Thornton McEnery is the executive editor of Dealbreaker. After earning his M.A. in business and economic reporting, Thornton has...
Bitcoin and its ilk enjoyed a surge in value toward the end of 2017, but the pendulum is always poised to swing back dramatically in this largely unregulated market. Joe and Elie chat with Thornton McEnery of Dealbreaker about the cryptocurrency market, the role of big banks (read: our clients) in the crypto landscape and what’s on the horizon in the U.S. and abroad to regulate the market.
Above the Law – Thinking Like a Lawyer
Cryptocurrency At The Crossroads
Intro: Welcome to Thinking Like a Lawyer with your hosts Elie Mystal and Joe Patrice, talking about legal news and pop culture, all while thinking like a lawyer, here on Legal Talk Network.
Joe Patrice: Hello, welcome back to a new edition of Thinking Like a Lawyer, the 2018 edition of this year, where we discuss what it’s like to be a lawyer, why you would be a lawyer, why we all have anxiety issues because we are lawyers, whatever.
Elie Mystal: 2018 is already a better year because Mariah Carey started it off by nailing her Times Square Ball Drop performance this year as opposed to last year. It was amazing.
Joe Patrice: It’s become like Punxsutawney Phil, like we evaluate how the year is going to go based on whether or not she can actually do her duties.
Elie Mystal: She nailed it this year, so I think things are going well. Obviously we have already suffered a major setback in 2018, because apparently Nick Saban can find quarterbacks from Hawaii to come in at halftime to win him championships. Apparently that’s the way the world works.
Joe Patrice: Yeah. No.
Elie Mystal: Any other coach does that and it’s a desperation move that gets them probably fired. Nick does it and he gets a ring.
Joe Patrice: Yeah, I mean it was definitely a desperation move; it just was one that paid off.
Elie Mystal: Yeah, it kind of was. That’s the whole thing about Saban, right. It looks — any other coach who did that, it would be a desperation move, but Nick Saban somehow planned to pull his 26-2 quarterback at half time if he sucked.
Joe Patrice: Yeah. I mean it was bittersweet for me given that that particular player’s first choice school was Oregon and Oregon failed to even bother to talk to him until the last minute and therefore we lost him, but good for him.
Elie Mystal: That’s not what I have to grind my gears about.
Joe Patrice: Oh, thank goodness.
Elie Mystal: Now, this one isn’t going to be much better. Actually, no, look, this is the grinding of the gears segment and I am supposed to be unreasonably angry at something, but here what I really think is that I am supposed to be a little bit counterculture on something. I have a slightly more nuanced take on the H&M Coolest Jungle Monkey in the world situation that broke this.
So if you haven’t been following along social media, H&M had this advertisement out, when they had a little black boy in a green hoodie and the hoodie said Coolest monkey in the jungle, which was offensive to nearly everybody.
H&M, I think they are Swedish or something, quick apologized and blah, blah, blah. Sean “Diddy” Combs already offered the little guy like a million dollar modeling contract. It’s been a big thing. And people have been very pissed about the insensitivity of H&M.
Okay, obviously the ad was insensitive; I am not defending the ad.
Joe Patrice: Okay, thanks. And that’s been grinding the gears with Elie today.
Elie Mystal: However, right, in Europe, and I think in Africa, it’s a very subtle point that I am trying to make, it’s a difficult point, the word monkey is not quite as immediately in every situation associated as a racial slur, if that word is used by other black people.
Joe Patrice: Okay.
Elie Mystal: Okay? So like I have got two little black sons, occasionally in the privacy of my own home I call them little crazy monkeys, right? Now, I am their parent, I can do that. If you came into my house and called my kids little crazy monkeys, I would punch you in the face, right?
Joe Patrice: Right.
Elie Mystal: So like you can’t say that, right? That’s not your word to use, right? In the context of my own home it’s an endearing — they are, they climb, they are little crazy monkeys sometimes. They are cheeky little monkey sometimes, right?
And so my nuanced point is simply this, there is a chance. There is a snowball’s chance in Sweden that the people responsible for this ad, honestly, at least one of them honestly did not know that they were being so ridiculously offensive. There’s a chance.
Now, obviously whenever these things happen, this is an argument for diversity, because I am sure if H&M employed like, I don’t know, a single black person who saw the ad first, they would have alerted them to this potential problem, but I am just saying, we see a lot of these racialized incidents in the world today, and this particular one I am saying I am not 100% sure was done with malice. Stupidity, awfulness, it was wrong, I am not 100% sure it was done with malice.
Joe Patrice: Yeah, okay. I mean, most corporate acts of racism are not done intentionally. There are very few businesses that intend to aim towards the KKK submarket.
Elie Mystal: I disagree with that. See, I actually think that most often these things are done with intentionality. I think this one — this one I think was an honest mistake.
Joe Patrice: Yeah, okay.
Elie Mystal: Just my thing, you don’t have to agree.
Joe Patrice: Yeah. No, I mean generally speaking, people who are trying to make money don’t go out of their way to do these things intentionally; they do them because, and you make the excellent point, because they lack diversity, have no sense of what is and is not offensive, and they do those sorts of things. The intentionality is almost always not there. That’s why it’s not worth making these sorts of excuses and nuanced points for them. You shouldn’t do it.
Elie Mystal: I am not making an excuse for them; I am saying I understand their position a little bit differently than I understand say, I don’t know Donald Trump’s, who is clearly out there being racist intentionally.
Joe Patrice: Okay, not a company, but fair enough. So that happened. So Mariah Carey nailed it in 2018; Elie, still waiting. But we have got many more of these podcasts to go and I am sure the next one is going to land, stick that landing.
So what was kind of a big deal towards the end of last year and the winds have changed a little bit, but it’s going to become much more of a legal deal this year and we have got Thornton McEnery here from Dealbreaker and we are going to be talking about Cryptocurrency.
Elie Mystal: What is Cryptocurrency?
Thornton McEnery: It is everything and nothing.
Elie Mystal: Do we all really know what it is?
Thornton McEnery: I actually just got a text from a Cryptocurrency trader who said in so many words it is 99% bullshit. The thing about Cryptocurrency, it’s what it isn’t is what’s appealing I think and what’s been appealing, and even today, when it’s hitting a bump in the road it’s that it’s not anything. It’s not backed by the Full Faith and Credit of anyone. It’s not really a currency; it’s code. It’s code that’s been imbued with meaning and value.
Elie Mystal: And it’s unregulated.
Thornton McEnery: Entirely. I mean we are seeing today, we are seeing this week the beginning of a regulatory environment, but it’s the regulatory environment you would expect from something that’s lived on the edges of legality. It’s the Chinese basically saying we are going to stop it, whatever that means, and the South Koreans fainting at stopping it, it seems.
I mean we had this newsbreak last night and it has taken the market for a bit of a hit today that they are going to go in and stop these mining operations, but what the real story is apparently is that the South Koreans are starting to debate legislation to maybe curb it. Which makes sense considering that yesterday there was an assumption by some people who were watching it from Wall Street that it was going to be a bad day because the Chinese were going to scale back on Treasury purchases, US Treasury purchases. But some people said that there’s really no causal effect, mostly, probably because the money going in and out of Bitcoin is so enormously coming from Asia that US markets are not really the concern.
Elie Mystal: I was hoping that you could explain that a little bit more, because I think a lot of people in our audience, even the ones that kind of understand Cryptocurrencies at a slightly higher level, they understand that this is something that is happening predominantly in Asia and we are only getting kind of a very kind of follow-on effect from it. So can you explain a little bit like why has this become such an important part of analyzing the Asian economy in a way that the Western world seems at this point still one step removed from?
Thornton McEnery: Well, especially the case with China, and less so the case with other Asian governments is that, equity in China finds a way to seep out whatever cracks are left in the gates. And for a long time it was US real estate or other solid assets abroad. Now it’s Cryptos. I mean it’s something you can go online and it permeates the globe and like there’s a ton of — they are calling it mining operations. It’s essentially server farms that create. You need a lot of servers and you need a lot of energy to literally, in computer time, to build these things. And a lot of the operation was going on in China. It’s been going on there for a while and that’s a huge part of the genesis of the whole market and just the idea of just the sort of the way that you can move money is I think perceived differently over there and then here.
And the antiregulatory thing isn’t as frightening. I think there is so much regulation and so little regulation at the same time that they love this gray area, whereas here there’s a little bit more of a concern.
Joe Patrice: I mean last month was when the SEC first cracked down on somebody and filed a suit for a ICO that they said was wildly fraudulent and they raised $15 million promising that he could get a 13-fold return within a month, which with any other asset I think you would assume was fraudulent, but weirdly in December that might have been true of Bitcoin.
Thornton McEnery: Yeah, what was amazing about that story for us is that like the SEC kind of overstepped. I mean because it’s an absurd claim. What he is saying is absurd. And then you look at what else has happened and it’s not that absurd.
And also, the other side of that token is every ICO is ridiculous. I mean the market — my favorite moment and this whole thing for me from sitting on the side, not being — not even an expert is Litecoin is sort of the number four player in this in terms of size.
Elie Mystal: Litecoin?
Thornton McEnery: Litecoin has been a major player in this whole thing. And there’s a guy, everyone knows, unlike other things, they know who made it, they know who started it, they know who has pushed this along, just one guy. A few weeks ago he sold his entire — he sold everything, he sold out of Bitcoin, he basically divested and it crashed. Everyone is like, oh wait, maybe this isn’t real and I that day was laughing and thinking, well, none of it is real. I mean like this could happen to any of these coins.
I mean if it was like a CEO, well, that really — if Elon Musk divested himself of Tesla stock tomorrow, it would be terrible for Tesla stock, but it wouldn’t make you turn around and go, oh wait, those cars don’t exist. And some people already think they don’t exist, but that’s a different conversation.
But I mean, it’s a very odd world that they are playing in, and I think now what you are seeing and what’s interesting to your audience is that there have been profits. The realness of the product can still be debatable, but now we are seeing actual wealth being created from these things.
And this is the first taxable year where people have to pay taxes on this stuff and the IRS is going to be — I mean, who knows under Trump, it could be a field day or it could just be a field day, depending on which side of it you are on.
There are a lot of — not a lot, there’s a handful as far as I can understand of these platforms, where you can trade and buy Cryptos that are allowing you to have like a tax thing going, where you can literally pay your taxes as you trade, and they are just like letting you hold it and then moving it over.
But I mean, I know some American guys who are starting up these Crypto funds who like that, but I mean honestly, the whole thing is kind of — it was a hilarious joke. It’s like people don’t want to pay taxes on it, that’s why they are in Cryptos.
Joe Patrice: There was a tweet I saw earlier today; I think it was Sarah Jeong, had a statement where she is like at the end of the day this is a computationally complex way to say you hate the government.
Elie Mystal: What is your level of confidence that American regulators have any idea of what’s going on? Like do you have any confidence that American regulators understand the currency to the level where they could even think about making reasonable regulations or applying reasonable standards to them?
Thornton McEnery: Well, my confidence in American regulators at the moment is low. I mean it’s a pretty sad moment in the history of American financial regulation. I mean insofar as it’s now been a solid year where we have a government that’s purposely undermining the power of regulators and Bitcoin is kind of a wonderful moment of like this is the kind of stuff that can happen.
There is the argument that can be made and it’s fun to think about for me, because I traffic in a financial Schadenfreude that this could be the next mortgage crisis. I mean there is an amount of wealth being thrown into something that is so, for the lack of a better word, bat shit that we don’t know what’s going to happen.
So I mean, yeah, my confidence is low that regulators are fully aware what’s going on. I am sure there’s a creeping understanding. I am sure they are pulling geeks off the street and getting them to give them a really good sense, but the thing about it, and the thing that’s kind of fascinating that underlies the entire structure of this thing is that at the heart of this is the blockchain, which is another thing that gets thrown around constantly, and the blockchain is almost as counterintuitive base for this entire thing.
Elie Mystal: So kids, this is where I get off the train, no pun intended, I basically understand what Bitcoin is; I do not understand what blockchain is, I do not understand how they interact?
Thornton McEnery: So I have I think what I would now at this point term a — probably like a 75% total grasp of blockchain. I think I understand it as an idea. And the idea is essentially, it’s a constant recording of trades. I mean it’s really what it is. It’s every large institutional bank that’s been fined in the past 15 years, it is their dream come true that people built for the opposite function of what they are looking for. It’s a self-regulatory dream machine. I mean it records everything that goes in and out.
So for you to get Bitcoin or to get any of these Cryptos, it has to go through a server. It has to be — it’s something coming in and something coming out, where it’s coming in from, where it’s going out to. And it’s all there, it’s all recorded, it’s all — you can not record it, you can’t hide this stuff.
So the blockchain, people say — Jamie Dimon famously said, Bitcoin is a fraud. Cryptos are just for drug dealers and criminals. But in a way it’s the worst way to launder money, because the blockchain sees everything and you can go get it. I mean you can access the blockchain. Regulators could access the blockchain, and come April 2019, they might very well be accessing the blockchain and seeing like who is not paying Uncle Sam or not paying — or it depends on how rich you are at that point.
I mean, it’s really what’s going to happen. The blockchain sort of exists. The blockchain at the center of this whole throwing money round thing is actually a system that records everything and it’s kind of fascinating to see how that’s going to play out. But if regulators do start to understand that the blockchain could play in, in a major way and it’s going to play in, in large banks. Banks are going to adopt it. Regulatory, lawyers at banks are going to be dealing with blockchain, probably already are, and we will start seeing much more implications of it.
Joe Patrice: Yeah, on our side, from the industry perspective, we’ve been seeing a lot of attention with smart contracts as a possible use of blockchain, basically all of these complex which are more in your wheelhouse than ours, but these complex deals the banks have where if something goes up 3% against LIBOR blah, blah, whatever, then money gets traded, but it doesn’t actually get traded at the end of a quarter. They figured out how much went back and forth and they settle these smart contracts that run off a blockchain stuff; theoretically, would move that money instantaneously every time something happened, that’s the dream of transactional lawyers whenever I go to a conference and hear about it. So that’s where law is kind of trying to take this.
Thornton McEnery: Yeah, I mean, if you have counsel at Barclays, it’s going to save you a lot of headaches because some 24-year-old moron is able to shadow trade on foreign currency exchanges after using blockchain, because he’s not just going to call in orders and then never fill it, they have to be filled or they don’t exist.
So, I mean, that kind of world will be sort of “fixed by it”. There’s always going to be a way around it, but for a while, it’ll probably get caught up. Yeah, smart contracts are blowing up.
Elie Mystal: I guess — I guess what I’m saying is that I don’t understand a recording device or technology that can’t be turned off, that you still have to turn on in the first place in order for it to then never be turned off again.
Thornton McEnery: It could be turned off but the money will never go anywhere and coin won’t move. I mean, in order to move Bitcoin or in order to move cryptocurrencies, you have to use the blockchain. It’s the server. It has to go in and out. There’s the only way.
Thornton McEnery cannot trade Elie Mystal Ethereum. I can’t just pass it to you, I have to go through the blockchain. I’ve got to sell it back and it’s got to come back out. So, in order for these currencies to move, they have to go through this thing. So yeah, so I mean, it’s not an on-and-off thing, it has to be on or off. So money — either money doesn’t move or it’s recorded. There’s no gray area, and that’s kind of the backwards genius of it.
Joe Patrice: Not to be the – I am just going to read clever tweets person but over the holidays, one that I saw that I have really enjoyed was from Mike Pearl here child but how can Santa deliver toys to every little boy and girl on his list in one night. Me laughs. It’s really quite simple. The items on Santa’s list are called Blocks and each block in his chain typically contains hash pointers time stamps and transactions.
It does feel kind of like magic when you listen to certain people talk about it. In particular, the security aspects of it which are impressive, but the way in which I understand the security aspects of it is, it’s largely unhackable because you have to hit multiple — because it’s all about confirmation from multiple sources.
So you kind of to hack it would have to get into multiple sites at once is kind of my understanding.
Thornton McEnery: So, yeah, it is hackable. It’s a crazy, crazy thing. I mean, again, it’s a joke on itself. I mean, it’s structurally hilarious. It’s a modern market that is absurdly inefficient and you go on and it takes a day, it takes a week after you pay for Ethereum to — for it to hit your account.
Elie Mystal: You were saying that you actually bought some.
Thornton McEnery: I bought some and it was amazing. It was as — I mean it was everything I thought it was going to be. It was bizarre to watch your money go out unto this thing that it’s just your money goes out and this fake stuff comes back but it takes forever to come back.
It’s so inefficient. It’s on the Internet and it’s less efficient than buying a bond on the Dow Jones. I mean, we leave these entrench old markets that we laugh at that are light speed compared to this new market. It’s bizarre and it is hackable. I mean, there is a thing, I mean, I’ve now been given access to some of these like group chats and I’ll jump in to see what these guys are talking about, just to keep myself a vague understanding.
And a major theme is, oh, don’t use that exchange, it’s been hacked more times than they’ll admit, who’s hackable, who’s safe, where is your money, 19:08 disappear from. I mean, the most famous thing was Mt. Gox, which was a huge hack in Asia last year — a few years ago, and they got cleared out and could not explain what happened.
It was like Jon Corzine but even made less sense. It was fat. I mean, it is hackable. So, it’s a pirates market, but it’s also not, it’s a slow-moving pirates market.
Elie Mystal: And just to bring it back to the kind of tax situation, you buy $2 worth let’s say at the end of the year, it’s $4 worth. How would I government taxman ever know that?
Thornton McEnery: Oh, you wouldn’t. I mean, my understanding is — because I don’t — I mean it’s HODL, is the acronym that these guys use. Hold it, don’t put it in your bank account because it’s going to keep going up. I mean, you’ve got this whole world of believers out there, they are like, oh God, don’t take your Ethereum and put it in your Bank of America account because then the government will see it.
And then also you’re just going to get richer and richer, if you hold on to the way Western governments break down and this is the only thing you can live with. So they believe, so the guys who were really getting rich on this are holding this stuff till the bitter end.
I mean, there is just trillions probably in a few months of wealth creation that’s going to exist that is nowhere, and it’s not anyone’s account so how would you know, but some people are using it to pay for things online.
So, yeah, it’s very hard to track and it could be a tax lawyer’s nightmare or dream.
Joe Patrice: I mean, the IRS is now suing Coinbase.
Thornton McEnery: Yeah.
Joe Patrice: So to get documents to show who has what. So ultimately the answer to Elie’s question is that taxman can start getting from the various people who run the exchanges that people buy these off of.
Thornton McEnery: Yeah.
Joe Patrice: They can get that data.
Thornton McEnery: I’m on Coinbase and the government finds my triple digits of money there, that’s going to be a really nightmare but —
Joe Patrice: The court has already limited the search to transactions of 20 grand or more; so hopefully you are okay.
Thornton McEnery: Which makes sense, I don’t want to have to give back what I think will be $60 of profit by year’s end. But, yeah, I mean, it’s a shadow world and that’s the point of it. But again, you have these elements where you have Coinbase or Gemini, which is run by the Winklevoss, who are by the way a Bitcoin billionaire, not billionaires because they have a billion dollars and they are two people.
And it’s driving me insane that they keep saying they are billionaires, because you need $2 billion for two people to be billionaires. Just as math, but Gemini is sort of the other Coinbase. They are these massive exchanges, they are going to have to turn stuff over, there’s just too much money being created.
So, yeah, and literally, money created, because it wasn’t there before. But it’s going to be fascinating and I think it’s going to play out — it’s going to take longer to play out than this taxable year if you had to — if I had to guess. I think we’re going to be figuring this out even if it’s gone. In the end, it is also the strange thing about it is it’s a binary market.
Elie Mystal: How do you mean?
Thornton McEnery: Either this stuff goes on forever, either we keep going, and these things just keep accreting value in whatever notional understanding you have a value or it goes to zero. At a certain point if these things drop to $4 day trading stocks, people are just going to dump them. There is no excitement there, it’s a volatility thing.
So, I mean — or they disappear. Bitcoin just have a tendency to disappear sometimes when servers are shut down. So, I mean, you’re dealing with a thing where you could honestly hold an asset that is going to keep going infinitely up and create another 10,000% value creation for you or disappear entirely. And people seem to enjoy this, they enjoy this game. I mean, so if you are dealing with something that theoretical, the idea of taxing it, I mean vaya con Dios.
Elie Mystal: I am going to go back to Minecraft. That’s a good way to start the year.
Joe Patrice: Yeah. No, absolutely, it’s going to be interesting like the — the tax issues, it’s clear that the IRS is going to start doing stuff. They have already filed a suit, Congress changed around some rules that are going to make it easier for them to go after this stuff and the SECs clearly thinks that there’s fraud going on, although whether there is or not.
So, this is going to be an interesting year for these currencies. As you know, I’m just going to keep several bars of gold bullion under my bed like I have –
Elie Mystal: Are you in?
Joe Patrice: No, no, I’m not in. I’m not in, I trust.
Elie Mystal: Are lucky people even allowed to be in on this?
Thornton McEnery: They can only use their earning from H&M, I’m not —
Joe Patrice: Yeah. So okay, so great, thank you for joining the show. Thank you for listening to the show everybody. You should be subscribing the show, you should be giving reviews to the show, all those sorts of things on your various platforms that you consume it through. You should follow us on Twitter. I am at @JosephPatrice, Elie is at @ElieNYC. You should read Above the Law and that pretty much is it.
We will be back soon, Thornton’s Twitter, which I follow, but I don’t remember it’s at —
Thornton McEnery: It’s at ThorntonMcEnery.com which is easy to find.
Joe Patrice: Not, not .com, it’s just @ThorntonMcEnery.
Thornton McEnery: Oh yeah, @ThorntonMcEnery, easy to spell, easy to find.
Joe Patrice: Okay, so yeah. You are one of those folks who got their own name like I did, which is huge. So, okay, and also read DealBreaker, which is the site that he runs, and with that I think we’re done. Hopefully I’ll see some folks in the near future at some of these conferences we’re going to, and —
Elie Mystal: Aren’t you going to the American Bar Association Conference that somehow isn’t in America?
Joe Patrice: I am, I am. So I’ll be there I’ll be at Legal Tech. Yeah, plenty of opportunities to see folks.
And with that we will drop off now and talk to you all later. Bye.
Outro: If you would like more information about what you heard today, please visit HYPERLINK “http://www.legaltalknetwork.com” legaltalknetwork.com. You can also find us at HYPERLINK “http://www.abovethelaw.com” abovethelaw.com, HYPERLINK “http://www.atlredline.com” atlredline.com, iTunes, RSS, Twitter, and Facebook.
The views expressed by the participants of this program are their own and do not represent the views of, nor are they endorsed by Legal Talk Network, its officers, directors, employees, agents, representatives, shareholders, and subsidiaries. None of the content should be considered legal advice. As always, consult a lawyer.
Above the Law's Elie Mystal and Joe Patrice examine everyday topics through the prism of a legal framework.
The week where Biglaw lunchroom policy got wrapped up in ongoing litigation threats.
The Mansfield Rule is a laudable initiative, but not nearly enough.
Lawyers often run for office -- and their past clients often become talking points.
A chat with former Orrick chief Ralph Baxter about what's next for firms.
Law and Sports Collide This Week.
Some hypothetical legal quandaries to contemplate.