Did Trump Just Legalize Hacking the Hackers?

Transcript

It's It's like stable coins are the new Euro dollars, except this time we're not going to let them leave, right? We're we're going to keep keep a bit of control. Hey everyone, welcome to Bits and Bips, where we explore how crypto and macro collide one basis point at a time. We're here to discuss the latest stories in the worlds of crypto and macro. But as a quick heads up before we dive in, Bits and Bips has its own channels now. If you're not listening on those, you're going to lose it. Come subscribe to Bits and Bips directly so you don't miss an episode. And before we begin, a quick commercial break.

>> This episode is brought to you by 1-in Aqua, the shared liquidity layer from 1 in. Back multiple liquidity positions with one wallet balance and keep your tokens in your wallet until a swap fills. See how it works at 1in.com/aqua. Not listening to Bits and Bips yet? It's our weekly crypto and macro market show with Rahm Alawalia, Austin Campbell, and Chris Perkins. Search Bits and Bips and subscribe. All right, everybody. Welcome back. Um, as a quick look at where we are, Bitcoin was in the 64K range today. ETH was in the 1900s.

Gold was at 44.25 an ounce. The S&P 500 at 77.85. 85 and CPI came in at 0.1% month overmonth, 3.4% year-over-year with core at 2 and 2.5. So the FOMC hike odds are down to 24% on Poly Market and US Bitcoin spot ETFs were minus almost 400 million of inflows on the week. As always, I'm your host Austin Campbell, high scholar of Zero Knowledge Group. I'm here with my co-host, Chris Perkins, the golden hand of Franklin Crypto. And since we're going to roll through a few important

topics today, disclosures upfront. Reminder that Chris has been involved in privateeering proposals for quite a while now, including uh with former CFTC chair Chris Jian Carlo, friend of the show. Um, and that we're going to be talking about the SEC's no action letter. So Chris is at Franklin Crypto now and that I formerly ran portfolio management and risk at Paxos doing stable coin reserves. So as we talk through these topics, both of us have been involved personally in the past. So Chris, we're going to start with everybody's favorite, which is privateeers. I want to give the layout here and then I'm going to throw the

ball over to you. I know you have a lot to discuss, so let me put this on the table. On August 12th, uh the president signed a national security memorandum letting vetted private firms run offensive cyber operations against foreign criminal groups under federal control. There's two authorized activity types. cyber surveillance operations and cyber effects operations that disrupt or destroy systems and the data on them. Firms doing this need to post at least 1 million in escrow. It will be forfeited for rulebreaking.

All of the operations need written approval from the DOJ and the Department of Homeland Security. It's run through Homeland Security's task force national coordination center. You're going to have two directors there, one from the AG, one from Homeland Security. Operating procedures, I think 60 days is the due date. We'll see what happens. Certainly, they could come later. They can't come earlier. Um, Chris, you and the other Chris proposed this about 18 months ago. So before I go deeply further into all of like the details and the objections, I want to take a first breath to say what was your original pitch and how similar to what you

pitched is this? >> Yeah, I mean it was a culmination of a lot of um crazy experiences I've had in my life. And you know, I'll go back to my days walking the streets of Iraq uh when the bullets were flying. I remember I went up to a little kid and I said, you know, what do you want to be when you grow up and he looked at me like I was crazy? He's just like, what are you talking about? I just want to survive, man. And like that's an extreme example, but if you don't have security, you have nothing. Um, and you know, as you're looking, you know, and again, I don't want to I don't want to mix the two, but it really resonated with me that security is everything. Being safe is everything. Um and then you know for the last five years I was in the trenches

with these founders uh these crypto founders and you know the beauty of DeFi was that they could access you know we could put value into the internet for the very first time. For me that was just an incredible unlock and I was like wow this is going to change everything. Um but then we started seeing the downside and the fact is is that security was it was and continues to be a major concern. I mean every week we show up and somebody's getting their assets ripped off. It's almost like you get numb to it. U but you shouldn't because that's stealing and we've had non-state actors supporting some of this stuff funding you know who knows maybe

their nuclear programs. Um but I was in the trenches time and time again. I've had multiple portfolio companies that were hacked and you see the t you see what happens these entrepreneurs, you know, they are working around the clock with their teams. They're going for it. They're sacrificing it all. Um and then back, you know, a few years ago, they would they would raise capital. Raising capital is really, really difficult. Um they would spend that on lawyers to figure out if they were a security or not a security. Uh and then they would get hacked and the government say, "How dare you get hacked?" Um, and to me that was wrong. I I feel like we were really failing our our entrepreneurs. And to me, the biggest issue that was holding up this incredible innovation that

crypto brings was security. Um, and there were no good solutions. Like what do you do? Um, do you pour a bunch of money into the government and try to, you know, build out uh certain crack forces within the government? Here's the problem. The government is actually really, really good at cyber defense. Um, but it doesn't have the surface area and it's it's you know, if they need to go after something high value, they can do it. Um, but you know, I've started thinking and going back to my old naval roots, you know, we were up. This is asymmetric warfare. You know, you have states maneuvering against entrepreneurs and, you know, you need an asymmetric response. And if you go back to the

history of our country, um, we were getting hammered across the board. George Washington was getting hammered on the battlefield. We had no navy. We couldn't afford it. And so what we did was we said, "Hey, ship captains, you know, get after it. Go attack British commerce. Um, you can keep some of the spoils. We're going to license this." This this practice called letters of mark actually have been around since the Middle Ages where it's highly regulated. Uh, the state regulates it. You issue a license. There's a prize court. There's there's the rule of law, but it's it's an asymmetric way of beating back a more powerful actor. And I would say, you know, that that's how it is in the internet right now. These young

entrepreneurs, these founders, it's an asymmetric threat. So, what happened in the Revolutionary War? Well, our privateeers ravaged the British economy. And if you go back to the newspapers in London at the time, um, at the strategic level of war, and we always talk about the tactical level of war, we were shooting each other, but at the strategic level of war, a lot of the British were upset. They're like, you know, stop this American campaign, these rebellions. Let them go because they're wrecking our economy. And we know what happened there. And so, I would argue as a Naval Academy graduate that our privateeers had as much to do with ending the Revolutionary War as did George Washington on the battlefield. No offense, George. uh happened again in the war of 1812. Again, a more powerful actor entered the space. The British

attacked again. James Madison unlocked 500 privateeers and off we went. >> This continues throughout history if you're familiar with the history of the Navy, right? Like we've even formally adopted these tactics into the US military itself at times when we needed them. So, take World War II after Pearl Harbor. What did we do? We unleashed our submarine fleet against the Japanese and massively disrupted logistics and shipping. Same tactics, right? Only there it was formerly the nation state. >> Yeah. And so, look, the the Europeans thought that this was a dirty business.

Uh they got out of it in the mid- 19th century. Uh the United States didn't get out of it. Uh why? Well, maybe because it's enshrined in our Constitution, Article 1, Section 8. And so back in the day, I was watching us getting hammered on the cyber battlefield. Um, and the only thing I could think of was the lessons of history and my n our naval roots. So went to Christian Carlo, we put our heads together and we said this is probably the only way to restore security. Uh, why? Because again, it extends the surface area. The private sector is smart, sophisticated, um, and it's also probably very cost-effective for the US government. uh who knows as they start recovering and and I hope they do recover ultimately and by the

way this was not just a presidential action we have seen it we saw a version of it the clarity act and article one you know enumerates the powers of the congress for those of you who don't know and forgot uh your your civil lessons of of grade school so so it's an enumerated congressional right that said there is some gray um but but we saw it pop up in clarity now we're seeing it with the executive um I'm I'm excited. I mean, I I wish I wasn't excited, but we have a problem. Uh we're getting we're getting absolutely clobbered in the cyber arena.

And to me, this is a nice first step to hopefully restoring security. Now, think about it. If we are successful, and it's hard, it is going to be brutal. But if we are successful, uh and and this security is extended to Americans, what will happen? Well, I think we'll attract a lot more entrepreneurs on shore as well. So, it should be very very beneficial for responsible innovation. Um, so that's it. Look, nothing is perfect. You know, people are very critical. Some people think that the government should do everything. Um, all I would ask is this. Propose something better. Propose a better solution because right now nothing is working.

And this is the only thing I could think of. There are people that are smarter than me. Uh but but yeah, come up with something better and and let's talk. >> So on that note, let's talk about what is going on mechanically in here, right? Because this has been in the works for a while. I know Gian Carlo pitched it at the crypto summit last year. Uh I know Secretary Bessant has been involved in this. I know this was a long road to get here. So what is the sausage that was actually made? So, one thing I noticed, Chris, the memo defines the targets as groups who are quote not an institutional part of a foreign government or wholly operated under a foreign government's direction. And it says groups will not be assumed to be

state directed unless clear intelligence exists establishing such a connection. And what's interesting to me about that is where Lazarus is going to stand on this one because there's a lot of anecdotal evidence that they are involved with the North Korean government, but the North Korean government themselves has not come out and officially said these people are operating at our direction. They are part of the North Korean government. And so part of what I first noticed in this memo, and I'm curious as to your opinion on this, is this a tactic to force the North Korean government to admit Lazarus is operating at their direction or they become legitimate tactics or excuse me, legitimate targets here?

>> Yeah, I I think it's a important legal question uh and maybe a philosophical one as well. Uh if a state is attacking us, then that is a that could be an act of war, right? which is definitely, you know, falls within um you need a whole government response and maybe the privateeers can help you as we've seen in the past. Um and and that that is the responsibility, you know, if you look at the social contract. If a state is attacking us, then it's probably the responsibility of the state. That's why we pay taxes to have a full government response and maybe the privateeers can help. If it is a non-state, then maybe this is an area uh legally. Again, not a lawyer. Sometimes I wish I was. Most of

the time I don't. Uh but I imagine this is this is a matter of law based on uh you know I'll tell you one thing. One of the best classes we took at the Naval Academy was the uh the the law of uh of war. Um very very fascinating. But um >> anyway I think it's a matter of law. >> So to me what I thought about here if we're thinking of this from a game theory perspective is it's going to force action by the North Koreans. is the way it was drafted. If the US government chooses to use it, call it offensively. And what I mean by that is either the North Koreans are going to have to raise their hand and say, "Yes, this is us." Or they're going to have to disclaim it and be like, "No, it's not us." In which case, they're definitely

valid targets. So, it would allow the US to tell people you could start going after them and see how the North Koreans respond. Like, we seem to own the optionality based on that drafting as it's currently designed. And Chris, you and I both know on a battlefield you would prefer to own the options as opposed to have them enforced upon you. >> Yeah, I I don't think um if if you're running the state there in North Korea that you would want to affiliate yourself with criminals. And so I I think it's uh it's pretty interesting way to drive a wedge um to the extent there ever was one.

So, let's talk for a moment about some of the objections here because I think it's important to walk through these. Uh, and I'm going to go through them kind of one at a time. So, we'll start with Paul Rosenwag, who's a former DHS deputy assistant secretary. Exact quote. This is a bad idea. There are much better ways to revive what seems to me is essentially a governmental function. And then he says participation would quote quite likely violate the international law prohibition on piracy. So back to law school, I'm going to start by saying, you know, somebody is losing the argument any time that they cite international law because that is not a thing, right? Like anybody who

wants to come to the United States and argue with us about military action on the basis of international law is staring down at this point, I don't know, close to a hundred years of precedent where we're going to tell them, "Sure, you enforce that with your army, right?" Like you remember the Key Peele sketch where he was president doing that, but it it what are you going to do? Sanction me, right? It is uh or no, that's Dave Chappelle. I have just insulted everybody. Dave Chappelle punchline though. Does the international law thing make any sense? Should this just be a government function?

>> Well, let's start with the problem and how you're going to solve it. Uh do do you want to to you know call raise taxes even higher and allocate more of those taxes uh to do this function? The things you need to consider are talent and incentives and it's just very very and scale. Uh it it's very expensive. uh and very difficult to source talent in, you know, that would come and and provide that government service. Again, we've got some great people uh in the national security apparatus, you know, doing this day after day, but it hasn't stopped the amount of crime. What was it? 20 something billion Patrick Whit was saying on Twitter. Uh and yeah, 21 billion last year. We have a problem.

The status quo isn't working. So we can either leverage the private sector and the efficiency, speed and scale or we can pray for the best, start a new agency uh and and I think we all know how that ends. Uh I I can't think of too many examples where the government's done a better job um at at at moving quickly and efficiently um when when we have a huge problem of this nature. So look, I I know where my head is, but um again, if you have a a better solution, like surface it, Jul $21 billion. So, okay, where are you going to raise the fund? Are you going to go to the House of Representatives and get them to open up the purse? How much do you need?

Where are you going to source the talent? You know, come, you know, don't come with solutions because no one's coming with solutions. This is the best thing we could think of. >> All right, so let's hit some of the others then. So, two that I'm going to put together. Erica Lteran from Colombia. Is this a slippery slope to enable private sector offensive cyber operations directly against nation state adversaries? And then Michael Garcia, who's former CISA policy, it comes down to attribution. And if you make a risky bet on who we're attributing attacks to, that's where things can get dicey. So to me as we're looking at this one and I'm going to lob this ball to you Chris. I do agree if you misattribute

then you're going to have call it potential nation state level consequences but given the main actors we seem to be targeting are North Koreans or various call it transnational criminal rings who quite frankly are mostly on the outs with China too. How big of a risk is this? Yeah, look, I think we made it clear that uh at this point the government's saying, "No, no, no. Uh we don't want you to attack state other governments or states. That's off off limits. We're going after the bad guys." Here's the beauty of crypto. Everything is on chain. Everything is on chain, right?

And so the ability to trace, particularly in our sector, the ability to trace and to run advanced analytics to understand who's doing what is pretty pretty amazing. And so to the extent that there is onchain activity and somebody deviates off course and they do the wrong thing, well, they're going to be held accountable. Back in history, they actually had prize courts and they also had bonds. And if privateeers went over the line and became pirates, guess what? They lost their bonds and they were held accountable. It was pretty awesome to see the government adopting a similar sort of framework, you know, million-dollar bond. um you know there about and so like they're using the

lessons of history for accountability. Again, this should not be a free-for-all to be successful. It needs to be highly regulated and enforced. And as we've talked all along as we've gone through all this clarity stuff, crypto is actually really good for national security because you find out where all the money's going. >> Let me actually follow up on that though with something like that caught my eye here. Is this limited purely to crypto? Because if you look at something like the pig butchering scam, >> yeah, >> that and for those who are not familiar, let me lay this out on the table. The pig butchering scammers are a criminal syndicate with thousands of people working together as a highly

professional organization. You can think of it more like a corporation that does crime than three dudes in a basement. Like your conception of hackers as individual actors here is totally wrong. This is a fully funded enterprise and they do a lot of different related criminal activities like romance scams, investment scams, hacking, sim swapping, money laundering, including for the Iranians, not just people in Southeast Asia. It is a very sophisticated group and it has a gravitational pull and they take in money from crypto but they also take in money from the regular banking system and they take in cash. So my question to you is is this only for

people stealing from Americans through crypto or would it target all of those activities? >> It feels like this uh this memorandum has extended the aperture a bit. Um that that's my sense and yeah you're right there's huge pig berturing issues particularly out of Southeast Asia. Um really really big issue. Um look I come at from I come at this problem from a crypto perspective. Are there issues in web 2 as well? Absolutely. Are the traditional banking networks involved in those issues? 100%. Um I would imagine crypto is still a small part of it but but again it's really holding up innovation in our space. This thing we call security. Uh and and we we we need to we need to be better.

>> All right. So, next one. I am very curious to your opinion on this one. So, Jake Williams, formerly of the NSA, hunter strategy. Americans participating in these operations could easily be classified as non-uniformed combatants while traveling overseas which maybe I'm curious as to your thoughts. >> Uh you know, in the uh the law of land warfare. Yes. non-combatants who don't wear military uniforms and follow a whole bunch of rules, they're considered non-combatants and they're treated as criminals. That's a fact. But I think the way that they thread the needle on this was they're saying we do not want first off there is no war declared that I'm aware of. Second off, we're I think

in this memorandum we're saying no, no, no, go out, you're not going after states, you're going after um criminal activities. So I I think they thread the needle on that based on my cursory look u you know based on my very limited education uh on the lawand warfare but um it's a fascinating concept if you ever look at it like when you are in war there's rules you have to wear a uniform the officers are not supposed to be mandated to work like it's it's really interesting um but again um this is not it seems to me this is not an offensive activity against the state So, I don't think that would be a that would apply uh legally, but you never know what's

going to happen. People get taken in by bad governments all the time. American citizens, we've you know, this is an ongoing problem. Um so, yeah, we'll see what happens. >> No, I I agree. And I feel like the understated part of that is if that's true, then the people on the other side of this are also non-uniformed combatants, right? Like you would have to be saying like, well, the hackers fall under the same treatment here because they're engaging in the same act. >> Well, that's right. And and we're not treating them as combatants. We're treating them as criminals, which is the way that they should be treated.

>> Well, I mean, it to me it's a fascinating paradigm. If people want to start arguing to treat them as combatants, doesn't that open up our ability to just like, I don't know, drone strike crypto hackers, which is probably not what people were expecting. >> Yeah. Yeah. So, so to the extent somebody stole um Bitcoin from somebody else in in a hack, coin card hack or whatever, that's a criminal activity and that's how they should be treated. >> Yeah. >> Yeah. To your point. Yeah. >> So, the final point on this one, um, and I think this gets into a multi multi-year history of like US call it juristprudence around war powers is isn't privateeering a congressional act?

Like why did this come through a presidential memo? And I'm gonna be the first person to say I have been criticizing presidential use of war powers since like the early 2000s. So I'm not so sure this is unusual, but what would you say? >> I'm not a constitutional scholar uh or lawyer, but I you know, we do know article 1 section 8 enumerates the power of letters of mark. I didn't see it say these are specifically letters of mark. It looks like it's kind of something in between. And you're right, there there is this line between article one and article two. You know, when was the last time we declared war formally? It's kind of in between. Um I think the lawyers are going to have to figure that one

out. Uh but I was also really happy to see a version of this in Clarity, right? So it's it's it's not like the executive is operating in a bubble. Now clarity hasn't been passed. I hope it does, but uh you know, we'll see what happens. to me on this final point. I kind of look at that one and when I read it, I'm going to be honest, I laughed to myself a little bit. I'm like, "Oh, so this is where you're drawing the line. You were okay with the Iraq and Afghanistan actions and you were okay with what's happening in Iran, but privateeering, no, no, no." Like to me, either Congress needs to take the war powers seriously and take back a lot of powers from the president and then react appropriately or this is probably an appropriate thing for the president to do if you think

everything else that was going on was appropriate. This is a little bit like saying it's okay for them to like steal cars and murder people and blow up buildings, but no jaywalking, right? like the scale of these offenses is just such that if this is where you're drawing the line, I have so many questions about the call it legal and moral framework upon which we're assigning war powers in the US. And this again this is somebody who's been somewhat skeptical, but if Congress wants to start doing their job, I would suggest they have much bigger fish to fry first. So on that note, as Chris and I predicted before we even got on the stream, we were going to jam on privateeering Phil. So, let me close it out with this comment.

The pig butchering scammers and people stealing money here have destroyed lives. There are like folks who have committed suicide, businesses that have been destroyed. This is a real problem. So, if you're a critic of this, I actually think Chris has said something very important, which is propose your solution because do nothing is demonstrabably a very bad outcome for the world right now. And so if you don't think this is the right way to do it, what do you think the right thing to do is? Because it's easy to be like, well, we shouldn't do that. But the base state here is very terrible. We don't get to live in a theoretical world with none of this. So what is your solution? I want to stand by Chris, on that point. And on

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channels with the full episodes at unchainedcrypto.com/bitsandbips spelled vips. Thanks again. >> All right, everybody. Welcome back. And in a inversion of the usual way that we do these things, I'm going to hand the mic over to Chris to lead this segment and he's going to get to interrogate me because now we're going to be talking about World Liberty. So Chris, feel free. >> All right, Austin. World liberty. They got some kind of approval from the OC.

The OC uh is the office of the controller of the currency, works for the department of the treasury. What approval did they get? What does it mean? People are throwing their arms up. Elizabeth Warren is not happy about this. What exactly did they get? >> So, let's start with the mechanics here. They have a conditional approval to begin operation. The main criteria that stands in front of them is any regulated banking entity in the United States of America has to hold capital, which you can think of as the money that's there in case something goes wrong. So, in the case of the specific entity that they've got, they're going to need to bring in 20

million of tier one capital and they're going to need to bring in roughly half a year of operating expenses and liquid assets and they're going to need to get written non-objection from the OC to proceed with that business plan. Now, I don't think this is going to be a problem for World Liberty, but I am noting for the peanut gallery. They have to post the money just like anybody else. No real waiver or like special conditions were given to them on that front. So >> what is >> Yeah. So they so they so that they they can raise capital but what are they allowed to do? So, this is a national trust bank. And those words are a little bit misleading because if you're sitting

at home and you're thinking of a bank, the model you probably have in your head is I go to the bank, I give them money, and they take those deposits and then go lend those deposits, right? And that's, you know, canonically in your head like Main Street businesses, opening cafes, building buildings in your local community. Now, what do they actually do with it these days? probably not that. It's more like project loans and commercial real estate and like credit cards. But fine, point is they're lending the money. A trust bank cannot do that. Here's what you're going to be allowed to do as an OC trust bank. You can take in customer assets, you can hold them, and you can manage the reserves of a stable coin, which means

you are holding bank deposits in another bank, T bills, secured overnight loans, where your collateral is US treasuries, and finally technically physical cash, though nobody is psychotic enough to do that as of yet. So really they're holding a pile of tea bills and overnight loans on behalf of customers so that these serve as the reserves for a stable coin in the in the particular case of world liberty that's the USD1 stable coin there's about 4 billion outstanding bit has been doing this work and what is interesting to me is that I think and Chris I would like your views on this it's very important

to break apart the concerns around World Liberty because I want to be clear that the activities of holding very basic reserves in name of customers and minting and burning the stable coin are not complicated, not terribly difficult and do not seem to be the part that people should have problems with. this has been working fine already through bitgo for quite a while and even the skeptics as I noticed them in this space are not addressing that the core operational part is not where people are having concerns right now I mean have you seen differently >> no I think to your point I don't think the concern is operational you know let's take out the politics for a second um what we have is we have a law it's

called the Genius Act the Genius Act has a lot of prescriptive requirements around how you can go about issuing a a a regulated genius compliance stable coin. Uh I think we'll talk about maybe a little bit Austin what the Treasury did today. They published additional guidance and rules. We're going to be in a position here in Janu January 18th where you're either a a regulated genius compliant stable coin or you're not. And so what it seems like is that you have a company that's moving forward, applying for the licenses, putting together the operations so that it can issue a genius compliant stable coin. Seems relatively uncontroversial at this point, right?

>> I mean, one would hope. Um, there are a lot of people doing this exact activity other than world liberty. If this is the part of things that's giving you heartburn, I just want to say there's about 300 billion of stable coins, probably about 50 billion of which are going to be swept into genius on day one. But there are somewhere, depending on how you measure it, between 7 to8 trillion dollars of government money market funds doing this exact same business. So if you have not been freaking out about those, freaking out about stable coins doing this specific part seems a little bit disingenuous to me at this point.

>> Okay. So operationally we don't have an issue. Um by the way do we know how many other uh folks have these types of licenses either achieved or in process? Any idea? >> Uh I mean there have been dozens of applications through the OC. Most of them are being processed in call it 100 to 180 days. So, World Liberty actually went a little longer. I don't quote me, but there should be over a dozen approved licenses before we've even gotten here. And that's not including the subset of folks who were probably genius compliant through the state path in New York. So, in many ways, Paxos, for instance, has been and Gemini have been operating under this since 2018 in

terms of equivalent things that would qualify under Genius. >> Got it. So, they weren't first in the queue. You would say >> no. Definitely. >> Got it. >> And by the way, let's let's pause here and say the OC has also denied some people already as well. So this was not purely a rubber stamp process for others like wise as one example off the top of my head was rejected for their OC charter. >> Got it. So then why is all why all the controversy Austin if operationally this is right down the fairway? >> So the problem with this thing is the governance. Um, so I am telling you what I have been able to discern from public sources. I have seen no like private documents here, but I think the current

ownership interest by Trump affiliates or the family is something like 35 to 40%. They've taken a passive stake, so they're not involved in the day-to-day operation at World Liberty, but I will remind everybody this was marketed as a Trump project. They have a significant economic interest. And as somebody who is putting together a curriculum for a course on the history of financial crisis, I went back through my notes. I cannot find an instance in the history of the United States where the sitting president had family members applying at the time they were president for a charter from a national banking regulator. So the weirdness here, and I'm going to pause and remind

everybody again, civics 101. United States has three branches of government at the federal level, legislative, executive, judicial. The banking regulators, with maybe the partial exception of the Federal Reserve, sit solely under the exclusive jurisdiction of the executive branch in terms of bossing them around on a day-to-day basis. So the OC is within the Treasury. That means Donald Trump is fundamentally the boss of the OC. And so you have the president as the boss of the agency and the agency evaluating an application where the president's family are significant holders of the entity applying. We haven't seen that before.

And the governance questions it's raising are more ones around is this being conducted fairly? Should they be granted this license? Will they be policed effectively? Can other people speak up? Because if you're another bank or a regulated financial entity and you want to go on record opposing this, the exact same regulator that the president controls who is approving this is the one that determines your life or death. And so, you know, a little bit like first amendment type issues in the United States, the chilling effect here from a constitutional standpoint would be expected to be very large. And so earlier on CBS Mornings, I said this was unprecedented.

And the part I'm talking about here is the governance structure around the thing. What World Liberty is doing honestly seems to look okay operationally. I don't have personal knowledge there, but nothing I read is throwing up red flags for me. It's the governance structure and effective policing that people are raising. And some, I think, are raising it in good faith. Some like Elizabeth Warren are acting like the world is ending, which it's not. But this seems to be a sort of an unsolvable Gordian knot of conflicts given that the president is policing his own family here would be the critique.

>> How do you think this ends up Supreme Court? I think while Donald Trump is president, it ends up with World Liberty being able to operate because most of the people most likely to challenge it are also the ones who are not going to because he controls the regulators. I think in 2028, if the Democrats take back the House or the Senate or both, these guys become public enemy number one from an investigation perspective. But I am not. But were I advising the World Liberty team, the thing I would point to is after 2028 because I will remind everybody that banking regulators

have incredibly expansive powers in the United States. Unlike the SEC and CFTC who are much more constrained because this is a chartering process. If you have a Democratic president in 2028, they are going to walk in and demand every communication, every policy, every procedure, every decision, every commercial arrangement, and look through everything with a fine tooththed comb and then have complete discretion to punish you for everything you did that was not perfect. This is kind of how under a previous Democratic administration, crypto companies were discriminated against impermissibly by turning the process into the punishment

in something that was called Operation Chokepoint 2.0. But you could easily run, call it a more targeted and more direct version of that to make everybody's life hell and create very large civil and possibly criminal penalties here depending on what they find. So bank charter powers are immense for the regulators. I would be very cautious about this. >> Got it. I don't know what else to say. Operationally compliant, but the uh rest of it's a little bit tricky and complex and political and who knows where it's going to go.

>> Yeah. And to me, again, I'm separating out what are the powers of a banking regulator if they want to use them for evil from what is world liberty actually doing here. >> Those are fundamentally two different questions. the operational level and the governance level are clearly two different things and we know that because regulators were closing bank accounts of well operating companies right from 2020 to 2024. So I would just advise everybody here tread carefully and I think it also raises to be blunt a bigger governance question about how do we monitor regulate and look at banks and financial entities in America large.

This is honestly an ongoing issue that has been part of a cake that's been being baked for 20 to 30 years. >> How do you think this plays out in midterms, right? Because this is going to be a rallying cry on the anti-Trump side. >> Then you got fair shake going pro crypto, which is sometimes prodemocrat. Like, how does this all play out? Or does this end up being anti- crypto, not anti-Trump? Like, how do you in in in the midterms, how do you think it plays out? >> It's a mess. I mean, one, I think it kills clarity because it makes it very hard for any Democrat for political reasons to vote in favor of clarity while this is going on without reigning it all in. I think that's a political

reality. I'm not saying that's a good thing. I'm not endorsing it. I'm just telling you what I think will happen. Two, I think it puts Fairshake in a really tough position and a lot of crypto advocates in a really tough position because the core operational part looks pretty clean, but the governance issue is pretty unprecedented. And now you have both of those things sort of compacted together in an inseparable package. It makes it very dangerous for fair shake to go after Democrats who have not already been very anti-crypto on this basis because then you start making it into a very partisan issue like gun rights as opposed to something that's kind of bipartisan like speech.

>> But scramles it just scramles all the marbles. >> But to be clear, if clarity is passed, that doesn't mean that this is enshrined and that it's okay, right? I I imagine there'll still be things the governance issue that you're talking about will still be worked through. Clarity doesn't say, "Hey, you know, world liberties is is is wonderful and great." You know, aren't these things separate? >> So, in an ideal world, Chris, yes. In terms of political messaging, no. Right. Like, again, the problem we have with American politics at large is people are not enlightened like philosopher kings.

It's and let's be honest about this, people getting five minutes of news either on like a TV station or Tik Tok to form their views. Government is very very complex. And this is the problem with all of these concerns being compressed into a very tight package is all of them are just going to be one sort of thing delivered to people whether we like it or not. >> But crypto is going to be very much part of the midterm dialogue. I hope uh because we need to have that energy come back and uh >> always is.

>> Yeah. And then hopefully it spills into Thanksgiving and then um >> you know I was talking to a couple folks and and they were like you know crypto's not even in the top 10 list of my issues and so you know I think that the industry benefits when it comes back into the the public uh thinking. Thi I was going to say this is also something I think a lot of crypto advocates need to internalize which is if you know how Washington runs right so if somebody's in the House of Representatives or somebody is in the Senate they are governing the nation which means they have the concerns of the entire nation on a list and usually crypto is not in the top 10 or even quite frankly the top 50 things like affordability, energy prices, Iran, civil rights, right? like

whatever you want to put in there usually are above crypto. As a gentle piece of advice for the crypto advocates, the more you can make these understandable in the lens of major issues and clearly state how they will help, the better you are going to do. If we make this about really niche things like the right to cryptography, you will get like Ron Weiden's attention because that's his bailey wick and like nobody else. All right. So, Chris, let's talk about another government thing, which is the Treasury and the SEC. Which one do you want to start with?

>> Let's do Treasury. You came out today, Austin. Would love to get your thoughts, sir. >> Okay. >> You're the stable coin guy. You're the genius guy. So, so, you know, enlighten us genius. >> All right. To be clear, Chris means the genius act. Uh, before I get myself into trouble there. So basically the core prohibitions for section 3 of the Genius Act are that only a permitted payment stable coin issuer a PPSI can issue a payment stable coin in the United States starting from whenever this rule comes into effect. That is how it's going to work. You cannot offer, sell or make available a foreign issued payment stable coin in the US unless that issuer

can and will comply with lawful orders and reciprocal arrangements. So what are they trying to work on here and propose? What does issue mean? And that means like first transfer direct or indirect that gives the third party the right to use um or engaging in the business of issuance for compensation or profit. It's basically creating or destroying. Peer-to-peer transfers are exempt, same parent company crossborder transfers are exempt, and self-custody wallet transactions are exempt. I think that's really important by the Treasury. They are making clear this is really about large-scale commercial arrangements, not about people's peer-to-peer private

wallets, which is an important and valid distinction. Two, they're trying to define scope and ask for comment on these things. So, if you have views, now is your time. Extr territoriality, how do you do location tests? What are non-issuance activities? How should offer and sale work? What are the compliance duties? Are there exemptions in safe harbors? And then they've included some interpretive examples here. So, this is relatively nuanced. And what I would tell you I took from it is three things. One, Treasury is pretty serious about thinking these things through. They did not yolo into this.

They are not shooting from the hip. If you are a person in the United States of America with informed views on this topic, get your comments in. They appear to be actually listening. Two, I actually think this is a very important point for foreign governments who want to work with the United States on this. The reciprocity in genius is real. It is giving people the ability to enter into a sort of bilateral currency agreement through stable coins that has not been formalized. So if you are the FSA in Japan, if you are the Bank of Korea, if you are the United Kingdom trying to look across financial regulators in the Treasury at what you should do, if you

are Singapore or UAE trying to become financial and global centers, it's probably a pretty good time to have your ducks in a row and talk to the Treasury about what reciprocity would look like as part of this arrangement because you're going to have a very big opportunity if you fail. it could very easily become the case that even if you're issuing your own stable coins or CBDC's if that's your choice they will not be accepted in the United States and so Chris to me the elephant in the room that was not discussed but who I think has a truly fascinating geopolitical choice to make here is China because do they want to start

approaching the US to try to get past tariffs and find a reciprocal arrangement for yuan dollar acceptance on both sides for business especially as the internet becomes increasingly automated and agentized or are they going to try to fight this thing and do it unilaterally. I I that's fascinating to me based on what's in here. >> Yeah, it's it's like stable coins are the new euro dollars except this time we're not going to let them leave, right? We're we're going to keep keep a bit of control. Um, what struck me about this was it really borrows from a lot of the DoddFrank concepts and to your point very sophisticated. What are they talking about? Something little thing called substitute compliance. We want to make sure that the other regime has

something similar to us. Uh, and extr territoriality. I mean, one of the most complex parts of what we saw in DoddFrank. Again, this is very sophisticated stuff. Um, but what's most exciting is that like Treasury is marching forward. you know, we've seen time and time again where regulators stand on their hands and it takes forever. Like DoddFrank, the final rulemaking, I think we're still waiting on some um but here they're they're very focused. Besson is on a mission. And what is that mission? It is to have people buy treasuries, right? And so we're I was very impressed with the speed and thought, sophistication. Um, I only have one ask is I would love to see the Treasury Department start accepting stable coins uh for things like treasury

bills. And so that's one thing that I, you know, we haven't seen yet. Um, would love to see that happen. You know, because we're still, we still need to address the utility side of things. You know, I think it's a lot of focus on the regulation is on the issuer, the issuer, the issuer, the responsibilities around the issuer, but how do we make sure that this product is has utility and that people will accept this product and that it will make your life better and easier because right now it's pretty easy as you just tap your phone and you buy something and you walk out of the store. How does the where is the value? Where is the utility? That needs to be a continued focus. I think once we have fully genius compliant stable coins like the regime booted up, stood up,

functioning properly, Treasury would be wise to actually do two things, Chris. One is exactly what you said. I would like to be able to buy Treasury bills with stable coins. They probably need a version of Treasury Direct that was not created in the 1820s in order to do that for individuals. Be good for institutions to be able to do that as well. But let me go one step further. I think they're also going to need to make it so that you can pay your taxes with stable coins. Right? Again, if these are genius compliant things that everybody agrees are well within the perimeter of the US monetary system, you should be able to pay your taxes with them as well.

>> Makes sense to me. >> All right. So, I want to pick on one part of this and then we'll move over to the SEC. So with regard to all of the call it nondirect issuance part, I want to drill down to a very specific point that I think is not totally addressed in here though they're hinting they're thinking about it and want help with it. If I am a US registered exchange operating in the US, Coinbase, Gemini, Kraken, whoever you want to pick, right, to just throw some random names out. So, don't get mad at me if I left you out.

Should you be able to accept or allow people to transact in a non US registered stable coin going forward? >> For sure. Uh provided that they're not US persons, right? I think that's it's kind of like where we stand with um a lot of the decentralized per taxes right now. There's a world outside of the United States. Um, and so I I don't I don't think the government has an issue with it, provided you're not offering your products and services to US persons. And this has been pretty standard throughout the history of crypto. Do you agree?

>> So basically, Tether can be used offshore, but not here. >> That's what it sounds like based on their regs. Is that how you're reading it? And I don't know if it's at the retail level or more at the institutional level. How do you read it? >> Yeah, I >> imagine there's going to be a dimminimous exception or something like that. Yeah, there may be a dimminimus, but I I'm starting to think like Coinbase's US platform might have to delist Tether. And by the way, Europe has already been doing this. I will remind people that's not new and we're not going first. Like the European Union with Mika basically said if you're not registered, goodbye and stood by that.

>> Yeah, I think we'll have to wait to see the final rules. And by the way, congrats to the Tether guys for getting their audit uh from a big four. That was a that was a big step forward. Te te Tether is in a fascinating place here with the decisions they have to make. Like Paulo's got some complicated thoughts. >> We also have USAT on shore being led by Bo Hines, which is the US stable coin, you know, Genius compliant um project in the works. So I I don't think that they're um just ignoring Genius. I think they have a they have a plan and and Bo uh we should get him on by the way. He's he's a good guy. We Fred, let's get him on.

All right, let's talk SEC before we run out of time. Chris, um, they had a notice posted August 13th cancelling the August 14th meeting to propose regulations for crypto. No replacement date as of yet from friend of the show, Eleanor Terret. Uh, the stated reason was due to an unforeseen scheduling issue. Tomorrow's open meeting will be moved to a later date. That unforeseen scheduling issue probably the Clarity Act. Um things we are hearing that might have been in there. Uh a startup exemption, low dollar number, a fundraising exemption up to 75 million with audited financials and semiannual reporting. An investment contract safe harbor.

And essentially, it feels to me like they're at least trying to start with, hey, not all tokens are securities type thinking and backing away from that era. Things that were not really well addressed in there are like how do you tokenize a security? What do we think about reggg NMS? How do we deal with the things that may already be existing that nobody knows what the heck to do with because they've scaled way above these limits? But this this feels to me like, you know, elements of Commissioner Pur's previously proposed safe harbor. Is that what you were reading in there?

>> There's a question like why did we push this thing back? I don't know. No idea, but I do know that it looks like the CFTC is marching forward. >> Yes. >> And and so, you know, maybe there was a schedule error. I don't know. But the CFTC is going to have a very big meeting uh with top CEOs. Usually, you don't do that unless you have some pretty big announcements. Chairman Celig's been marching from the front. He's been he's got a very strong view uh around federal preeemption, particularly when it comes to prediction markets. He's marching forward. Um, look, I think the SEC has a lot more work to do. Frankly, there's a lot more as you start thinking about all the different changes they're trying to establish uh the procedures. Remember,

it used to be that if you were a security, it was a death sentence because there was no path to register or anything else. You're dead man walking. Now, it just takes time to put those procedures in place that try to balance disclosures, client protections, and a thoughtful path for innovation. So I do think it takes longer at regms for the people who don't understand what that means. National market standard which includes the national best bid and offer. So it's how equities are routed to exchanges for the best price. It really put in place this concept of the flash boys. Um that's really interesting because it's really the extent that there are exceptions there. This is gonna really overhaul completely at US equity market structure which I think is

going to be a huge opportunity maybe for some of those flash boys if they you point a little bit different direction. I think there'll be plenty of opportunities for them to do just fine. Um but yeah, I I just think there's a lot more going on with the SEC. You've got the clarity overhang as well. You don't want to be going in a different direction than the way that clarity is being negotiated and compromised. So, I just think there's a lot more moving parts. You know, you got to keep the boss happy. Uh he's dealing on who knows things perhaps around ethics and other things. Um it's maybe it's just a timing thing too complex. But hey, we'll see.

I'm here in Wyoming. I'm going to see I can speak I think tomorrow. Uh looking forward to that. I'm sure he'll have a lot to say. And and I think part of what people don't appreciate here is how complex this dance is because everything you change interacts with other parts of the system that we've already built from an SEC perspective. Like changing rag NMS has a lot of implications for non-crypto things. But if you give an exemption only to crypto, people are going to freak out about the favoritism, right? Being shown either for or against. I I think >> it's an unenviable position to be. I don't feel I don't feel great for the staff over there. They've got a hard life.

>> I I have to, you know, hat tip to Chairman Atkins. He's been really really thoughtful about this stuff. And what is the biggest lesson of this cycle is that equities, traditional assets, it's the error of convergence. It's it's all about these real world assets that are trading 247. If you step back, it's even bigger. And what is it? It's the era of 247 markets. And if the if the SEC pushes back a meeting as we're unlocking 247 markets, that was a this is a very very big change. And so I would be more than thrilled to give him a little more time because uh he's got a lot of work on his hands, him and the staff. And to your point, um those staffs work really hard. Uh they don't oftentimes get the

credit and uh credit where credit's due. We know that they're working really hard to to bring innovation into our financial markets. So, as a final point on all of that before we run out of time here, the other thing that I would be keeping an eye on if you're watching this from the outside is the complexity of the forces that continue to weigh in on this because the SEC is between other financial regulators, asset managers, banks, hedge funds, and crypto firms here. And let me tell you, at most of these places, they don't even agree with themselves internally, much less with each other. Like, if you get 15 people from the financial industry in a

room on this topic, you will get at least 30 opinions. It's hard to know who is right right now. And so, I I just want to express I on this one, I have some sympathy for the staff moving slowly, and I think it might be not an unwise decision to measure twice, cut once on this guy. So, on that note, we've got to let Chris go because he's in Wyoming. He's got to go be a cowboy over there. But for all of us here, thank you for joining us for this episode of Bits and Bips. We'll be back in one week to discuss more about how the worlds of crypto and macro are colliding. And as a reminder, we have our own channels now. So, subscri subscribe directly to us whenever you get your own podcasts. And we'll see you

next time. Thank you for watching and hope you enjoyed this episode of Bits and Bips. Just remember, nothing we say here is investment advice. And please check unchainedcrypto.com/bitsandbbit for more disclosures.