Blockchain and Cryptocurrency Predictions For 2018: Nick Morgan, Attorney, Paul Hastingsbr>
Nick Morgan is a partner in the Investigations and White Collar Defense practice at Paul Hastings, based in the firm’s Los Angeles office. He focuses his practice on complex securities litigation in state and federal courts and representations involving government investigations and white-collar crime allegations levied against individuals and businesses.
In the course of his practice, he routinely represents securities issuers, company officers and directors, investment funds, analysts, and brokers in connection with SEC and Financial Industry Regulatory Authority (FINRA) investigations, litigation, and arbitration. Morgan also counsels public companies, funds, and broker-dealers on securities compliance and corporate governance; conducts internal investigations; and assists in regulatory examinations initiated by the SEC’s Division of Corporate Finance and Office of Compliance Inspections and Examinations.
Earlier in his career, Morgan served as Senior Trial Counsel in the SEC’s Enforcement Division. During his time there, he served as lead counsel on a wide variety of litigated matters including prosecution of insider trading, investment adviser fraud, revenue recognition fraud, broker/dealer fraud, and mutual fund market timing.
Block Tribune talked with him about what to expect in cryptocurrencies and blockchain during the coming year.
BLOCK TRIBUNE: So, let’s start with current events. Bitcoin is on a wild ride. What is the effect of that going to be going forward into 2018?
NICK MORGAN: Well, the effect on what, I guess, would be the counter-question. If it’s the effect on ICOs, I think it serves to draw attention to the whole cryptocurrency space. You get headlines, you get people interested in the subject who weren’t interested in it before. The thought of making money just on the increase in the value of crypto-whatever token currency gets more people interested in the space. If there’s a crash in the price of bitcoin, that’ll have the opposite effect. Scare people away and paint the sector as volatile and lacking in credibility.
BLOCK TRIBUNE: What’s your feeling? Are you a bull or a bear as far as the current prices go?
NICK MORGAN: I guess I’m neither. I’m a skeptic in the sense that it’s a big increase in a short amount of time. We’ve all seen those happen in other contexts and most times that results in a bubble, or is a bubble that results in a deflation at some point. But maybe cryptocurrencies are different. Limited supply, increasing demand as a result of speculation on the one hand, but also increasing demand as a result of future use or future expected uses of bitcoin and cryptocurrency. So, I don’t know. I wish I had a crystal ball. I think it will continue through most of 2018 to increase.
BLOCK TRIBUNE: Now you were Senior Trial Councilor for the SEC. How long ago were you with them?
NICK MORGAN: I left in 2005.
BLOCK TRIBUNE: So cryptocurrency really wasn’t even on the radar back then because it wasn’t invented, really.
NICK MORGAN: I’m dating myself, but I was there when the SEC created its first Internet enforcement branch or section. I think this is sort of relevant to this discussion, it was then later when it became obvious that the Internet was not some novelty that could be used for a one-off securities fraud, but rather just the medium in which we were all going to be operating. The SEC disbanded that Internet section because it was too ubiquitous. Similarly, we see now the enforcement folks, there are clusters of enforcement attorneys who are beginning to take a focused interest in crypto tokens. I wouldn’t be surprised if we saw the announcement of a specialized unit working on those issues specifically. Right now they’re within the Complex Financial Instruments group in the Enforcement Division. Those are the people who are focusing some attention on this.
BLOCK TRIBUNE: The SEC seems like they just started to take notice of ICOs during this summer in a big way. Or, at least publicly.
NICK MORGAN: I think the world was learning about ICOs … most of the world. Obviously, people who were enthusiasts and early adopters knew about it much earlier. But I don’t think it moves to the level of something that required a whole lot of attention much earlier than the Dao Report came out. It’s clear from conversations I’ve had with people in the Enforcement Division that they’re still on a learning curve and the number of people who are focused on this is pretty small, from what I understand. But the SEC has a lot on its plate that has nothing to do with ICOs, so it’s probably a proportionate response and timing-wise, I think the Dao Report came out … It could’ve been a few months earlier. But this is all pretty new to the marketplace so not too far off the mark.
BLOCK TRIBUNE: In your estimation, what percentage of ICOs are not legitimate? In other words, they may be out-and-out scams or they’re just vaporware in the sense that they have no intention of creating a product. However you want to quantify it.
NICK MORGAN: One measure of legitimacy, which would lower the bar quite a bit, is they involve the offering of securities and the offerings haven’t been registered or they’re not exempt. Sounds like that’s not what you’re referring to. You’re referring to fraudulent offerings. I’d have to know the size of the total ICO universe, and I don’t. Let’s put it this way. If you sort of compare it to another market with few controls, like the market for private placements of securities, it’s going to be something north of 40% or 50% are going to involve some level of deception.
BLOCK TRIBUNE: Now, we’ve seen some prominent hacks of ethereum blockchains and other things. Does that give you pause going forward about the whole construction of the business?
NICK MORGAN: It does, although those hacks don’t seem to have stopped the enthusiasm of investors for putting money into these things. That’s the real test, is whether investors will continue to put money into these types of investments. I guess what we would expect to see is … I’m not a technical person, so I don’t know how you would achieve this, but greater security or touting greater security that would prevent these types of hacks from happening in the future. It doesn’t appear to me to have dampened enthusiasm at all. So I don’t think it threatens the overall viability of tokens or ICOs in general.
BLOCK TRIBUNE: Several nations have talked about developing their own cryptocurrency. Do you see that happening in 2018 and what will be the effect on the market?
NICK MORGAN: I think we will see that happening. Singapore expressed interest. There was some eastern European country that expressed interest, and maybe Zimbabwe might have said something along those lines. If you get a national government behind a cryptocurrency, that certainly lends credence to the whole notion. Yeah, I think it will happen. Some country will announce it. The level of impact it’ll have will depend on the country that does it. Singapore obviously would send a very strong message. A country with a more volatile political landscape, like Zimbabwe, it says less about it. I would expect that to happen in 2018. The effect will depend on which country does it.
BLOCK TRIBUNE: What do you see going forward as far as the United States developing its own? Will there be any stirrings of that in 2018? Will there be at least any conversation about it? It’s been very muted so far.
NICK MORGAN: Yeah, I would doubt that. For better or worse, the U.S. dollar seems to be a fairly well accepted currency, so I don’t see much political will even for a discussion along those lines in the US. It’s countries that are either smaller or less stable, or newer, newer countries, that I think have a greater chance of having that conversation go anywhere or even get started.
BLOCK TRIBUNE: What do you see happening as far as regulation goes in 2018 from federal and, perhaps, from a state-by-state level? Do you think it’s really going to exponentially ramp up? Are we still in the very early stages of discovering exactly what it is and how to go about policing it?
NICK MORGAN: So, focusing on my area, securities regulation, no doubt 2018 is going to see a much greater number of ICO-related enforcement actions. Wouldn’t take much. As far as I know, they’ve brought two … really one, in 2017. I’ve witnessed the learning curve in action. There’s plenty of examples to be made out there. So, yeah, we’re going to see, I would say, dozens of cases in 2018 from the SEC.
BLOCK TRIBUNE: What effect will that have on the marketplace?
NICK MORGAN: I think there will be a slight pulling back of offerings in the US that may cause some regulatory arbitrage. It may cause some people to go to other jurisdictions that aren’t either as active in the enforcement space, or have a laxer regulatory regime. I think it’ll cause the more legitimate part of the market to become more like players in the small offering security space. We’ll see more people registering offerings or designing their offerings to be exempt from registration. I think it’ll just be a factor in sorting that out. It’ll shove some people offshore, shove some people into established regulatory frameworks, and then there will still be a fairly large size of the market that continues to operate unaffected by those cases.
BLOCK TRIBUNE: Some governments feel that they’ll lose control of their monetary system if cryptocurrency becomes much more prominent. What do you say?
NICK MORGAN: Well, right now, for a currency like the US, it’s a fly speck in terms of competing with the US dollar. Other currencies, I think, that are less stable or have less confidence from the citizens of those countries, I think it is a threat. I think countries where you’ve seen massive inflation, like Venezuela or Zimbabwe, I think there’s a demand for something, particularly when the governments have outlawed the use of currency like dollars. People are looking for an alternative that has the ability to be a store of value. I think for those other countries, there’s a legitimate fear of cryptocurrencies competing with the national currency and there’ll be impact. I think we’ll see some of that developing more than it already has.
BLOCK TRIBUNE: This year, as far as the ICO overall volume of deals, we’ve gone over the three billion mark. What do you see happening in 2018?
NICK MORGAN: Increases. I think this is going to continue. As we discussed, the enforcement actions will increase as well. But given the enthusiasm for this new funding technique, I think we’ll see it increase. That will be parallel with other uses of blockchain technology in other financial, non-ICO areas.
BLOCK TRIBUNE: You’re talking about futures and derivatives and things like that?
NICK MORGAN: I think FINRA has announced some use of blockchain technology with regard to brokers. It’s just as a purely record-keeping mechanism, going to become more ubiquitous.