Dechert Litigator Sees Pushback to U.S. Crypto Regulatory Effort

Andrew S. Boutros has had a ringside seat for some of the most important developments in the fast-moving changes in the crypto sphere. As a former federal prosecutor, he led complex international fraud and cybercrime investigations—including of the individuals behind the Silk Road “dark web” market. Today, as regional chair of Dechert LLP’s U.S. white collar practice, he represents clients in cryptocurrency matters—and he’s keeping a close watch on regulatory matters.

Sign up for our daily crypto newsletter

Bloomberg Law: Just recently, the Department of Justice caught the alleged perpetrators of a $3.6 billion Bitcoin heist, probably the biggest bust since 2015. As a federal prosecutor in Chicago at the time, you were part of the team that brought down the Silk Road group. What’s your take?

Andrew Boutros: There was a lot of déjà vu. It’ll be interesting, because you can imagine it will be incredibly litigated, hotly litigated—just given the amount of money that’s in dispute—and how the government goes about prosecuting the forfeiture aspect. You’re going to have very talented lawyers on both sides, who will be fighting it out in one of the most respected districts in the country, the Southern District of New York, and the government is going to be putting in a lot of resources to make sure that they’re successful. So it should be fascinating.

Andrew Boutros of Dechert.

Bloomberg Law: Bitcoin and the Silk Road sort of grew up together, but things have changed a lot since then. Is it still the Wild West?

Boutros: I think if you ask regulators, they do still think it’s the Wild West from a regulatory standpoint. So, how do you put in place guardrails that will allow for this technology to continue to flourish, to be used in a lawful and positive way and not to stifle it or to suffocate it, while at the same time being able to detect criminal activity, to prevent tax fraud, to prevent people from underreporting their taxes, to prevent people from using it on the dark web?

How do you strike that balance? This is still a relatively new technology. We’re talking about less than 20 years, give or take, and an enormous value. When you look at the market value of Bitcoin alone (nearly $800 billion currently), it’s astronomical.

Bloomberg Law: Security and Exchange Commission Chairman Gary Gensler and Rostin Behnam at the CFTC both appear to be determined to tame the “Wild West.” Considering that, what do you see happening in the crypto litigation space?

Boutros: I think that there will be a lot of litigation. There’s too much money at stake. People are not just going to agree and roll over on whether a particular crypto currency or product is a security or not. Because if it is a security, then the regulatory regime gets triggered, and all of a sudden compliance costs become very high, the lawyers obviously need to get involved, and the regulatory complexity becomes exponentially higher.

Everything is still at the early stages. The early wins or losses will obviously dictate the rules of the road moving forward. There’s a lot of interest in shaping that conversation to make sure that regulators are going to do this as narrowly as possible, that the courts get to weigh in, and even, in some cases, the juries weigh in.

There’s a fascinating case out of Connecticut dealing with hashlets, where the court for the first time decided that the question of whether or not hashlets were securities was more suitable for the jury to decide as a matter of fact, as opposed to the judge deciding as a matter of law.

Even though other judges had previously found various digital assets to be securities—therefore subject to the various securities laws—the jury in that particular case found that the hashlets were not securities. The significance there is not just the finding of the jury, but also the determination by the court that under the legal test that the Supreme Court has put in place—the Howey test—the issue should go to the jury and not be decided by the judge.

To my knowledge, the Supreme Court hasn’t ever resolved a cryptocurrency or digital asset question. It’s impossible to think that at some point, there will not be an issue that goes up to the U.S. Supreme Court, and obviously that will be very important.

Bloomberg Law: How are firms responding? What is Dechert doing?

Boutros: Firms are reacting. They understand market forces, and they understand rising tides in terms of new practice areas. Law firms, investment banks, and other market participants understand that crypto is here to stay.

It’s a complicated area of the law. There will be litigation and transactional work and regulatory work in the space, and so law firms are also beefing up their practices to capture market share—no differently than when the [Foreign Corrupt Practices Act] really started to boom in the early 2000s. Law firms that had never even heard of the FCPA all of a sudden became FCPA experts.

At Dechert we very much believe in cross-pollination and interdisciplinary groups. The firm has brought people in with various backgrounds—SEC backgrounds, DOJ backgrounds, regulatory backgrounds, transactional backgrounds—the kind of people who have an affinity for this type of work and understand the technology.

On some issues, there literally is absolutely no law, no guidance, or anything else, so we’re operating now from first principles. We’re also operating from an understanding of how the regulators and the DOJ work.

Bloomberg Law: What are you watching for now from the Biden administration in terms of regulation?

Boutros: I think there’s a lot of energy being put into some of the tax reporting obligations that recently went into effect. The infrastructure bill contains provisions that had tax consequences, and that’s obviously set people off, and the industry’s very concerned that this will have collateral consequences that are unintended.

In fact, some members of Congress are now suggesting or proposing new legislation to amend and modify the just-passed provisions, because the industry groups now have really focused on it and brought these concerns to the attention of the legislators, who maybe are realizing that, we didn’t do this exactly right. Again, it just shows you that sort of trial-and-error phenomenon; it is so new. It’s always dangerous when a provision gets added to a piece of legislation that is monstrous in scope, that cuts across so many different areas and has so many different pages in it, and all of a sudden a few sentences or a few provisions are buried in there somewhere.

I also think the SEC naturally is going to want to expand its jurisdiction. So, I think you will see pushback from the industry, and I think courts are going to weigh in. It’s interesting because some of the stuff is taking place at a time when the Supreme Court has relatively new justices who are potentially willing to take a fresh look at the Chevron doctrine, to what deference courts should give to agency interpretations. It wouldn’t be surprising if the Supreme Court either changed or clarified the Chevron doctrine. It has nothing necessarily to do with crypto directly, but it could have a ripple effect that affects crypto in how it’s interpreted at the agency level—particularly because there isn’t a lot of guidance that’s going on right now.

Bloomberg Law: So, if the regulators come down heavy, you expect to see immediate pushback?

Boutros: Correct. You can see it coming in different ways. A trade organization, like the Chamber of Commerce, that can show they have standing on behalf of their members who are impacted by legislation or certain cases. I think you can also see economies of scale with one or more participants who have market share coming in together and combining resources to do this. Anything that requires coordination is often not the easiest thing to do, because you have different groups of lawyers, different clients, different perspectives. But there’s nothing like a singular attack that’s viewed as seismic to the industry to bring them together.

Weddings and funerals tend to bring people together, they say. In the crypto world, I can see a lot of people viewing regulation as a funeral bringing people together, as well.