The Regulatory Impact of FTX | Kristin Smith, Jake Chervinsky

Transcript

a lot of people in the industry know there was sort of a Sam orbit and the people who were in the Sam orbit were on ftx's side but not from the perspective of saying we actually think this is good policy it was just this is what Sam wants to get done so you need to fall in line and like Kristen said this to me was like mob Behavior right it like rose very quickly to the level of personal threats [Music] this episode is brought to you by Circle the issuer of usdc which hopefully as you all know is the preferred stable coin of digital Natives and crypto natives with over 1.5 million holders globally you'll hear more about usdc later in the show all right everyone welcome back to another episode of Empire we are joined

by the executive director of blockchain Association Kristen Smith and Jake travinsky the head of policy of blockchain Association Jay Kristen welcome to Empire thanks for having me here yeah of course all right Jake throwing this to you uh you came in here you said last week you were kind of calm cool and collected you were able to get your thoughts together this weekend uh or today you woke up you're pissed off you're angry um I would love to just hear why you are coming into like what what about it is is so maddening for you right now I I think it's just um well I think a few things the first is uh you know it took a while I think last week for us to realize that this

wasn't just Sam bankman freed having an error in judgment you know a good faith mistake or something like that this clearly looks like a fraud uh and you know not just a fraud on the users of FTX but basically on everyone I mean Sam was lying left and right for months maybe years and the Damage that he's done is is incalculable and that's from a policy perspective but also just from an industry perspective there's so many people out there you know the the customers of FTX who've lost their money the other companies that he screwed over it just the damage is is unbelievable and there's there's no reaction to that I think other than to be angry I the

other thing is I'm mad at U.S Regulators I think they failed us you know there's a question now right are we going to rush to pass new regulations in the U.S that's the exact opposite of what we need to do U.S regulation prevents this kind of conduct U.S regulated exchanges and custodians cannot trade on customer funds there is no way that this could happen with a company like Kraken or coinbase or Gemini and and in part you know FTX was not a U.S exchange it was a Bahamian exchange but it sounds like it did have U.S customers right I'm hearing from a lot of people that if you wanted to trade on FTX you just needed a VPN they were not really trying to screen

out U.S customers and what that means is they should have been subject to all those same regulations that apply to U.S firms they should have been regulated by the SEC they were offering tokenized stocks but what was the SEC doing were they investigating FTX well it seems like no they were in secret talks with FTX to work out a deal giving them exemptive relief that would give them them a regulatory advantage over U.S firms and and the same thing for the cftc FTX was a derivatives exchange if it was offering derivatives to U.S retail it should have been regulated by the cftc this is what happened to bitmex when bitmex offered derivatives to us persons the cftc prosecuted them as an

unregistered Futures commission Merchant the business bitmex Executives were also prosecuted criminally what was going on here was the cftc investigating or Prosecuting FTX well no they were considering a proposal by Sam to offer derivatives legally to U.S retail participants they published that proposal for public comment in March and meanwhile they're Prosecuting U.S firms coinbase and Kraken for minor violations these Regulators were asleep at the wheel and both of them are telling us they want more authority to regulate crypto that makes me very angry I'll stop there Kristen yeah we love Angry Jake yes the passion

um yeah no listen I'm I'm angry too but I've been angry at Sam for six months I've been angry since he showed up in Washington and was pushing this proposal to allow Mom and Pop to do derivatives trading here in the U.S that didn't seem like the good opening sell vote for the industry to me um I was mad at him for pushing through legislation that would have thrown defy under the bus entirely and not solved any of the long-standing clarity issues around Securities Commodities definitions and so yeah I mean I've been waking up every morning not fighting Gary Gensler or the US Congress or anybody else I've been fighting sampling free so for me um you know my my I'm I'm less angry

because I've been angry for a while I think you know the important thing now is we have to figure out a path forward for the industry and you know probably not all of us are going to make it right but a lot of us are going to make it make it so what we need to do is like I I see sort of in two phases between now and the end of the year it is our highest and best use here to stop any legislative activity for moving forward I think it's really important that we learn from everything that Sam did before allowing Congress or Regulators or anyone else to move forward with with actions that impact the rest of the industry they should be focused

exclusively on the Bad actors at FTX and looking at what happened there and using existing laws to go after them because it it seems fairly apparent that there's plenty of violations of existing law that happened but then going forward we really need to double down in Washington as an industry I think that we have made a lot of traction this fall in trying to distinguish how centralized entities work versus defy I think that's going to be our number one education priority next year and then we're going to need to go through and work with regulators and yes there might be some additional legislative items but I think it's going to be in our best interest to to take

our time learn from what happened and make sure that there isn't a quick overreaction and so um you know we've definitely got our work cut out about out for us but you know I think we're in a good spot um yeah I the my blood boils every time I see a headline that talks about how Sam was the only one doing work in Washington uh that's not true there have you know blockchain Association has been around for over four years coin Center has been around twice that long uh we've got the defy education fund and others that are really doing great work on the ground and we've got individual companies who have invested in teams here in Washington so there is an army of people here willing to clean up the mess that Sam has left behind and so you know we're going to have to get

organized while we are organized but continue to stay organized and stay focused and um you know we'll clean up this mess and move forward that's that's the only thing we can do in a situation like this yeah oh all right lot to dig in there um one I think I want to highlight how present Sam was in in DC and and dig into that actually for a second uh it as a non-dc person as an outsider it it felt like there's no there's no CEO I felt like not even just in crypto but take any industry like it felt like there's no CEO who was personally lobbying uh folks in DC to this extent as much as Sam was and it felt like policymakers and staff

really welcomed him um he had a lot of people tricked right you know he's this big successful person um big personality as well and it seemed like he used that to kind of Usher in this bill as well so I'd love to maybe Kristen here you talk about just like how active was Sam and like how yeah how active was Sam in in DC these last several months it seems like as an outsider he was more active than anyone yeah no I think that's right I I've worked in Washington for 22 years seen uh any executive in any industry spend as much time in Washington as Sam um and um you know most CEOs will come in because they testify maybe they come

in for a day to do some key meetings uh and then they leave most CEOs are running their businesses um and they have teams of people in Washington that that manage this on their behalf Sam was the most aggressive I've ever seen he was meeting with Regulators he was meeting with members of Congress but he would also meet with the staff right he would go out and have beers with them like as if he was you know sort of their friend and you know every day I would be getting you know reports of Sam did this Sam did that and um I mean he he was incredibly aggressive um incredibly Charming incredibly well liked um I mean I think the sentiment obviously has has changed I think a lot of people are feeling uh very betrayed

um you know people within government are feeling very betrayed by by what he did you know he sort of showed up and he was telling the story that they wanted to hear that there should be more regulation and you know here was all you know it's complicated but here's the answers on how to do that and um you know I think it's left a lot of people burned um and and you know at least if there is a silver lining it's sort of you know sort of forced everyone to step back and take a pause at least on the current efforts uh like the the digital Commodities consumer protection act so um but yeah no this this was highly highly unusual for a CEO to be this this personally active in Washington when did it become apparent to you guys that his actions were not beneficial to the

industry well yeah maybe you go it was last March or April yep I mean I think it might have been even a little later than that because you know I mentioned earlier that FTX had this proposal to offer derivatives to U.S retail and at the time you know we all praised the cftc for being forward-thinking right for being willing to consider a novel proposal like this and I think that's still true um and but at the time right we also thought that FTX was an extremely high quality uh you know resilience stable well you know well-functioning exchange and I remember when there was a hearing back then um testimony in front of I think it was the uh it was either the senator or

house agriculture committee to talk about this proposal and um it was Sam testifying alongside these Executives from the traditional Futures exchanges and we were all on Sam's side right we were looking at those Executives thinking this is the epitome of what's wrong with traditional Finance these rent-seeking Gatekeepers and good for Sam being the one trying to cut through these you know these intermediaries and I think it wasn't until he started lobbying for the dccpa right this bill that would give the cftc jurisdiction over crypto spot markets while at the same time potentially um you know creating serious problems for D5 right maybe subjecting D5 to the same rules as a centralized exchange

which is totally unworkable I think it was then that we realized this person is not here to help the industry move forward he's here to help himself and his exchange move forward at the expense of everybody else and that had to have been you know at least three or four months ago and I look I think one thing here is um many of us were not public about that and I think you know maybe we were intimidated by his influence or by his uh By His Image I mean he still was sort of viewed as as The Golden Child uh you know both in the community but also by policy makers and we didn't want to you know come out necessarily attacking him aggressively even though we thought that the positions he was taking were wrong um so you know definitely that was maybe lesson for us about about our own

responsibility to call out these red flags and push back harder when we see conduct like this yeah it's interesting interesting you say that right there's a lot of like Monday morning quarterbacking going on right now and there's also a lot of just uh people looking back at like the signs right of like what what what was there I I mean I don't know much about how DC really operates I worked in Senator wyden's office uh on the hill for I interned in wyden's office and like have have some uh come from like a little bit of a political family as well but like there weren't the the thing that became apparent to me I was like why is he pushing this so hard right this is occurring in a in a mid-election year which is typically the lightest time period on on passing bills

because members right are focused on the re-election so like that was a little bit of a red flag but I you know it wasn't enough I guess so that was a red flag the other red flag was um the donations to members I'm curious I'm curious if this was a red flag like they're all these like I think smaller things that started to add up right yeah no well I I can tell you the first red flag for me is you know FTX sort of shows up in Washington and hires a couple people to work on the issues here and we'll you know sat down with the FTX government relations team and had lunch and like hey let's work together great um you know did a dinner with some folks at FTX one night and

you know blockchain Association is a trade Association we have 105 member companies who join the association because they believe it's important for the industry to First work together or commit to working together and then figure out together what those policy positions should be what bothered me about FTX is they came in and said here's the solution and that solution was very much tailored to the licenses that they had um and the way that they were structured and you get on board with our solution and I said no no like we need to pause and find something that works for all of the exchanges for all of the participants why don't you join blockchain Association and work on that with us or if not let's just at least

very very least work informally together um and they they were not team players like this is this is um I know in in the marketplace you compete against your competitors but in Washington if you want to get policy done you have to do it as a group otherwise the industry gets to divided and things happen that was sort of my first red flag I think the second red flag was over the summer when I realized the extent to which his campaign contributions were going to like leadership packs like for Pelosi and Schumer um and my understanding that he was meeting with McConnell and hosting breakfast and on the phone with him and you know all this information is coming my way and that's when I realized I was like Sam's trying to get this DC CPA

done this year you don't you know try to grease the wheels of leadership with um with campaign contributions if you're not trying to get something done and then the next I think sort of shoe to drop was Jake's tweet thread around the time and I don't know Jake if you want to share the reaction we had when you put out your five points on the dccpa but yeah sure so there was a hearing on the bill in mid-september and right after the hearing we put out our views on the bill right and look we we generally at the time liked the overall idea of the bill which was subject to centralized custodial exchanges to some reasonable regulatory regime in the U.S and so we said look overall this is a good bill but it has some problems and

we flagged a series of issues um you know related to the definition of a digital commodity the impact on defy and a few other things and the reaction from from the FTX team was was like we had you know run over their dog or something like that they were Furious that we had even voiced concerns about the bill I mean and this is in the context of us saying this is a good bill and we want to work to improve it what is FTX being furious mean like were they calling you are they saying how how the hell like why the hell would you do this are they texting you or they're like how much you want to tell about that yeah I mean I'll say I got you know so the funny thing is like outside of a couple meetings with the FTX team up until last

month we hadn't actually met with Sam in person uh despite his you know extensive lobbying on these issues but yeah we got pushed back via signal chats we got phone calls we got calls from intermediaries who said if you don't let this bill get through this year Sam is going to call all of your members and make sure that you don't have a job next year um like crazy like threats that like this had to get done now and calls from you know people in finance that run giant funds who were convinced that this was the solution and listen again as Jake said we're not a opposed to better regulation of centralized exchanges I

think the problem we had is our discussions with the committee staff on issues around defy the bank secrecy act and some of these other issues were hit with resistance with with all of our conversations you know they would listen to us hear us out but at the end of the day they weren't making any of the substantive changes we needed to get comfortable with the bill and so we felt like we needed to be in a you know like we ended up having to push back and um and yeah that very much seemed to anger Sam and the rest of his team hmm it seems like where this ended up is I mean Jake hats off to you for for pushing back and sharing that tweet thread there it seemed like where where FTX kind of ended up is you had like

uniswap and coinbase and Kraken and Ave and and blockchain Association D and all these great folks lobbying for the industry and doing things that yeah might have been good for their companies but really things that were good for the industry and then FTX basically found themselves on the wrong side of the fight it it seems like is that like was anyone in the industry uh it seems like you had all these companies and the associations like together and then you had FTX over here on the other side was that was anyone else on ftx's side here or maybe that's a mischaracterization of it no I don't think it's a mischaracterization I mean as you know a lot of people in the industry know there was sort of a Sam orbit and the people who were in the Sam orbit were on ftx's side but not from the perspective of

saying we actually think this is good policy it was just this is what Sam wants to get done so you need to fall in line and like Kristen said this to me was like mob Behavior right it like rose very quickly to the level of personal threats um which again should have been a red flag for us that maybe we should have you know talked about more um publicly but you know I think anyone who was looking at the policy was saying this isn't the right way forward let's you know slow this down be careful and thoughtful and do this right as opposed to just ramming it through and I think the thing that's most confusing to me is given what we know now about the state of the balance sheet and the business at FTX I don't understand what Sam was doing I I does not make any sense to me

why he would have thought that this strategy focusing on on getting this regulation done was going to solve his problem was gonna you know close the hole in the business uh maybe it was just you know sort of a Madoff move which is the closer he is to politicians the more he looks like he's you know The Shining Beacon of Regulatory Compliance the longer he can get away with this without being investigated and maybe he did pull the wool over the eyes of the US Regulators but that's just I'm I'm really confused as to why yeah I so I've had two like types of thought on this well maybe three before the with c potentially bailing out Sam I just thought this was Sam trying to get a monopoly for FTX us or as close to a

monopoly as he could get particularly for crypto dirt which of you know for that which he needed the spot spot regulation then when the CZ announcement came I thought oh gosh there was a giant hole related to Terra Luna and three arrows capital and Sam saw getting this bill done as a way out of that because that would you know give him the Monopoly and he would be able to backfill and solve his problem um but now I just think Sam's like Sam and Caroline and Bonnie and Clyde like they're like I think they're just I think this is like every every indication I have is that this might have been like premeditated and not an effort I mean I don't know that but I get a lot of information all day long

and um yeah now I just think they're just Crooks and I think that's what Jake said like it's the closer you are uh the more you can get away with because people trust you and they're they're not looking at you if if I had to speculate and I don't really know anything here but if I had to speculate um this the master plan included two there are two things missing from the master plan one was FTX having a stable coin and two was prohibiting defy uh to ban competition and once that was done there's I mean there's no telling how big this could have gotten right so I and I think I think Sam knew that obviously Sam knew that there was a big hole of five to ten billion dollar hole and I think the stable coin probably would have plugged that hole so that was

that's my I mean who knows basically think thank God that FTX wasn't able to roll out a stable coin so I'm curious Kristen How uh how much do the political donations matter here like what say I'm able to do all of this because he was don't he was the what largest or second largest donor to the Democratic party yeah listen I mean I think um you know he he was at a different level um the you know when Kristen Smith gives a couple thousand dollars to a congressperson the benefit of that is it allows me to build a relationship with that person um when Sam gives millions of dollars to a Super PAC that then plays at a race

like that's a little bit of a different level right um you've built a really good relationship with somebody um when you're donating at that level so yeah I mean listen members of Congress these races are really expensive and they have to raise a lot of money and you know they are looking to engage in areas that will help them you know raise that money um you know again it's not a quid pro quo but it's you know an effort to build relationships and um you know Sam was great at doing that right he gave a lot of money but um you know he also showed up and um um you know was in the room and really like talking to people and teaching them

about this so you know I think it's a factor but a lot of it is also just Sam personally being there in the room yeah there's some there's some things that maybe Fringe on the get a little conspiratorial here I would say so I don't wanna I don't want to go too too deep down that rabbit hole but I will say like Jake you brought up in in your kind of opening statement here about just you know how like the SEC right like the SEC is somehow somewhere somehow at fault here uh and and really either they were just asleep at the wheel or or it goes deeper I don't really know but how did the SEC miss this and was like does it go deeper than this I mean Caroline there's like the

Caroline's dad was Gary gensler's boss at MIT something like that there's obviously the massive amount of capital um at play here like what Jake where where do you fall out on this yeah I um look I I think we don't know is is the short answer um there's definitely a lot of uh what I would describe as innuendo being thrown around right and often this is how these conspiracy theories uh get generated it's like two people worked at the same place at some time therefore they must have had some master plan that you know lasted many years after they were working together and that explains the whole thing and I'm I'm hesitant to sort of fall down that rabbit hole um that said I you know I think we need to fully understand what happens here

and that includes not just investigating FTX but it also means investigating the investigators and you know sometimes where there's smoke there is fire and so I think it's just it's something we have to get to the bottom of yeah I guess SEC did Miss Madoff they looked into Madoff many times and they did mismade off many times so yeah and we had you know okay no well I was going to see that's that's like another funny story like Regulators didn't expose what happened with FTX it was an international Regulators it was a combination of Journalism and blockchain analytics and you know people in crypto Twitter trying to trace the trail right it's this in some ways was like a self uh you know kind of Community Police uh effort here I mean obviously it was you

know you could argue maybe late or maybe early depending on you know how big this could have gotten but um it's a lot of damage was done before anybody figured it out but um but ultimately it came to light because you know coindesks and journalism and um that that I think is an interesting um outcome for you know something that that is regulated right like there is some regulation overseas and we do have Regulators here that that known the company and we're working with the company so yeah uh I think it was Elizabeth Warren who who posted something something along the lines of like we basically need better we need better regulation here and and I think

as Brian Armstrong who responded her on to her on Twitter saying actually it was the unclear regulations yeah we welcome regulations but it was the unclear regulations that actually pushed a lot of users offshore into these kind of shadier exchanges like FTX I re obviously you know got a lot of likes but I'm just curious when you I'm just curious of the impact of something like that and I'm like does a do these politicians and these in these Regulators do they actually understand what Brian is saying there are they are they taking it in are they just like it you know it's ships passing in the night here I don't know I mean they should take it in right I think it's absolutely true and I think it's you know I guess two things the first is there is no U.S regulation that is going to change what

a non-us firm can or will do because they're not subject to that regulation right so when Elizabeth Warren comes out and says we need to regulate more I think it's really important to consider well what regulation actually would have changed things here given that we already have many regulations on the books here in the US that would stop something like this from happening but I think that the second thing is um I think at this moment Regulators are more concerned about how they've been perceived right I would guess that they are also sort of scrambling to figure out how did we miss this and I don't think they're going to be particularly receptive to arguments like that but policy makers need to be because because the main impact of lack of regulatory Clarity here in the U.S is in the scope

of this fraud not necessarily the fact that it happened but the scope of it Sam would not have been able to bring in so many billions of dollars if not for the fact that U.S firms that would never do something like this that could never do something like this were not able to offer alternative products and that's what made this fraud not happen but what made it so big uh to the point where it was yeah Kristen when you meet with folks this week and the rest of this year that this is obviously going to be the probably the biggest biggest issue that you're talking about what is your response to them when they say oh well regulate better better crypto regulation could have solved this what's your solution to that what's your response to that yeah you know I mean I think it's an

interesting question I mean my response to it is let's look and see what happened and map out the bad activities to see whether if this were in the U.S current regulation would have already addressed this or not um listen I think the regulations that we have today that centralized exchanges have to comply with you know money transmitter licenses at the state level Etc you know it's not the most efficient best way I think there's probably better ways we can do it but I think we really need to like dig in because prior to you know the FTX blowing up everybody was kind of thinking about this really in a vacuum and what are the problems and you know even having um you know sort of a market regulator at the cftc

for example that's you know overseeing and surveilling the markets you know that may or may not have stopped this I mean perhaps the the disclosure of um you know conflicts of interest might have but given the way that FTX operated like I'm not entirely sure that they would have been forthcoming and um you know with everything that they were doing and so yeah I think I think it's a really interesting you know sort of public policy challenge I think it's one that you know if if we you know continue to stay focused and do our job right um you know we'll be able to have these productive uh conversations but right now I think we need to bring the temperature down like everybody's very heated right now Regulators are very heated

um obviously like people who have lost like their life savings are like understandably very upset and so I'm excited though specifically this week because blockchain Association is having its first annual policy Summit we have all of our members coming in we're going to be able to have conversations to see where regulators and lawmakers are at and then to break out as an industry and figure out and Forge a path forward um you know I do think this is a setback but this is not the end of the road but we're going to have to you know double down on education and building more relationships and staying focused and you know I think we can get to a good outcome but it's something that you know we're not going to be able to take a day

off like we need to every day be watching what's going on making sure we're responding as quick as we can when new things come up and then you know trying to take the reins of this process and drive really good policy forward are you uh are either of you worried that Regulators are going to jump to conclusions here uh and and and take action when maybe they need to hear the testimonies and uh here basically just get more info first [Music] um enforcement actions in particular take time I think criminal charges take time like there's a process there

um I have a little bit of concern that Congress might try to do something quickly but I think given that Sam was the driver of the closest bill being done that's giving lawmakers a lot of pause where they're trying to kind of reassess and figure out what happened I mean remember just like those of us in the crypto Community who feel burned those policy makers those lawmakers that trusted Sam I think also feel burned and so um you know I think that that gives us time to you know start fresh with the new Congress um you know kind of go back to square one and factor in what's learned but but yeah no we're watching very closely just in case that that path doesn't happen we're I mean you would think we're ready to go yeah I

mean you would think that I mean we're in lame duck now right so like you would think that this wouldn't be iced out till next year my is just that you know you have a you have a I feel like Congress always feels very compelled to act when there's a crisis and yeah they don't they don't have to be a free crisis for them to do something else quickly I I would say though lame ducks are when a lot of things happen right right past bills and you can you know attack other things to just so you know there is a pathway where the dccpa could could you know if all of if if that house since then agriculture committee all agreed they could attach it to the National Defense authorization act or an Omnibus or something like that so that that does

exist but I think there's enough pause right now that you know people are trying to just take stock of where we're at and reflect and that that should be able to run out the clock so that we can start again fresh next year but if not we have amendments ready to go we have Grassroots websites ready to go that will help you know get get the community to be able to weigh in with their members like you know we've got all of the kind of backup steps in place um but but I don't think it's gonna lead to a markup or get attached to a bill yeah and I think we're already seeing some some uh signs at least from the Biden Administration to that point just this morning uh secretary Yellen who I think is probably the most important uh official in the administration you know

outside the White House um to speak on this issue she gave a statement saying that this you know reinforces the need for careful regulation keyword being careful um I think you know yes this will put a focus on the need to come up with some kind of regulatory regime I think we've all sort of thought for a long time that uh that it's appropriate for us to come up with something but um but I do think that that you know we'll do it in an intelligent thoughtful careful way as opposed to just ramming something through in the next couple months it's definitely a moment of high risk it always is in the immediate aftermath of a crisis um that is sometimes when we see rash action uh and usually that that means overreaching um but I'm pretty confident that that's not going to happen in the

next couple months and as Kristen said this is going to be our sole Focus um you know to make sure that we don't make a we don't follow-up of this fraud with a policy error that will compound the problem yeah all right everyone time for a quick word from Circle and uscc as a crypto user you know the power of stable coins dollar digital currencies that transcend borders banking hours and Legacy Financial rails while circles usdc has quickly become one of the most trusted and widely used stable coins it's simple people use usdc because of its composability its stability and its Reserve transparency and uscc isn't just adopted by a few of us D5 djends and Dows and nft marketplaces crypto

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would recommend you check out the recently published transparency Hub on circle.com it's a great update to circles content on usdc it outlines everything from links to their weekly Reserve reports monthly attestations blog posts that are written by their exact team that highlight how and why usdc was built so it is really recommend it just go to circle.com backslash transparency to access it now let's get back to the show yeah Jake are you off 20 minutes ago when you were talking about the kind of Five Points and the thread that you wrote about the dccpa can you just give an overview can you just give an overview of the bill so that folks know what what what's kind of on the table here yeah sure so um as we stand now U.S exchanges that have spot markets meaning

trading of the actual digital assets are not comprehensively regulated on a federal level they are regulated in many different ways as Kristen said they have to get money transmission licenses in the States they're registered with fincen as money transmitters at the federal level for anti-money laundering purposes all sorts of other types of regulations like that consumer protection laws Etc but no comprehensive registration regime of the sort that you have for Securities exchanges with the SEC or derivatives exchanges with the cftc and that's actually how it is for other non-security Commodities right gold markets are not comprehensively regulated wheat markets Etc and the question is should we have some kind of registration regime for spot crypto

markets and I think again the answer sort of is yes we should uh and the question then becomes what does that look like who is the right regulator and the dccpa is a bill that says the cftc the commodity Futures Trading commission is the right regulator for crypto spot markets and what it does is it has definitions of what are called digital commodity platforms four different types of them Brokers dealers trading facilities and custodians and it says if there is a firm engaged in the activity of one of those types of platforms they have to register with the cftc and then they have to follow certain rules and requirements that will be set out by the cftc according to certain principles and standards that

are included in the bill all that actually makes pretty good sense um there's just some some you know devil in the detail type problems with the bill one of which being it doesn't clarify which assets fall within the cftc's jurisdiction under the definition of a quote-unquote digital commodity it has an exclusion under that definition that just says Securities are not digital Commodities which means the SEC would continue to have the same Authority they have now to come out and say every asset we see is a security therefore we regulate them not the cftc and that's the key issue that we have to clarify in U.S regulation the bill doesn't do that it also has very

expansive definitions of digital commodity Platforms in a way that could capture defy not only the protocols themselves but also any number of D5 Market participants right the liquidity providers the governance token holders and voters the people who are running uh you know web apps or front-end user interfaces or wallets that have Dex functionality built in right all of this is is you know potentially captured even though it shouldn't be under the bill and a few other issues like that so that's what we've been working to try to figure out overall having a regime like that could make sense I think given the uncertainty about FTX I'm very hesitant at this moment to say that the cftc has earned the right to get that Authority

but that's just something that we're going to have to hash out I think you know over the next year in 2023. hmm do I hope so do I I just want to almost repeat it back to you and make sure I I that I actually understand it here which is that it seems like this bill was not born out of sin right it seems like this was aimed to cover crypto intermediaries and if the and if the dccpa was constrained to just crypto intermediaries and oversight of crypto intermediaries excuse me centralized crypto intermediaries that would be okay like that's kind of a normal thing in under other Industries uh for first problem lies in the fact that this kind of got extended to defy and then there's a second thing which I didn't understand as well until you just explained it here Jake which is that this kind of provides

the SEC with veto power over weather assets that aren't Bitcoin and eth so any any crypto that's not Bitcoin underneath uh it gives the SEC veto power over whether those assets are digital Commodities or Securities do I those are the two main issues here yeah okay Kristen well I would also want more issues is like our biggest problem that we proactively need to have solved and I think what bothered me about this bill is it didn't really do anything to address our core problem so we were trading all of this regulation of

everything including D5 but even if it had just been for centralized regulation the fact that we were moving forward with that without getting a solution to what's a security or what's a commodity to me was a complete missed opportunity and strayed from the strategy that we've had as an industry for the past several years um anyway I'll let Jake go back to the other problems yeah no I mean and there were you know a lot of of other issues those two I think are the biggest ones but just to give you a few other examples um it's possible the bill turns Venture Capital firms into regulated commodity pool operators which doesn't make any sense at all um the bill uh gave the cftc extra territorial jurisdiction so that it could regulate transactions that took place entirely outside of the United

States which I think is just as a foreign policy matter is a mistake because there are other countries that are pursuing their own separate approaches and we need to sync those up as opposed to you know be the U.S World Police and and try to impose our will on everyone else um the bill uh added every type of digital commodity platform to the bank secrecy act meaning all of them would have to do customer due diligence and kyc under the anti-money laundering laws which again in the defy context just doesn't make any sense at all and there's not a really good reason why a cftc spot crypto regulatory bill in the Senate agriculture committee would amend the bank secrecy act a totally separate framework and I think you know just to

go back to the point you made the concept here does not originate from Sam in fact this wasn't the first bill that did something similar the first bill was the digital commodity exchange act the dcea which came out of the house agriculture committee years ago and the DCA I think it's fair to say is is a significantly better Bill and many of the distinctions between the dcea and the DC CPA we are now sort of coming to realize our differences that would have given FTX an extraordinary advantage over its competitors and I think that's the reason we need to really step back we think is this the right approach why would it can you just explain the second order implications of the it being extended to deep like like what what

would the impact on uniswap have been or on Ave for example yeah so one of the digital commodity platform types in the bill is called a trading facility and the definition is extremely broad it basically says a trading facility is a group of persons who maintain a system in which uh trades of digital Commodities can be executed period and there's a little bit more Nuance to that but not much and so you could in theory interpret that to say all of the liquidity providers using the uniswap protocol are a group of persons responsible for offering a training facility therefore those liquidity providers have to go register with the

cftc and then comply with all the requirements set forth in the bill the problem is one of the requirements set forth in the bill for trading facilities is a requirement to operate a centralized Market period and in a more recent draft that we saw there was a requirement to operate a central limit order book meaning amms would be totally illegal under the bill so there's just no way that a protocol you know users of of uniswap would be able to comply now our argument of course would be liquidity providers are not a group of persons who should be regulated in the sense of an ordinary exchange like a coinbase or a kraken or you know Gemini who clearly are trading facilities under

this definition and I think they're the ones who are the proper targets of Regulation they're the ones that frankly want to be regulated the challenge is the cftc has taken a view recently in an enforcement action against Uki Dao that any group of people who are acting in any way in concert in in relation to defy are an unincorporated association that are a proper Target of Regulation so that's why this became such a big issue for D5 among other reasons uh did you guys listen to the Sam Eric podcast on bankless maybe two weeks ago yeah yes uh So I listened to that and I think a lot of our Circle probably listened to that and said wow Eric brilliant eloquent

so Eric dominated the conversation the folks in DC that I know said Eric excuse me said that Sam unequivocally won the debate where it matters which is in the DC circles I'm curious if you two heard the same thing which is that uh folks on the hill and folks in DC really like Sam's take on this um I'm curious what the reaction in DC was to that podcast I think it depends on who you talk to yeah um I think those that understand crypto we're on team Eric and those who you know want to expand their power we're probably on team Sam yeah I guess I I guess I asked the question

because I'm just wondering if this I think one Dynamic to watch for I think it was someone on your at blockchain Association Ron might be his name yeah um I think he tweeted out like the dccp is he said one Dynamic to watch for maybe this was Jacob Twitter but one Dynamic to watch for is that the dccpa might be largely largely viewed as the FTX bill on the hill um or or that it's already viewed as the FTX bill so if I'm just putting myself myself in the shoes of a politician here like there's no way I want to vote Yes on the FTX on on the proverbial FTX bill yeah that was yeah that was Ron our um our government Affairs director and I think he's absolutely right about that

and I think there's going to be a lot of people in DC who are gonna you know who maybe are on video shaking hands with Sam and now they're gonna say sam bankman who never heard of them right I think that'll come through especially if you took money right like if you if you're a member and you took SBF campaign contribution which is a lot of people if the DC CPA comes to a vote there's no way you want to be seen and voting for that and being like Oh well Sam was in my pocket oh yeah well it's interesting like Politico had a headline this morning that said crypto chaos comes to Washington and everybody's kind of like oh wait I took money from him and I was supporting his bill and we want to do a bill but not this bill and you know everybody's kind of uh like it

and I think chaos is our friend right now like let's let everybody kind of run around to like a chicken with their head cut off trying to figure out what the heck happened um because we just really just need to make it to 2023 for a fresh start um where we'll be able to have better conversations but but yeah it goes back to it he broke you know he had built up a lot of trust and and obviously you know violated that trust and so I think you know I don't think we have to do much work to equate the dccpa to to Sam the dccpa is Sam's bill but I do think we have some work to like make sure that everybody knows that crypto is not FTX but an FTX isn't

crypto right like these are like that was behavior and values that are fundamentally different than what the rest of us are trying to build with decentralization and so that is a story that we need to push out you know through the media through one-on-one meetings through every channel possible um and quarter you know between now through q1 of next year because I think we can get there um it's just going to take a lot of work and a lot of conversations to distinguish the good players which are most of the most of us working in this industry are the good guys right versus what is very clearly a bad guy yeah I want to move on to some other questions I had but uh any any other last points on the dccpa that you

think are important that we haven't covered I don't know cool uh midterms good or bad for crypto you know it almost doesn't matter um though I think the ideal outcome is to have split a split Congress so it looks like very clearly now that the Democrats are taking the Senate that looks like Republicans are likely to take the house I think this is the most ideal outcome because it will force a very sort of balanced conversation on any legislation moving forward prior to Sam I used to say it didn't only matter either way because we have Champions on both sides of the aisle uh

you know post Sam debacle I think it gets a little bit more complicated um I think you know I really want the Republicans to take the house and not the Democrats because I you know I could see something moving quicker um and more hastily if we have one party government as government yeah I agree with that I'm actually a little bit more positive on it I do think that where how it looks now does seem ideal for crypto I think a divided Congress is good for us because crypto is a bipartisan issue we don't want you know one party or the other running to the extremes um in how they want to handle crypto and I think having a divided Congress means

if something gets done on crypto it'll have to be bipartisan which makes it more likely that it'll be you know reasonable and thoughtful and well considered um I also think we saw a lot of new members elected to congress who seem very constructive on crypto right who have talked about it before uh who seem to understand what it is that we're trying to build here and are you know very um uh sort of constructive in their views on crypto I mean that includes um Senator you know soon to be Senator Senator like the Vance um Senator elect fetterman um Mark Wayne Mullen you know there are a few people who I think we're going to add to our ranks who are going to be um open to thoughtful consideration about how to regulate crypto so I'm I'm

pretty excited about that yeah and it seems like all I saw Ryan tweet out Ryan sulcus tweet out all 19 candidates that GMI pack supported in the general election won their seats including 16 open seats that's 16 new voices you will expect you can expect will be informed enough on crypto to craft policy that protects users and punishes fraud without stifling Innovation really positive sign yeah you know listen I think GMI pack you know I think despite being supported by the FTX crowd um is actually has a pretty diverse funding base and the team GMI pack has totally outperformed they are really great I think they've been incredibly thoughtful and that yeah we have a whole new

you know slate of people showing up that yeah they might be a little bit Junior in the house but they're going to work their way up and we've got you know Ted Bud coming to the Senate we're super excited about that and you know GMI packed help with that so you know kudos to them they've done a phenomenal job yeah um it's fun it was kind of crazy seeing all of this happen wow there are other important things there was a this Library lbry thing that just happened I don't know if they're they're like a couple of tangential things that I wanted to discuss that aren't directly related to FTX there's uh what's going on with ripple um right Ripple mounted this defense against the SEC grayscale's doing the SEC coinbase is doing the SEC there's this kind of pattern of overreach from

the SEC into crypto companies right now and I think crypto companies are now pushing back which is great to see so I'd love to hear your guys's take on that and I'd also love to hear you talk about it yeah I want Jake to talk about that but I want to make one point real quick you know federal agencies can't give any more guidance right if they could very clearly interpret how existing laws apply to crypto assets they've done it where we're at now is sort of the stage where there's this push for legislation which was happening before FTX because there are some gaps for spot markets stable coins maybe a couple other issues but the other kind of phase we're in is this litigation phase and that's because two things are happening one is agencies

We Believe are stepping too far and companies are willing to fight the good fight in court to to defend what we think is a bad interpretation of the law and similarly with grayscale and others it's when the government is failing to act because they're treating crypto unfairly they're also going on the on on the offense and and suing government so so we have you know the next couple years are going to be legislation and litigation or are they are the two games in town but I'll I'll let Jake kind of comment on this specific yeah no I I completely agree with that and I mean that would have been um probably the first thing I would have said which is the SEC does not get to decide what the law is in terms of what assets are or are not Securities

the SEC just gets to decide its own interpretation of the law but no asset is a security or is not a security unless the issuer of the asset admits it's a security or a court of law decides based on litigation that it's a security and that's where we are now we're fighting out these different interpretations of the Howie test right this test that's used to determine whether and when an asset is a security subject to SEC jurisdiction we're fighting that out in the courts and there are a couple of fundamental disagreements between the industry and the SEC in terms of how broad the Howie test is the sec's view basically is to read every prong of the Howie test so

broadly that it would capture basically every asset with a market price in the entire world and our interpretation of the Howie test which I think is the correct one is it is meant to capture relationships between issuers of assets and the purchasers of those assets when there is a transaction between those two parties and so you know what I think is frankly great to see although it's sort of sad that this is where we are um it's great to see that there are crypto companies willing to sort of fight this out and you know not roll over for the SEC just because they might get a lenient settlement right we need to get some clarity and since the SEC refuses to give it to us and since it seems like legislation that gives us that Clarity is so far away we have to fight this out in the courts so in the

two cases you mentioned were you know library and unfortunate decision from the court that I think was was wrongly decided that the asset that they created LBC was a security I think a couple of sort of um incorrect elements in that opinion um and then of course the Ripple litigation which is is really the um the main Battlefront where where this fight is being fought now and so many industry participants including us showed up to file a mucus briefs I was really proud of the brief that we filed explaining why we think the sec's interpretation of the law is wrong um but I think the sad thing here is it's just going to take years and years and years to get clarity through litigation right it could take decades

for us to come up with reasonable um you know guidance basically from the courts that really should get done in legislation or in rule making or in guidance from the agency but that's just sort of where we are now can you explain the library uh like what are the second order implications of this Library decision you know I think um there's not a whole lot uh in my opinion that's new from library that we didn't see in earlier cases like kick and telegram I think look the Fatal flaw in the decision is the court misunderstanding the difference between primary sales and transactions in the secondary Market I don't think there's many people who

would dispute that if you run a business and you sell a token and the token is totally non-functional and you say to your investors don't worry I will make the token go up in value based on the efforts that I'm going to carry out by building this network or what have you that's an investment contract it should be regulated that way but the thing is and this frankly comes from the SEC itself from Bill Hinman in 2018 the director of the division of Corporation Finance who gave this now famous speech about this concept of sufficient decentralization which basically said an asset can start life as representing an invest contract but then as time goes on the facts and circumstances can change

right this is all about facts and circumstances can change such that the asset no longer represents an investment contract and you know in my view and I think the the broad consensus within the industry is when those assets are trading in the secondary Market among people who have no relationship whatsoever to the original sale right that that initial promise that was made by the issuer of profit based on their future efforts it doesn't make any sense to say that that asset continues to represent a security and the failing of the library decision was just not recognizing that distinction whatsoever right the court basically says well these tokens were sold as investment contracts initially therefore they always represent investment contracts

even when there are purchases of that asset that have nothing to do with an expectation of profit right and the court even says we understand there were people in the secondary market and elsewhere who are buying this asset because they wanted to use it and because they thought they were going to make profit but we're just going to ignore that and say the asset is a security in every context and that's just wrongly decided yeah that does seem like the reasonable thing by the way is to have something that starts as a security potentially and then can shift over time to a commodity it seems It's yeah I mean that's frankly that is sort of the basis of the modern token distribution model the industry has moved on from icos right no no credible company is doing an Ico now this is a concept called Progressive

decentralization um it's it's one that you know on the side of my day job I'm an advisor to variant funds which is you know an early stage investment Fund in crypto and it's something that Jesse Walden the GP there is has written about and talked about a lot that's how this is supposed to work and you know we need the courts unfortunately to recognize that given that the SEC doesn't I think just one other flag is these cases that we've been seeing are all in the first or the second circuit um they're you know different circuits within the country that have different case law and the first and second circuits are where the SEC likes to bring its enforcement actions because the case law there is very favorable to the SEC but if the SEC were to bring

these cases in the fifth circuit right which is down in in Texas Urban the 11th circuit which is in Florida I think those courts the district courts and those circuits would have very different views on the Securities laws and I think ultimately where this goes is we're going to end up with a circuit split right the first and second circuits we'll say the last one way the fifth and the 11th maybe also the sixth we'll say it's a different way and then ultimately this goes up to the United States Supreme Court and the Supreme Court will be the one that decides what the law of the land is again it's just going to take us many years maybe decades to get to that point and get that Clarity well the library the library case does set a dangerous precedent right in that every crypto could be a security that's that's

why folks have kind of riled against it so hard yeah I think I think it is I you know I think um the law always comes down to the facts and circumstances and you know with all due respect to the folks over a library and I think you know hopefully they would admit this to at least in the early days right when they initially conducted the token sale there were some facts that really don't look good for them right a lot of promises that they were made about um you know what was going to happen to the value of the token and like I said that is not what happens in in the modern uh you know industry that this is not something that the large project that you know right the the major DFI players this is not something that they've done so yes I think it's it's a

disappointing decision but I don't think that you can extend it to you know the the modern tokens that we've seen in recent years right the industries have matured a lot yeah do you think that we get better Clarity Kristen I'd maybe throw this one to you like how what's the right question here how close are we to Clarity on Securities versus Commodities is this does this just get dragged on for years and years here yeah I think it's a question that ultimately is going to be resolved by the courts I mean I think it'll be interesting to see how the Ripple case um comes out that you know is potentially one pathway for um getting getting some more certainty and Clarity sooner um but you know we'll see but yeah this this is an issue that's going to continue uh to be litigated I don't see this getting

solved via legislation in the short term can you explain the Ripple case what's going on here yeah I mean I'll maybe let Jake do that he's uh we did a great job in that case yeah sure so I you know sort of similar to what I was describing before the SEC um you know investigated Ripple for many years and eventually filed a complaint alleging that Ripple's sales of xrp were investment contracts because those sales came along with Ripple's promise to carry out future efforts that would make xrp go up in value and you know I think again we can argue about whether the initial sales of xrp by Ripple our investment contracts the problem in the

case and the issue that that we flagged and that you know Ripple itself argued and many others is this lack of a distinction between Ripple's initial sales of xrp versus transactions in the secondary markets the SEC alleges in their complaint violations up through present day even though Ripple had stopped selling xrp you know sometime before then and so again the question becomes is this just an issue for ripples early sales or is the entire second secondary market for xrp you know in violation of the Securities laws this is not just an academic distinction it's what led every major U.S exchange to de-list xrp the moment that the SEC

filed its suit right if the SEC had only alleged violations uh based on those primary sales that wouldn't have happened and that means that you know all the the xrp holders wouldn't have um you know been so adversely affected right that there was a major price crash at the moment that the complaint was filed because of that delisting and so that's just you know one of the the many issues that we raised in our Amicus brief and then I guess you know the other point is as I said the SEC interprets the prongs of the Howie test in such a way that they apply in every single case right so so you know for example the SEC will say you can have an investment of money the first prom of the Howie test even if there is nobody

who actually invests any money in the project right they say air drops are an investment of money because of some sort of intangible expectation that the recipient of the airdrop will themselves contribute back some effort in order to increase the value of the network and that effort constitutes an investment of money that is a concept completely made up by the SEC that no court has ever recognized and that I think makes absolutely no sense if you actually look at the decision in the Howie case when it came out in the 1940s right what Howie says is the test is designed to apply to transactions where there is an issuer who seeks the use of the capital of others on the promise of profit right

the use of the capital of others on the promise of profit in other words an ordinary business that is Raising Capital that they will put at risk in some Enterprise that they're going to run and there's you know similar issues with the SEC just sort of expanding its interpretation of these prongs in a way that it captures every asset the market price and that's what we've what we've flagged and hopefully the court will will recognize as an erroneous view on the part of the SEC nice anything we haven't talked about that you that you two feel is uh really important here I mean my only final thought which I think I sort of said before is but to drive at home is that there still is a pathway forward here in Washington it's going to take a lot of work but the good

news is there are a lot of really good smart hard-working people on the ground here in DC that take this very seriously that understand what it is that we're trying to build in this space and understand decentralization and I think that you know as shitty as a position as we are in right now it's you know it's not the end of the road we will be able to move forward and recover from from the damage that has been caused by by Sam and FTX yeah I think my if I had a parting message to I guess to leave on a more um positive note um um it's that I think as awful as this is it actually reinforces why we're here

and why we're doing what we're doing and I put out a few thoughts yesterday Jason that you retweeted and so I got you fired up and I'm that was sort of my goal and I got a few other messages like that too and I do want to um you know leave people optimistic and fired up about what we're doing the financial system we are trying to build is a decentralized disintermediated financial system the purpose of which is to make sure that people cannot do what Sam bankman freed has done that's what we're here for and as sad as it is that in these early days of developing this new ecosystem this new this new technology that that someone like him was able to abuse the system obviously that's regrettable and it's something we need

to investigate and figure out how to stop but the best way to stop it is not through regulation it's not through policy it's through code that's what we're here for and we need to reconnect ourselves to the principles that brought us here right recommit ourselves to decentralization and to be building that future and I guess I'll just say I'm so proud to work at the blockchain association with Kristen and with all of our fantastic members you know we have members like Kraken for example who are running these types of centralized custodial businesses but they see the bigger picture right Jesse Powell understands the bigger picture we're here for more than than just you know making Krakens bottom line look good we're here for for you know building the

future of finance and I think we will do that I have no doubt that we will do that it's just going to be a rocky road but but I'm very confident uh in the future we're trying to build I love that Jake I you said decentralized and disintermediated I would add one one more word there which is just transparent right if you look at a lot of the large Financial crises over time uh what's going on with FTX right now uh the mortgage back crisis in in 2008 2009 um a lot of these uh big major economic blow-ups are called are caused by a lack of transparency in the system and it feels like a good as good of a time as ever for our entire industry to come together and start fighting for moving the entire Financial system on chain right I think I think we should all be

it's a good time to be on chain Maxis right now um whether it's proof of reserves with exchanges or pushing more for the betterment of D5 I completely agree with you Jake so yeah thank you guys this is great I appreciate it thanks for having us yeah I would also just give a big uh plug for the blockchain association you guys are doing you have been doing great work for years and you I'd uh it's a really important time for crypto and Washington and you guys are fighting the good fight over there so we appreciate it thank you [Music]