Ladan Stewart, the SEC’s former top crypto enforcer
Copyright White & Case LLP
Ladan Stewart is a partner at White & Case LLP in the firm’s Global White Collar/Investigations Practice, where she focuses on SEC and other regulatory enforcement matters, white collar investigations, civil litigation and trials.
Before joining White & Case, Ladan served for more than eight years in the Division of Enforcement of the U.S. Securities and Exchange Commission, most recently as assistant director and regional trial counsel heading the SEC’s crypto and cyber litigation unit. Ladan litigated SEC nforcement matters, including SEC v. Ripple, SEC v. Telegram, SEC v. Bankman-Fried and SEC v. Coinbase.
Excerpted from Forbes CryptoAsset and Blockchain Advisor. Subscribe now to leading insights into how to navigate the crypto market.
Forbes: What was your role at the Securities and Exchange Commission, and how did the SEC approach the industry?
Ladan Stewart: I led the SEC’s specialized crypto trial unit. As a way of background, historically, the SEC’s litigators have not been specialized. So, whereas investigative attorneys can join units like asset management or market abuse, trial attorneys–the ones that litigate the cases–are jacks of all trades and are not focused on a particular subject matter. However, as part of the expansion of the Crypto Assets and Cyber Unit a couple of years ago, the agency decided to create a group of trial attorneys specializing in crypto and cyber cases to maintain and build upon the unique expertise these cases require. I was selected to head that unit in 2022 and was responsible for hiring and training the attorneys who became part of the unit. My job involved supervising crypto litigations, such as the SEC’s case against Coinbase. Another part of my job was working with leadership in the Enforcement Division and the SEC’s other Divisions to consider programmatic enforcement priorities, litigation risk, litigation strategy and the like. Before I took that role, I litigated several of the agency’s biggest crypto enforcement cases, like those against Telegram and Ripple. So, I’ve been focusing on crypto enforcement and litigation since 2019, for about four years before I left the Commission.
As to how the SEC and the Crypto Assets and Cyber Unit think about and approach crypto, I can’t speak for the SEC or the unit, but I can tell you what I observed in the four years that I worked in that space. The SEC is technology-neutral. Many officials, including Chair Gensler, have said this, and I observed it when I was there. Also, there’s no systematic plan at the SEC to kill crypto or drive crypto projects out of the U.S. I know there’s a lot of talk about that. There are a lot of theories, but that’s not what I observed during my time there. What I did see was a true concern that the lack of compliance within the crypto industry was bad for investors. The conversation was always focused on investor protection. Are investors getting the disclosures they need before putting their money into risky assets? Are they aware that certain crypto projects pay celebrities who tout their tokens? Do investors know the platforms that custody their crypto assets may be doing things with those assets and are they aware of what those things are? Are investors aware of potential conflicts of interest when the same entity performs different functions than you would have in the traditional financial space? So again, I know there’s a lot of talk about there being some big conspiracy in the U.S. government to kill crypto, but speaking for the small portion of the U.S. government that I was a part of, I saw a genuine desire to make sure that this new financial framework that so many investors are so excited about can be run in a way that protects investors.
Forbes: What was it like working with Gary Gensler?
Stewart: I wasn’t working with Chair Gensler on a day-to-day basis. We certainly interacted as members of the Crypto Assets and Cyber Unit and as management within the unit. He is a very involved chair, and he knows these issues well. He asks very good questions, and he delves into the issues. He asks for advice on the law and how he should think about the legal issues because he’s not a lawyer, but he has a very good sense of what he wants to do in this space.
Forbes: How has your viewpoint on this industry changed since you switched from the public to the private sector?
Stewart: Since I started getting involved in this space, I’ve always thought the technology has a lot of benefits and has the potential to offer unique benefits to our financial system in terms of decentralization and democratization. That’s why I am building my practice around trying to help players in the crypto industry navigate the thorny regulatory issues they face. I wouldn’t be doing this if I didn’t believe in the technology, and I always have. It’s been interesting since being in the private sector, for all of two months now, having conversations with people who talk about from their perspective how these regulatory issues are making it difficult for them to operate when they want to do what is right, they want to do what is good. But they don’t know how to comply within the frameworks of the existing laws. It’s people who seem very genuine in those beliefs. It’s also been interesting to hear that people are increasingly reluctant to approach the SEC and find ways to work within the existing framework because they fear their approach will become an enforcement referral. I’ve already had conversations that have made me think that there must be a better way we can do this in terms of restarting the engagement between the industry and the agency.
Forbes: How does the SEC decide between going after potential token issuers like Ripple and Telegram versus where there seems now to be a large focus on exchanges?
Stewart: As I said, some of that is natural evolution. You do a number of cases against issuers, and then you think, what’s the next step? What’s the next way in which investors may be harmed and that we can move to try to protect investors? That happens in any kind of enforcement regime. The first wave of enforcement cases by the SEC was largely against issuers like Telegram, Kik, Ripple and LBRY, and then the focus in 2022 shifted to intermediaries. By the way, the shift happened before FTX. If you look at some of the Chair’s public comments, they happened before.
In terms of really looking at the big intermediaries in the space, platforms like Coinbase, I think a lot of SEC officials, including Chair Gensler, have talked about the reasons for that focus–potential conflicts of interest that could arise when you have the same entity that’s acting as an exchange and a broker-dealer and a clearing agency. I think it was the logical next step, which is not to say that the SEC has stopped bringing cases against issuers. However, moving from the issuer cases focusing on one token to these broader cases, the SEC can present evidence of alleged unregistered offerings of multiple tokens. In the Coinbase complaint, I think we named 12 or 13 tokens, and in the other intermediary cases, the SEC has named other ones. So, these are larger cases that can have more market impact and also go toward a different part of the industry– these are not just one-off issuers but platforms where everyone trades.
Forbes: How does the SEC enforcement action against Coinbase dovetail with the approval of its S1 in 2021? And regarding FTX, how does it feel within the SEC when something like that occurs? You heard the criticism that the SEC went after Coinbase but let FTX happen.
Stewart: It’s never good when things like FTX happen; when you work at a regulatory agency and a fraud of that kind of magnitude happens. It’s not something that makes people feel good, but I think the way that the different agencies came forward to conduct that investigation after the facts were made public in November, the speed with which the investigation was conducted, and the charges brought by the three different agencies working on the matter, speaks to how seriously it was taken.
Regarding your question about the interplay between the S1 and the enforcement action…
Forbes: I understand that two different divisions within the SEC deal with S1s and enforcement actions.
Stewart: Right, and that’s important to make clear. When issuers are looking to make a public offering or to do an IPO and to go public, they do this in consultation with the SEC Division of Corporation Finance, and it’s the staff in that division that they’re interacting with. Corp Fin staff do not judge the merits of a particular issuer or offering but focus on the disclosures and their adequacy. To my knowledge, Enforcement is not involved in that process. What enforcement does is very different. There are times when Enforcement gets referrals from other divisions at the SEC, but they’re generally not involved in the process, for example, of a company doing an IPO or things of that nature.
Forbes: I want to talk about DeFi. I understand you probably can’t get into any specifics about the Uniswap Wells Notice, but in general, what are your thoughts about DeFi and, more broadly, DAOs and those that have governance tokens, even if they’re focused on an investment club or something unrelated to lending or trading.
Stewart: I definitely can’t go into specifics. DeFi may be the next frontier for the SEC’s enforcement focus, given the publicized Wells Notice to Uniswap Labs. It’s also going to be interesting to see to what extent, if a case ultimately is filed against Uniswap Labs, it is going to be heavily litigated a la Ripple. I saw interviews with Hayden Adams, Uniswap Labs’ CEO, where he was talking about how they will fight, and to me, it sounded very similar to comments that Ripple and others have made. I think how the SEC views DeFi and DAOs and anything that purports to be decentralized is to ask if they are in fact decentralized. So, as Howey says [Editor’s note: the Howey Test refers to the Supreme Court case for determining whether a transaction qualifies as an investment contract.], we don’t look at the labels. We’re supposed to look at the reality of the economic structure of something–what is actually happening. Is the project decentralized or is there someone out there running it? Is the DAO truly a decentralized autonomous organization? Those are the questions that the SEC asks. Being on the private side for just a couple of months, I get asked often: what if we create this kind of entity and call it this? My response is that it doesn’t matter what you call it; what matters is what it is and does. That’s how the SEC is going to be thinking about it.
Forbes: Are there any metrics, methodologies or anything else that provide markers for whether something is decentralized or not?
Stewart: The SEC would say the marker is Howey. The test is: would a reasonable investor be looking to the efforts of others? So, are there “others” that people are looking to the efforts of? If you look at the Howey analysis that the SEC put in their various complaints last year, that’s how they think about these issues. There’s no other secret formula. It’s just applying the Howey test and seeing whether a particular arrangement fits within it.
Forbes: There are a few ways that issuers could sell or release tokens in a manner that would be compliant with securities law. I’d like your thoughts on whether those avenues are scalable and why there has not been much uptake.
Stewart: There’s not a one-size-fits-all approach. It’s something that an issuer and their counsel have to determine. And I hope they make those determinations after consulting with the Division of Corporation Finance at the SEC. In the past, the few tokens that have been registered have used a few different approaches. A couple of years ago, INX registered under the Securities Act. There were others that did Reg A offerings. It’s never a satisfying answer, but we lawyers like to say it all the time: it depends on the facts and circumstances. As far as I know, no action letters have not been pursued that much of late. This was a point that we litigated in the Ripple case–because one of the arguments that the SEC made in some of the briefs when it came to fair notice, and other issues, was that there was a no action process that Ripple had not pursued. And Ripple responded that the SEC never grants no action relief. I know it’s something that’s not done very much, and I know it’s another of the processes where there’s a lot of back and forth, so it can get frustrating, and sometimes you do a lot of the back and forth, and then what the SEC ultimately says to you is that they can’t grant it. I know it’s frustrating, but I know it has been done in the past, and I don’t see why it can’t be done in crypto. But to your question about it being scalable, I think that is more difficult. Again, because we’re using Howey and because for every single one of these, there must be a determination under Howey, it’s difficult to make those kinds of fact-intensive exercises scalable. So that is one of the issues with the regime we have right now, which is the analysis under Howey.
Forbes: I’ve been told that no action letters only relate to the very specific circumstances of one applicant. They are not generally applicable.
Stewart: Exactly.
Forbes: Regarding litigation enforcement strategy, what’s the SEC strategy? Does it make sense to go after a big fish first and then see what happens? Or is the thinking to spread actions out a little bit more?
Stewart: My answer won’t be satisfying. It just depends. There are some times when you have ongoing investigations simultaneously, and by either design or happenstance, they reach a resolution around the same time. You’re able to time them so that you’re pushing a lot out, and you’re able to get more information to investors. It’s more newsworthy if you have some back-to-back cases. It makes a bigger impact on the market, at least through news and media. There are other cases where you’re unable to do that because of resource constraints. I think people don’t always appreciate that investigations often take a very long time. It’s possible to do investigations more quickly, but you can’t do that with every investigation. You can prioritize and throw more staff and bodies at some limited number if you’re trying to get them done more quickly. But you can’t do that with every investigation. To be perfectly clear, in the case of Uniswap, the SEC and the Commission’s five members have to decide whether or not to bring a case against Uniswap. The Wells Notice that has been publicized is just the Enforcement Division saying that they are at the point now where they think they’re going to recommend charges to the five-member Commission, but we don’t know whether ultimately the Commission is going to approve a case and whether or not a case is going to be brought.
Forbes: Were you surprised, like most people, by the huge reaction to the Bitcoin ETFs?
Stewart: I thought it would be big, but I was surprised by its size.
Forbes: Did you lead the Luna investigation?
Stewart: I was involved in the Terraform investigation.
Forbes: What are your thoughts on stablecoins?
Stewart: Regarding whether the SEC will pursue more stablecoin cases, that is, for me, the toughest question to answer. You mentioned Terra. There was Binance and BUSD. Terra and the algorithmic stablecoins are slightly different, but the more interesting one is BUSD because of how the SEC framed the complaint against Binance. It was really about Binance’s promises in terms of yield, which is why investors would be looking to those promises and the marketing that Binance was doing to increase their profits. What is going to be interesting is to see whether other cases could be brought against other stablecoin issuers where there’s a similar kind of marketing as the one that Binance was engaged in. I don’t think it’s inconceivable, but it poses a lot of litigation risk and much public scrutiny because many people in the industry and Capitol Hill would not be fans of enforcement cases against stablecoins. This, to me, especially in the next year during this administration, will be a really interesting thing to watch out for.
Forbes: Could memecoins be securities under Howey or in general?
Stewart: I certainly see arguments for how they could be securities, and the SEC, it was late last year, brought the SafeMoon case. So I think there are instances where memecoins could be a security, but the bigger question is if the SEC will pursue them outside of cases like SafeMoon where there’s fraud and manipulation. I don’t know from a resources perspective whether it will make sense for them to put a lot of resources into memecoins. My view is that some of the hype that currently is everywhere about memecoins is a little bit unfortunate because the hype is mixed with all these reports of rug pulls and scams and other fraud, and, putting aside whether the reports are true, the reality is that the impression of memecoins that you see in the media is that they’re all a bunch of scams. For an industry that is maturing and trying to get to a place where it’s recognized as a legitimate mainstream financial system, this focus has the potential to cast doubt on the stability of other projects. Again, not to say that people shouldn’t be able to mint memecoins and other people shouldn’t be able to buy them, I just hope that some of this hype around the memecoins goes away a little because it’s not healthy for the industry.
Forbes: What are your thoughts on NFTs, knowing that the market is still pretty tepid?
Stewart: There was a recent NFT case brought either early this year or late last year, but that’s another thing I don’t see as a huge area of focus for the SEC. I think it hasn’t been to date for some of the same reasons as memecoins. But I think to the extent there’s manipulation and fraud, then certainly I could see it happening. But short of that, it’s likely not going to be something that, at this point, with the different cases they have going on, they’re going to devote a ton of resources to.
Forbes: Thank you.
