The S&P Moves Onchain Amid Massive Regulatory Sea Change

Transcript

If the S&P is comfortable with hyperlquid, that is opening the door for all institutions to start trading on Hyperlid and to get comfortable with Hyperlquid. CLIG is out effectively saying perpetual futures are coming. I do think it's a really meaningful shift uh into a 24/7 365 world. It's not trivially easy and I think it's a generational opportunity for new crypto platforms like Hyperlid to step into that and become really dominant in these new markets. So, the SEC created a taxonomy of five categories of crypto assets, each with distinct legal treatment. That is a huge clarification that we've all been asking for. This interpretive guidance is coming from

both the SEC and the CFTC, but this doesn't carry the same force of legislation. This is guidance Hey everyone, welcome back to another episode of Inflection Podcast. Uh before I begin, I want to please note that none of the information discussed constitutes investment advice or an offer recommendation or solicitation by Block Works, Galaxy, Bitwise, Anchorage or any

of its affiliates to buy or sell any securities. So with that out of the way, let's jump into it. Um we have some topics that we wanted to cover this week. a lot of big news. But first, uh I just learned, you know, you can if for the viewers at home, those who don't do audio only, Dave is at a hotel and that's because he's at a conference in Brazil and I think there were some like interesting takeaways from it. David, >> I am. Yeah, I'm I'm at a stablecoin cryptobanking conference in Brazil. Um I love being here. It's my country of origin. Um, you know, I think maybe we should do an episode on that one day,

but I think the Brazilian crypto market is a little bit overlooked, especially in the US. The thing here is that the the Brazilian financial market and the banking system are extremely well-developed. The Brazilian banks are huge and they're known for being one of the bestrun banks in the world. They're known for that. And Brazilians are usually pretty early adopters of technology. So, and crypto has been no different. I think if you talk to anyone about um crypto adoption in emerging markets, everybody will get that. But the part that people miss is that there's a massive crypto institutional market here in Brazil. I would say in

LAS well more broadly but in Brazil you have like these giant banks like the JP Morgan of Brazil or the Goldman Sachs of Brazil. These guys are running some uh crypto strategies on uh their prop books. They are offering crypto access to clients. Uh some of them have built their custody solutions from the ground up. So it's really cool to see how how much adoption and how kind of ahead. Of course, the US has been catching up a lot uh with the regulatory shift that we saw uh over the past year or so, but I feel like the Brazilian banks are are kind of ahead uh even um of some of um our their US peers. So, it's been great

to see. I mean, a lot of discussions around u stable coins. That's definitely the main topic right now. There's banks and regulators and financial institutions from all of LATAM. Uh really good to see. I think it's a testament of how the institutional and banking uh crypto market not only in Brazil but in Latan more generally has been developing. >> Yeah, for sure. I remember in like 2022, New Bank, which is for the viewers a fintech, a large fintech in in in Brazil, uh they launched us uh you know, they they were so early with it, they launched their own token, Newcoin. They tried to use it for like loyalty points and people think thought maybe that was the way that project was obviously cancelled and I I their last earnings

report they announced their stable coin linked cards. I'm sure I'm sure New Bank must have had some kind of presence at the conference there. And I know Mado Libre, which is another big is like I I kind of describe it as like the Amazon and PayPal of of Latin America. They also are playing in the in the crypto front, stable coins, macado pago. So yeah, definitely Brazil's ahead in terms of like fintech. >> 100% man. Uh Nubic is probably one of the largest fints in the world. They're actually now opening a banking charter in the US. They're they're moving to to the US and they they've built a very strong crypto team. Uh recently they did some very big hires. Uh Michael Rehani from Coinbase, the guy who created the

Coinbase card. Um he he he's at New Bank now. Very very strong team there. They also had somebody from the Libra team join too, right? Libra, which is Meta's or Facebook back then's play of like a stable coin so to speak. Yeah. Yeah, I think like they're really pushing out their like crypto personnel and their and the US now with their bank charter, which is something we talked about last episode, >> right? >> David, are you seeing uh uh beyond the hiring and the planning and the implementation, do you get a sense for the like actual on the ground real use um of things like stable coins there?

Like what is how big is that? How significant of it? Is it still just a tiny little niche? Is it broadening out beyond cryptonatives? Do you have any any feel for that? >> Uh I actually think stable coins are heavily used here, Matt. Um there are there is some data and don't hold me to it because I'm just pulling this from memory, but the Brazilian IRS uh they collect crypto transaction data and something like 70 or 80% is stable coins. Most of that is Tether. So stable coins are used as a payment system for crossber transactions either B2B or B2C.

So so so the usage is pretty extensive. There is one large bank BTG puck to all. They're kind of the Goldman Sachs of Latin America. Now now they've brought it up to to retail more. This is not probably the best analogy, but that bank launched a stable coin in Brazil quite a few years ago. So, it's been pretty interesting to see. Um, and there's there's definitely adoption as as a payment system. Of course, there's there's the trading side of it, but as a payment system, it's definitely used in other Latin American countries. I would say it's even more. One thing I heard is that I think in Colombia you're gonna see like typical consumer goods like a car being quoted in local currency and

in USDT. It's not even quoted in dollars. It's quoted straight in USDT which I I guess it's also a testament of how much adoption we're seeing. >> Amazing. >> Saw a picture on Twitter too in El Salvador in the airport like grocery or duty-free like same thing. It was priced in the local currency and then also the tether sign which is like I don't know I don't know I saw it long ago enough that I don't think it was an AI generated image so I believe it but these days you never know. >> David was there any uh indication of what chains they favor in Brazil. Um you know it's always amazing to me um sitting in the US how much Tron is slept on in Asia right from the US

perspective. I mean, when you look at stable coin flows globally, Tron is doing a tremendous amount of work through USDT and like I will just tell you like at Galaxy, we don't talk about Tron that often, right? This is not something that comes up. I I'd be surprised if Anchorage or Bitwise was any different. Um, so I'd be and I think that's like maybe something that is just built in the the sort of the culture now of of some of these Asian countries. I was wondering in Brazil, is there any sort of favoritism there to a particular chain?

>> It's a good question, man. Um, I'll probably need to dig deeper, but I I do see the main chains, the ones that we are used to. So, like Ethereum and Salana. Uh, one that I probably see more in Brazil than in the US is Polygon. Uh, we were just talking about Polygon before we started uh, recording here. I probably see Polygon a little more, but it's definitely not the prevalence of Tron that yeah, hear a lot in Asia. uh maybe even more as a trading instrument than as a payment tool. Uh but I I'm not familiar with Tron being that much used in in LATAM.

>> It's really remarkable. I mean I I was looking at the the block works data page says the average transaction fee and it looked like an advertisement for Tron because the average transaction fee was like 0.01 like a penny or maybe a tenth of a penny and then Tron was like eight zeros and a one. Um, if I had been working at Tron, I would have just captured that and shared that all over social. I just look now and it's actually zeroed. Uh, which means it's it's actually rounding down. So, I mean, there's a reason it's so popular, Mike, right? It's like super cheap. >> Super cheap.

>> And the people have trust in it and therefore they've they've they've gone that way. What's interesting from the DeFi perspective though, Matt, is like they really haven't built out much of the DeFi infrastructure on Tron that you would expect given all of the stable coin and payments flows, right? Like if you I I mean I could look it up right now, but if you look at like the top dexes on Tron, they've got like 200 million of volume, right? Like almost nothing um a daily volume. Uh so that is a big question in my mind about the about Tron and and I do actually think it's used largely as a payments platform but um it's interesting.

>> I think that might be almost on purpose because if you if you start to have DEX volumes then you start to have you know competing block space and then that's what ends up driving up the price. But a stable coin transfer doesn't matter if it takes half a second, one second, three seconds, the users are willing to wait and that's why the fees are so low. I mean, and even though the fees are so low, David and I were talking about payments chains before, like Tron is consistently in the top three or four chains by fees across all chains, even with the and vast majority of it is payments and even as low as Matt said, x number of zeros before the cent. So, they're doing a ton in volume.

>> Yeah, I mean that's a great point, Mark. I will just add though that this is a solved problem on other blockchains. So for example on Salana, Salana uh partitions Blockspace based on the accounts that you touch. So if you are sending a transaction for just a payments transaction, um you're not competing against an NFT launch or a DEX transaction or you know any other sort of uh borrow lend protocol. Um it is completely separate. Um now it will still sit in the same block space but it will not compete um for transaction fees with others. So I do think though that like Salana is pretty advanced in that sense um on the EVM side which I think

Tron is definitely a fork of of Ethereum. You're right that is a consistent problem and it's been a problem on Ethereum as well. >> Yeah. I would just note one thing that you learn from this which I think crypto mistakes all the time is that brand and familiarity and stickiness matter a lot more than people think. I feel like because they're all techno cryptogeeeks uh on crypto Twitter, they're like pushing for the lowest available cost and the most people just get stuck on what they're doing. Uh I think there is real brand moat consistency in crypto which I actually think is is important ultimately to the valuation of these tokens because I think that's where some of the non-commoditized pricing will come from that there is this this stickiness of users which is

which is real right it's not all subject to um to sort of like sushi swap style attacks that that vampire out instantly there is more brand consistency and I think that will grow as crypto matur Sure. I think that brand comfort will become more and more valuable and it's one of the reasons I don't ultimately think block space will be fully commoditized. >> I mean that's a great point in >> uh oh sorry when I when I talk to our investors like if you talk to an Asian investor you're going to see a lot more interest on things like BNB. Uh while you talk to US investors you're probably going to see other things. Uh I think this home bias has reduced a little bit but it's still quite persistent and I think it speaks to a little bit of that

too. Yeah, I was I was going to add to that on Hyperlid. Um that is probably Hyperlid's most powerful asset is its brand. Um Hyperlquid users are vehemently loyal to Hyperlid. Um and uh you know it doesn't seem like even if someone comes out with a better perfex um that they're going to lose market share because Hyperlid users have been on Hyperlquid from the beginning. It doesn't hurt from the fact that Hyperlid made a lot of their early users quite wealthy, right? Hyperlid had a very very interesting business model. It didn't take VC funding and I think that is an

under reportported story on in the trenches. You'll hear it all the time, but like in the big news, you don't hear this that often, but Hyperlid didn't take VC funding and therefore didn't have VC token unlocks. Instead, it was self-funded, thereby, I think, increasing brand loyalty and trust from users. And on top of that, what it did was it air dropped Hype token to its users in proportion to how much they uh used the the protocol. And when Hype went up in value, all of those users got uh made a lot of money. And that actually created a network effect that is persisting to this day. Um, and now

you've got an army of Hyperlid users out there that have made a lot of money on Hyperlid, hold hype still, and are uh constantly promoting the venue. So, it's really it's really interesting. >> They just just got an additional lock with licensed S&P futures. We can talk about that later, but I think that's quite interesting. >> They're gonna be a giant. >> No, let's let's let's talk about it now. Like, that's that's big news for Hyperlquid. um they I mean it's a gateway like permission almost for the institutions to now trade this S&P which many other crypton natives have been doing on perpetual futures on hyperlquid um and you know last episode I or maybe I talked about how I love that there's

other instruments coming out to trade on a weekend now and that's not just Bitcoin so a lot of the volatility can be distributed to other assets so yeah like love to get your takes on this like what does this mean I've got Uh I've got an interesting take I think um if you uh bear with me for a second. So like on the surface the headline is simple, right? The S&P 500 has been has been licensed for a perpetual product on Hyperlid. Uh that means a 247 onchain officially licensed S&P 500 per. Um and obviously that's bullish for Hyperlid.

Um but that is not the real story. I think I think the real story is what this seems to imply for institutional adoption of hyperlquid because like if you and and why that matters actually is because hyperlquid it for retail is one of the most exciting products in crypto but it is not by any measure like a pristine model of decentralization right like the codebase is closed source the validator set is 25. Um, the team has a the Hyperlquid team has enormous control over Hyperlid. Um, and maybe that will change over time. Maybe this is just early but

it's not decentralized by any stretch of the imagination when you compare it to Ethereum or Salana or or even Tron or BSC. Um, but that matters uh because Hyperlid's core product is PERS and PERPS have historically lived in this very gray area. They've had to be offshore. They've had to be geoenced from the US. Um, they've had to operate outside traditional US regulatory perimeters. Um, and uh, and so that has been sort of the the the status quo, right? If you're going to have a pers exchange, it's got to be offshore and um it's got to bear on, you know, crypto per um and it can't target

US persons because if it does target US persons, the CFTC has very strict rules against PERPS, right? Pers are illegal in the US. Um they're considered a future and futures without an expireree are illegal in under the US. So that's like sort of the background here, but it all is even more difficult for hyperlquid on paper when you think about equity per. I called equity pers in a tweet a couple months ago the holy grail of regulation, right?

You regulated as a securitybased swap under the SEC. You're regulated as a future under the CFTC. Under the SEC, you can't trade securitybased swaps unless it's on a nationally registered exchange. For the CFTC, it's even worse. You cannot uh trade uh uh futures unless you're registered to do so, unless you are a CF, right? Unless you have all these different regulatory trapings. So the on both sides here, the SEC and the CFTC, um equity based PERS are very very uh risky from an institutional

perspective. And yet the S SNP knows all of this, right? The S&P understands this dynamic and supports this and is putting its flagship equity index. It's that that that huge stamp of approval on this product. And I think that is tremendous. And it means either one of two things. Either S&P just doesn't care and they're just saying, "Oh yeah, we're just an index license. We're just going to it's a licensing deal." Um I don't think anyone believes that, right? The S&P is very sensitive about how it safeguards its brand and its reputation.

very sensitive. Um, or the alternative is they understand the risks. They understand that this is a very uh touchy area for crypto regulation and they're doing it anyway because they've gotten comfortable with hyperlid. And if the S&P is comfortable with hyperlid, that is opening the door for all institutions to start trading on Hyperlid and to get comfortable with Hyperlid. So, it's it's a new more nuanced take, but I think that is a an astounding development for Hyperlid, and I think it's going to be um we have to see where this product goes, but it's um it's probably the most

bullish news for Hyperlid since Hyperlid was founded. >> Yeah, I agree with that. I mean, I I I'll maybe add my own view of the context of the decision. I think it's a meaningful step that S&P said it was okay. I do think that really opens the door as you're suggesting Mike. I think there's this uh financial development framework in the US right now which is that regulators say something can exist and then you build it and you make lots of money. As an example, they said let there be super apps and now everyone is building super apps and they're being rewarded in the marketplace. I think something similar is true here, right?

The CFTC allowed Coinbase to self-certify perpetual futures last year and then Celig is out effectively saying perpetual futures are coming, right? Like so they they're the the tea leaves are there that this is going to be okay and I think I think S&P is um front running it. I do think it's a really meaningful shift uh into a 247 365 world. I I don't think people understand how difficult will be for the existing system to go 247 365. I think a lot of people are like, well, CME will just go 247 um or NASDAQ will just go 247. But you can't really pull that thread. There's

so many things that collapse if these people try to go from markets that close to markets that never close. It's not trivially easy. And I think it's a generational opportunity for new crypto platforms like Hyperlquid to step into that and become really dominant in these new markets because they cannot flip a switch. Like the systems will break margin requirements, broker requirements, maintenance, etc. It's all set up to have these breaks. They're not there because people want to take nights and weekends. They're there for very complex reasons. And so it's this huge opportunity for Hyperlid. I think it's really significant. strong agree with both Michael and Matt. This adds a lot in terms of like regulatory standing and

perception. And I would add on top of that is that it makes hyperlquid more efficient than others as a trading venue because there's there's a whole perception and regulatory standing side. But the other thing is that when you are sourcing a per straight coming from the SNP data feed, you can potentially be more efficient, especially during times of volatility versus other because there are other S&P per out there in the market. They're not licensed, which means that they're either relying on oracles or they are relying on thirdparty kind of proxy price aggregators or something like that. For a lot of investors, this not going to make a lot of difference. But for some,

especially for the professional ones, the ones that are doing uh complex arbitrage, the ones that are doing basis trading, and this is a lot of the volume in crypto and probably even in traditional markets, we sometimes try we sometimes forget that a lot of the volume is happening from is coming from delta neutral investors. So if you are one of those types of investor who are literally paying attention to basis points and these efficiencies and you want to be uh close you want to have a strong tracking even during times of volatility that's I think is where operationally the licensed index comes and that's that's that's kind of a lock for hyperlquid even compared to other

venues within DeFi. So yeah very positive very excited to see that. I just want to add one one other thing here um that that I am a little confused about. Um and I would like love to know what you guys think because so US jurisdiction is universal for any US security that affects US markets. I don't think anyone can convince me that if this t product takes off, it is not going to affect US markets. Right?

And yet the geoblocking wouldn't matter in this circumstance. The geoblocking doesn't matter if even if a 100% of users are non US and it is completely offshore. if it is trading something linked to US securities that has an impact on US security markets, the SEC will have jurisdiction. So that is a huge I mean I know for I know every lawyer that the S&P talked to said the same thing and yet they went with it anyway which makes me think there is a potential change in regulatory posture that is going to happen beyond what just came out with the SEC um with the guidance that we uh I'm sure we're going to talk

about here. But I think more is coming. Like this the only way I can conceptualize the S SNP getting behind this. >> I just I do want to clarify just for the for the listeners like it's not we we we've been saying this is a big win for hyperlquid and it is and but the point I want to make and it's important is that it was it was actually trade trade.xyz XYZ who got the license from SI SIP and they use you know HIPP3 and not to get bogged down into details but this is kind of the beauty of this system.

Hyperlquid is permissionless. So the separate entity from Hyperlquid they are the ones who went out and licensed the S&P index from from standard and pause and they are tra they are licensed to trade it on hyperlquid. They were prior to this they were already the dominant um per perpetual offer for real world assets on Hyperlquid like something like 80 90% of volumes. So that obviously helped with them you know negotiating these licenses these tend to be like bespoke deals on compliance and revenue potential whatnot. And so, you know, theoretically speaking, another entity could also license it and and launch it on the S&P. But my the second point I wanted to bring up was it's after, you

know, these perpetual futures have no expiration date. That's the nature of them as we know. But, you know, they after the market closes, they're no longer using S&P's direct feed. They'll they then they go to the external oracle. And even before this licensing for all for reall assets the oracle price is bounded. So even after even when markets are closed unless like a weekend the price can only move so much. And this is just another this is the reason for this is risk. It's a risk mitigation technique in case there's liquidations happen in case there's oracle failure. So yeah, those two points I wanted to clarify because it's it's permissionless but then still you know there's still some semblance of

regulation and risk management happening behind the scenes as well which is you know and in one side this is the beauty about you know decentralized applications this this permissionless nature that anybody can do it and on the second side it shows the maturity that the crypto industry is going through to also put the right systems in place to prevent any like you know cascading fallout. >> That's a great point. I I think trade is like kind of hyperlquid's tokenization arm or RWA arm. Uh I think it's kind of a subsidiary of their tokenization unit. Uh so yeah, that's that's a very good point to make and and yeah and I think on the uh we I mean the S&P doesn't have doesn't doesn't print 247 prices for obvious reasons. Uh and I

think honestly I think this is a great start. This is a very very good way to to do this and kind of bridge the DeFi 247 world with the traditional 9 9:30 to to 400 p.m. world on weekdays. Yeah. >> Just sounds ridiculous when you say it, David. >> Okay. Nice. Michael, you you brought up the SEC CFDC news that we also had this week. You want to kick us off? >> Sure. So the SEC released this guidance that uh we all kind of anticipated was going to come out but it's still groundbreaking nonetheless. So the let me give the high level and uh we can talk about it. So the SEC created a

taxonomy of five categories of crypto assets each with distinct legal treatment. So digital commodities, digital collectibles, digital tools, stable coins and uh and digital securities. And the entire document is built around sorting these sorting the crypto universe into these five buckets and explaining what the law requires for each one. Uh my take is uh the most important category is digital commodities. I think that's the most groundbreaking piece of this. Uh the SEC defines a digital commodity as a crypto asset that is you know intrinsically linked to a functional crypto system um and derives its value from how that system operates and from supply and

demand not from the expectation of profits based on someone else's managerial efforts. Um and the SED SEC does something here that has never done before. Uh, it names specific tokens. Bitcoin Ether Salana XRP Cardano I think Chain Link, Avalanche, Polka Dot. Um, which other ones? Dogecoin, Sheba Enu, Litecoin, a couple others. Um, all named explicitly as digital commodities, not securities. Um so like for anyone who watched the prior SEC enforcement uh you know you know the prior SEC enforcement actions you know suggesting that Salana

Cardano and others were securities that position has now formally repudiated by this SEC. So that's a big one. The second major development is uh I think the treatment of investment contracts. So the SEC, you know, it's not abandoning the Howie test to be clear, but the commission's making this big distinction it had previously refused to make that the crypto asset itself is not the security. It's the investment contract around it that is the security and the two can be separate. A token can be sold as part of an investment contract in its primary offering. You know the issuer will make representations about building a network, hitting milestones, delivering value, etc., etc. And at that stage, the

offering needs to be registered. But once the issuer fulfills those representations, the token separates from the investment contract and it becomes not a security. And after that separation, you know, the token can trade as a non-security in secondary markets. So under the prior enforcement regime, there was no clear path for a token to stop being treated as a security. Um the only guidance there was the DAO report in 2015 where or 2016 where um the Ethereum DAO when it first launched had this unregistered tokens offering uh you know an ICO of ETH um and you know they hit the SEC came back a few years later and said that was a securities

offering to be clear but we're not going to enforce anything against you. We're not going to go after you. And people were sort of like well is that a securities offering? Is it no longer a security? I don't know. So now they're formally sort of declaring that securities can no longer be securities if they don't continue to have the proper indisha of a security, right? And what is that indisha to be clear? What is like the main thing they're talking about? Um they're talking about the following managerial efforts and not just managerial efforts, essential managerial efforts. What does that mean? So unless the value of the token derives from the essential

managerial efforts of the founders, that is not a security. The token is not a security. And they go into a lot of detail in this uh in this report about it. And so that is a huge clarification that we've all been asking for. Um I guess the last two things are >> but before you move on to that I I actually want some more clarity. You said managerial efforts of the founder but but what and if so that means if it's not the founder those managerial efforts are okay or any managerial efforts >> when I say founder I mean so typically it's called founders and promoters right so yes the founders and promoters of the

project um what I think this excludes now is like token holders promoting the token um and them being hit with uh regulatory enforcement actions. You know, it used to be the case that if you were a big bag holder of a protocol and the SEC thought it was a security and you're promoting it, you're going to get lumped in as the promoters and as the founders and therefore you're going to get hit with securities action. Um I think that is now very much uh no longer the case and it's for two reasons. one just the the clarifications on the Howie test, but the second is that the SEC clarified

in very prospicuous detail that network effects are no longer considered um essential managerial efforts. Meaning even if the founders or the promoters engage in activities that create ne network effects for the protocol or for the network that those are not essential managerial efforts. So just on staking and mining just real quick they're saying staking and mining is outside of the securities laws just not securities. Staking is not a security mining is not security. And another one that went under reportported here I think or not really talked about as much is they went into wrapping of a token and I'm sure you know Matt and

David uh have dealt with this a lot which is like explaining to their illegal and compliance team like you can hold a wrapped token uh but not uh you know you can hold a wrap token which is the same thing as the token except it's just wrapped a certain way so as to be able to be traded on a on a blockchain. um they the SEC has said that does not create a security. So that is actually big for DeFi because you need to wrap all of these tokens in order to trade it in DeFi. So I'll pause there. But um very very bullish bullish news. >> I I also thought the liquid staking tokens they also completely ruled that out as a security too which which some years ago um uh Matt I used to work for

coin shares selling um ETPs here here in Europe. Well, a while ago that was a big uh topic of discussion whether liquid staking tokens were securities or not. And I I didn't think staking was, but then I started to feel like maybe liquid staking was, but I'm glad that we finally got some clarity on that. But yeah, Matt, go ahead. >> I was just gonna I I that that I remember those sorts of debates as well. It is super helpful from a clarity perspective. I was going to zoom out and talk about why this matters at like a 30,000 foot view. I don't know if that would be uh helpful. Uh because I feel I feel like I feel like all the conversation I see misses. It's almost like people imagine this as crypto picking a lane. It's either a commodity

or security and like they think crypto wants to pick commodity because security is slightly more complicated. But it's way more existential than that. Right? The core of securities law is that you have to have people come in and register and control the protocol and do disclosures and be liable for it. So decentralization is incompatible with being a security, right? It's not like a it would be slightly more challenging to be a security for Salana to be a security or Ethereum to be a security. It's actually that you can't be decentralized than a security. There's no that those are square and round boxes. So this is like an existential challenge. And then why does it matter beyond the like challenges around

trading which I think people get hung up on? If it's unclear if you're a security or commodity and you're an entrepreneur who wants to build something interesting, if you bet wrong, you are personally liable not just at the corporate level but down into your bank account in the home that you live in for the losses that you may cause to people. And as a result, there's like a massive chilling of entrepreneurial energy such that I think the scope of what crypto can do has been like contained 50 60 70% because bold founders have looked at this and said, "Well, this would be cool, but if I do it, I'm going to lose my house and that's not good." Um, so it it was it's it's really important,

right? Before this, it was Bitcoin and maybe ETH and ETH was maybe. And then everything else, entrepreneurs were taking enormous risk or crypto literally couldn't exist because it couldn't be decentralized. That's like the the scope. That's why I think this is so exciting. Uh there there more micro reasons it's exciting, but I think we should make sure we note the big picture too. >> This is absolutely awesome. Maybe I'm I'm the one left with throwing a little bit of shade or or or talking about the nonssolved issues. And make no mistake, this is a great development. Um on top of everything that Michael said, I mean the fact that this interpretive guidance is coming from both the SEC and the

CFTC, right? So this is already a reflection of both agencies talking about working together uh to move uh financial infrastructure forward. uh the fact that we got safe harbors or very broad safe harbors around staking, mining, wrapping, airdrops, um really really positive stuff. I would say that most of what was there are things that the industry has been asking for for a long time for five, seven, maybe 10 years. No one who's serious in the industry would dispute that a tokenized stock is a security. the fact that you're tokenizing a security maintains it as a security. So that's why we have

the tokenized securities category. I think everybody would agree that this digital commodities category should exist. To be honest, I don't understand very well the separation between the NFTs and the utility NFTTS. That was like very specific, very interesting to see, right? So like something like ENS that has utility is a digital tool and something like Crypto Punks that is only a collectible is a digital collectible. So very interesting to see that they came up even with with those types of distinctions. But the two things I want to highlight is number one this is guidance. So it's obviously very powerful. Obviously, the current SEC

administration and the CFTC administration should be expected to abide by this as long as their tenurs are around. But this doesn't carry the same force of legislation. This was a first step and I think uh SEC chairman Paul Atkins said it very nicely. He said this is a bridge for the crypto market structure bill for clarity. So, they're kind of anticipating themselves a little bit towards that. But a lot of that and and and a lot of these things will be better enshrined once we have crypto market structure legislation in place.

So let's not forget that the prize is still there. The big uh the big objective of having a crypto market structure bill, I think most folks would agree that the chance to get one is kind of 5050. The window to uh to close when everybody's going to be focused on midterms is kind of coming here in a few months. So the crypto market structure bill remains extremely important because I saw a lot of people saying that because these are topics that basically is a lot of what people have been asking for in the crypto market structure bill.

It doesn't mean that the problem is solved. I think it would be very important to have these things enshrined. And the second topic and perhaps the even more important one is that the and and and and Mark and Michael talked a little bit about this before we started the recording is that there is a very important category of assets that has not been addressed and these are the revenue generating tokens. So like if you're hyperlquid, if you are a if you are unis swap or syrup morphos token. So if you are one of these tokens that are generating revenue, at least to me and to most folks I've spoken to, it is very unclear whether they we can fit them in

the digital commodities category or whether they're straight securities. There's question around fee switch. Like all these tokens I've mentioned, they have different fee switch uh kind of procedures and they're they they're in different stages of evolution. So I feel like that's the question that's still lingering. Unfortunately, these are some of the most interesting assets in the space right now. So if you talk to a lot of the smarters folks from VC to momentum driven hedge funds, a lot of the most interesting or a lot of their favorite positions are assets like hype, are assets like syrup, are assets like a or uni. So uh again uh chairman Atkins put it very nicely saying this is a

first step and a bridge to the crypto market structure bill and I think we it doesn't mean that we have solved everything that needs to be solved within the crypto securities regulatory environment. It's it's a massive step. It's a very very important first step. But we still have a few lingering questions that I think we'll be grappling with. >> Yeah, I I absolutely agree. I think the revenue producing fee switch question is notably absent and probably because it's it's more complex. Like this stuff is all just a slam dunk. I will make one note on that. It reminds me just how gas lit we were by the previous regulator

that were excited that the CFTC and SEC could actually cooperate on something. We're like, "Whoa, that's amazing." Uh, and we're excited that they could actually name Dogecoin as not a security. Uh, it it is a reminder that like the world we're in now is actually the normal regulatory world. We were in some massive outlier crazy world where we couldn't even talk to each other between the two regulators and we couldn't even make simple statements about what's a security and what's a commodity. Um, we now at least uh have done, you know, 60 of the yards. There's still 40 to go. Um, as as David said, but uh but we have made real progress

and we are in a more normal world uh than we were uh just a few years ago. >> 100%. And and I would say we saw some of that in the market price action. It's very hard to untangle because there's just so much going on. And there was the SNC uh SEC CFTC joint guidance. there was a hyperlquid S&P 500 uh licensed per uh announcement. On top of everything that's going on with macro that we don't need to repeat here, there's plenty of podcasts talking about what's going on with the price of oil and and the FOMC meeting yesterday. Um, so it's hard to untangle, but if you look at the price action of a lot of these revenue

generating crypto tokens, they were relatively weak uh after that guidance came out. And I think maybe some of these folks, they're I wouldn't say they're disappointed because this is massive progress. But I guess um these are questions that are still lingering. The exception here was probably was hyperlquid and that might be because of the S&P 500 contract or maybe I don't know some something else. We never know but it was interesting to see that playing out in the price action too. >> I'll push back. Um and and this is a little bit of a devil's advocate argument but um so I guess the question is like what happens when a DeFi governance token like Uni A or Morpho like that gives holders a share of protocol revenue? What happens? What is

the status of that? uh token. It does does getting protocol revenue uh make it a security and I can understand why people would be confused about this because security if you expect profits you're a security right but we got to remember it is profits that are derived from the essential managerial efforts of the promoters of the founders um and of course for uni for uni for morpho for a and for a lot of these other protocols the fee switch the revenue they generate is from the protocol it is from the programmatic exercise of the smart contracts on chain it is not from the

managers let's compare uh the unis swap fee uh switch and the revenue generation that that you get by holding a unis swap token to a public company deciding to issue dividends to its shareholders. What is the big difference between these two? Well, if you're a public company that decides to issue dividends to its shareholders, the board is voting on that, right? That is a decision that the board makes and it is predicated by the managerial efforts of the board and the seauite of the company. Compare that to unis swap. Uniswap had a governance

vote. The governance vote went in favor of the fee switch and as a result now the programs are upgraded and they programmatically distribute revenue according to the code. These are two very different models. And so I think um you know based on the narrowing of the essential managerial efforts definition in uh the SEC's guidance I think it's pretty defensible to say that uh governance tokens governance tokens that afford its users uh revenue streams is still not enough to be counted as a security. I will make one other point.

The SEC was very clear that governance tokens in and of themselves are not securities. And if you think about that for two seconds, if a governance token is not a security and a governance token affords its holders the rights of governance over the protocol and those holders vote to generate revenue and distribute revenue programmatically, how could that governance decision then turn what is effectively not a security into a security by virtue of distributing the revenue? So, I actually think it's a pretty solid uh I think the SEC was pretty solid in this.

>> I agree with you. I agree with you. The uh but but just to steal me on the other side and to present the reason I said it's more complex. Uh let's imagine that unis swap labs developed unis swap and still had 98% of the tokens and so the governments was only controlled by them. That definitely pushes you into a gray area if they decide to throw the fee switch, unthrow the fee switch, etc. because they have the dominant you know the the vast majority of share that's why I meant it's like more nuance when you get in practicality when you look at the token distribution of unis swap and how the governance actually works I agree with you that that's uh boots on the ground true but I can abstract back to a world where just because it's a governance token you have to do a little

bit more analysis to think about how separate that is um and that's why I think it's like a little bit more nuance but I agree with you in >> and it's there's a spectrum here right so like Even if you stay within DeFi, there's maker on one side and there's maybe hyperlquid on on the other, right? So like some of them look a lot more like centralized companies than others. And I guess the question is be what are the guardrails? What are the important questions here and the important kind of metrics and concepts that will throw an asset on one category or another. I don't know interesting to see.

>> But at least now we can talk about it. You can't decide if Doge is a commodity, then like what are we talking about here, right? Like there's no way you're going to parse Hyperlquid in unis swap. Uh so we we've moved the ball forward. We >> we normally talk about saying the quiet part out loud, but I think they intentionally left it quiet for the SEC in their statement for the reasons I think and I I think that I don't think ownership should matter. I think control should matter. Um and there's a little bit of a distinction between them but so the you know to your example M with the 98% or Michael when UNISOP made this vote I or I voted that is my vote on this centralized front end um automatically programmatically linked to

a blockchain and then it's it it already has some predetermined nature to change to flip on a P switch probably not and definitely not for all protocols it's it's more we as The builders and founders of this protocol wanted to put out a community vote and they said that they wanted a fee switch. So we with the controls over these keys edited the code whether it already had it built in or not I think is irrelevant. edited this code to start to generate to take some of that revenue cut and and you know if we were to say this if this was a Robin Hood example where Robin Hood didn't go to their board but instead went out to their shareholders to vote and you know Robin Hood is a a free tier model right

and if they then put out a a vote um to should we start to take a fee like I mean one is a security one is in and then the other one you're saying is not a security just by definition because it's a digital asset. But I'm not I'm not really seeing the distinction and and I agree it's very nuanced especially with David's point with the hyperlquid because L1 is a commodity but then they start to generate fees and then you know tempo has a dex built into it so it starts to get very blurred but if I mean if I if I had if if and I want to ask all of you all this like I mean and I'm sure you're going to have different answers to me but if I had to be honest and ask I don't want to name any

particular protocol but a a lot of these revenue generating protocols are they a commodity or they security and I know more nuance, but if I had to like just choose one, I would lean towards security. And I don't I don't like admitting that out loud because >> But why? >> Because to me, it seems like they have shareholders phrased as token holders. Um, you know, governance just framed as share share voting framed as governance. Um, revenue framed as fee switch. They have the same um characteristics that I can relate to a regular security. And in fact, you know, not sometimes when I explain to my friends who are outside of crypto what this protocol does, I I don't use the word token. I just say

share, I don't I don't use any of the cryptonative words. I just replace the words, the entire meaning stays the same and then they understand it. But if I start to use cryptonative terms, it becomes confusing. So just the to summarize why is because it just seems like it seems like. Yeah, sure. But I think we got to be really now very strict on when we talk about the conditions for a security. The SEC says in this guidance that it is the essential managerial efforts of others that would give a representation to users and two owners of a token that they can expect to make money. Does anyone think that Hayden at uh the CEO of uh Uniswap Labs, it's his efforts

that are essential to the fees generated by Uniswap on a day-to-day basis? I think the answer is no. But even if you think it is yes, there is a lot of guidance in the uh in the SEC's writings that say that actually the stuff that you probably think are essential managerial, that's actually administrative and ministerial, which is different, right? So operating a mining pool SEC says it's administrative. Running validator nodes administrative custoing staked assets choosing node operators administrative. Even running a liquid staking protocol that holds billions picks validators and issues liquid staking to tokens. The SEC still

treats that all as administrative. And so like if those things are administrative surely uh what Hayden does and the and the unis swap team by running a front end and like holding a vote and like doing a couple of other like sort of tangential things to the that are tangential to the core protocol that is also administrative even if it feels like that's somewhat similar to what a company would be doing. >> Yeah, I I think that's probably right but I think the devils are still in the details. Uh certainly crypto is not great about disclosing uh token distribution and ownership in a real-time way that people can trust.

Certainly we've seen examples of votes that happened and then were just ignored. Um like the governance is not quite as button down. You could argue uh that then that is fraudulent activity or something, right? I think there's a case to be made. So I actually I agree with you, Mike. I just think the industry needs to mature a little and we need to define these things and we need to peg them down. such that it's more formulaic than it has been in the past because certainly if you look over the history of of governance activities and token disclosures and things like that, there's definitely been some hands in the in the pie. Not always, but sometimes. And and listen, I'm playing I'm playing devil's advocate here a little bit because I agree completely that um you can take any good fact pattern in favor of nonsecurity, change

the slightest things about it and all of a sudden it gets into the securities landscape. The securities laws were written and the judges have interpreted the securities laws over the last almost hundred years um to be broad and um to not be restricted. there's not really many bright line rules. And the reason is because the moment you put a bright line rule in, uh, you know, uh, securities issuers will figure out a way to just not do those bright line rule things to issue unregistered securities.

And the courts know this and so they've made these rules very flexible and malleable. Um, that has good things for um, for in many regards. It's also bad in a lot of other regards, especially as it relates to crypto um, as we've seen over the last few years. So I completely agree. There's a lot of wood to chop here still. But um I think as a just a primmaaccia argument like just at first blush I think um it is defensible to say that UNI and other uh governance tokens would not be considered securities. >> It's definitely progress. I'm happy that we're now going to start to tackle the more complex questions. I think great great for the industry.

>> Yeah. I'm just going to I'm just going to say that, you know, if the unis swap team left, I'm I'm I would assume that like the labs team, I would assume that the price of the token would go down. Um I I I feel like that's people basing their expectations on the price of of work of the others, especially when they're upgrading code at V2, V3, V4. Doesn't seem like administrative to me. But again, I I'm not an advocate of this. I'm I I'm like I'm playing devil's advocate as a lot of us are. I I I'm sure there's a way to do it. maybe like with Burns or something. But yeah, uh I just want to end it off on any any last thoughts you guys have because we're coming up on time. There was one more topic I I wanted to just mention um the

staked ETH ETFs that are coming out. I don't know if Matt had any thoughts on that. I'm sure that's big news for you. >> I I think it's great. Um I think it's great. Look, it it it speaks to the continued progress that people are making. There have been some challenging questions around tax. That's actually what's held up stake ETFs more than anything else is is questions around tax. Um, and it's good that we're making progress on them. The thing it reminds me of more than anything is that this crypto ETF journey is in its earliest days and uh it's going to be 10x 20x 30x bigger than it is today eventually. So this is just, you know, just imagine we're just getting to staked ETH. Um,

right? Just imagine the unlocks that are coming. So, I think it's a big deal. Um, I'm excited for it. >> So, on on the tax question, like here in Europe, like if you have if you have a Ethereum ETP, it like kind of reinvests. They call it coin entitlement. So, it's not considered taxable because it doesn't actually distribute back to the uh to the the ETP holder as a dividend. But is is that the same thing with the US now or I >> I think I think you'll have to ask Black Rockck then that one uh they have the the staked uh ETH ETP. >> Okay, fair.

Um, okay. Awesome. Any closing thoughts from anybody else? >> D next week. Tune in. >> Yes. Thank you for doing my job. I will we will all be at D next week. We are actually going to be hosting the live podcast. First time we're all going to be together live in person. So, if you're not doing not coming to Das, I don't know what you're doing. If especially if you're listening to this podcast, it's it's going to be the place to be. So, I hope to see all of you there. You're going to can hit all of us up. So, please please please come out.