Salman Banaei: Why CLARITY Is More Likely To Pass Than You May Think (Insider Scoop)

Transcript

Hey Andy, hey Rob. How you doing? >> Good to have you, buddy. >> Good, good to see you. >> Good to see you. Thanks for having me. >> How was your weekend? Did you get some time off? Cut some grass? >> I did. I got uh kids that are 10 and 7, so I spend a lot of the weekend driving around the DMV area. >> Love it. Love it. Yeah, we had that smog in New York. I was in Cape Cod. It was It was nice to get away from the city. That's for sure. Um and it sounds like you had a busy end of the week in DC, man. So, yeah, I know we're on the precipice of clarity. I think we're looking at the August 10th or 17th deadline is kind of what we're hearing. And I mean people are people are throwing all sorts of figures and

predictions and takes, so wanted to get your insights as to what your experience was the last couple days in DC. And uh yeah, man, fill us in. >> Yeah, well, I you know, while I was in DC, um there was basically four themes to the discussions. Um and the gap is both a political one and a policy one. I think the policy ones um we can we can cross those. Um the political ones though are challenging. Um I probably the one that's the the biggest impediment to this bill becoming law is around ethics.

Um so, Donald Trump indicated I think he uh he he made about $2 billion last year um in his latest financial disclosures off of crypto. Um mostly off of his meme meme coin. Um and that's fueled a lot of um controversy, um to say the least. Um publicly, in particular among Senate Democrats. And we need, you know at least nine of them. Um I think uh just given that there seems to be a couple Republicans that won't be voting for this bill um to get the 60, which is what we need uh to get for this bill to get out of the Senate.

Um nonetheless, it was clear, you know, from senior Dems and their representatives um that Dems do want to get to yes. Now, I don't know whether that's signaling um you know, to to stay on the good side of the industry or whether that's it it's it's earnest. I think it's earnest. Um I I do think they recognize that uh while this bill may not be perfect, it's a step in the right direction. Um and it removes this cloud um of not having legislation in the space um over the heads of of Democrats, which um has been perceived as a political problem for Democrats coming out of the Biden administration.

So, I'm optimistic. Um I spoke with a friend in the administration a few weeks ago. He asked me, you know, what I thought the odds of this bill passing were. At the time, I said 20%. Um he said, "You're you're being very optimistic." Um so, I actually came out of the meetings last week feeling even better. Um I think we're at 40, maybe even 50%. Um I think if we can get get a workable outcome on ethics um one that in particular would prohibit the use of meme coins for, you know, fundraising uh by by federal politicians um I think we can we can get enough

Democrats to support this. Uh one of the things that came across in in meetings, particularly with Republicans was that over the weekend, we would be seeing some language on ethics um by today, actually. Was their goal. Um I don't think that's that's come out yet. Um I haven't seen that language. It may be being socialized first with a select group of Democratic senators um that are uh looking at this issue very closely. Uh Ruben Gallego being one of them. Um I'm hearing Adam Schiff is another one.

Um and then one or two others. So, there may be some private negotiations uh going on as we speak um around the ethics language. So, fingers crossed uh that we can get to a good outcome on that point. Um and I think the the test will be whether the ethics rules would be durable enough to prevent um the kind of uh thing that we saw happen uh earlier in the administration. Or actually, I guess the meme coin launched the day before >> Yeah. >> um the uh the administration.

>> Yeah, it's you know, you can't retroactively go back and do anything, but obviously forward-looking is the is the goal. You know, when it comes to that ethics point specifically uh you mentioned just about the, you know, pr- uh prohibiting the future use case of you know, call it meme coins or tokens as a means for fundraising for federal officials. Are there other components of what getting that ethics clause over the line would entail? Like is there other negotiation points that uh come specifically from either party that are notable to to mention?

>> Yeah, so um one of one of the things that I'm hearing that's being negotiated is well, you can't trust the federal government to police itself. You can't you can't expect the executive branch to police itself. Um And so, there are um negotiations happening as to uh relating to the authority of state attorneys general um to have some kind of enforcement power in addition to federal law enforcement. So, that is one of the areas um that is being explored.

Um And uh you know, you you could see something where state AGs might be be authorized to go after uh violations of the ethics rules should the federal government not act. Um, so that's one of the the ideas that I that I think is is is is in the is in the discussions. >> Got it. Um, what one of the there was a thought that occurred to me over the last couple weeks on this ethics point which is maybe out of maybe a wild concept, but you know, obviously the Trump and his family made a lot of money in part of this meme coin. And it it feels as if, you know, him and his family are somewhat personally attached to this ethics point. And so, you know, given the the the emphasis to get this

through, but the limitation that we're having, you know, around this ethics point of view mostly from from Democrats, is it at all possible that that we get a situation in which, you know, Democrats are are putting this ethics language together, but there are some personal targets at the president in which, you know, he would find them like egregious. And so, we actually get language that progresses, but, you know, it gets to the president's desk and because of this, you know, egregious language, he decides not to sign. >> I don't think it'll get to that point.

The White House has been heavily involved on the the evolution of this ethics language. So, I think um, I think the more likely thing you will see um, is ethics language either not coming out or ethics language coming out um, that isn't enough for Democrats to get to yes. Um, in the latter case, and in the former case, we we just kind of see this bill languish um, without any ethics language coming out. I think um, that second scenario where some ethics language comes out um, and uh, doesn't get enough Democratic support is is the more likely one. Um, I I think it's, you know, 50/50 the ethics language comes out and it's unacceptable to a sufficient number of Democrats, or

it comes out and it is I think those are the the the two two more likely scenarios. Um, but if but it is possible that nothing ever comes out because it never gets sufficient um, you know, even like tentative buy-in from the the Democrats leading the negotiations with the with the White House and and Senate Republicans. >> Yeah, somebody here in the chat says, "As a former Dem, I voted Trump, but I'll be voting Dems again if they can't get clarity and other pro-crypto initiatives done by midterm in 2028." Just curious if that kind of sentiment is something that you think is resounding amongst people in DC, voters, citizens, yeah.

>> I think you know, privately a lot of Republicans that want this bill to pass have expressed some you know, frustration with how far this administration has gotten into you know, let's let's say charity questionable activities relating to crypto. Um, and so that is one of the one of the issues that this that this negotiation has to surmount is that perception. Um, I'll note you know, I testified before the House Financial Services Committee on tokenization and these ethics concerns were a major topic of discussion.

Democrats wanted to talk about it quite a bit. Um, but what was notable was no Republicans were really trying to defend um, you know, the the most controversial issues, you know, particularly around the meme coin or World Liberty Financial. >> Yeah, I mean it's pretty hard to it's pretty hard to I mean yeah, so. I mean somebody else in the chat says, "Trump and Barron could have just supported Bitcoin and ETH and legitimize the industry, but of course they had to go and do the meme and the World Liberty etc." Um, that's the that's the political side. You mentioned that the policy side you think is far more manageable, feasible to kind of you know, you know, get through in terms of obstacles there. What are those obstacles there that are uh kind of on that spectrum of difficulty from, you

know, easy to hard? What do those look like? How is the chatter kind of on those topics? >> Yeah, so from uh starting with hard, putting aside ethics, of course, um the provisions on DeFi are also a major um area of uh negotiation. Um one of the key Democrats in these negotiations is is Mark Warner, who is vice chair of the Intelligence Committee, very plugged into, you know, the world of uh uh combating money laundering, um sanctions, things of that sort. So, he's a very um he's seen as a a very credible voice on national security. Um and he has indicated that he wants to see more

protections um against illicit finance, use of regulated DeFi. And then, well, what does regulated DeFi mean? So, in the latest version of the bill, we have some uh AML requirements that are applied to the what are called distributed ledger messaging system. So, these are these are front ends, basically. So um how broad or how narrow um that requirement is, I think will be is is is another topic that's being heavily negotiated.

Um another area that is also um you know, potentially you know, an area where the policy gap, I think, is is is is manageable. Um and by the way, I do think that the DeFi provisions, you know, we can get to a manageable outcome. Um the parties are not that far from one another. Um is uh the the the other topic is around the um conflicts of interest. So, a lot of crypto exchanges are vertically integrated. You know, the brokerage function is integrated with the exchange function, which is integrated with the custody or clearinghouse function.

Um traditionally in US markets, uh we have tried to um manage those conflicts of interest by making it hard for, you know, uh one layer of the supply chain to be vertically integrated with another layer of the supply chain. Um and so some Democrats have been pushing back uh that they want to see stronger conflict language. Um and so that's another area uh where where I think uh the policy gap uh should be is narrowing and and and should be should be narrowed. >> Conflicts, uh could you just elaborate what what's like what does that mean?

>> Yeah, so for example, um you could have uh an instance where um a particular token uh may be held by a uh asset management arm um of a uh crypto exchange and then that product ends up getting, you know, pushed to your feed, whereas competing products are are not pushed to your to your trading feed. So, thing things of that sort. >> Right. Cuz it's been kind of like a a free-for-all. It's like, you know, whatever these exchanges want to do, they can effectively do it. I I'm curious about token fundraising. ICOs, we had Hester Peirce on recently. She spoke She's very She's very, you know, optimistic about capital formation on chain. Is there anything in this bill

specifically that it um speaks to the enablement of this or uh rules around ICOs and these types of things? >> Yeah, so uh the bill has a framework where um before a project is decentralized, um that it can actually raise money from the public um subject to a cap of uh don't quote me on this, uh 75 million per year, uh up to I believe 200 million um in in the aggregate um before the token itself graduates to decentralized status.

And so this would this would provide another funding mechanism for projects other than VC capital. And I've heard you know some some VCs connecting the dots on this and and you know complaining about it maybe not as loudly as on other topics but on this topic there is a significant um alternative path for projects to get access to capital other than VC funding. >> Yeah. Yeah, the whole you know, it's funny someone the whole dynamic right now that is ongoing in the industry is you know revenue buybacks treating token holders like you know first class citizens trying to think about these assets as equities investor calls open financial sharing transparency

you know profitability and the whole token equity dynamic split was a result of the rule making around obviously fraudulent 2017 ICO craze that then led to this safe simple agreement future equity plus token warrant dynamic for all venture capitalists invest in the space. And now we're trying to like go get away from that because you know people are realizing that that they want to invest in a in a I don't know a more investable asset in the space. And so hopefully this contributes to that the removal of some of that structure you know or at least the eventual removal of it and a bit more of like a

a equity like token structure in the future for investors to have in the space. I think that's something that's playing the space a bit and so hoping that that that that would kind of contribute to the reverse of the Gensler era that caused this kind of token capital formation structure as the only kind of go to uh uh accreditation things. Is there anything on um accredited investor rules in the US? Um things of that nature in this bill specifically for crypto or is that I think that's that's kind of something entirely separate.

>> Yeah, that's that's not really a focus of this bill. Um you know, it it does provide access to early stage projects um in a way that um or at least it gives the projects the the opportunity to you know, market their tokens early uh to the public. So, in in that sense um you know, by uh eliminating the complete um reliance on VCs for early capital, um it it helps in that direction. Um another thing I'll point out and this this actually is is not just in the bill, but this is in in recent guidance, but um the the recent SEC CFTC guidance on crypto assets as well as the the clarity bill, which attracts pretty closely, um make it clear that

as long as the tokenomics of a of a uh token are derived from the operation of the protocol, um and you know, it's earning fees subject to some uh hard-coded algorithm that can only be changed um by a DAO vote, then that token can retain its uh secure its uh non-security or or digital commodity status um or obtain it. So, um that you know, pathway to monetizing tokens or embedding um you know, uh revenue into the into the token is something that this bill um you know, actively encourages as does the the recent guidance.

So, I think uh I think that will be uh an unlock as well because there were there were concerns, you know, from my earlier times in in crypto that um any type of uh revenue sharing uh type functionality in a token um you know, might make the token a security. That's pretty clearly out as long as those revenues are driven by uh protocol operations and not by uh you know, central management team. >> Yeah, and programming those revenue uh uh mechanisms into the protocol itself provides investors a higher degree of assurance that they will persist and sustain rather than, like you said, the management team can just change their

mind. If it's programmed in, you know, there is investor assurances there. >> Does it say actual like DAO like DAO governance in the text? >> And is there is there some sort of like minimum threshold to the amount of involvement that a community must have? I mean, recently there was I think it was on I for- I don't want to misquote the the name, but there was like a one-of-one uh vote on a DAO that drained like 12 million from the treasury. >> something. Yeah, yeah. >> Yeah, was there any sort of like sufficient level of decentralization or or participants that are required in this in this vote?

>> Yeah, so there are there are restrictions on um the concentration of voting voting rights um that would, you know, once you cross that threshold, um then the the the the project is is not sufficiently decentralized. Um or in the language of the SEC CFTC guidance, um I think it's uh um a functional blockchain network is the language they use. So, there are um it's at this point there are there isn't clarity in terms of when um that line is crossed, but it's clear that um when there is, you know, uh reliance on a central uh management um

team, then um you're looking at more of a securities-type product as opposed to a algorithmic approach to things like revenue sharing with a fallback of a DAO vote, provided that that DAO is itself sufficiently decentralized. Um and the biggest token holders are going to end up being the VCs and the um you know, the project the founders and and you know, maybe early uh early team members. Um and the best practice that uh is permissible under both the legislation as well as the uh the the recent guidance from SEC CFTC is uh delegating um those voting shares to a third party. Um and so that that can be done um

or or just locking up the the voting uh power. >> Of like the of like the insiders basically. >> Right. >> Um so I'm coming coming back to to clarity here for a minute. I mean the chatter online is that this August 7th or maybe August 10th is like the deadline even though you know, there's another couple years in this administration and this you know, bill could theoretically still pass after the midterms. But people are are saying this August, you know, 10th, 7th it because you know, there's a there's a re recess. What is that truly the timeline here?

It's like do or die by you know, early to mid-August or is there a chance, you know, recess happens, midterms happen and this thing you know, goes through in 2027? >> Be The um you know, I said 40 50% chance. Um I think if it if it doesn't happen by um you know, early mid-August and we're we're into the Senate recess, the next window, which is a very small window, is in the lame duck session between the November election and the swearing in of the new Congress. When the new Congress comes in, most likely Democrats will control um the house.

Um And they're they're likely going to have another set of priorities other than this legislation that's that's just the general expectation um from staffers and members that I speak to on both sides. So um I think those are the two windows. The the more likely one being between now and August and then the other one, the lame duck. Um, I I I the the next window after that is probably after the 2028 election. Um where >> election? >> After the 2028 election, I think is is probably the next window after that.

>> Wow. And then is that deadline accurate? The 10th to 17th? Is it just in that Is it a hard date? Is it a soft date? >> It's a hard date. That's when, um, the Senate goes on on recess and yep. >> Yeah. >> And then And then after that, there just won't be enough floor time between, um, you know, I guess it's September and, uh, November, um, to to to get this bill through. >> Man, what a bull market catalyst this would be for us if we get this through in August. My goodness. >> Yeah, I mean, one of one of the things I I like to point out is, uh, title four of the bill, uh, specifically section, uh 401 which permits banks to use digital asset technology for any function, any

financial activity that they engage in. That in and of itself will be a huge unlock. Um, while the banks could get that kind of guidance, um, from the banking regulators, you know, in the interim, having a statute behind that makes sure that that's future proof. So, that is is going to be a huge on That in and of itself is going to be, I think, an enormous unlock, uh, that this legislation provides. Um, cuz banks don't like to build, you know, they they build on multi-year time horizons. And so, if if if they have any significant concern that, hey, a future bank regulator may ask them to wind down their digital assets operations, um, that's going to increase the, uh, the

the the risk that they assign to these new projects and involving digital assets. >> Yep. Okay, so that is super significant, uh, to understand where and and how these banks are going to fit in uh, and the blockchain systems that they build out which we've seen more and more of these banks build out more of their systems and their teams and hire more personnel. The other portion that I wanted to ask you about this in the case of is stablecoin yield and so I think it was the the czar of crypto David Sachs who who said hey you know when it comes to the banks they want this bill and and you know notoriously they were against this bill partly because of the stablecoin yield

provisions but as we understand it now with the genius act stablecoin yield is possible through the form of rewards and so what happens to stablecoin yield if this doesn't go through? We still have the genius act. Where does stablecoin yield fall pro or con if this bill does not go through? >> Yeah so the OCC recently came out with a rule making um that puts restrictions on um yield offered by affiliates of stablecoin issuers and uh there's now you know debate in the comment record around like well how broad is that definition of affiliate? Does it mean like literally you know

commonly controlled you know in terms of like shareholder you know control um or is it uh you know something if there's just like a contractual relationship between the third party let's say a centralized exchange and the stablecoin issuer whether whether that um triggers it. So that's being actively debated at the uh you know the federal banking regulator level the OCC um right now. Um so I think you know from that particular business model perspective there's probably more room to offer those rewards without this legislation um than there would be with this legislation because with this the the um and I didn't mention this this was mentioned in a tweet I recently

posted as you know the fourth area of debate. Um the debate doesn't really seem to be that active. Um I think it was about a month, month and a half ago, um the White House brought to the table um representatives from the crypto industry and the banks to come up with a compromise. And the compromise that was achieved is um transaction-based rewards are permitted, but um any type of uh reward that looks like a, you know, uh savings account yield, um those are those are those are prohibited.

So, um what I'm hearing is the banks are actively trying to even get rid of that transaction-based um incentive, um but it's really falling on deaf ears. Uh it I'm I'm I did not hear any traction for the banks' position um on Capitol Now now Now that may be with, you know, the other members, um and, you know, and I've spoken to other people in the industry, they they that are met with even more members, um and their staffs, and they say that that argument really isn't getting traction because the pushback is, "Well, you guys, you know, you you agreed to this compromise.

So, we can't relitigate it at this point, but, you know, they got a lot of people that need things to do, and so um you know, if if they can if they can uh nudge things in the right direction, uh they will. >> Yeah. >> Yeah. >> So, um sounds like you had a great couple days there in DC, and um I mean, we're in the group >> I'll be there tomorrow, too, actually. I'll be on the Hill tomorrow. Um doing a a DeFi a DeFi event, as well, doing a demonstration of uh of DeFi for for uh staffers, as well, tomorrow. So, uh yeah.

>> Yeah, well, we've got a We're in crunch time here. Um you know, I think the whole industry really wants this to get through. Obviously, we, you know, we're a couple weeks out at this point. I'll be going to Argentina to ski for a week and a half, come back on the 9th, and the 10th will be the day. So, I'm I'm I'm either coming back to up only or or the depths of Hades. >> And Sal, we we'd love to have you back, you know, it's definitely going to be busy back and forth from DC, but uh love to have you report there. Uh keep us updated. >> For sure. Thanks for having me, guys. Yeah, look forward I I hope hopefully, Andy, you'll get a notification on your phone when you're chilling at the chalet that uh hey, the bill the bill just

passed. So, fingers crossed, man. >> Yeah, yeah, it'd be a Fox News article with your face on it. >> [laughter and clears throat] >> Thanks, Sal. >> That would be That would be funny. >> All right, buddy. >> All right. >> Have a great day, man. >> Thanks, Sal. All right. >> Yep.