Policy Series: It's Time To Go On Offense | Rebecca Rettig, Jake Chervinsky

Transcript

how an agency which is supposed to be protecting investors but also facilitating Capital formation and maintaining fair and efficient and orderly markets is literally refusing to do its job refusing to carry out its mission to the point where so many people now are thinking about should we just abandon the United States as a market for digital assets [Music] this episode is brought to you by Chain analysis the leading blockchain data platform that powers investigation compliance and risk management tools used by both businesses and government agencies around the globe you'll hear more about chain analysis later in the show Welcome Back everybody we have two very special guests which we've had on before and this is part of a broader

regulatory series which is becoming increasingly more important uh we have Rebecca and Jake again welcome back guys it's great to have you thanks for having me back of course so um why don't we start I mean there's been a lot that happened last week some of which we covered in the in the weekly Roundup last week but I mean you guys are the experts you you live and breathe this stuff you've been doing it for a long time so why don't we start out with you know the SEC the recent enforcement actions and just your thoughts there yeah I guess I'll start um and I'll spare everyone the the Gory details because I think we were all focused on this all week last week but in short the SEC decided to bring two enforcement actions against the two largest crypto exchanges in the world

finance and coinbase making allegations that frankly didn't surprise most of us who have been following this from a regulatory perspective the SEC thinks that all digital assets except for Bitcoin are securities and they think that anyone who is creating a secondary market for trading in those assets is violating the federal Securities laws by not registering as a national Securities Exchange um they also think that staking services are securities they think that stable coins like the USD to your securities right the SEC does not like crypto I'm not exactly a big Revelation I think you know the only thing that was maybe a bit new from the news last week was some of the allegations about binance um and some of their I guess you could call it more unsavory conduct although

we've sort of seen those allegations for for a while as well you know I think for us that the takeaway is um this is not a surprise we knew that we were going to have this fight in a sense it's almost a bit of a relief to finally be in the fight as opposed to sitting around thinking what's the SEC going to do next when are they going to do it what's it going to look like now we sort of know what the world is and how to navigate it and until there is a resolution in that case frankly it's business as usual and I think there's been a lot of relief in the industry where people thought you know when the SEC finally takes its shot then all of crypto is just going to collapse immediately and now here we are right we're still trading digital assets on

secondary markets we're still building we're still invest thing we're still you know moving on and um and doing what we do best so I think you know it was a rough week but overall the takeaway is um let's just keep at it and uh you know in time I'm sure we can work this out it felt like the SEC strategy has basically been to go after decentralized exchanges or actually even some dexes but maybe start with some small exchanges chalk up some wins there like The Ether Deltas of the world move to some bigger ones like bittrex and now they've kind of gone off to the the two big bosses right coinbase and binance I'm curious what you think comes next like are they coming after the tier one D5 protocols next are they coming after the l1's like it like I don't know garrigan so that well but it seems like

he's not stopping here I'm Rebecca I'm curious to get your thoughts on this I think it's very clear just from the progression as you laid it out and from the different entry points that a lot of these different complaints lay out that there isn't concerted effort to choke off the industry in a number of ways so if you look at a lot of these Securities allegations in the complaints they're for the l1s and l2s right so to really try to bring down volume and transactions that are going on there I think one of the newest types of allegations um that I would say is not a huge surprise to a lot of lawyers but maybe a broader surprise to the industries the allegations about how wallets route orders and themselves are broker dealers and I do think that previews that were moving away from the centralized

exchanges in the sec's eyes and we're moving into more of the software side of things and what types of activities that this software actually facilitates for users and how he wants to scope that in a key being chair Gensler or how the SEC wants to scope that into their remit too some of which may not actually be in their remit I think the other thing that has sort of gotten lost in The Fray but is important to think about especially given this week is that the SEC has a proposed rule making out there on scoping indexes and defy into the definition of exchange under the 1934 act and responses are due tomorrow you know June 13th um and so there are a lot of people who've already put in their responses but there is already an effort

going on to bring D5 protocols within the scope and even validators for l1s and l2s into this go of the SEC that need to come in and register as an exchange so we're taking the come in and register that applied to centralized exchanges and moving them into the tech space in a way that I think is pretty unprecedented in terms of I mean coinbase in particular were there was there anything in particular that really surprised you um I mean Jake you talk about ex you know people expecting this but you know how serious is that putting binance aside but just kind of curious a lot of people are talking about well the I you know the SEC kind of allowed them to go public but that's not an endorsement of the business model it's just simply they don't have an opinion on the quality of

the companies and securities they just simply approve something and in the risk disclosure it's like the SEC made deem some of the things that we list the Securities that was a risk factor so I'm curious like how you guys think about that there seems to be a very polarizing view among lawyers on crypto Twitter yeah I mean look I think um as a matter of policy it's kind of crazy that the SEC let coinbase go public and then shows up to say the core of your business model is illegal I do think that you know the sec's response is that's that's not what uh the IPO process is for us we're not reviewing every company to see if they're breaking the law we're you know doing a check to make sure that they've complied with the listing standards and I think technically that's true right so like as

a formal matter they sort of get away with that argument but I just don't think it makes much sense from a policy perspective right the SEC knew what coinbase's business was and if they thought that the core of the business was illegal then that should have been worked out in advance so I think you know just goes to show that the SEC sadly is not acting in good faith when it comes to crypto and I think you know similarly the other elements that Rebecca just mentioned and and what did surprise some of us in the space was the SEC saying coinbase is acting as a broker because they have a non-custodial wallet that allows users to engage in transactions on D5 protocols right we knew that the SEC doesn't like D5 but I

think we thought they were attacking do you find more through rulemaking rather than through enforcement it is interesting to see them sort of work that issue into enforcement as well um this sort of Sparks for me a bigger strategic point that I wanted to make which is we have been for years watching the SEC engage in regulation by enforcement now I think a ban by enforcement and we've done so in a totally defensive and reactive posture right we sort of sit around waiting to see what shot the SEC is going to take Next almost as if we're sitting ducks and of course the SEC like like Jason was saying has a strategy of picking off the low-hanging fruit first building a precedent that benefits them going after targets that either can't

defend themselves because they lack resources or targets where the fact pattern is as advantageous to the SEC as possible that's how they pick their cases I think that we in the industry need to stop being so defensive and we need to start going on offense and this is something that I think you will see us at the blockchain Association and Rebecca and me through the D5 education fund where we serve as board members you're going to start seeing us doing this more where instead of being Sitting Ducks we're going to find cases that we think are beneficial to us right fact patterns that paint the best narrative for crypto issues where we think the law is favorable to us and then to get those cases proactively offensively into the courts so we can start setting precedent

that benefits us this is called impact litigation right it's not new it's been happening in crypto to some extent right coin Center has brought a couple cases against the treasury Department coinbase was involved in its own suit against the SEC to force them to make a decision about this petition for rulemaking that they submitted last year I think this is part of our strategy that we've under invested in that you're going to see a lot more as time goes on I I think the other thing to underscore that builds off of Jake's point is coinbase I think went public on either the last day of um a chair Clayton's tenure or the first day of gensler's tenure and so the approval of coinbase's uh IPO was done

under a different chair and so what you have to think about is truly the separation of powers in the United States some of which Jake is alluding to like the SEC is part of the general administrative Administration the administrative arm of the government we know what uh President Biden's stance is on crypto he's made it clear in a number of things that have come out from the White House or his administration has um but uh and the courts obviously as you guys pointed out in your last week's Roundup are starting to take note and say all right we need to figure this out because there is this rulemaking you're not paying attention to it but you are going ahead and suing coinbase so the courts are meant to be a check on the administrative arm and on the

legislative branch and I know we're going to get into it too but there's a lot going on in a positive direction in the legislative branch that may be hopefully counteracting some of what we're seeing seeing out of the administrative Branch right now in the United States yeah why don't we talk about that because I saw a great clip from the what seems to be the general counsel Robin Hood really getting behind coinbase's argument which is we engage with the SEC for months I mean it was almost a year and trying to make progress around the process to you know become compliant to list you know these tokens and then they kind of just went um radio silent on us and and and of course now Robin Hood is delisted a number of assets and you know I'm curious um what is something that is positive

around that you know like in this Jake 0.1 offensive litigation sounds like coinbase is really you know taking that approach as well to to kind of corner the SEC and say guys it's time for you to give us Clarity of what it is to come in and register because no one's actually been able to do that okay analysis is the Premier blockchain data platform crypto businesses financial institutions government agencies regulators and policy makers all utilize chain analysis data and and services to make sense of what's happening on the blockchain to analysis demystifies crypto by providing industry-leading compliance Market intelligence and investigation support for all crypto assets for organizations like square and Barclays and bny Mellon as regulators

and policy makers work together to pass legislation that provides Clarity for crypto businesses and protects consumers they have the chance to do so with unparalleled data and Research into the entire crypto ecosystem gain greater visibility and insight with the leading blockchain data platform by visiting chainalysis.com forward slash Empire if you are looking into compliance and you need blockchain compliance there is no better place it is chain analysis.com forward slash Empire I think that what Jake is saying is that look we this is not necessarily from the SEC side of things we understand its

position I suppose there's the SEC will say or has brought out or definitely crypto Skeptics have said oh you wanted regulatory Clarity you're getting it now from the SEC through many of these um complaints but you don't like this type of regulatory Clarity and I think one of the things that um we keep sort of glossing over including uh with respect to some of the different types of entities that have gotten um uh approval through finra to be broker-dealers as which which assets are actually Securities all of them some of them last week's hearing um chair Benham who's the chair of the cfdc when he was asked which digital assets are securities did not answer the question

um you know we can go through all the different contradictory statements between the different agencies and the states and things like that um but I do think there's a threat threshold question to get over here and that needs to come I think through the legislative branch for sure or at least through some clarity with the courts as to what the scope of the sec's remnant really is yeah I I wish I had a better answer for you I think um it's just very disappointing that the SEC has taken this approach where they say publicly the exchanges must come in and register and then behind closed doors they literally refuse to offer any path toward coming in and registering and there's been a number of exchanges Robin Hood is is one that's been public

about this and coinbase as well but I think many others who have gone in not just to say to the SEC look we want to register tell us how but it actually brought proposals to the SEC of what that could look like how you can square up the Federal Securities laws without needing any legislation without needing any new rulemaking to get these exchanges registered and to allow them to keep trading these digital assets and the SEC just refuses to engage in that process and it's honestly It's upsetting to me that this is how things work in the US right now that this is how an agency which is supposed to be protecting investors but also facilitating Capital formation and maintaining fair and efficient and early markets is literally refusing to do its

job refusing to carry out its mission to the point where so many people now are thinking about should we just abandon the United States as a market for digital assets so I know that's not that's just me venting there's like nothing constructive about that answer but that's just sort of where we are right now and so like talking practically coinbase or strategies is to Corner them and say can they actually can a court go to the SEC and say you know it's clear that you haven't done that do it and provide Clarity uh and do you are you is that possible like what kind of probability would you ascribe the scenario where the court demands that the SEC rules that the SEC has not been doing it's it's functioning and and you know somehow Corners them to come out out of the guidance like is that

feasible is that even possible I mean that's what the mandamus process is for that's part of the checks and balances and the different branches of government if you asked me a week to 10 days ago I would have said highly unlikely mandamus is an extraordinary remedy used very very sparingly um but after last week's order which you know required coinbase to respond at least substantively to the briefs I'd say there's definitely a greater likelihood um and I think it's very hard given how public the chair of the SEC has been with respect to his statements some of which contradict each other and some of with you know how um how forward he's been about his

personal views with respect to crypto assets and how there are contradictory statements sometimes the chair is speaking for the SEC sometimes he's not sometimes they won't tell you in court what their ideas are sometimes they will um I think that some of that may just get into a quagmire that the courts see and say like no we got to move forward here in a way that's actually you know meant to be yeah well let's talk a little bit about what's going on recently you know today um you know the UK you know a16z crypto which is one of the more influentials on the space really announced that they were opening an office in London and then you know uh prime minister of zunak was like really rallying behind that um you know the coinbase has gone out and met with and visited Dubai and and

you know visited London as well and then Hong Kong has put out an open petition saying look if anyone wants to come here you know we're open for business and are welcoming how much of that factors into um you know the political landscape in the US you know we talk about of course innovate we've been beating kind of pounding the table saying Innovations going elsewhere capital is going elsewhere but does that really is that really making an impact in DC like are people feeling that is it gonna matter yes but only so much I I think um yes it does have an effect U.S policymakers don't want to see U.S companies going overseas right their their goal is to create jobs and to create tax revenue and when you can show

not just say this is something that will happen but actually show look at Andreessen Horowitz one of the largest Venture Capital firms in the world they are going to London and part of that is because of how the US government is approaching this industry I think that really does matter there's there's maybe two challenges though that limit the impact of that type of argument one is it's still fairly unclear to policy makers in the U.S what the benefit of crypto is right we were talking before we started recording about use cases for crypto and how that is the one demand from all policy makers and the problem is there isn't a mainstream you know widespread adopted use case for crypto where my grandparents are using a blockchain based product or service

every day and what that means is when you say to policy maker while all this Innovation is going to go offshore they're like okay what Innovation and why should I care about that and I think right now that is a major challenge for us to articulate exactly what those benefits are and yes we can say here are the amazing things that are coming it would be so much better if we could actually say here's what is being done right now today that we will lose if we don't you know address these concerns the second and maybe bigger issue though is the SEC is an independent agency and Gary Gensler basically gets to do whatever he wants and yes there is some element of oversight from Congress but really Congress can't make him do anything he doesn't want to do and so we're in this situation where I don't

think the sec's approach reflects the overall view of the US and government which is a massive entity that does not have a single perspective right it's extremely idiosyncratic but it's very difficult for us to affect the you know Viewpoint of a single agency head who is independent who has it in his mind that politically is advantageous to ban this industry through enforcement or rulemaking or by whatever means necessary to it seems Advanced his own political career so there's just not a whole lot that we can do I think to push back on that I will say just to talk about this use case idea the one thing that may have been overlooked last week is that the Innovation data and commerce subcommittee of the Energy and Commerce Committee so it is the the you know

Committee of Congress that is really focused on economic growth in the United States held a hearing just on building blockchains that's what it was entitled and all the various use cases for web 3 and distributed Ledger Technologies and it gave people the opportunity to start articulating what the actual use case was and why there's a benefit right like in web 2 your privacy and your data and all of those things are compromised and and especially that's important for the Energy and Commerce Committee which is very very focused on consumer protection including for data privacy and why it's good and I think it is worth um and maybe we can link it in the show notes the opening statement by the chair of that subcommittee chair bilirakis was um so surprising to hear from a

legislator that we haven't heard before who really said like this isn't literally verbatim said this isn't a crypto Casino that's not what's going on here there is a broader use and we need to start that conversation in DC because we've only talked about the financial aspects of it and we see everything that's going on so I think it's worth um talking about and understanding that the broader conversation about use cases is starting to happen in DC but as Jake said there's the I think the SEC narrative has just really overtaken a lot of everybody's psyche and what people are focused on right now was this the uh I saw some clips about Ryan Wyatt your counterpart um who was talking about look I come from YouTube I was highly successful there I went to polygon because I saw you were right

behind him yeah so maybe we'll link that that was a great I thought stuff like that really is impactful because when you see someone that was successful in Industry coming into the space it really legitimizes the space um so I mean I definitely agree with you it feels like at some point you when someone becomes so obnoxious and goes to an extreme it really helps other parts of the ecosystem really understand how irrational some of these arguments are and how much damage it's creating which leads me to the next topic of conversation which is the McKendree Thompson bill which is something that is perhaps being overlooked because there's so much noise right now and focus on coinbase and finance but I mean there's a mega thread by one of the folks at Paradigm uh Justin Slaughter but would like to kind of just talk about that a

bit your interpretation of that I know it's a very comprehensive bill so we're not going to cover it all in this segment but maybe just the highlights and and your thoughts and Analysis on that would be would be great yeah it's it is extremely important I do think it's been overlooked and honestly partly that might have been by design that maybe why the SEC brought those suits because the SEC does not like this bill because what the bill does is it creates exactly the type of regulatory Clarity that we've been asking for all along right what it says is yes there are legitimate concerns about risk in the digital asset markets right that could be a risk about um token creators who have privileged access to information that they ought to

disclose to people who are buying or investing in tokens in order to understand their Investments right valid concern maybe valid concerns about Market manipulation or wash trading or you know other Market Integrity issues and secondary markets right all valid concerns that we should address what this bill does is it creates a framework that actually addresses those risks but in a way that does not sacrifice the benefits of decentralization and disintermediation that are at the core of this entire industry right something we've been asking for for a really long time I think it's noteworthy that this bill is a joint effort between the house financial services and house agriculture committees which are the two most important committees in the house for

our issues and historically we've seen proposals that are sort of disjointed between the two right the house ad committee oversees the cftc financial services overseas the SEC the turf war between those two agencies over jurisdiction in for crypto has sort of bled into in the past the interaction between those two committees similarly in the house excuse me similarly in the Senate between the Senate Banking Committee and the Senate agriculture committee so here we have those two committees coming together and saying hey the only way we're going to figure this out is if we work together and come up with one bill that addresses both agencies and what their jurisdiction is and I think this is by far the most serious effort that we've seen from

Congress to you know to try to come up with a comprehensive solution for that I think it's right by the way for us not to get too far into the details of what the bill does because one thing that's been really clear is the draft that came out is a discussion draft it's not Congress showing up to say we've figured this all out this is what it's going to be whether you like it or not they really are taking seriously the need to discuss this with industry and with the public they've been very open to suggestions for changes and I think that this bill will develop and mature as time goes on to the point where all of us should be absolutely in favor of it so it's a very exciting and important development I I think the one thing I would add is IT addresses a lot of the

realities of the way the industry works right there's a concept in there called end user distribution those are airdrops um and I when I was reading it I was like oh airdrops and wrote it next to it I mean it's really trying to address a lot of the ways the in it's it's not a look I think a lot of what we've seen from the SEC is square peg round hole type of stuff and this is really meant to fit what we know into a lot of the regulatory Frameworks that we have but also expand them out a bit thinking about concurrent jurisdiction between the SEC and the cftc which does happen in the traditional Financial World from time to time too um but also really dealing with how Capital formation has worked super important as Jake mentioned a number of times from the sec's perspective

um and also really trying to break out some of the information asymmetries that people have I think talked about um in the industry between when you raise from VCS versus when you do an airdrop and things like that so I think it does really I mean it's I think it is a Herculean effort that was put into it to really piece apart but then also put back together in a regulatory framework the ways the industry has been working to date one of the things that caught my attention was this idea of you know this 20 ownership uh that seems to be really important if a team has 20 ownership um one thing that I want to get your thoughts on is uh this kind of definition of of a decentralized

organization um which said and I'll quote this is kind of a broad definition excludes any organization that is directly engaged in an activity that requires registration with the SEC or cfdc is that like problematic if the SEC holds a hard stance that everyone that is engaging in in this industry needs to go and register with them and so it I'm curious if this like supersedes that or how would kind of the SEC fit into that because they could be really kind of difficult it's a great question honestly I'm still thinking through that I you know I read that definition for the first time 10 days ago and haven't had a huge amount of time to sort of parse what that means I'm really curious what Rebecca thinks about this I guess what

I'll say is I think conceptually anything is better than what we have now right what we have now basically is the cftc's perspective in the ukidao case which is literally anybody who's doing anything in coordination whatsoever should be treated as if it is a typical entity right an unincorporated association and regulated accordingly that's crazy and not workable in any way so I think it is important for us to have some kind of definition that addresses what does it mean when you have unaffiliated dispersed individuals who are acting in coordination in some way but in a very different way from a traditional Corporation or entity that should be regulated in a traditional way

I think where this becomes confusing at least for me is the concept of a decentralized organization and I've always sort of felt this way about the term Dao where it's like if you're an organization then how are you decentralized unless all we mean is a corporation which in many ways is already decentralized and then sort of where you put the regulatory burden in that context I think you know just gets pretty confusing so I hopefully I'll have a better answer for you once I thought through that more maybe Rebecca's got a better yeah I think this is I think this is because it's a discussion draft I think um the sum of that activity actually falls properly under the exclusions um a portion in I think 309 and 407 for exclusions for ancillary activities I

think it probably fits well in there because I do not believe given how well-intentioned and thoughtful this bill is that they want everybody who's participating in a dow to come in and register another thing that was interesting is they go on a defined digital assets and it comes quote unquote fungible digital representations you read to into that and are they not talking about nfts is is that fair to say that you know nfts kind of are in the safe ground uh and and just kind of like not really okay and both of you are nodding so I'll just yeah I know I don't think this is meant to I mean look the other thing you can say about this bill is it lines up for the most part with how other countries have been approaching regulating the

crypto asset space mostly uh intermediaries also issuances that's very much the case in Mika already that is what the UK has put out and that's what a lot of other regulatory proposals look like Japan has already been regulating centralized intermediaries for a while now in the crypto asset space and leave some of the harder technological issues defy and nfts for further down the road there's a defy study in here and that's very very consistent with how other countries across the world are handling regulating crypto I totally agree I um I think a a benefit of this bill is that it doesn't try to do everything all at once right it doesn't make perfect the enemy of good I don't think we have any idea what nfts are going to be in five years and

the idea that we would put nfts into a bill like this and think we've like figured it out in 2023 is is you know not an intelligent approach and so major credit to the the authors of the bill um for sort of understanding that and similarly with defy as Rebecca said you know this isn't trying to work out how do we regulate decentralized protocols for the exchange of digital assets I don't think we have a really good sense of how you address risk in that type of environment I will say though the way you phrase the question Santi is does that mean nfts are safe and in a sense actually means the opposite which is like if nfts don't get clarified in this bill then is the next thing the SEC comes out to say is like board apes are

securities or something like that and then there's no legislation that protects them so there is sort of a trade-off just saying we're gonna we're gonna clarify this leave the rest uncertain and then we'll keep dealing with that uncertainty as time goes on that's such an interesting observation Jake because I think for a long time we've been like now it's very clear what their intention is so like now you really wanted to find everything um I want to go back to something that you said earlier which is this end user distributions I.E airdrops and something that really caught my attention was this idea that and I'll quote again you know that these end user distributions I airdrops are neither investment contracts nor Interstate security transactions I mean I think this might be one of the most important and pro kind of things in this in this particular working graph

because then it really opens up the possibility for one you as investors and consumers to get access to airdrops and and that has not been the case for such a long time is that is that fair yeah I mean I think what we saw very early on was airdrops were very ubiquitous it went to everybody I think we saw then a shift to specifically excluding U.S persons from airdrops from a lot of people um from a lot of different projects uh and this to your point would would allow U.S persons to be able to receive uh tokens via airdrops um but look as Jake said this is a discussion draft and there's going to be a lot of um a lot of negotiation over it not just

in terms of industry and uh Congress which by the way I will say I give a lot of credit to um uh chairman mchenry's team and others but they have been very open to feedback and they are hoping that people give them feedback on it but there will also be a lot of negotiation Within These two subcommittees and these two larger committees and then uh you know in the house and the Senate themselves as to what is even viable so I think this is a very forward-thinking bill and I think it does open up and meet a lot of the objectives of both the SEC and the cftc but they may not remain that way you know when we see it even get passed out of committee yeah this is a this is an all GOP bill it looked like so so the

bill may pass the house but it obviously needs some serious Democratic support to to really get pushed through um is that just the unfortunate reality of today is that crypto's gotten so politicized that it's now a you know pro pro crypto equals Republican anti-crypto equals Democrat is that just how how things go moving forward well hopefully not and one of the things I think the industry uh has done well at some times but may have fallen off a bit um when Jake was heavily involved in the infrastructure Bill everybody was calling the representatives and there was a lot of Grassroots movement and I think the industry sort of uh raises itself at times that feel very existential and then sort of goes quiet again but I'll tell you when I am on the hill a lot I do hear people say like nobody's calling me saying they care

about this and I think it's really really important to put calls into your representatives not one time and not when it's existential but over and over including if you live in a district with um Democratic Representatives because you need the Reps all to hear that you care about this that there's Innovation here it impacts you your job because what they're supposed to be doing and their job is is to serve their constituents so if they think this is an issue that their constituents care about they will dig deeper into it and then I will say if you're engaging with your representatives don't use technical jargon I will say they'll also hurt a lot on the hill last week like stop making it so complicated for us uh stop using words like airdrop and um yeah

yeah stop saying smart contracts and honestly what I have started saying is like same internet different back end and just showing literally showing people like look this is the way you engage in something do you see this website and people say yes and I'll say this is a front end and the light turns on because when people talk about front-end regulation or things like that people don't necessarily know what it means because we've been using highly technical jargon for a very long time yeah well there's the document's 162 pages I don't intend to go through everything the last section I want to talk talk on about and then kind of get your thoughts around how this compared to Mika and some other kind of progressive regulation across the world is this idea of digital Commodities they basically said you know digital

Commodities are digital assets that are issued through an end user distribution or that are related to a working certified decentralized Network the problem is that then the SEC I think it's a jurisdiction of the SEC to deem what is and is not a decentralized network and as we've seen historically they've been kind of dancing around that but apparently I think my understanding is this is still a very positive step forward because the SEC has I think when someone would go and register they have I think like 30 days or so to reject that certification um and provide kind of a detailed analysis so in some ways at least you're allowing them to like set a precedent of do's and don'ts um right which would be really useful at

least for from a Clarity perspective is that a fair kind of interpretation yeah look I think there is some risk to it but one the bill does uh Define decentralization it does Define a functional Network it does set out timelines for what you're supposed to um when you're supposed to hear back from the SEC and the other thing that the bill doesn't explicitly say but is true for everything um ultimately you could appeal to the courts if you don't like the decision and you know it's the Court's job to interpret the law and they'll look at this legislation and go from there so you know all hope is not lost yeah I agree with that I I would say this is one of the sections of the bill that will likely be revised as time goes on I think this is one of the most

important issues and look this this issue lives on a spectrum of how much should Congress delegate to the agencies and in a way this also becomes something of a partisan issue where Democrats in general are more comfortable delegating authority to the administrative state so to speak right letting agencies make decisions whereas Republicans tend to be less willing to allow unelected officials in the administration to make those types of decisions and I think as Rebecca described the the discussion draft tries to draw a compromise where it says we are going to delegate authority to the SEC which look I mean maybe they need some Authority in order to do their jobs but there's going to be some checks and balances on that some

requirements so that we don't live in the type of world we do now where the SEC can just say no we think all digital assets are securities and there's basically no recourse whatsoever that's said I don't know that we should accept any type of Delegation that allows the SEC since we know that they would rather crypto not exist in the US that allows them to sort of take that same position and then just justify it through legal loopholes and then put us back in court for another three or five years trying to argue with them about it I don't think that's a good solution I know the one thing I'll say that go back to it is like the policy changes as the administration changes too and so having this very clear set of now it feels very existential to delegate that to the SEC

but you don't know how things are going to go forward in the future and the interesting thing is I heard uh former chair Clayton speak had a big conference I thought it was Bloomberg that's right yeah and look he still says I believe in the agency I believe in its Mission but there are there's one value here and there are two um ways to try to bring this all into compliance that may not be enforcement related and so I think um that even though uh he was obviously very aggressive going after icos and some other I think as we as Jason alluded to earlier he had some early enforcement actions like ether Delta um which I would say was more centralized

they had a centralized order book they I mean the founders held the admin keys and stuff like that but even though he did you know sort of start this I think that people's thinking does evolve and so when you look at the bill you can't only look at it in the vacuum of what's going to happen today but in a much larger broader long-term context of clarity has this been like I mean I think one of the things that I've appreciated is that genser is also kind of unpopular with other non-crypto people because it seems like he's he he hasn't addressed kind of core issues uh ESG and some other components I'm not too familiar but at least it's a sentiment that I get talking more broadly about the agency and the kind of the checks and balances has it been a problem historically where

the SEC has overstepped and become problematic for other Industries I mean we talk about like I think a gold ETF but that was like way back in the 40s or 50s I believe and then the UK kind of passed it and they passed it but why hasn't like no one kind of thought about like maybe kind of like ring fencing or having more checks and balances on this delegation of authority of the SEC I I don't I don't know that the SEC has ever acted like this to any other industry and maybe I'm just too young to remember an instance like this but like look people have always complained about the SEC they were regulator Industries always complain about their Regulators that's not new and I'm sure there were complaints about sarbanes-oxley and

about Dodd-Frank and all these kinds of things right but nothing like this where the SEC is literally trying to ban an industry without Congress having ever said anything about how the industry should be regulated and during the course of Congress discussing legislation that would regulate in a healthy way that industry I think we're like way outside the realm of of any experience or precedent on this kind of thing um but I don't know maybe Rebecca who knows more about financial regulation than me will tell you a difference no no I've been saying this you know very recently to people for a long time I mean as a litigator and Regulatory enforcement lawyer lawyer I've just never seen anything like it Jake's right nobody's ever like the SEC is really really happy to get this you know

subpoena from them or anything like that even outside of just the um crypto context I was litigating Financial Services issues for a long long time but uh this is this is unprecedented um and especially just to go back to something we talked about earlier in the context of the world isn't going about this the same way so I mean there are real concerns the rest of you know Regulators across the globe are talking about them including International Regulators like fataf and the bank of international settlements and things like that um but this is just an outlier as far as everything else goes it does feel super bizarre that on one end you have kind of the McHenry bill that is thoughtful

Congress there's people within kind of in both camps and houses whatnot try to like make progress but then there's an agency that's really kind of like a stubborn child it just says no to everything and in stark contrast like I guess if you're a listener and you don't care about crypto but you're in another industry well this really makes you think at minimum we should just rethink the checks and balances in the delegation of authority to an agency because it can as as they are being problematic to crypto today they can go after and look if you're in the marijuana industry I mean they approve a bunch of IPOs like if you're in some other industry that maybe down the road it becomes problematic then then it just impacts you a lot I feel like they're I feel like there have been

other times that um administrative bodies have overstepped like uh like maybe um doj against Microsoft in the late 80s or late late 90s or like uh European commission was uh criticized for like what they've done with them like the antitrust cases against big Tech or FCC and net neutrality but in every one of those instances there's like this strong why that they have and the only why that I hear from the SEC is protecting consumers which uh like fundamentally doesn't make sense in my opinion but I guess that's just my opinion like it feels like those other cases You could argue there's been this this overreach but there's also a strong why um yeah it feels like that's missing here

I mean I think the sec's response would be something along the lines of this is these are securities that are now being offered to retail which we don't typically allow except in very very very narrow circumstances and through um you know a very clear system where there are no conflicts and you know exactly how it works and so there's none of that here and so since there's access to retail and there's been a lot of thoughts of these get re get rich quick schemes we're really just trying to that's why they keep saying we're trying to protect investors but to go back to you know the issue of well there's been a massive drop in coinbase stock um when the SEC did approve right there S1 and their IPO and things like that so the question is like what way are you

protecting consumers is the real issue down from 150 bucks to eight dollars you know like I don't know Lyft is down 95 so right and look we saw this in the.com bubble like 20 years ago right I mean this in a way we're just sort of reliving history to to an extent although in obviously a much more and and in some ways very unprecedented way look I think also ultimately it's all politics and there are a lot of people who really hate crypto and I think that's what this you know we call them Skeptics crypto Skeptics they're not Skeptics right they hate crypto they think that crypto has no purpose to exist except to enrich a class of quote-unquote crypto Bros who are people

who they despise and don't want to see succeed right everyone knows like some guy who bought Bitcoin in 2013 who was a total jerk about it for the last 10 years and now they're getting some schadenfreude by seeing the SEC you know try to take down crypto and I do think that in many ways is what we're reacting to and that's why this issue of use cases is so important if you give someone a product or service that makes a difference in their lives that uses this technology that will change everything and I think just the same way as with the rise of the internet where it was really easy to make fun of pets.com or whatever in you know 2000 but then all of a sudden when everyone is living their whole lives on the internet no one is saying the internet is a is a fad or a scam or anything like

that same thing with mobile phones same thing with basically every type of Technology we just need to get to that point where we get past the hobbyists and into into the mainstream I guess that yeah and to Jake's point if we are all living our lives on the internet do we want to turn it all over to these centralized intermediaries right there are lots of things that happen on the internet that you don't even think about Maps taking your location right this is something that Ryan talked about at that hearing last week and giving over your email and giving over you know buying things on the internet once you start combining all of those things there is so much about you that lives on the internet in a proprietary way that can be commoditized and all of those things and look we've all gotten used to that

but the question is is that the right way to live our lives on the internet and is that what people really want to do um I think there will be some exciting doing things about use cases coming out so that will be a great development that we can all use and leverage um we very publicly stated a few months ago that we're putting out an open and transparent database of use cases so look out for that but the other thing I'll say is um you know this is an enhancement of the internet and so if you think about the utility that the internet brings we should be talking about it as bringing back user privacy right to the to our use of the internet yeah that's such a good point I mean I think at the end of the day like the music industry right

Napster got clamped down but then it just became such a powerful ubiquitous force that you just have to accept it and then work around do we need some regulation absolutely do we can we protect consumers can we have better information disclosures like absolutely but unfortunately you know all this enforcement you know uh actions by the SEC are very distracting and distract us from talking about the most important stuff um I guess I want to get your thoughts on the state of the bill relative to kind of Mika and some other regulatory processes in in Dubai or the United Emirates and Hong Kong some other jurisdictions like how does this compare to some of these other um you know legislations

well Miko has just passed into into law and voted on by the parliament so that's moving forward and will be enacted in all the things that come with it which means promulgating additional rules from the European banking Authority and the European Securities markets Association and things like that so that's well on its way I think everybody's been looking to Mika as this oh Panacea let's all move ourselves to the EU I think it's important to remember that there are going to be these ancillary pieces of legislation like the data Act and the transfer of funds regulation and the amlr which is anti-money laundering that may make things much more restrictive for crypto um and I think there was a tweet Maybe by Patty Hansen from Circle a few weeks

ago about notwithstanding all of those side pieces of legislation Mika has made it very attractive and investment from VCS in European countries has gone up by a lot in the last quarter or something like that um nobody else has a piece of legislation you know moving quick quickly through I would say the UK is one of the ones who are most further out ahead but they're still in the consultation process the UAE still in the consultation process Hong Kong Japan all of those still a lot of them are in the consultation process for certain types of legislation as I said Japan has had good uh regulation of security of um uh exchanges for a long time um but I will say yeah the UK is pretty

far out ahead and has been pretty vocal about how much they do want to be not just a crypto asset Hub but a tech Hub and I think that's really important to just keep in mind given the Advent of AI and all the different pieces of new tech that's coming out it's early in this game right I think yes other jurisdictions are doing better and moving faster than the us but I don't think it's all over right like we were tweeting about um about the SEC actions last week and a lot of the comments were like the US has lost the game is over everyone is leaving I don't think that's true right I think we're getting outplayed in the first quarter of this game but it's still very unclear how this is going to play out and I still think there's great opportunity in the

US to get this right so yeah the UK I think to me is is sort of out in front right now but that doesn't mean that we can't uh you know catch up so to speak I think um like we were saying before really on a decade time scale we will look back at these years as like if that really weird period of time where we were arguing about whether the internet was a scam or not and and it's you know way too early to sort of draw conclusions about where this Innovation will happen or who's going to be out front in the end yeah the one thing I'll say just as a build on to that though is nobody is setting up in the US anymore nobody and everybody is is thinking about moving themselves offshore I know people last week and even the week

before the finance and um coinbase complaints came out that told all their us employees were shutting down the U.S you have six months to find a new job um best of luck so there's a lot of that actually happening um does it mean it's all over no but I mean there's a pretty clear Exodus and there's not a single new software developer and and to Jake's Point early on like people are still building things are still moving forward um they're not doing it here absolutely not absolutely not I mean I think in my prior investment I don't think any of them have a substantial presence or any presence in the U.S you have Majors like Galaxy now looking to go overseas coinbase uh so many projects are just going elsewhere not to Canada certainly

because Canada is like not very different uh but they were going to the UK they're going to Dubai they're going to Hong Kong and and Singapore and so you know I guess in in this assessment of a timeline how fast or not things would move I mean you know chairman genzer has another 18 months in office assume he finishes that uh you we have elections what is it next year you know what would be your kind of most optimistic um scenario operating kind of assumption for for the US I think the most optimistic time scale would be to say we can get this Market structure legislation done this Congress meaning before the end of next year

along with it there's another draft bill that we haven't talked about much which is um stable coin legislation right so regulating centralized custodial issuers of stable coins I think an extremely important maybe not the most exciting but an extremely important part of of this industry and these markets it's entirely possible we could get both of those done by the end of this Congress next year there are definitely some political challenges to that as as Jason was saying earlier these bills by and large have support from Republicans in the house they could get out of the house they could then die in the Senate without even getting a hearing if there isn't enough Democratic support in the house to send a signal to the Senate that this is important and it's a

bipartisan effort right it's really important that we keep these things bipartisan I do think it's more likely that the legislation will make some progress this Congress but then we're going to have the presidential election next year and nothing will get done because of that you know DC sort of freezes up starting at least in like June of next year because everyone is just focused on on the election and then in 2025 we're going to have a new presidential term maybe a new president maybe not but either way there's going to be a transition that means new leadership comes in we can all cross our fingers and hope that chair Gensler does not go into a second Biden term and then we have a whole new Congress and who knows what can happen in terms of control of Congress so I think it's likely that we're still talking about

this legislation in 2025 2026 that's probably the same timeline for the litigation so just as an example the SEC brought its enforcement action against Ripple over xrp and its security status in December of 2020 we're now almost three years ahead and we still haven't gotten a ruling even on the motion for summary judgment and it could go on even past that to a trial or up to appeal at the circuit court and even to the Supreme Court so I think it's likely that in 2025 2026 we're still dealing with these binance and coinbase enforcement actions and whatever else the SEC decides to throw at us so I think that's that's the most reasonable timeline is maybe by the end of next

year but more likely two three years we'll still be talking about this on that point I mean I um you know when they go after Majors you know binance purportedly is earmarked a rebellion if like this uh coinbase is also very well capitalized and has a pretty good bench to go in and fight this and even be proactive and aggressive in litigation the SEC uh has continuously asked for more resources uh with the but this debt ceiling I mean I don't know how much they actually got I mean I know the IRS cut back significantly um in their proposal to expand kind of the number of staffers um like the SEC team do you would it would it be fair to say that the SEC is spreading itself too thin when it goes after kind of two major players in the

space do they have the resources I mean they're fighting uh Ripple uh was it grayscale uh and Coin coinbase and binance potentially others but like those four feel like you know those four entities have plenty of resources to kind of draw this out and kind of see it through I'm curious if you believe in that the how important that is I'm just kind of curious they have resources to do let's say four big uh you know cases that you're talking about five but that's they're not stopping there right as we talked about at the beginning like there's gonna be more uh as Jake talked about there may be impact litigation they may be flooded with some impact litigation

so you're right I think resource constraints is really important to think about uh as things move forward and as the industry reacts um to you know what what is coming out of the SEC to think about the fact that what something looks like on its face may not necessarily be everything that's going on behind the scenes or tell the whole story so I think that's really really important I guess we've talked about binance coinbase we've talked about kind of Mika and some other jurisdictions and the McHenry Bell uh what else has caught your eye in the regulatory kind of landscape recently or stuff that you want to cover in this segment kind of funny because there's so much going on all the time and it's so hard to digest all of it and even for us you

know back in me working in policy full-time it's like every day there's something new that happens and it's hard to keep track of I guess one other thing um for folks to keep in mind is a throwback to the infrastructure bill which we mentioned earlier so as people may remember the infrastructure Bill had new Provisions in the tax code that basically said a whole bunch of people who were not doing tax reporting right now should be doing tax reporting and one of the issues there was does that only apply to someone like coinbase and binance right a centralized exchange that has relationships with customers who honestly should be getting some tax report from from that entity to make their own um you know uh experience paying taxes easier the big question

though was what about D5 right what about a non-custodial front-end provider do they have to do tax reporting meaning do they have to kyc all the users of the front end and then file a report with the IRS saying what the user's transactions were and until now those rules have not gone into effect because the IRS has said we are going to do rulemaking over what the definition of broker the key term in the infrastructure bill is and they were supposed to do that rulemaking like a year and a half ago and every time we check in it's like yeah it's right around the corner it's going to come out next week and then it never comes out and we heard this again in May It was supposed to come out in May and we're still waiting for that but I think that's sort of the next big shoe to drop

is this question of tax compliance in crypto it's a big issue and one that we have to figure out and I think when the day comes that the IRS publishes a 600 page you know draft of broker rule making or something like that then we're going to spend a whole lot of time talking about that and trying to figure out how do we make tax uh reporting make sense with crypto I guess both of you spend meaningful time in DC what's the overall sentiment there like I've heard obviously that there are folks um Within These agencies staff that is actually Pro crypto I spent a lot of time thinking about it I've heard also that you know there's kind of disagreements within that people are losing credibility I'm curious like how you guys have observed

uh the the you know kind of the sentiment in DC evolve and change over time and how it is today yeah so even though I'm uh doing full-time policy I'm still a lawyer so the answer is it depends and and it depends on who you talk to and I think all of the points you're making Santi are right there are some people who are and probably always were and remain skeptical there are people who've spent time learning about the technology including within some of the Regulatory Agencies uh in ways that may surprise you and not just at the SEC but even broader agency uh perspectives um and there is at least an understanding of the tech and also of a lot of the nuances we talk about right

where lots of money long people talk about money laundering happening through D5 I understand it happens there but I think we saw in the D5 treasury report they said most of the money laundering happens in Trad five still and with you know National currencies or Fiat and things like that so I think um it depends on who you talk to there can be nuanced understanding I think the other thing that may surprise you is that there are definitely people who've been long-time crypto Skeptics who at least understand that there needs to be some form of of Regulation and maybe turning to what that looks like whether it be the McHenry bill or something else that they themselves want to work on or put out but I think there's there is a slow broader understanding that there may need to be something I think the Vigilant crypto Skeptics aren't you're

not going to change them um and none of the arguments we're all putting out oh overseas or this or any of that it is going to change people I think the thing that cannot be forgotten and that I think we all don't want to talk about is FTX and particularly that Sam was so prominent on the hill it's not just FTX imploded it's that Sam was on the hill all the time and at least when I'm there I hear about it oh well Sam said similar things when you're talking about compliance or something like that or oh we heard that from Sam too I mean not necessarily to me but there is the sting isn't gone I think we all wish it was and I think um you know there are some people who I'll give a lot of credit have said we

understand that was a fraud uh you know very traditional to something like a Madoff or something else um but that I just think especially given how close he was and how much time he spent on the hill in Congressional offices there is a lot of Sting to it that has not been taken away yet yeah I I can't underscore that point enough and I think we in the industry stops talking about Sam like five months ago because why would we we all understood what happened and we didn't want anything to do with him but his um his sort of image Loom is large in DC and again everything in the end comes down to politics and the question is what is the benefit what is the opportunity for a policy maker to be pro-crypto and basically what they're

saying to us is like we don't hear about your issue very much like Rebecca said no one calls us to tell us they care about this we're not seeing it making a meaningful impact in you know in the market or in the world we're not seeing people using this and we don't want to take the risk of being aligned with your industry given what happened to all the people who uh you know were sort of in bed with with Sam and so I think we're still fighting through that I think we will fight through that like one of the best things that has happened recently is Rebecca deciding to do full-time policy work even though she's still a lawyer because it takes people like Rebecca spending some time in DC explaining this stuff to people the problem is just like Rebecca's one person and we need an army of Rebeccas

in order to get that done and that requires a lot more resources than we have um in sort of like the crypto policy infrastructure right we're getting out spent a hundred to one by the banking industry and obviously they're not our friends and so that's just a big challenge that we're that we're up against as well yeah well we can go on and on and I know this is going to be part of a broader segment I mean bring you guys every month to talk about the latest developments in regulation I think this was a great episode covering a lot of the stuff that is super topical and and I think it's always great to hear your opinion uh an interpretation so in summary it sounds like you know people listening they they want to understand how they could help and I heard you say look we need to be more

proactive about showing people the positive use cases of this technology so if you're an artist and you've benefited from this if you're a collector if you're you know I think these are some of the stories and anecdotes really help at the local level at the you know broader level of course and also it sounds like there's going to be a plenty of opportunity to really kind of work through this 162-page draft of McHenry Thompson bill that if you're in Industry you could certainly like engage and participate in in refining this working kind of draft of sorts so those I think are the two kind of takeaways for me at least for people that want to and your causes and the industry as a whole um so I don't know if there's anything

else you would like kind of close with uh but I think this is really good good I mean I think Jake and I put out a lot of what we sort of talked about as what are the takeaways for the industry call your reps think about how you can be proactive call Jake if you want to ask um or reach out to him if you want to figure out how you can support any efforts that VA is doing in DC um and you know in the courts in a broader way um and I think the other thing not to be super cheesy is like keep building fine if you're not going to do it here but but keep building I think for those of us who have been in the industry for a long time and I think one of the reasons I really did turn to full-time policy is

I'm a real believer um and if you are and if you're building something great just keep building it it's it it may feel rougher before it feels brighter um you know as Jake said we're really getting into it now and I don't think that the coinbase and finance complaints were the end of what we may see from the SEC but I think just keep moving forward and maybe stop flooding on on Twitter I would love if people could stop doing that but that's just my own personal oh Rebecca I'll tell you wishful thinking you know the flood's going to continue but I I will say you know one of the treats of my job is to get to talk to so many of the founders that I get to invest in and I always am reminded that they're always usually way calmer

than most people and they just keep their head down you know talking to stani for so long you know all these folks like they just have their head down and they they know that what their North Star is and they keep building and I think that's honestly people like that are really what drives us forward because then it shows up in the use case and and you know that's kind of the most important thing so I agree with you but uh I think crypto Twitter will continue to do its thing so we'll hear that we're here to we're here to and hopefully people are tuning in and listening to what you guys have to say because uh I think it it really is important to get it you know as close to the truth and you guys really do that for us so appreciate both of you coming on and

we'll see you next time foreign [Music]