We talked to one of the most credentialed critics of cryptocurrencies and NFTs about fraud and potential “cataclysmic events” in the industry. John Reed Stark spent nearly two decades at the SEC rooting out online fraud, including 11 years as the founding chief of the agency’s Office of Internet Enforcement. But he’s never seen anything that has concerned him quite like the world of cryptocurrency and NFTs.
“There have been awful frauds from unregulated people and regulated people,” Stark said. “But nothing comes close to the level of fraud in all these Web3 applications.”
Over the last decade, Stark has become one of the most credentialed critics of the burgeoning industry. After studying the industry at length, he has come to believe that it will end in a “financial cataclysmic event” that will hurt the most vulnerable of investors. Stark isn’t an all-out cynic. In the lead-up to the dot-com bubble, it was clear to him that the internet would lead to incredible innovation, he said. But with the world of cryptocurrency, he sees little more than a series of frauds and “get-rich-quick schemes” of remarkable size.
President Joe Biden signed an executive order Wednesday to develop a plan to regulate the cryptocurrency industry while still allowing for innovation. The news was cheered among many in the crypto world, who saw it as further proof that the industry would be accepted by mainstream institutions and no longer struggle with legal ambiguity. Stark, for his part, had a different perspective. “They always call for clarity,” Stark said. “Be careful what you wish for.”
Motherboard spoke to Stark about his concerns, as well as the difference between buying NFTs and trading cards on eBay, the “cult-like” hatred he receives, the growing partisanship around the issue, and the “regulatory capture” he sees taking over the legal industry.
The below conversation was edited for clarity.
Motherboard: You recently said never in history has so much fraud been so widespread. When was the moment you realized, in your view, something was amiss with NFTs?
John Reed Stark: The very first time I looked at it, I thought, This is a pet rock . Aside from the market being rigged, and there being no regulatory oversight, it seemed like a silly Beanie Baby thing that made no sense. But initially, I don’t think I really had too strong of an opinion. If somebody wants to invest in something really stupid, I don’t have a lot of sympathy for him.
But because I’m a cybersecurity lawyer, usually what I look at is, what could happen? How could this be hacked? It became clear to me that the potential for money laundering was significant. I started to investigate the idea with NBA Top Shot because I’m a big NBA fan and my son is a big card collector. All of a sudden, I thought, This is a market that could really hurt people . It’s not just people losing money because they invested in something utterly absurd. But more importantly, this kind of thing could be used by criminal organizations. And it seemed to me that it was being used by criminal organizations to launder money.
If you’re trying to explain to someone the issues you see with NFTs, what distinguishes them from just trading physical cards online?
The better question is what’s the difference between buying cards on eBay versus buying NFTs. There’s a lot of oversight through an entity like eBay. If you use your credit card and you pay through PayPal, that gives you double protection right there, not to mention the eBay authentication guarantee. And if you get cheated on eBay, there’s a lot of different avenues of redress. I’m an avid eBay user. Having used eBay for many years and having probably 5,000 transactions on it, I think there’s a certain degree of confidence.
Now, suppose you had a really interesting Omega timepiece up for auction at Sotheby’s. You could probably go into eBay, buy all of those Omegas up at absurd prices, and maybe drum up enough interest so that your physical auction price goes higher—and there have been accusations in the watch industry about that kind of thing. But that takes a lot of work and ingenuity and risk. That’s a lot different than what could go on in these NFT marketplaces. The opportunities for fraud are so much more significant when you’re dealing with a digital asset. With NFTs, there’s no compliance, there’s no oversight, and it’s global.
You left the SEC in 2009, […]
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