Salman Banaei Maps Clarity's Vote Count and Peirce's Vault Warning: DEX in the City

Transcript

The goal um is to get a vote on Cloer. This is uh the the biggest hurdle cuz you got to get 60 votes. Um there are two Republican senators that seem to not support this bill and one that is incapacitated. So that would require just doing the math, I think that's 10 Democratic senators to support. And we're really on the knife's edge as to whether we can get 10. Um and I think it's really going to depend on this ethics language that gets negotiated. >> KK is out this week. So, I'm your host today, V the GC of Veta, along with Jesse. >> This episode is brought to you by Cape, America's privacy first mobile carrier.

Same premium service you'd expect from any other carrier, but designed so your number, your location, and your data actually stay yours. Get 33% off 6 months at cape.co/chained. >> Okay, we're going to kick things off a little differently today [music] by starting with a little bit of good news. not be cryptoreated, but >> well, I first want to say you're doing a great job moderating. I think we're like without a sale, without KK here, so please just um take this as you will. Um the good news is despite me pretty much sleeping at already last night, Chicago hair and spending the entire freaking day in the airport, um lots of stories

to say about there. When I first arrived here, I'm in South Carolina. There were dolphins everywhere. It was like, "Get ready for decks, sit on the porch, think about what you're going to talk about, and we're here to give you good luck." And growing up, my mom and I used to go watch dolphins every morning when we were at the beach. And so, it's a very good memory for me. >> There's nothing I love more than a dolphin sighting. And sadly, my kids do not share in my enthusiasm. Um, okay. But let's let's jump right into it. So, we're going to do another thing a little bit differently today, which is uh we, you know, Jesse like usually does an AI segment, which I feel like we need to come up with a name for it.

>> Me, too. Me, too. >> AI corner. >> Maybe AI can tell us what it should be called. [laughter] >> Yeah, let's ask AI. Um, but we're going to actually start things today um with just not just one AI topic. We actually have two AI topics that um we're going to discuss like what happened this week or last week and then also tie it back to crypto. Um but Jesse, why don't you get us started by telling us what happened with Open AI and Hugging Face, which was like the only thing on my timeline. I'm actually gonna start a little differently, but first I do want to say that like we do talk about it as an AI segment, but I was just on a

different sort of panel talking about like advice to crypto GC's. And my first one was get out of the crypto bubble. Like don't listen to every single social media post that's out there about rumors about what happened about every statement from this regulator or this one unless it's like something that because so much happening outside of crypto that will affect crypto. So I'm not saying like go touch grass. I'm saying go think about the other technology and how the future of cyber security regulatory AI is going to affect you because I think we're seeing as crypto matures that all markets are coalescing and we've talked about this

before on there but you know obviously in a lot of ways not all crypto but a lot of crypto is merging or at least overlapping in some form of a ven diagram with tradi right and the lines are becoming a lot more gray And the same thing with AI too. So the story I actually want to start with on AI is one that is not an AI story. It's an everything story. And crypto in particular should be paying attention because everything I'm about to tell you sort of rhymes with what we've gone through, particularly the DeFi part of our industry.

>> So [clears throat] I want to start with the Chinese AI open model fight. Now, everyone's sort of talking about this and you probably have heard bits about it, but I want to like narrow us in on why it's important for the audience here. And obviously, it's salacious. There's a lot of interesting stuff and different teams and dynamics being developed, but it matters for crypto and for anyone who believes in open source and code, etc., and first amendment and code. Because once a government decides that publishing weights associated with open source models is a controlled export rather than a protected publication, the theory is going to travel. Like this isn't going to live in

a silo in AI. So let's give a bit of a refresher here about what happened for those who don't listen to AI podcast all weekend. So a Chinese company called Moonshot announced something called Kimmy K3. You've probably heard of. It's an open weight model that's just pretty freaking good. And they release the weights along with the model. So that means that not you or I on our regular computer, but anyone with serious computing power can copy it, modify it in whatever way they want, good or bad, and run it. There's no oversight, there's no license, there's no off switch. It's just code, right? And obviously the government has national security concerns. Not that's not

shocking. Um, but their current proposals for addressing them come back down to controlling what code or open- source models people are allowed to have. And then in the administration right now, they don't really know exactly what they want to do, but there's an internal fight like should we impose sanctions? Should there be federal pressure on American companies to not use these Chinese models? Should there be rules that anyone who hosts the model needs to guarantee the security and be liable for anything that happens?

So if you host it, you own the consequences. None of this has happened yet and there's a lot of internal debate in the government and then also externally. But the conversation is real and as crypto knows, you don't need a law necessarily if the conversation's strong enough because if there's a soft ban or a choke point, let's call it um that is very concerning too. You know, Dean Ball who's you don't might not agree with everything that he says, but he worked in this administration now. He works for OpenAI for a long time. He was writing a lot and saying a lot of really interesting things about policy and AI.

And it's worth like reading his stuff with a skeptical but open substantive eye because there's a lot of good there too. But he described this narrative out loud calling a soft ban essentially regulatory FUD where you don't ban the technology. You instead make every regulated company too afraid to touch it. All this comes from a fear that the models the code right the open- source weights have hidden vulnerabilities that someone will modify them and be used for cyber attacks horrible things right so in other words because people might use a technology to do something bad we need to restrict the technology now does that sound familiar to any folks here right

so like AI is having our fight right now new choke point potentially and then with laws and export restrictions. It could be just like we went through with DeFi. And it's interesting like everyone should go read Jensen Wong's um position on this. It was actually his first tweet which Denny's liked which I >> like that letter that letter right. Can you talk about that like what's >> Yeah, I I think that letter and what Nvidia is doing really interesting is really interesting. So, first I should say that Nvidia will financially benefit most likely with open source models because everything is built on chips whether it's open source or not and so they will

profit from it. So I want to layer that incentive side over it. But it's important to listen to what he was saying he's saying because he's been in this space a long time as well. So the letter says we should punish actual theft, privacy violations, and contract violations. Don't treat the model as the criminal >> just because it came from China or somebody will misuse it. Now like V, does that sound like a DeFi brief to you? You know, >> totally >> like punish the contact the the conduct. Don't ban the infrastructure >> or the bad Yeah. punish the bad actor, not like >> the infrastructure for being like misused or abused. I just like, you

know, it's not not an exact analogy to tornado cash and and you know, those kinds of cases, but there's a lot of rhyming and maybe even like more than rhyming here, like learning from it because it's the same concept of that just because a technology can be used for bad doesn't mean the technology should be banned. and Daario and Anthropic came out either this morning or last night with um a blog post because they hadn't publicly commented either way, either signed uh Nvidia's letter or otherwise. And they said the national security concern is real. They want to accept that. We know that

Anthropic has been saying that over and over, but it's not an open model closed source like problem. national security just issues just exist with all of this. And what he said once again from the crypto playbook, he said, "The scariest model isn't the one you can download and change. It's the one you can't. It's the one that's trained in secret at a centralized entity and handed straight to a military or a government or whatever." And so the potential ban doesn't actually protect anybody. And you know me, I worked in national security. Like I really think that that's an important concept, but it

cannot be overused in order to be able to go against something that you don't want. Like you need to have a real understanding of how this tech works, whether it's going to actually impact natural security. If yes, is the balance sufficient for how it can help? And there's like an extra added layer here. And I know we're going to talk about the hugging face open AI incident that these open-source models actually can be used in a and leveraged in a better way to stop cyber attacks from you know an open source model from another country. So I I don't know if you want to pause and talk about open AI for a second.

>> Yeah. Right. If we're if we're talking about like the like using it to defend yourself against >> Yeah. Correct. Like I guess that's that's a good segue maybe into the hugging face. >> Yeah. So this was another big huge AI story >> and we might hit on another one but essentially and I want to this one like you can find a lot online on the technical side but essentially open AAI was using a model we think it's one that hasn't yet been released and they put it in a sandbox which is a closed room that no information should be able to get in or out unless it's given through this like tiny slot in the wall right so as part of the sandbox box, the agent or

the um the LLM was told, "You need to solve X problem and then figure out the best way to do it within this sandbox." Now, instead of trying to solve that problem, the agent went and found a way out of the sandbox, went to Hugging Face, which had nothing to do Hugging Face is like sort of a GitHub for LLMs. You could think about it that way. Um, it went there where it knew or could figure out that it had answers to this problem, had an intrusion on hugging face and took the answers that way. And it's interesting because there's the concept

of the paperclip problem or paperclipip something, I forget what it's called, which I'm sure everyone here or most people here have heard of, where essentially the worry about AI, I think this was like something from a decade, two decades, three decades ago. The worry that was if we tell an agent to make as many paper clips as they can, that's their only goal. Maybe at a certain point they start thinking humans get in the way of making more paper clips because there's enough space on Earth or, you know, they're using up resources that could be made to get paper clips. So, it gets back to the point of we have seen agents hack. We've seen cyber security attacks. Like you've heard me talk about that and I don't want to overblow this as like everybody

freak out, but it's interesting to me that like this is a singularity issue. Like this is an alignment issue where the person telling the agent um what to do has a different end goal in their brain than what the agent wants to do. And so the the pack fact about the open source models and how it all connects is we don't know if like OpenAI knew this was happening or what, but the first person who reported it was HuggingFace and they only found it because they used an open-source model to figure out what was going on. So the argument that Nvidia has made and others have made is

that open-source may be the only way to actually protect from a lot of these intrusions. And today actually or maybe it was last night but the news of today is that Nvidia started open security alliance or something like that to build with other I mean it's interesting that there's no like open AI there there's no anthropic as part of this but to build a security like standards for open-source models. So, it's a really interesting conversation that touches AI, it touches government enforcement, and it touches how we think about open sources and yeah, like DeFi and open source models are not exactly the same. The weights

you download, it's different, but the concept of tech being used for bad means banned tech, that's really scary. >> Yeah. I So, two things. One is what was really terrifying to me about the hugging face story is that like I think you know when people think about like AI gone rogue or like doing bad things they assume that like the prompt to the the AI was right like that's just naturally how you think of it or like intuitively how we've always thought about it. But what was scary about that and I think we all know this by now is that the prompt doesn't have to be malicious. it could be just them carrying out their task and they you know decide to do it in a way that turns out to be um like dangerous

or risky right so that was one thing that was really scary and then I think the other the other thing that this raised for me is like you know when we talk about like making things open source um makes it like makes it so that we can use it to defend ourselves or protect ourselves against like bad actors But it like to me the the reasoning almost feels sort of circular, right? Like if if you buy the argument that the reason the bad actors were able to do what they did in the first place is because it was open source, right? So like you know like where like how do you attack that problem basically?

>> Yeah. And it's interesting because like a lot of people don't really understand how open source works and I'm not saying I am the total expert here but essentially like it allows you to download it onto a machine and then you can change it on there and so there's technically no centralized entity but what happens is that you're leveraging like a lot of these open-source models they make money based on APIs assuming that people aren't going to fully host it locally and how you look at how people use open source versus closed source. It's not one or the other. Like they're using things for different things. So there's also a problem there.

But I don't know if a ban is going to solve that, especially because like oh this is another weird fact. So Hugging Face used the opensource model to figure out what was happening. And it's unclear from the background about whether like they realized it was open AI or OpenAI came and told them it was them. It's unclear. But in the future, if someone's using an open-source model, um you are not going to be able to tell who it comes from. So then you're sort of screwed.

>> Yeah. Yeah. That's really interesting. Um I don't know. I feel like all of these stories make me think like AI is good enough. Can we just like stop? I know. I know. But like what I guess I also wonder like why is crypto being so quiet here? >> Because I don't think we should be sitting on the sidelines for this conversation. Now granted, it's only really beginning, but it's been something I've been saying and yelling into the clouds on many, many episodes here because crypto has spent years fighting the argument that because criminals use it, the government treats the technology bad, right?

>> Yeah. We can't just stay quiet and deal with it because once the government decides that publishing weights is a controlled export, which it might do. It's, you know, the theory is going to travel. It doesn't just stick with this one tech. >> Yeah. I also think there's, you know, like we talk about tradeoffs a lot on this pod, right? Like I I think you can also make the argument that like even if that's true, right? that tech I mean this is always going to be true like tech can be used for um bad purposes maybe the innovation that opensource allows is worth that tradeoff right I actually think that you know like it's it's worth asking that question honestly right everything everything comes with

trade-offs but I but I agree with you that like you know in crypto we've spent years proving that open-source software can create enormous value. And you know, my my hope is that AI uh learns that lesson because they're they're basically going through the same thing that we did. It's super funny because I feel like I don't want to talk about FTX, but like I feel like when a lot of that happened, people outside of crypto, but even some people in crypto, but Matt Lavine in particular was like crypto, you're just repeating or all the bankruptcies, you're just repeating all the mistakes that banking and tradi

already learned. And in some ways, I don't know if like AI is repeating the mistakes, but like there's a lot to learn from what we've gone through. Not that we've like successfully overcome it, but we've made a lot of these arguments. >> Yeah. We're still going through it. Like, >> I know >> fast forward, but AI is going through it even more fast forward. >> Totally. Totally. I mean, AI and crypto, I don't know if I like overthink this or this is what keeps me up at night or something, but in many ways, they're similar in that there's been a lot of tech developed before. Like AI and crypto are not new. Obviously, there's really new things about both of them.

And AI might be transformative in ways that other things haven't. I don't know. >> We can have that debate forever. But one thing that I remember thinking about crypto I don't know eight nine years ago was you know it was being built like the plane was being built when it was already in the air like it was being built while customers were already putting their money on it and so it had to learn through customers losing their money etc that I don't think that happened in the same way with other tech maybe some forms but this one seemed like huge like We were trying to figure out how do you build a DeFi e ecosystem while people were in the DeFi ecosystem.

Yeah. >> And the same sort of thing with AI like yes AI has been machine learning has been around for a long time but once open AI released its first like chatbt model people saw it and people used it and that was when the vector of vulnerability began. >> Yeah. Yeah. Well, that's I I think that's kind it's kind of a double-edged sword, right? The fact that like something being open means that like innovation and just like the evolution of that thing happens a lot more quickly also means that we can figure out like where the weaknesses are more quickly and and fix things, right? It's just like the iteration happens a lot faster

than it does with closed models, which is good and bad is, you know, I think kind of the point. >> Um, okay. So, another AI related story that caught our eye this week and I think also like has uh really interesting like parallels to to crypto and sort of the journey that we've been on was Apple's lawsuit against Open AI over alleged trade secret misappropriation. So, Apple claims that former employees who joined Open AI's hardware team improperly took confidential information with them. So, you know, obviously those allegations will be sorted out in court, but I think it does raise broader a broader question. Um, that's really interesting, right? So, you know, building on what we

were just talking about, um, you know, one of the things that we've learned from crypto over the past decade is that some of the most valuable technology in the world can be completely open source, right? to think about you know Bitcoin and Ethereum and unis swap and a you know anyone can read the code fork the code improve the code right so the the code itself is not generally the moat um [clears throat] instead value acrru to like the stuff that's being built on top right like the network the apps um the liquidity the distribution uh the the user network the community right and the brand so I think that's that's actually very profound because it's a it's a different model of innovation than what

you traditionally see in tech. Um, [clears throat] and so like if you look at what's happening with AI, right? Right now the biggest AI companies in the US are investing enormous amounts in proprietary models, uh, proprietary data sets chips infrastructure u and apparently now hardware, which is the subject of this lawsuit. Right? So in other words, um AI is trying to like these companies are trying to gain competitive advantage from closed source things. And that I think is a really fascinating contrast with crypto where the competitive advantage often comes from things that everyone can see, right? It's almost like the total opposite philosophy. And I think from

from a legal perspective, it also highlights a really important distinction that pretty much every tech lawyer spends time thinking about, right? So um when you change jobs as an employee, you obviously you know you get to take your knowledge and your skills and your experience with you and you know that's a lot of times how innovation happens. But what you're not allowed to take are trade secrets or confidential information belonging to your former employee employer, right? So courts like litigate these issues all the time. they spent a lot of time trying to distinguish between those two things because it it can sometimes be hard to draw the line, right? So, if you're, you know, one of the world's like leading hardware engineers, your

experience is obviously incredibly valuable, right? So, the question is when does that experience become confidential knowhow or um or something that you're allowed to take with you and to use wherever you go for your next job? And I think a super important layer of that V is like I'm sure everyone here remembers how non-competes have been outlawed particularly in California strenuously. So how do you enforce this because there are so many people who have moved from appall to open AI and there is at least a lot of allegations that they took information and they continue to take information. So has

trade secrets like litigation become a replacement for non-competes for the really extreme situations? >> Yeah, non-competes have become a lot more restrict. I mean like it's actually the non-compete the litigation over non-competes in the past few years is like very fascinating and it's been very active like you know things have been overturned. I don't actually even know what the current status of it is like these days but they're either legal or not enforceable. I don't I don't know what the current status is. Like an appeals court may have overturned something like that.

>> California it's uninforceable. >> Yeah. I think New York may be the same. But anyway, that's not >> Yeah. Not the point. Yes. But it's interesting because like you're right. So with the open source conversation, does that mean that trade secrets become less important? Does it mean that like open source is a quote unquote better path? Because I don't know if anyone's ever been a trade secrets litigator or been involved in a trade secrets case. I unfortunately have been involved in the latter, not me personally, but just dealing with it uh for you know entities. And it's a hard charge to prove and you see like there's a lot of cynical people here because you know hardfork was talking about how

although the allegations are really bad like they said something like Apple treats everything that h happened in Certino as a trade secret. So, like maybe they've been building this, but at the same time, like let's just talk about one of the allegations here, which is like a guy who left Apple gets into the Apple's network storage, messages a friend who still works at Apple and says, this is a quote. LOL, I found out I can access the network storage. So funny. And then she writes back, I'm ready. So, look, could we interpret that in many different ways?

>> Not really. But that is the paragraph that gets you past summary judgment, you know, if you can show it. So it's really like interesting to like look at this in the holistic view of these behemoths, right? Apple, Google, now anthropic and um open AI like they are competing to see who wins here and litigation has become a tool in that. >> But that but that's what's so fascinating, right? is that like if open source does start to become the default model, it really does change the nature of all of these fights and potentially like the law and obviously like the need to litigate a lot of these things. So I think that's really interesting and again I think like there are a lot of lessons to be drawn from crypto because

I think we have actually stumbled onto a model that will prove more resilient. Right? So think about this, right? If your competitive advantage is open protocols, network effects, and interoperability, you just become a lot less dependent on protecting individual pieces of intellectual property or IP, right? And you and you become like the need to enforce non-competes and like you know, trade secrets and all of that just becomes a lot less important. So I I think like if open source does become the default with a lot of these technologies, it does transform the nature of all of those things. Um okay, anyway, let's let's move on. Um

we are going to go to break first to hear a word from our sponsors and then when we come back, our guests will be joining to talk clarity, defy lending, and vaults. So stay tuned. We'll be right back. If you hold crypto on your phone, your biggest vulnerability isn't your wallet, it's your carrier. AT&T, Verizon, and T-Mobile have been breached again and again, and SIM swaps are still one of the easiest ways for attackers to drain accounts. That's where Cape comes in. America's privacy first mobile carrier.

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>> Joining us now is Salman Bani, the GC of Plume, uh also former head of policy at Uniswap and and Chain Link, I believe, and also someone who has spent time >> oh ch analysis, sorry. And someone who has also spent time as a lawyer at both the SEC and the CFTC. Um and lately, I think you've been involved in efforts to try to get clarity over the finish line. So, we thought it would be great to have you on just to give us an update on all of that. Um, and also Commissioner P's statement on DeFi lending and vaults. Uh, something that you and I talk about all the time just because, you know, that's what VA andly involved in. Um, and I I think this statement could be best described as like a warning shot,

but we'll we'll get into that in a second. Um, do you want to start with a clarity update? I know you you work a lot in particular with um the Democrats in Congress and their staff. So, I'd love to hear in particular like how they are thinking about it right now. >> Yeah, thanks V. Thanks uh thanks for having me on. Um yeah, so I uh I've been involved in uh some of the this the discussions around clarity um for several months. Um it's picked up uh last couple weeks. So, I've been on the hill uh several days over the last couple weeks meeting with members and and different offices on on both sides.

Um I would say uh you know the the sentiment is um generally uh positive but there's a lot of concerns that political factors um may be affecting this legislation um that go well beyond I think the gaps on policy um which do seem more surmountable. Um, but yeah, uh, I caught up with some lobbyist friends, uh, shout out to Keith Castaldo, uh, this morning to get the the the absolute latest. Um, so you may have seen this morning, uh, in Morning Money. Um, Ruben Ggo promised that he's working on ethics language with Tom

Tillis. Tom Tillis being a Republican senator that's fallen out of disfavor with the president that's publicly you know called out uh some of the uh you know shady dealings of of him and his family around crypto and other areas. Um so he's seen as a a credible go-between Republicans and Democrats. Um GGO um has promised Ggo is a Democrat by the way um from from New Mexico or from Arizona I'm sorry. Um, and he is uh he's been very pro- crypto um since he got elected a couple years ago. Um, and he he really sees himself as the the one of the leads. He's the ranking on the digital asset subcommittee um at at Senate

Banking. Um, and he's promising ethics language in the next couple days. Um my understanding [clears throat] is that a uh one of the red lines for Democrats is having some kind of state authority as a check on a uh Department of Justice that may or may not um actually enforce the ethics provisions. Um so that's that's a red line and I think we're going to see some language there where the state AGS could have some authority in enforcing the ethics provisions. I think that's what Democrats would like to see. Uh there's precedent for this. Um the CFPB's um leg statute extends uh state uh enforcement authority to state ags as

well as the federal government. So there is precedent for this kind of thing. Um, >> I definitely want to get into the ethics provision deeper, but I have a question about something you talked about, which I know is obvious to you and maybe some of our listeners, but you talked about the difference between policy and politics, right? And how politics might get in the way. I think it might be useful to like dive into what you mean by that a little bit more because it's easy to sort of glaze over those comments and to people that don't know those words or don't work on the hill like you do, it's sort of difficult to know where the winds are taking each part.

>> Yeah. So, it's really a matter of calculus, right, and goals. So when it comes to a political issue, it's the kind of issue that a member has to take back to their district or to their state um and have to be able to defend themselves not just from, you know, um losing, you know, potential support in the general electorate, but probably even more importantly these days, it's the primary electorate. Um, and so taking, you know, a position, for example, for a Democratic senator that could be seen as giving in to Trump, um, could put them in danger with primarily a, uh, primary, um, electorate. Um, and so that's something that a lot of these members are very sensitive to, um, given

the dynamics. You know, there's been a number of, uh, you know, upsets in in different, um, primary races this year. Um, that's a trend that's likely to continue. So that's [snorts] that's the that's what I call a political calculation is like what is the um cost benefit in terms of electoral politics. Um and then there are policy differences. So policy a policy difference would be on a matter of public policy. So, for example, um a lot of senators are very concerned about illicit finance um and the potential of if we bring digital assets into the mainstream, does this facilitate um illicit activity, sanctions, evasion, uh moneyaundering, human trafficking, etc.

And so that is uh that's something that reflects the senator's uh policy preferences. Democrats have some tendencies, you know, some some some priorities. Republicans have some priorities. Often times they might agree on the outcome, but they may not agree on the mechanics um and the specifics of how to get there. Um and so that's that's that's that's a policy question. So one of the policy questions that's front and center is the extent to which DeFi and DeFi related intermediaries um come under uh the Bank Secrecy Act.

You know, the the US's anti-moneyaundering statute. And so that's one of the policy um you know debates that's that's happening. But this political issue around ethics has really overtaken most of the negotiations. Can a question on the ethics part and be I didn't mean to cut you off but if I was an alien coming down to earth looking at this I would sort of think like yeah why shouldn't everybody agree that you shouldn't be you know enriched based on this right and there's obviously different dynamics to it but from the outside it seems like this should maybe be the easiest part of the bill because it's less technical and trying to understand how to protect DeFi

and stop elicit finance and much more political I guess. Um so I think it it would be helpful to understand what the two sides are going for. Um I think some of us have a sense of what it is but if you could lay it out like being on the ground rather than just getting the rumor mill. >> Yeah. So, um I think the you know the Trump Trump and the Trump family have uh you know engaged in different types of business activities um you know since uh the president took office. I think his net value has gone up um by what is it two two billion and I think a large amount of that um came out of the the memecoin issuance that came the weekend before he uh he was inaugurated. Um

that's really something new. That's not something we've ever seen before. um and the use of a memecoin as a way of you know making money um by a political official um or as a mechanism to to curry favor with with the president is really unprecedented. Um and so Democrats's view is that that should not be allowed. We should not have these these situations. At at at best it creates a an appearance of a conflict and at worst it's a mechanism to curry favor with the president and get favorable policy. uh based on, you know, your holdings of memecoins um that benefit the the president's, you know, direct bottom line. And so that's really been the focus of this uh this ethics

language. Then there's just general, you know, business dealings, you know, including World Liberty Financial, which involves members of the Trump family and senior members of the administration's family. Um and there the concern is probably more general as in it's a business. Um it could be used as uh you know doing doing business with that business could you know curry favor with senior administration officials. Uh but that that that's been done you know um previously and the the ethics restrictions um that are currently on the books do not extend well into um the family of uh a president or a senior administration official. And so that's a broader question. Um, and that really

isn't touched by the current ethics negotiations, but I suspect it will become a focus for oversight, particularly if Democrats take over one or both chambers um, next year. >> Yeah. And then what about the BRCA? Is that issue pretty settled or you still seeing back and forth on that? >> I I still see back and forth on that. What I'm hearing from a lot of Democratic senators and their staff is they want to see where law enforcement lands on this. If it ends up being a net positive for the broader law enforcement community, um you know, the the way this bill, for example, extends the regulatory perimeter to cover um a lot of DeFi, including elicit finance, um you know, wallet screening at the at the

uh interface level or the DeFi messaging system level um in the bill. um you know that that is seen as a net positive. Um there there is some concern that car the BRCA carving out DeFi developers from having to register as money transmitters um could you know hamstring law enforcement efforts. There's been a mixed public record um among um you know u people in this administration, people in the last administration as well as different law enforcement groups. Um it's notable that a couple key law enforcement groups have come out in favor um of this bill as a net positive.

Uh that includes the Fraternal Order of Police which gave a statement I think it was a couple days ago um saying that they support the bill um as well as the national uh organization of black law enforcement um which came out I think it was last week in support of the bill as well. So, um there seems to be an emerging consensus among these law enforcement groups that this bill is a net positive. Um and so that that could um you know give cover to these Democratic senators that hey this this bill at least on the BRCA D5 regulation front is a net positive and something that you know they can they can they can work with and and and potentially support.

>> Okay. Awesome. And do you expect to see a lot of action this week like a lot of movement? I guess the what is it the August 4th? Is it August 4th or August 7th? >> Um yeah, so I think uh the the goal um is to get a vote on Cloer. This is uh the the biggest hurdle because you got to get 60 votes. Um there are two Republican senators that seem to not support this bill. Um and one that is incapacitated. So that would require, just doing the math, I think that's 10 Democratic senators to support. Um, and we're really on the knife's edge as to whether we can get 10. Um, and I think it's really going to depend on this ethics language um, that gets negotiated. And this ethics language has

three key stakeholders. Um, there are the Democratic senators that are leading the negotiations. So that's Ruben Ggo from Arizona, uh, Kristen Gillibrand from New York, and then Adam Schiff from California. Um it's possible we could get something that um Jill Brand and Ggo could support, but maybe we don't get Shiff. Um if we get Shiff, uh then I think that unlocks a lot of senators. Um Shiff has been, you know, very uh principled and has a strong reputation on issues relating to government ethics. Um and so him lending his support would would would would actually bring a lot of credibility and and you could see above 60 votes potentially. Um, >> yeah,

>> I would say, you know, there's probably about a third, maybe half of the Democratic caucus that is probably not going to support this bill almost no matter what. Um, so the question is whether we can get above that that 10 Democratic vote threshold or not. >> Yeah. Okay. Awesome. Thanks so much for the update on that. I wanted to move on to Commissioner Pur's statement on DeFi lending and vaults from last week. Um, so Commissioner Pur released a statement last week about vault and onchain lending that I think um is actually one of the more important crypto statements we've seen from her in a while. So I've seen a lot of takes on what this statement was trying to do. But I personally read it as like a warning shot but also collaborative, right?

She's basically saying, "Look, come in and talk to us because these things do raise regulatory questions and we want to better understand whether and how they may come within the SEC's regulatory perimeter." Salmon, how did you read it? Yeah, I I agree with you and and I think one of the um the key call outs is for those of us in the industry to just come in and you know help educate the crypto task force and the SEC staff in terms of the vault ecosystem. Um and I really break it down and I really break that down into the you know what I'll call the vault supply chain. So u both Vita and Plume are developers of uh vault protocols or you know on our side it's

the Nest protocol. Um so there's the development um then there is the curation which is um developing essentially a vault strategy you know the vault will invest in these assets it'll be automated it'll be discretionary um and then there's what I call something in between which is the administr vault administration so this is kind of the back office so once the curator has designed the portfolio strategy for the vault the vault administration the vault administrator then carries out tasks like rebalancing the the the the vault based on incoming stable coin and the the overall strategy of the vault. So this is the vault administration function I see as

analogous to fund administration which is not generally regulated unless you you know touch on um you know uh investment advisor activity or transfer agency activity in the in in in the traditional finance context. vault curation though um you know it it it does look like uh it it could trigger um aspects of securities laws uh potentially commodities laws depending on the the portfolio strategy. Um and then one of the things that Esther first also focused on was the application of the securities act of 1933 which governs um registration of securities. Um and so she she you know pointed to the fact that certain vault tokens

um and the overall context of of the the function of the vault may trigger uh 33 act issues and she cited Reeves and uh you know our our our friend everybody every every crypto lawyer's friend Howie as well. So actually she doesn't say how is she I think in the footnote she cites foreman >> does she okay >> which is like an option but yeah >> but yeah she does she does talk about investment contract analysis um but yes >> so >> um >> so yeah as you as you parse it you have developing vault protocols you have vault administration vault curation and then the nature of the um token

>> uh itself the vault the vault token the receipt token Yeah, I also think um another thing that like people seem to be missing is that the statement wasn't just about vaults, right? It's all it's also about the onchain lending protocols, right? Like she says in the statement quote unquote uh onchain loans depending on the party's motivations, the plan of distribution and other relevant factors can bear the hallmarks of notes that are securities. So she's just basically laying out the reed factors. So that that has nothing to do with vault. She's actually saying the onchain lending protocols like even direct interaction with them can raise security questions.

>> That's right. Another another thing and this this was something um you and Jesse were talking about before I joined is uh the uh you know the extent to which there is a human factor involved or not um and reliance on open source code as opposed to you know human discretion. Um and so that's that's also a factor that she she points out. Um and she alludes to you know there may be certain structures that lack a requisite human element um that might bring you know uh some of these vault-based products um out of the scope of securities regulation. There's also another aspect uh that you know you and I have talked about V which is the commodities uh law aspect of of of this um and you know there's registration obligations for

commodity pool operators that pull assets from investors and then invest in commodity interests um which uh includes uh not just uh commodity derivatives but also options on commodities. >> I can't saying that right now. I'm like the SEC stuff [laughter] the security stuff is like enough. I I think you're you made a really interesting point and one that does connect to the open source conversation of like human in the loop like how many times do we talk about that with AI governments. I I would ask you guys like on the vault side it seems like aside from AI DeFi has been having this conversation forever like where is the human how much control and now it seems like each of these conversations are

really being narrowed down to different products right so now there's a whole conversation about vaults and what does that look like and obviously aentic finance is something I'm working on as well and it's the same sort of rhyming of patterns across it like do you think that even though we're we haven't been able to solve sort of the DeFi holistic question of human in the loop, we're going to have to nail down on specific products. >> Yeah. So, I think it's uh it's there's an interesting common thread between what's happening here in clarity um Hester Pers's speech as well as a statement that FATF published yesterday on the application of AML on DeFi. And all three of these the common thread is

control. Um when is there requisite control to trigger regulatory obligations. Um and the way clarity and fat if you know if you squint your eyes across the two is it's really control over the protocol. Um is there a discrete group of people um that have the ability to change the the the core functions of the protocol? and if there is then some kind of regulation should attach. Now, what's what's interesting about the FATF report is it doesn't necessarily mandate um the specific type of AML compliance that we've seen, which you know, I I you know, a lot a lot of people at Defi are complaining about this report. Um I I'm focusing on the glass half full part

>> which is um that it it does you know contemplate ways of complying that don't necessarily require traditional you know customer due diligence uh KYC requirements um and instead opens the door to some kind of onchain native way of compliance and in the form of um blockchain transaction analytics uh freezing and seizing capability uh things of that sort. Um, so >> one really interesting shift I've noticed in the last few years about how we talk about DeFi is like we've kind of almost moved away from this con concept of decentralization as like the mental model and now it's this idea of control as like the organizing principle, right?

And maybe decentralization was always a proxy of a kind for control. But like I I do think thinking about it in terms of control and discretion um is a more useful way to to think about whether and how the regulations apply. >> Yeah. >> Isn't it different like is something can be decentralized with many people sort of touching it, right? and having sort of human in the loop as we're talking about, right? And so I sort of don't know if that's the right direction for us to go. I mean, like look at us struggling with control over the past I don't know how many years,

right? And so I don't know what the right answer is, but um >> well maybe the the better way to to think about it is like centralized control like is there a centralized party asserting control, >> right? Because like you know even with these open protocols like the the onchain DeFi lending protocols there are actors that make decisions about how the protocol operates right so they will set um you know they decide things like what collateral is acceptable and other things like risk and oracles and you know they make decisions that do affect how the protocol operates right but it's a lot of times it's done in a

decentralized way like it's a some sort of like dis um like dispersed like governance body, right? So maybe the right way to think about it is is not like decentralization is a proxy for control, but it's a proxy for like the lack of centralized control. >> That's right. And that's that's that's the the view articulated in clarity. Um, another interesting thread between clarity and the FATF report is that they both have carveouts for some limited control as it relates to things like cyber security. So, um, you know, there is this option of, for example, a security council, you know, voting very quickly to address some kind of cyber security vulnerability. And that in and

of itself is is in and clarity is especially clear um doesn't trigger, you know, the requisite centralization. That's like a uh a carve out to facilitate that kind of cyber security uh um mitigation. >> Yeah. Yeah. I I think that's something we want to incentivize, right? Without like then subjecting the protocol to like the full speed of you know reg. >> And then the next question after well if there is requisite control then what kind of regulatory obligation should attach? um you know and and my my argument is that the the control uh should extend to the kind of activities there should at least be an analogy between that level of control and

regulated financial activity. Um and it's not necessarily like if you if there is control then the whole paniply of regulation attaches. it's instead tailored to the amount of control and then what is feasible within that um you know scope of control um from a regulatory compliance perspective. Uh so for example you know if if a uh you I'll use the clarity terminology if there's a um a team that controls quote unquote a nondentralized trading protocol uh what is the extent of the regulation? Now in the clarity bill um there is clearly uh authority for um Treasury uh to regulate these

entities um as um under the under the under a limited version of the BSA. Um it it is a onchain native way of compliance. So it looks a lot like you know what the FATF report suggests and in its rather flexible approach. Um so it doesn't necessarily trigger CDD you know KYC obligations but some kind of um onchain um blockchain analytics you know uh is is would be appropriate under clarity and that approach is mirrored in the fatf report. [laughter] Now, um, one thing I was prepared to talk about, if I can just jump jump right into it, uh, because I know we only have five minutes, is what happens if clarity doesn't pass,

[clears throat] right? So, um, a lot of, uh, you know, people here in DC seem to think that the next Congress will not move forward on any kind of digital asset legislation given that Democrats are likely to control one or both chambers. Um I actually think that there will be efforts um uh to come up with uh a new version of clarity. It you know probably won't be called clarity because of political baggage at that point. Um but the uh the interaction of the Biden administration's approach with the Trump administration's approach and this underlying need um to regulate the space and the recognition of that need um that at this point is bipartisan I think is going to um generate enough momentum

that there will be um you know digital assets legislation um under the next Congress as well. Um you know there's different ideas um around what it might look like. Um I think you know uh we it will probably focus more heavily on ethics you know um that that'll definitely be a core part of it. Um and the when you see publications like this FATF report um that also provides uh some institutional you know international institutional backing for what an approach to regulating DeFi would be. Now, I I would expect Democrats to push um deeper into the supply chain. Uh but I do think that

there is and you saw this with um the leaked version of the Democrats's negotiating points on Clarity from early this year um where they had an exclusion for DeFi developers. It was just much more narrow than you know what what ended up being in in Clarity. So within the the framework of like this institutional architecture that's developing um you know through through reports like this fatif report which by the way in included uh you know representatives from treasury um in in drafting it um I think we could we could kind of foresee where Democrats might land on future uh digital asset uh regulation. I think another area where Democrats will focus on is um trying to

trying to more carefully um uh avoid instances where um it's easier for example for a corporate issuer to launch a memecoin um and get around a lot of uh you know the securities regulations um as opposed to issuing you know common common stock. So um >> a lot to a lot to work [laughter] through there. >> A lot a lot to work through. Fingers >> crossed. We should probably cover the fattest stuff on another that that's an important report that I think people are both reading wrong and is worth talking about too because whether this passes or not, but especially if it doesn't pass, um, that

is going to be a model that people look to >> for sure. Yep. >> Thank you so much for coming. That that's interesting that you think that like even if it doesn't happen now that it's it's not like it's never going to happen. Although I think we can all agree that we do not want to go through this again. So still fingers crossed for like the next few weeks. Anyway, Salman, thanks so much for joining us. Um everyone KK will be back next Tuesday. Can't wait and we will see you then. >> Thanks V. Thanks Jesse. Take care. Hey,