it as one long continuum of sort of wrongdoing, obviously, to varying degrees. And it’s prompted a lot of my research efforts on that

Nathaniel E. Baker 9:12
space. Nice. So your interest in this comes from an activist what sounds like an activist short angle. We’ve had activist short sellers on the podcast before but I’m actually glad that we’re not talking about stocks, specific stocks here because it’s always a bit of a legal minefield. Yeah, more for you than for me, but for me as well, but Okay, so let’s so crypto exchanges now, how are they currently regulated, if at all here in the US?

Jacob Ma-Weaver 9:42
Well, I think that’s going to be one of the biggest areas of potential enforcement, quite frankly, because I see there being a very clear cut definition of what type of exchange is required to register with the regulatory authorities and What’s so remarkable in this space is that a lot of the major players that are household names have not done. So to be clear that there are some carve outs that appear to be possible for an exchange to operate legitimately without any federal oversight with the exception of registration as money services business. So as a first point, if you are just selling Bitcoin, or a similar commodity cryptocurrency for cash, you are more or less entitled to do that by simply registering as a money services business, also known as a money transmitter with the various states and fincen at the federal level, oversees that process. And the goal is basically just to make sure that people are not engaging in money laundering activity. And so the rules that apply to that are really geared towards that, and not any of the things that we have come to associate with broker dealer or exchange supervision in the US, like best execution, custody requirements, you know, various other regulations that are really geared towards protecting small retail investors who want to trade and stocks and other derivatives.

Nathaniel E. Baker 11:25
Okay, so the crypto exchanges are registered as these money transfer agents or whatever they called?

Jacob Ma-Weaver 11:29
Money services business,

Nathaniel E. Baker 11:31
money, services, businesses, is there a limit like a certain type of you know, notional value that you process and processes day where you have to go to FINRA or something? Or how does that work?

Jacob Ma-Weaver 11:42
Well, so it’s it’s state by state, the bit of patchwork of regulations. But generally speaking, if you’re handling customer funds to buy and sell commodities, you need to have this registration. But it’s a pretty low bar. It’s it’s a notice filing, and then some reporting requirements, you’re supposed to report suspicious transactions. But it’s not the full fledged Swedens brokerage broker site that I think you may be thinking of. Yeah, but but that is actually the key sort of thing that I found so surprising about the space is, there is of course, a regulated framework for registering either a broker dealer, or a, the commodity side is called a futures commission. And that really is the thing that a lot of exchanges have ignored. Because it wasn’t convenient for them, because they, they couldn’t comply with all of the regulations that apply to those businesses. So broadly, if you trade securities, and I realized there’s some debate over what exactly in crypto may be a security, then you need to have a broker dealer registration, and that’s where FINRA or the SEC, actually a combination of the two would have some oversight over your activities. And on the commodity side, either if you offer a rate derivative of some sort, like a futures contract, or if you have a basically a finance to retail purchase of a commodity that is not subject to actual delivery. That brings you also under the CFTC its oversight. So you can think of that as market trading, basically.

Nathaniel E. Baker 13:28
I see. Okay, so but FINRA, so the rule says FINRA is for buying and selling of securities, and how does it define it? You know, I’ve had because it seems like that’s the question is that these cryptos claim that they are digital assets, which for whatever reason, is not a security. So what is the Yeah, how does that get resolved?

Jacob Ma-Weaver 13:50
Well, so we should come back to the question of what is or as a security because I think the perception that there’s uncertainty, there is a little bit of a self serving idea that that’s been the stated and the market, but given that you have any securities transacting on your platform, then it’s very straightforward. I like the definition of a broker and the definition of the dealer are found in section five of the Securities Act. And it’s pretty straightforward, I mean, if you either acting as a principal or as an agent to facilitate transactions in those instruments, then you are required to register full stop,

Nathaniel E. Baker 14:33
okay, in what instruments

Jacob Ma-Weaver 14:36
sorry, securities

Nathaniel E. Baker 14:37
securities, but how do they define securities? Like what is it like?

Jacob Ma-Weaver 14:41
Well, so then we get to that question: what is the security and I think the definition is quite broad. You know, it includes all the instruments that you would already you know, self evidently expect, like, like the stock, but what you usually ends up being the point of contention is that also includes a category called an investment contract. And an investment contract is really a catch all the through case law and importantly, a Supreme Court case, the that’s often referred to in the context of the howey test, basically has come to mean any investment of money in a collective common took rise, where there’s an expectation of profit. So that can refer to a lot of different things. But substance is more important than for,

Nathaniel E. Baker 15:38
or for somebody who’s not a lawyer, you pretty much put that into context pretty well, I must say, and show a quite a bit of knowledge of of the statutes from what it sounds like. And it also sounds like there is absolutely no reason why digital currencies shouldn’t be included in this right.

Jacob Ma-Weaver 15:58
Well, I think that’s the key point, you know, the SEC looked into the theory of what when they issued the year, the report in 2017, called the report on the GAO. And they basically walked through that analysis and relied heavily on the howey test, and then sort of introduced that to the public as a way to provide guidance. And, you know, sometimes regulatory authorities are criticized for regulating solely by enforcement. But this was the commission coming out and saying, you know, here’s what we think. And a lot of these offerings that we’re seeing in the marketplace, looked a lot like securities. And oh, by the way, this very well known one was, in fact, a security, but it’s been long enough, people maybe didn’t understand they were well intentioned. So we’re going to exercise our forbearance and not prosecute them. But if you do something similar, you know, you’re on notice that, that that may be a securities offering, and you should register it. And so what’s so remarkable about that piece of history, and in my view, incredibly self serving was almost immediately afterwards, you had all firms come out, and, in my opinion, deliberately throw sand in the air to try to muddy the waters and scream, regulatory uncertainty. There was a white paper, of course, it was white paper, issued by the law firm Cooley, where they introduced the concept of Saft, which was the simple agreement for future tokens. And they basically had this idea that, you know, if you do a securities offering the private sale in the Saft that that investment into an actual security, could later convert into something that was a commodity cryptocurrency, which would not be a security and therefore not subject to the securities laws. Oh, and that was a very clever workaround, it relied very heavily on one particular interpretation of the Supreme Court precedent that, frankly, a lot of attorneys take issue with, but you know, it was out there and companies relied on it. But at the end of the day, the the determination of whether that newly created currency was a commodity or not depended a lot on whether there was any actual use value at the end of the day. And I think we saw a lot of maybe not so well, meaning projects come out and try to rely on that loophole and raise money without having a truly consumptive commodity in question. And I guess, just for the sort of detail minded folks in the weeds who enjoy this sort of thing, the specific case that that I think, was in opposite reliance. And again, I’m not an attorney, but I sort of enjoy geeking out over this stuff, too, was a case called foreman, where the Supreme Court looked at a housing cooperative, where the investors are really purchasers in the housing cooperative, were buying homes to live in. And when they were asked to consider whether that purchase was an investment contract or not, the Court made a comment that, you know, if you buy a house solely to live in, then clearly that’s not a securities investment at all. Like it’s not an expectation of profit, you’re buying your residence. But if there’s some combination of the two, maybe some utility and maybe some investment purpose, then you have to look at effect based analysis and it gets a bit more up in the air. And that’s really, I think, the genesis of this idea. That has taken on a life of its own that like a cryptocurrency might not be a security if people just could use it enough.

Nathaniel E. Baker 20:09
Well, that’s a good one because what exactly do they use this for other than speculation and may maybe paying off criminality? Like, right? Like you can’t even buy a pizza. Right? You can’t, I thought,

Jacob Ma-Weaver 20:24
well, there was some Bitcoin pizza idea but only took credit cards. So this sort of amused me

Nathaniel E. Baker 20:34
Okay, so this all begs the question, why haven’t any of these regulatory agencies be at FINRA, the SEC, the CFTC, stepped in and tried to do more to regulate cryptocurrency trading?

Jacob Ma-Weaver 20:46
Yeah, I think that’s a great question. Um, but I have two entirely opposite responses to that. I guess the first one is that they have. Okay, I think it’s it’s under appreciated the extent to which the SEC has acted relative to its normal kind of pace and ability. So I’m not sure most people realize, but there have been 75, I believe, was was the most recent number. I saw cryptocurrency related enforcement actions in the last, I think, three years, which is a huge number, right? I mean, a lot of those are relatively small border offenses. But that is part of their broader enforcement strategy, you know, they tend to go after blue hanging fruit, and have a few marquee cases that really try to establish the deterrent value and make clear what the limits of acceptable behavior are. But that’s all happened in an incredibly short period of time when you consider that their statutory enforcement period is five years. And so a lot of the behavior in 2017, you know, still has not been adjudicated, and there were headlines, I think, a year or two ago that something on the order of 300 open investigations were underway within the space alone. And you know, it’s hard to validate that number from the outside, but but I would say that they have been very responsive to hearing from the public. And I think that when you think about the sheer number of unregistered offerings that took place, and ultimately, I think most Icos were in fact, unregistered securities offerings, they are not going to get everyone it’s more just a question of which moles get whacked. If I can torture, the metaphor of like, at the end of the day, they will bring a lot of enforcement actions, but some people will get away. And so there’s maybe like a larger political question of whether that’s the right approach or if it’s sufficient to protect investors. But, you know, within the context of how they typically operate, I think it’s been relatively robust. The CFTC has also contributed to some of that, although I guess from my perspective, they’ve been a bit less active. I think that’s been partly due to transitions at the senior level and in the commission, and also just the limited resources that they have, again, on a relative basis. But what I personally have found surprising, I suppose, is that they haven’t generally taken the, in my view, obvious step of having established that certain assets are securities and then sanctioning the issuers of those securities, taking the next step and sanctioning the second order players in those securities. So, for example, they they charged and then ultimately won the case against kick, which was the issuer of a digital token called kin. And there were exchanges that sold that token, there were venture capital investors who may have statutory underwriter liability as resellers of that token. And none of those entities have been charged. By the same token, pun intended. You have other sort of widely acknowledged securities that were widely traded on platforms that are not registered as broker dealers. And so I think, to the extent you accept that those were in fact securities, I think it’s a really interesting question. Why haven’t they charged the exchanges? I don’t know the answer to that. I think it’s a mix of regulatory priority. And, you know, May at the end of the day also be a political question to some extent.

Nathaniel E. Baker 25:00
Right. And that is a type of thing where one would think with Republican administration is typically a little more hands off when it comes to regulation, and maybe a democratic administration a little more hands on. So perhaps now with this transition that we’ve just had in DC, things could be changing. Is that a possibility thing?

Jacob Ma-Weaver 25:19
I do think that’s a possibility. I mean, I find it a little bit ironic that a lot of fans of crypto were excited about Gensler comfirmation because he taught a class on blockchain and MIT. But I think when you look at his public comments, he’s evinced a lot of concern for investor protection issues. And, you know, I will say that Jay Clayton was significantly more active than a lot of people expected for a Trump nominee. But it’s it’s anyone’s guess how all this will play out? I mean, I think to, to name a couple of specific names. I mean, you have seen very public statements from one of the SEC commissioners, Hester Pierce, that sort of are in favor of financial innovation and towards a less, you know, heavy handed enforcement regime. Similarly, that there was a statement and sort of a concurrence in a recent CFTC enforcement action against Coinbase, where Don son, who was another Trump appointee, basically made the point that while she didn’t necessarily have any problem with the specific enforcement action that was taken, which was a slap on the wrist for some market manipulation Coinbase engaged in a number of years ago, she didn’t think that the CFTC had any business regulating cryptocurrency exchanges at all. And then it’s one of those things where, you know, if the majority of the commissioners don’t want to take a course of action, actually, it doesn’t matter what the law states in that regard. They won’t do it. Hmm.

Nathaniel E. Baker 27:01
Yeah, no doubt, no doubt. Is there. This crypto to your knowledge has a big lobbying presence in DC yet?

Jacob Ma-Weaver 27:10
Yeah, that’s an interesting question, because it’s been reported just in the last few weeks, but that has become a much more salient feature. And I think even a few years back, you know, some of these investors made so much money that they could devote attention and resources to creating foundations and lobbying arms that whether they they used to not so much specifically lobby Congress and disclosed way, but they would push for like the Wyoming legislature has passed a number of blockchain related bills that try to encourage companies to locate there. And there have been some very public efforts to try to push back on specific enforcement cases, kicked as an example, had a, almost a GoFundMe of sorts, from members of the community that, you know, went to its legal defense fees and ripple, which is another argue roughly, and allegedly, securities offering that’s currently in litigation with the SEC, has hired Mary Jo white, as defense counsel, she she’s formerly of the SEC, and very publicly stated that, you know, they don’t think they’re offering was a security, which obviously, I disagree with quite strongly, but there’s a bit of a ironically, David versus Goliath dynamic where I think the Goliath is the crypto industry to some extent. And the reason I say that is that, you know, people who are ordinary market participants, or investors, like myself, may have our biases. You know, I don’t have the word chess that Coinbase does to to lobby for change. And Bryan Armstrong was quite public, just this week, posting pictures with Nancy Pelosi and talking about how he just spent a week in Washington trying to socialize his views of what cryptocurrency regulation should be. And I don’t know what those views are, but I am fairly certain they don’t involve heavier regulation of his business. Except insofar as when base would actually be a beneficiary of, you know, regulating out of existence, some of the more marginal players.

Nathaniel E. Baker 29:37
That’s true also. Alright, we’re overdue for a break. But I want to ask you one last thing before we do take a break, which is what do you make of the argument that regulatory bodies effectively can’t shut down? crypto trading if they wanted to? You hear that a lot like with this, you know, with India, for example, it’s been a couple news reports over the last year or two that India is going to stop allowing crypto exchange People are crypto trading. And people say, Well, you can’t do it. You can you can’t stop it. There’s no way. What do you make of that? And it sounds like I think I know your answer. But yeah, what do you think?

Jacob Ma-Weaver 30:09
Yeah, I find it amusing because I think governments have as much power as we decide to give them as the citizenry. So, you know, you can pay more. Right? I mean, that’s a social contract. Right. And at the end of the day, government could impose 100% tax on profits from cryptocurrency, you know, if they chose to do that. I don’t necessarily think that’s going to happen or that, you know, an outright ban is likely, whether it would be technologically easy or difficult to enforce isn’t really the point. I think. Some people maybe take that line of argumentation a bit too far.

Nathaniel E. Baker 30:50
Huh, yeah, it seems like that’s a common theme taking the arguments a little bit too far when it comes to this particular asset class. Alright, Jacob ma Weaver. I want to come back and I want to ask you about what you think may be coming specifically in terms of regulation in the US for these cryptocurrencies. But let’s first take a short break to hear from our sponsors. Real quick though, if you are a premium subscriber, don’t touch the dial don’t go anywhere because you will not get the break. And to become a premium subscriber. head to the website contrarian dot supercast dot tech, te ch and sign up. Welcome back, everybody. Jacob ma Weaver here from cablecar capital, fascinating discussion on cryptocurrencies. We touched on your background at the outset a little bit. But this is the segment of the show where our guest gives us a little bit more of his or her origin story, to put things into Marvel terms, and just talk about how they came to the world of investing. And their current station in life. So curious about your story.

Jacob Ma-Weaver 31:57
Yeah, well, definitely not a superhero of the light. But I i’ve been managing cablecard for now, almost eight years. It’s sort of hard to believe. I started when I was 26 years old, fresh off a stint mici capital, which was a hedge fund better known as Porter, Orlan, one of the original kW Jones model, long short strategies and operation since the 70s. Before that worked, Dodge and Cox a big long only shop here in San Francisco and McKinsey straight out of college. You know, what can I say I’ve been in San Francisco, the last 11 years, was in New York before that, I went to school at Columbia. And for me, investing has always been one of those just perfect seat on the world type of careers. And it appealed to me because I had very broad interests that I could never quite narrow down. I was a comparative literature major and undergrad and then did a master’s in statistics. So one for love, and one for money, I always have job. But you know, not always the one you would think I think the job really requires a lot of close reading and statistics is more about a philosophical way of thinking about the world probabilistically and thinking about investment outcomes, and the same way. So, you know, what I do today is, I could style it a little bit like a family office, just without the capital base. You know, I launched cablecar with as a ra, initially when I was managing separate accounts, rolled that into a pooled vehicle and 2018. And today, we run about $25 million. Obviously, trying to grow that like like every manager, but you know, at my current size, it’s an interesting inflection point, where I am running one of the smallest multi prime and multi strategy funds that that’s really out there. You know, I do a lot of work in the hard to borrow short selling, focused on some of the investor protection issues I mentioned earlier. And that requires a lot of deep understanding of sokoine and corporate action dynamics and working with different brokers on that kind of thing alongside, as mentioned, more long term oriented, long book, which I think the main feature there is, I’m looking for asymmetric risk return and trying to find opportunities to own securities that have downside protection as sort of my first and foremost criterion. And then I can take more concentrated positions, where I think there’s some potential return that’s being underappreciated by the market.

Nathaniel E. Baker 34:55
All right. How is San Francisco right now is it coming back now from COVID Because New York kind of is but yeah,

Jacob Ma-Weaver 35:02
yeah, noticeably. I mean, I have a two year old that comes, I can’t say get out as much as I may be used to. But, you know, I think people are really welcoming the opportunity to go back to restaurants and think it may be a little longer before mutale comes back. There are a lot of store closures and things that are really unfortunate. And I think it’ll be hard to come back from but certainly restaurants have had a noticeable uptick and traffic as well. Hmm.

Nathaniel E. Baker 35:33
Interesting. All right, cool. So let’s talk a little more granularly. Now about the risk for cryptos that you see. And like I said, we saw it today with the pboc. And this is not the first time that pboc has acted against cryptos. By the way back in, I think it might have been 2017, the last time that these, you know, experienced a boom, and I was in the region at the time. They came down and crack down on a bunch of them. And it caused a huge plunge in Bitcoin, well into the single digits, if memory serves. But what but that’s, that’s just the pboc. So, you know, none of us really have any knowledge about that. But we do, or at least you do have a little more knowledge of the situation here in the US. So what do you see coming down the pike?

Jacob Ma-Weaver 36:17
Yeah, well, I think anytime I’m making predictions, you know, obviously, disclaimer, supply, I don’t know. And as much as my bias would be that I’d like to see some broad market clearing event where there’s instant regulatory clarity, and, you know, some sort of holding to account of bad actors. You know, those types of events are quite rare. And I think not the most likely scenario.

Nathaniel E. Baker 36:42
Oh, hang on a second. Let me let me just ask you about this. Because, yeah, on that they are quite rare, but they do happen periodically. And if you go back to, you know, Sarbanes Oxley, in the early 2000s, Dodd Frank, you know, which greatly regulated banks and broker dealers and a bunch of stuff, all these things are precipitated by crises of some sort, which, and more specifically, a huge sell off in the assets in question. We may be starting that here, we’re already looking at a 20% correction. Can you see that being the thing that precipitates this?

Jacob Ma-Weaver 37:17
This is so yeah. So I mean, I would qualify any prediction with if there’s some sort of mass loss event that takes place, particularly among retail investors are, you know, that’s where back to the political question. If people lose a lot of money and ordinary folks are harmed on a scale that prompts collective action, then I think you will see it. There are obviously risks that exist within crypto, and that could lead to that sort of thing. But you know, your guess is as good as mine, if it will ever actually happen. And I think probably the prime example of that would be something like tether if that were to collapse. Or quite frankly, that that’s where regulation could come into play. If there were an enforcement action of some sort that were to prevent tether from continuing to be used in the way it is now as an on ramp and off ramp to many of the less legitimate unregistered exchanges that exist and provide services to the industry. You know, that is the sort of watershed event that I think could potentially precipitate some form of Dodd Frank or similar regulatory response. But barring that, what do I think will actually happen? You know, there, there are a few things I think we can point to, and I’ve sort of already alluded to some of them. There will be more Ico and related enforcement actions. I don’t know how many I don’t know which I’m not sure what timetable either. But they’ve been slowly trickling out. And I think I, I have not seen any indication that the SEC in particular is done with that. And there are certainly a number of projects out there that have legal exposure. I also think that there will continue to be a wave of private litigation, whether the SEC does something or not, are securities laws are quite robust to that. And you’ve already seen a number of class actions. And my firm is actually involved in funding an Ico case and would fund more if you know, the need. I think there’s always a limitation there where, you know, if attorneys are willing to take that risk on their own, they don’t necessarily need outside capital that can work on contingency, but sometimes you have a group of plaintiffs for whom that makes sense, and I guess my door is always open as far as that goes. But you know, the other way in which I think regulators fly Is the exchanges. So, you know, there is a need for just for basic investor protection reasons for exchanges that allow people to speculate and the way people do in the stock market to have some oversight and MSB registration doesn’t cut it. So you’ve already seen Coinbase, for example, has purchased a broker dealer license.

For whatever reason, they’re they’re not currently running all of their coin transactions through that subsidiary I, that would be a question for their attorneys. But you know, would seem like at some point, they might be moving in the direction of operating either in ETS, which is sec approved exchange alternative transaction system, or registering this broker dealer. I think that other exchanges may also need to register with the CFTC. As mentioned, the finance retail purchase of commodities, if you’re offering margin trading to us persons, arguably, there was some regulatory uncertainty three or four years ago about that, but poloniex actually submitted a rulemaking petition. And that’s the one that I referenced commenting on earlier. The CFTC had previously brought an enforcement action against bit FinEx, for failing to register. And then they put out a rulemaking to make it doubly clear. And they finalized that now a year ago saying, Yeah, you know, you need to register. And they recite regularly and their enforcement actions, regulate or registration is the kingpin of the statutory machinery. And I think it’s a great point, which is really, that if you’re not registered with an oversight body, they can’t very effectively regulate you, you know, the only way they can regulate you is through enforcement. And so I think registration is really essential. And along the same lines, registration of a prospectus is really important in an offering. You know, like it or not, we we live in a disclosure based regime, not one that’s qualification base. So as long as you disclose the risk, you are basically allowed to sell things to the public, as long as you’re not committing fraud, that there’s no body that approves or disapproves to your perspective. So as being good enough. And I think for companies looking to raise capital to ignore that is really,

you know, very disappointing, and, frankly, a sign of the times that cryptocurrency is just one example of it. But it’s one of those things that gets very easily enforced again. So, you know, we will see more registered offerings that touch on blockchain in some way, if people genuinely have demand to invest in these assets. So by the same, I already said, By the same token, but it’s a good one, we can keep using it, no worries that that’s going to mean the projects that don’t comply with those, again, fairly straightforward, and I think not that limiting requirements, you know, people do private placements and reg D offerings, and, you know, crowdfunded offerings where they make various disclosures or limit their offering to accredited investors all the time, it’s not hard to raise money that way. And I think for companies and a self serving way to argue that they don’t have to comply with the existing regulation, that’s going to continue to be a focus. So you’ll see more of that. And then more specifically, you know, anything that’s sort of an obvious flaw, like, for example, the SEC and CFTC jointly brought a case against a company called the Abra, a year or so ago, for selling security based swaps, that they were basically tokenizing equities on the blockchain. And you can’t do that without having a prospectus and, you know, if Tesla or Apple or whichever company needs to file a prospectus to sell their stock, you need to file a prospectus the solid derivative on on that stock and, you know, unless there’s a qualified assumption, So, bottom line is I think we’ll see enforcement actions against exchanges against Ico issuers against, you know, obvious violations like that. And the open question is how far the regulatory authorities we’ll go into some of these newer, you know, more, I guess, harder to characterize new innovations in the space so yeah, Will a stable coin be considered a security? That’s the topic of some debate right now? I think you can guess what my perspective would be. And is. But, you know, we’ll a defined platform where, you know, there may be some central bodies that act in certain ways to control it. But otherwise, responsibility is spread out among different actors, which of those actors will ultimately be held to account? And how will enforcement authorities prioritize that? I think there’s a great deal of uncertainty with respect to that right now.

Nathaniel E. Baker 45:38
No question. Yeah. Here’s a question for you. What about there are several publicly traded companies that are kind of like derivatives of crypto, if you will, and they’ve kind of served as like these, whatever they would gateways for crypto, you know, over the last year or two Coinbase is the most recent one that went public. If you’re a you’re a short seller, would you think that these companies, these stocks are at risk if there is more regulation?

Jacob Ma-Weaver 46:07
Yeah, I mean, speaking from my own point of view, my decision whether to buy or sell any of those individual companies would have more to do with their specific circumstances, rather than like a broad bet on the sector. But certainly, there’s an argument to be made, that the stocks will trade in some correlation to broader views of the space. I don’t know that it’s necessarily a first order effect, like Coinbase. Again, leaving aside whatever its merits and valuation may be, if you were considering that solely as an exchange, I could make an argument from the Intercontinental experience that like, actually, it should be correlated to volatility in, in crypto as opposed or trading activity than, as opposed to price. So sort of the first derivative, because, you know, that’s what would drive, you know, greater trading on the platform and spreads and profitability. But you know, it’s not that simple. So I think when it comes to less widely known securities kind of pump and dump schemes that have tried to piggyback on on activity in the space, that that’s where you might almost expect to see a closer correlation. Thinking back to 2017, you know, when you had the wave of companies that change their name, and you know, Long Island Iced Tea famously became long blockchain, those types of movements are Kodak, you know, getting a brief premium, due to its association with the space, these are the types of things that are much more short lived and definitely correlated with mania in the sector.

Nathaniel E. Baker 47:58
I wonder if some of this stuff, you know, whatever utility that, you know, these cryptos have, as you have more regulation, if that kind of removes it. But who knows, I mean, already, you’re taxed on these things. So it’s not like, at least in the US, so it’s not like, you know, it’s any kind of loophole there.

Jacob Ma-Weaver 48:19
Well, I’ll jump in there for you. I know one friend of mine, who is a crypto investor will be listening to him just spoke yesterday. You know, I think, to say something positive about crypto, I think that, to the extent blockchain technology, or distributed ledger technology has practical applications, investors in the space should really welcome more aggressive regulation of financial promotions and in the space, you know, anytime there’s excitement about a new technology, you see a lot of capital flow to it. And that, of course, attracts bad actors and people looking to separate fools from their money. But you know, this much capital doesn’t flow to something without at least some promise. And I’m not the one to comment on what exactly that might be. But, you know, if it’s there, it will come to light and the cream will rise to the top as it were. And, and so, I think that ultimately less, you know, speculation and what’s ultimately socially harmful in the form of gambling activity, in my opinion, would be a good thing for the projects that remain.

Nathaniel E. Baker 49:39
Yeah, yeah. I mean, look.com in the late 90s. Those companies with a few exceptions are all long gone, right? And it took a while for the world to kind of harness the internet and figure out and with advances in technology to and obviously, broadband and such, to kind of put it to use in a real business perspective. So there is that But as far as the currency aspect of it is, you know, here’s a question for you. We’re recording this in 2021 10 years from now, 2031 will crypto still be a thing?

Jacob Ma-Weaver 50:14
I personally don’t think it’ll be a thing. Not not in its current form, I do think something distributed ledger related might have technological applications that could still be in use. I don’t think there will be widespread acceptance of a non government and back digital currency. You know, for for all the sorts of reasons that we’ve been discussing from a regulatory standpoint, but but ultimately, and in part because of the current fragility of the system, and the way it’s been set up. But that’s not to say that the underlying technology couldn’t be used for a socially useful purpose. They have to be proven wrong on that, too. I, you know, it’s, again, important to emphasize that I’m not allocating capital to this view, so much as you know, using it to inform my understanding of publicly traded securities and trying to work with regulators where I can to make a bit of a difference and some of the things I see as being risks to investors.

Nathaniel E. Baker 51:25
See, now you’re sounding like an economist. On the one hand rates could go up on the other hand, it could go down. No, I’m kidding. But anyway, I get calls. Yeah, yeah. No, I got it. Jacob Ma. Weaver. Thank you so much for joining me Contrarian Investor Podcast. Before we close, maybe you could tell our listeners, how they can find out more about you how to get in touch. I don’t think you have a social media presence. But maybe you do. So yeah. And we’ll put this in the show notes as well. But go ahead.

Jacob Ma-Weaver 51:52
Yeah, appreciate it. Um, I have a website under construction. But you know, it’s a privately marketed fund. So the best way to find me probably is on social media. I do have a somewhat active Twitter account. with apologies for that. It’s cablecard. Capital. cablecar. Capital.

Nathaniel E. Baker 52:10
Okay, one word. Is this. Your the cable car I think come from a maybe because you’re in San Francisco.

Jacob Ma-Weaver 52:18
Yeah, yeah. San Francisco. I was surprised it wasn’t taken. You know how people name their funds after geographic landmarks. They’d like the up and down a metaphor for long short equity. You know, as I do occasional transactions in the fixed income space, people sometimes point out that Triple C isn’t the best abbreviation, but that’s right. I nevertheless, did like the name and we manage the funicular fund. Yeah, that’s right. Yeah.

Nathaniel E. Baker 52:50
Yeah. So what’s your second fund going to be the gondola fund? No, that’s different thing?

Jacob Ma-Weaver 52:56
That’s a good question. I don’t know. I did have a SPB engaged in some litigation efforts called Kakapo, which was named after the flightless parrot. On last chance to see Stephen Fry a funny segment on it. But, you know, that was an analogy to kind of harmed investors who maybe would not have any other recourse. Okay. capos nearly extinct. And in doing that sort of passion project for local conservation. That’s the standard of life.

Nathaniel E. Baker 53:38
Interesting. Very cool. Very cool. All right, Jacob, thank you so much for again for joining the podcast. And we look forward to speaking to you all again next time,

Jacob Ma-Weaver 53:49
Yeah, that was my pleasure. Thank you. Thanks.

Nathaniel E. Baker 53:55
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