ep 7 – Policy Principles

Transcript

welcome to web3 with a6 and z a show about building the next generation of the internet from the team at a6 and z crypto this show is for anyone whether developer artist community leader startup entrepreneur other builder policymakers anyone seeking to understand and go deeper on all things crypto and web 3 towards a decentralized community owned and creator-owned internet this week's episode is a quick overview of principles for thinking about policy briefly covering topics and recent moves that are top of mind in u.s crypto regulation it is based on a live conversation that took place a couple weeks ago on twitter with congressman jake auchenklaus of massachusetts also vice chair of the financial services committee he also formerly led product

development at both a fortune 100 insurance company and a cyber security startup we also have miles jennings general counsel and head of decentralization at asics and z crypto who has advanced and published several legal frameworks for both builders and industry on topics such as dows and more you can find those on our website and finally the conversation is moderated by asics crypto founding general partner chris dixon he's the first voice you'll hear followed by the congressman and then miles as a reminder none of the following is investment business tax or legal advice please see asxanzi.com disclosures for more important information including a link to a list of our investments [Music] so i'll just do briefly a little

overview i think i won't i won't belabor too much since we've got uh we're so short on time but but you know our view at a16z is that web 3 is a major new uh computing movement that has the potential to unlock a whole new wave of innovation and specifically blockchains as enabling tokens and which allow for sort of new kinds of ownership allow for new kinds of networks to be created that are owned and operated by communities instead of by companies there are lots of different use cases some of them are digital some of them are offline one digital use case i'm particularly excited about is allowing creative people so for example

musicians writers podcasters etc who today have not really benefited very much from the internet because large intermediaries like google and facebook standing away and take most of the money when one thing we're really excited about is a new way to kind of unlock new business models for those for those folks there's also of course new financial applications uh people heard about d5 stable coins things like that there's also new kinds of social networks and other kinds of marketplaces and a whole whole kind of range of different things so we see it as a kind of a major new movement and have a lot of great entrepreneurs working on things we'd love to see this movement happen primarily in in the united states most

of the companies we invest in are based here as we've seen in the past with previous eras of the internet um this was this is i think a really positive thing for the us so you have these kind of large successful tech companies based here so that's that's another kind of goal of ours today we'll be talking about policy i think kind of our general view is so far there has hasn't been a lot of kind of policy you know kind of legislative action most of the uh government involvement has been through kind of enforcement actions i think we've seen kind of the outcome of this which over this crash we've seen a lot of kind of bad things happen that that we think could have been probably prevented and it feels like now you know hopefully that will be a catalyst for

what we hope will be you know smart government action policy that balances innovation and the ability to kind of create these new ways of startups but also protections for consumers and investors and others so maybe with that i mean we have a bunch of specific things we could talk about including um some bills before congress and some other things but maybe with that i'll i'll pass it over uh to the congressman chris thanks again we're looking forward to having this conversation brief intro for our listeners i represent the massachusetts fourth in congress the suburbs of boston i'm a freshman representatives uh and i am the vice chair of the financial services committee in the house so i've been

uh elbow deep in in this policy really since day one a couple of years ago and before we dig into the bills i want to start with what i think of as three guiding principles for policy in this space at the federal level and it's important to have these principles because right now it's pre-partisan it's not even necessarily bipartisan it's actually this has not yet become a deeply politicized issue which when you find one of those in washington dc it is a special thing and into something to be cultivated and preserved because it gives you an opportunity to do real policy work and these three principles number one should be that

whatever we're doing it should strengthen the role of the us dollar as the world's reserve currency since world war ii the u.s dollar alongside the u.s navy has really been one of the key pillars of u.s global strength and to the degree that stable coins or other financial innovation could persist and expand the us dollar is the world's reserve currency that is a major geostrategic geoeconomic interest that congress should be should be sustaining number two we want the innovation to happen here we want it to happen in america right now too much of it is is getting pushed offshore by regulation by enforcement that is paradoxically i think targeting

named actors who are trying to operate in good faith as opposed to those on the periphery who are actually engaged in illicit activity i represent massachusetts as i said i think a good analogy for this is is biotechnology people forget this because massachusetts has become the biotech capital of the world but in the 1980s and 1990s biotech innovation happened really in europe actually and it was a series of policy and regulation decisions that the united states made that allowed us to domesticate a lot of biotech innovation the benefits of that have been profound not just for my home state but for patients and providers everywhere and we want to see that same type of organic innovation here in the united states we want crypto

the best and the brightest to happen in america and then number three the third principle for me beyond the us dollar is the world reserve currency and domesticating innovation is i'm not a bull or a bear on crypto i do not think that's washington's job to figure out the use cases to root for a certain application that's entrepreneur's job that's the market's job we're not bulls or bears we're zebras we're referees ensuring fair play consumer protection market integrity and contract enforcement and i really think it's critical that we don't succumb in washington to predilection that politicians too often have to manifest their own

vision of what some industry should be let's let entrepreneurs and consumers decide and just make sure everyone's playing by a set of stable fair rules to do that so i want congressman do you think if you had to sort of assess the current landscape there's the loomis gillibrand bill there's there's some other activities going on like how do you how do you think about sort of the next year or two in washington so broadly speaking the gop is pretty sympathetic to crypto yeah i'm speaking in broad strokes here you'll always find exceptions but gop kind of is on board and sees the benefits i think the center left is figuring this out we're still

looking at it poking prodding asking questions and then unfortunately and i think without a whole lot of justification the progressive left has become quite hostile and that's going to be a dynamic that that industry and policymakers are going to need to work on and to address you mentioned the gillibrand loomis bill it's probably the most significant federal effort yet done on crypto for people's context senator gillibrand is a democratic senator from new york uh senator loomis is from wyoming these are two states that have significant crypto stakes uh they're obviously of separate parties senator loomis as a

republican and this is a fairly comprehensive bipartisan effort to create digital asset regulation and i'm happy to dive into some of the the parameters of that bill and what i think its prospects are if that's helpful yeah i think that would be that would be great to hear congressman in particular uh one thing i'm interested in is the comprehensiveness of uh proposal addresses many different facets of the industry and and it'll be interesting to hear your take on on whether or not you think that is a viable strategy in terms of of kind of getting everything passed at once or if you think that there are you know certain areas um you know such a stable coin legislation that we might um you know or should be prioritizing it's the age-old question you know narrow and

deep or wide and comprehensive you know do one big piece of legislation that everyone tries to get their luggage on that train that's leaving the station or do it incrementally to be blunt i don't know the answer to it and i actually initially thought that the way to do this was narrow and deep through stablecoin legislation that really just tackled the issue of stablecoin issuance and the auditing and disclosure thereof this bill is obviously a totally different approach and i think the wise thing to do when you don't really know is to is to push on both and figure out which one gets traction and that's going to be my approach i'm going to support both those efforts narrow and as well as wide and see which one gets traction because both of them would be beneficial in their own ways

this gillibrand loomis bill there's really kind of six features of it and different people can break it down different ways but i'll try to give a high level of the six different features here one is clarity on the terminology there are so many terms that get thrown around and we're seeing this with sec enforcement in the courts now and elsewhere that don't really have strong grounded definitions and this bill defines them everything from digital assets to distributed ledger technology etc this bill really just puts legal clarity around terms and that's just going to save everybody money so you don't have to figure out what these things mean in court the second thing it does is it demarcates between the cftc and the sec on who has

jurisdiction over what broadly speaking it's giving more authority to the cftc it's basically presuming that most digital assets are commodities unless proved otherwise and as commodities they would be subject to the cftc and the spot market would create would be created under the cftc if it was put to the howie test and was classified as a security then the sec would still have jurisdiction so both agencies will be there but the cftc clearly has gained jurisdictional heft through this bill and they're also been tasked these two agencies to form a working group to help devise a self-regulatory organization sort of similar to finra that the industry could

use to help them interface with regulators the third thing this bill does is it lays out rules for stable coins and in general i would say this is a an approach that uh tries to strike a medium between those who think that only banks should be able to issue stable coins and those who think that really anybody should be able to issue stable coins this bill says banks can issue stable coins and non-banks can issue staple coins non-banks though have to work through a federal regulator to do that and they're subject to pretty strict asset and liquidity requirements as well as a disclosure regime and they outlaw algorithmic stable coins and we

can we can dig in more because i'd be interested for your guys's thoughts on on the stable coin legislation fourth the bill cleans up some taxes issues it basically says if you're using crypto as a medium of exchange and you're exposed to it's a de minimis appreciation you don't have to pay taxes on it it cleans up a real kind of stumbling block for this that is not the intent of the tax code it directs a lot of studies on energy use on the use of crypto and retirement accounts as i said on self-regulatory organizations these studies are really meant to help the federal government just learn more as the industry evolves about whether further regulation or regulatory revisions are needed and then finally it provides

more clarity and disclosure for states and consumers for state governments about how they're allowed to regulate crypto and for consumers about what they should expect when they're engaging with crypto issuers or stable coin issuers kind of rules of the road for both you know one of the other areas that we've been particularly focused on is the initial step towards kind of establishing some legal frameworks for dows in the context of yes federal tax laws one of the things that we worked a lot on is trying to establish a legal framework in the united states that would be workable for dows i think there's two real reasons why you see a lot of web 3 companies moving outside the u.s one is lack of regulatory clarity here but then also a lack of real legal entity

structures for dows to exist in the united states you know means that there ends up being a lot of offshoring because ultimately i think a lot of founders and and you know people in the space are looking for certainty and then at the moment that's just not available in the us that's a terrific point i should have mentioned that about the dows one of the more exciting to me innovations at a blockchain and as you said this provides uh this replaces some of the quicksand with with much firmer footing yeah that's right so on the on the stablecoin point what's your general perspective on kind of how they they crafted that you know we also have i've seen that you know uh senator tibby has put out uh you know legislation previously around stable coins i think it speaks to uh you know your first principle that you outlined which

is is that strengthening the role of the us dollar as the world's reserve currency you know obviously stable coins can can significantly help that we've been very surprised just how large appetite the world seems to have for us dollar denominated stable coins so it seems like a really positive area direction that the the congress could go in providing rules of the road 100 agree with you the demand to store wealth in the u.s dollar if anything has grown only stronger i think the the myth of the decline of the dollar has been punctured to some extent by the demand for stable coins i actually think we need to push harder for more expansive affordances for stable coin experimentation i don't agree that we

should outlaw algorithmic stable coins or stable coins that have uh non-traditional or you know not 100 treasury backing for example now maybe they shouldn't be called stable coins maybe we need to provide a hierarchy of stability that is is more digestible and legible to consumers and to investors but i've got a lot of confidence that if you are requiring disclosure and if you have an insurance regime where people have to get uh insured and rated markets work and markets are going to price the liquidity of these stable coins provided that there is is transparency to close disclosure and insurance and we want to see that that experimentation and innovation it's so early i just don't think we should be closing doors on on new ideas yeah i

think we agree on that obviously there are business models with respect to stable coins that you know are potentially too risky to allow for but if you look at the performance of maker dow and dye uh over the the course of the you know last several years uh particularly in the last few months right we've seen the resiliency of that system and the protocol has handled uh liquidations you know relating to the drop in and declining asset prices that has all worked as intended and maker happens to be you know more than one to one collateralized so it does have that advantage but certainly there there should be a pathway to those types of stable phones exist tonight one thing that's missing from the bill is any type of regulation around nfts

and if we think stable coins are complicated nfts are in almost a polar opposite way equally as complicated chris i'm interested for your thoughts on the potential of nfts and what type of regulatory architecture might help them thrive and might help the creative economy do better with them yeah no thank you yeah we're very excited about that it spans different areas so i think we've probably made something on the order of 15 investments in the last six months in in games these are sort of top game developers coming out of companies like epic and blizzard and riots or top game companies who are excited by the idea that you can have economies and games where you think about popular games like fortnite today you have an economy and you have virtual

goods but all the money goes back to the company that created the game and in web 3 gaming you have the potential to have economies where it's much more peer-to-peer and so users can create new kinds of digital goods or experiences and participate in that economy and we think kind of really broaden the economic beneficiaries in these games that's just one example i think another area we have a few investments that i think is really exciting areas around music so music i think it's particularly interesting because everyone on the call is probably a fan of musicians and very passionate about it and most musicians unfortunately today are relegated to to making most of their money offline where they're you know selling merchandise and thing because there's no intermediary there and online they're very intermediated by facebook

google spotify etc and make very little money one of the neat things with nfts is they now have a way to go direct to their audience and sell digital collectibles and experiences and backstage passes and all sorts of other things and that can apply to all sorts of other creative classes that have that have mostly you know been left out of the you know the web 2 companies the google facebooks just they basically have you know very advanced machine learning algorithms for extracting all the money out of the system including the money you know that was really generated by kind of the creative people that create all the content on the systems so i think meaning there's a ton of potential there making a lot of investments there on the flip side there are as with anything like like in this last price run up last year we saw abuses of nfts

you started having you know kind of behavior that where people kind of used nfts to do things that look more like icos or something from the previous era and you know there's all sorts of kind of questions around if there's you know i'm not a lawyer but you know they see some of them seem to get into kind of securities areas where they made promises and other kinds of things and so i think this is another area where to my knowledge you tell me you know better i i don't think the loomis jiller brand bill addresses it but i think that's another area where clarity be helpful i don't know if that clarity comes through specifically through nft policy or from from other you know from from just better guidance around other things but it is i think an important area and one

which we believe will benefit from from policy the balance of innovation and protect consumer protections this is an area where i think it's so important for the industry to show and not tell i i mentioned before there was some skepticism even even hostility may be in in the progressive wing of the democratic party to crypto it's it's mostly leveled though at crypto manifesting in in the form of financial services better faster cheaper financial services now i don't really understand that because if you're hostile to the big banks and the big tech you should be rooting for a disruptive force which web 3 clearly could be but that is not sort of how the narrative has spun out over the last year whereas the creator

economy musicians artists craftsmen these are folks who really are not able to capture the value that they're creating in this platform-driven economy and demonstration projects about how musicians in particular could earn a middle-class wage from a thousand to two thousand true fans as opposed to having to get 20 million streams on spotify to get the equivalent of a middle-class wage that would be incredibly powerful and we don't have as you said there's there's no nft regulation within gila brand loomis you know to the extent that there are securities hidden in an nft that's just going to come under the sec

i think that's not so much new regulation is just that's going to get regulated existing body but if there's true it's true differentiation there just true ip that's really distinct we may need to look at that individualized policy yeah one of the real challenges that you have within within the nft space is that under how test you look at an nft that let's just say is a piece of art right and you would say well the implicit value of that that artwork is is the actual nft it is the actual artwork so it shouldn't be treated like a security but one of the odd things that that comes about as a result of that is is that you know with nfts you can do a lot more with them than you can do with you know a piece of physical art so for instance

you can take an nft of a of a character and turn them into a video game character but then the question becomes well if the person's expecting that and you do implement you know in in your the creator and you're you know adding this additional value to nfts after the fact did that make it just more likely to become a secure and so as a result of that right the way that the regulations kind of currently apply is that creators are almost incentivized not to deliver value to the people that buy their artwork and that's obviously an incentive structure that we don't you know that doesn't really make a lot of sense and ultimately doesn't kind of deliver value to to consumers and so i think that it's definitely something that needs to be worked on and a framework needs to be uh implemented

that kind of you know aligns incentives uh and and kind of takes advantage of all the opportunities that the technology affords that's an interesting point just to make sure i dig into that and understand you're saying that you know if you look at general pay and loomis they basically say hey digital assets are onto the cftc but they'll go to the sec they'll be considered a security if out of many things one of them is there is profit or revenue derived solely from the entrepreneurial or managerial efforts of others that's right and so you're saying that if if you kind of imbue an nft through your entrepreneurial or managerial effort with more value you may have just created a security that's that yeah that's exactly right so so you sell an original piece of artwork that a

person holds and and you could you know go about your day and that's it that the relationship is over but isn't it better for consumers if you know the people continue to deliver value and utility potentially right to their nft holders currently in the way that our legal frameworks work is that that creates risk for the creators and so they're actually incentivized not to do that which just doesn't really make make sense right now obviously um you know you don't want to venture into lands where these things should be treated like securities but we need a framework that actually uh incentivizes people to you know protect consumers and deliver value rather than than the opposite there's a lot more than we could

possibly cover but um i think that's a good directive you know i think it is incumbent on industry to to uh you know and us and and all the kind of community to demonstrate these use cases i think that's begun and i think it's sort of underreported on but i think it's something that we're going to certainly continue to push on i guess congressman my closing question to you would be what else can we on the industry side what else can we be doing to kind of advance vance's mission and and to better work with policymakers i think one is that joe don't tell in terms of the the nfts and empowering the creative economy i think that's going to be really powerful and demonstration projects starting small

is fine obviously not all the kinks have to be worked out but really bringing that into the real world and as you said it's been under-reported and it's happening which is exciting to me the other i think is taking the initiative on the financial services side of the house i mean i broadly think of this as breaking down into creative economy and financial services at this point from the use cases we're seeing on the financial services side of the house taking the initiative on sros on self-regulatory organizations we already see in the gila brand loomis bill that they're directing the cftc and the sec to study what an sro should look like and how they might want to work with an sro we've seen in with finra that an sro can be beneficial we've seen with you know the motion picture association of america that an

sro can be beneficial it can become an important buffer and interlocutor for industry with regulators they can take some of the sharp edges off i would get started on that now i mean you've got the trade groups with blockchain association and coin and others but i would start to set up with respected actors in the crypto currency ecosystem in particular your own apparatus to police bad actors to promote best practices because actually in the medium term i think it's really going to be to the benefit of domesticating innovation great that's very helpful well thank you thank you very much congressman for your time and uh for all the work we do and maybe we can uh do this again sometime i'd like that have a good week everybody

okay thank you peace thank you for listening to web3 with a6 and z you can find show notes with links to resources books or papers discussed transcripts and more at asicsncrypto.com this episode was technically edited by our audio editor seven morris to follow more of our work and get updates resources from us and resources from others be sure to subscribe to our web3 weekly newsletter you can find it on our website at asicsncrypto.com thank you for listening and for subscribing [Music] wow

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