SotN #16: RETREATING! w/ @jchervinsky (BitMEX REKT, SEC Action, is DeFi safe?)

Transcript

the bankless state the nations are brought to you by wiring wiring is defy's first self-building community run project which i just get really really excited about iron is a system that seeks out yield in defy and it does that in a number of different ways a very aggressive way is with the vaults where you can deposit your preferred asset of choice and different defy experts will come in and generate a strategy for what to do with your deposited token right and so it'll go find ways to get yield in that deposited token in d5 for those who want to just earn yield on their stable coins the urn system is for you where you can deposit your preferred stable coin and wiring will go and figure out which money market on d5 and

d5 is producing the best interest rate whether it's dydx it's compound or ave it looks around d5 to see where the yield is coming from and it directs stable coins automatically so you don't have to check them out at yearn.finance to get started and also check out the stats page to see what other people are doing as well we're also brought to you by monolith monolith is your cool new defy account your defy savings account your d5 checking account except the cool thing about the monolith defy account is that it gets software updates right you actually get to increase the usefulness of this over time so here are some of the features monolith is a smart contract wallet with a lot of the features that you would expect if you've come to know defy and what it is you can you can add money to

it you can put that money to work uh in compound and accessing yield but you can and you can also swap through uniswap what was cool with monolith is that they will send you a very sexy monolith visa card that connects to your smart monolith smart contract wallet on ethereum so it's a really awesome tool to live a bankless life with a a savings account that gets software updates so this is something that you're never going to find out in the real world but you can still do real world things with you know real money and like buy your groceries so that's just fantastic coming soon to monolith actually already here to monolith is now you can buy die and get it sent to your wallet directly right so it's also being an on-ramp so you don't have to go

through your centralized exchange like coinbase or gemini or wherever you can just go straight from your bank account right into your monolith checking account smart contract wallet so check them out at monolith.xyz all right bankless nation welcome to another episode of state of the nation this is episode 17 with and we we have a special guest today uh jake chur vince chavinski who is going to tell us a little bit about all of the regulatory action that's been going on in crypto it has been heavy the last week and absolutely crazy david how are you doing today sir just fantastic

kind of a an interesting and kind of good week to be in the defy realm of things because like this is kind of where we get to say like i told you so like this is why we do defy but also not defy isn't really in the state that it should be in order for us to really be saying i told you so so a little bit a little bit of a juxtaposition there and if this is your first day of the nation guys so dave and i do this every tuesday we release it on youtube it's live on youtube now so if you're watching on youtube you're watching it live and then the following day so on wednesdays we release it on the podcast stream so you can catch it that way too what we do in the state of the nations is we try to apply the things that are

going on particularly in the past week to the macro concepts that you read about and hear about on the bankless podcast and newsletter so david what are we talking about today man so much has happened like and talking to like the whole legal side of crypto twitter the whole legal side of twitter is that uh so much has happened that like just can't keep up because it just came one after another and and for first there was bit max and then there was salt and kik and then and then there's now there's john mcafee and and so there's just a a big push coming from like the nation state three letter agencies getting into the world of crypto saying you know drawing a line and saying everyone that's on this side of the line has gone too far right and so that has

all happened in a week uh and so last state of the nation this wasn't even on our radar and now this state of the nation there's so much to talk about with specifically just legal stuff and jake is an expert he actually like predicted this stuff in a way before it happened so we're gonna start there i think he's the perfect guest for this uh before we get there let's talk about what's going on in the bankless nation so david we released an epic podcast like the moloch slayer podcast yesterday give us a sneak peek on that yeah yeah moloch's lair with amin solomani and kevin awakey of get coin in the 2018-2019 bear market amin solomoni uh kind of gathered everyone around and said like you guys there's this problem called moloch and like ethereum is

currently like experiencing it like we're currently having to deal with this and so he go in over to combat moloch he made moloch dao and as a short snippet of what moloch actually is moloch is like the reason why humans always tend to fail to coordinate right like it's it's this incentive uh mechanism that always happens where like the more and more humans coordinate the stronger there is an incentive to defect from that coordination because it profits you in some particular way right and this is basically the instantiation of the prisoner's dilemma and it's a really important subject matter and so we got a mean and we got kevin from git coin onto the podcast to talk about moloch and how ethereum represents this like opportunity for us to experiment and

iterate on like governance strategies on incentive mechanisms to really try and force moloch to retreat so david i think i think guys david said that was his favorite show so make sure you you check that out i think it's the the topic just everything about it was uh was spot on so make sure you check that out you also have a meet the nation coming out later today right later today with rac andre yeah so uh andre who is a grammy award winning artist and i i really like like the guy mainly because i listen to his music in college and i and to this day i still listen to it uh and you know in the while he was dabbling with music and really pushing his music career forward he was also like working with ethereum like on on

you know just out of interest out of curiosity right and he's one of these guys that was able to take one part of his life and then take this other part of his life and get them to converge right and so this guy released tape on zora which was an nft that went from like twenty dollars to like nine hundred dollars and and that kind of really kick-started like this whole nft movement uh and now he's doing uh the rac token which is this community token for his fans to be able to express their interest and value in the music that he produces so uh uh using the example of ethereum as this like experimental layer for coordinating value uh in what we were talking about in the moloch episode there's now rac andre who is using this layer to coordinate his

fans uh in a way that other artists have not yet experimented with so really interesting stuff rac is a member of the bankless nation and he actually besides you and i he was the third person to ever don one of these shirts yeah and he was wearing it in the in the meet the nation video too oh awesome that's awesome all right well i haven't seen that so i i can't wait to check it out the last thing we got to tell you about is a really exciting virtual conference event called invest ethereum that is coming on october 14th so definitely going to check this out uh vitalik's going to be there rune christensen christensen's going to be there other d5 leaders are going to be there to talk about the future of the ethereum economy i think this is going to be the conference maybe of the season

don't miss it david you're also speaking what are you going to be speaking on yeah so i was actually talking with the guy that was coordinating it and i was looking at the schedule and the schedule was just fantastic and i was going to talk about scaling ethereum but then i saw on his schedule that there's a section to talk about ether the asset bullish or bearish and i was like definitely put me on that one what you're bearish right super bearish uh and so yeah so i i have a nice little speaking slot to to shill my ether my hardest uh at coindesk so uh really happy to see cointess coming around to ethereum in the ethereum ecosystem so tip of the hat yeah i think that's great so you know support what coindesk is doing with this conference they'll do more about ethereum if we show support

for it and if you register with a link in the show notes use the bankless code you get 25 off so that is certainly worth doing david i'm going to start with the question we always start with at the state of the nations what is the state of the nation this week my friend the state of the nation already hinted about this the state of the nation is retreating we are retreating the the like we we talk about this frequently on the banquet spot how like you know the bankless nation it's a new type of nation but these nations conflict and sometimes old nations aren't too happy about that right and so there is like i said a clear line was drawn by the by some of the three letter agencies of the united states and also uh of the uk the

uk is also involved here and they drew a line and said anyone who's on the other side of this line is you know doing unlawful things and so uh john mcafee just got arrested uh bit mex guy uh it got um charged with be operating in a legal exchange and violating the bank secrecy act uh arthur hayes is quote unquote at large uh and so some big moves coming coming from the legacy nation state yeah we're going to talk about that so the the nation is retreating right now from the legacy nation state and i think the big question on everyone's mind david is what does this all mean for d5 right so our next guest our guest on today's state of the nation episode is going to talk about this jake jerinviske welcome to state of the

nation you are the general counsel of compound can you help us make sense of what's going on with these regulations and everything that happened last week sir i can do my best and thank you guys for having me on i'm a long time fan of banquo's well fantastic it's great to have you on you i think are one of the best legal minds that we have in the d5 crypto space and like we're so grateful that uh you are active here and you're applying your knowledge in your mind here maybe we should start with um kind of your tweet and i'm going to put this up on the screen if i can your tweet really sort of predicted what would happen last week i want to say so you said this on september 28th you said

the sec and cftc they both end their fiscal year on september 30th right there's often a flurry of activity the eos settlement other things that that happen within that time window and then you said this week could be interesting and this was before any news came out and great news at all and certainly it was very interesting so can can we start with maybe a recap of some of the things that happened this week jake yeah sure and um yeah i mean it turned out to be even more interesting than i thought so i don't want to take credit for having called all of this i i did not know any of this was coming um although it is often the case that we see news at the end of the fiscal year as these agencies are trying to

put together their best argument for how they did in a previous year and ask for more money for the next year um so just really quickly before i jump into a quick summary i should say i am general counsel of compound labs as you mentioned but i'm not here in my capacity as an employee of compound i'm just here to provide my personal opinion on what's been going on in crypto and in the defy space um nothing i say is intended as legal advice um so yeah last week was a pretty big one i think um the first really big decision that came out that's uh that related to crypto was an order from the sec on salt lending which was an ico from 2017

um it was frankly just another in a long line of these icos that has been tagged for an unregistered securities offering basically salt lending sold a token in i think 2017 they raised 47 million dollars they did that by selling a token that they said would increase in value based on their efforts building out this lending protocol and as you guys may know from being around crypto for a while what you have to do with these tokens is apply the howie test to see if they represent investment contracts meaning an investment of money in a common enterprise with a reasonable expectation of profit based on the managerial or

entrepreneurial efforts of a third party or promoter and the sec basically said this token is an investment contract meaning it is a regulated security under the federal securities laws in order to sell it salt lending had to register it with the sec and make a number of disclosures about their business by failing to do that registration they violated the securities laws and so the sec required them to pay a 250 000 monetary penalty um which may not sound like a whole lot of money in comparison to the 47 million that they raised but the more important thing that salt lending has to do with the token is they now have to register it and treat

it like a security they also have to pay rescission meaning a refund to all of the initial purchasers of the token which is potentially a huge amount of money and you know for all we know put could put salt lending out of business uh and treating these tokens like they are securities is a really significant compliance burden so this is definitely a pretty significant blow to salt lending um and anyone who is you know excited about what they were working on so so jake you said that this is kind of fits this is the bill as many of the 2017 icos and and to a very large extent it does right it's just another token that was sold that you know basically was you know within it had some sort of social contract of an investment uh

contract but what's different i think with this one is that you know with previous sec uh moves in this in the 2017 against the 2017 ico space this one to me is different because there's nothing fraudulent about this one there's nothing there's nothing malicious about salt it just didn't register right and i and from what i've gathered the sec hasn't really made moves like this before where previously they were going after just kind of the worst offenders and salt really didn't harm anyone it just didn't follow the rules does that map on to your understanding too uh yes and no you know the sec just like any enforcement agency certainly didn't start with the overt frauds right the malicious actors who

were literally trying to steal money from people by lying to them um but this isn't the first enforcement action related to a pure regulatory violation so for a couple of years actually the sec has come out with other enforcement orders against ico issuers who maybe didn't mean to do anything wrong but just weren't paying attention to their obligations under the securities laws so even dating back to um paragon coin which was related to a cannabis business you may remember air fox gladius network there's been a whole bunch of these yeah munchie was i think one of the very first ones um there have been a lot of these and and frankly it's just the sec going one by one by one through all of these

hundreds of icos from 2017 and sort of rolling them up in these enforcement actions are they gonna like catch them all do you think jake you know i don't know i i think probably not just because there were so many i mean probably thousands of these that followed the same structure right and it should have been and i think it was obvious to most people who understood the securities laws back then that these schemes were not compliant with the registration requirements where you're selling a token that has absolutely no use or function at all right all it does is represent a promise to build a network using the funds raised from the sale of the token that someday in the future may use the token and give it some value

that's sort of like a textbook investment contract um i think the problem that the sec has in terms of going after all of them is it takes a lot of resources to to litigate these cases and you know probably they sent out hundreds of subpoenas and opened up you know dozens of investigations but only so many of those are really worth bringing to fruition and enforcement action um i won't be surprised if we keep seeing more trickle out week by week and month by month for the course of years uh in fact i'm a little surprised we haven't seen more of them before now right but i think that if the sec was really going to take care of all of them at once we would have seen what's called a sweep where the sec issues orders or you know

files complaints against dozens in a single day and they've done that before so you know in the early 2000s when there were a lot of um internet stock scams the sec did a sweep where they went after literally dozens of the internet stock companies at once and they decided not to do that with icos and i think that probably that the time has passed for that maybe that's because the icos are inherently just a global phenomenon and it's just kind of harder to track down uh icos than it would be the the internet tech stock scams yeah i think part of that's true a lot of the issuers are not in the u.s so it's it's harder to you know to get them to respond to subpoenas when we see enforcement orders like this it's it's also important to remember

this is a good segue into the next case we saw last week those enforcement orders are negotiated settlements it's an agreement between the issuer and the sec not to proceed with litigation which means salt lending was negotiating with the sec for probably months or years about what the settlement would look like now if salt lending had refused to settle with the sec the sec's only next step is to file a complaint in a u.s federal court and that takes a huge amount of resources and for them to file cases in court against dozens or hundreds of icos is just not possible especially when they're outside the u.s and it would be hard to to get jurisdiction over them

anyway um or rather it would be hard to get them to show up to court right they might default and what's the point of that so you know maybe that's a good segue into the next big race from last week yeah so the next one the next one is kick right which is probably where you're going which kind of fits the motif of like a you know 2017 era ico and they actually um i i think took the sec to the to the next stage to to the brink or maybe tell us because this looks like more like a a court settlement case and so maybe they weren't willing to settle can you tell us about the like the high level of this case yeah that's exactly right so the kick foundation also did a public sale of tokens called kin tokens um at the time of the sale

you know at least as as far as the sec alleged and the court found kin tokens didn't have much value um their main reason for existing was that kik promised to carry out future efforts that would bring value to the kin token they promised to integrate kin into their messaging app so kik was a company long before the ico that had a messaging app and they basically promised to build this ecosystem that would use the kin token and would make the kin token valuable over time and unlike someone like salt lending the kik foundation refused to settle with the sec and actually in a sort of weird uh unusual move the sec

sent them what's called a wells notice a couple years ago a wells notice is a document where the sec basically says we are planning to recommend an enforcement action against you this is your last chance to convince us that we shouldn't go forward and kik wrote a response to that notice which is very typical but in very unusual fashion they published the notice and basically said we're taking this fight public right um which is which is not usually done usually they made a campaign out of it they made a very directed campaign out of it and they started this hashtag called defend crypto or something defend defend crypto i think weren't they weren't they also david accepting donations they accepted donations right and so they kind of turned this into like a political

campaign saying like the sec is uh you know bringing down the hammer and coming after us uh and they tried to like quote unquote rally the troops behind them to in order to you know fight off the sec i have my my own opinions about the legitimacy behind that but jake before before i express those if you want to continue with the story yeah no it was very interesting and exactly right they they positioned themselves as a representative for the entire sort of like ico industry to try to fight against the sec's legal interpretation of the howie test and because of that they refused to enter a settlement with the sec and said basically if you want us you have to sue us so they made the sec file the complaints

they litigated the case for quite a while they got very quickly to the motion for summary judgment stage so this is a point where basically the parties say there is no material dispute about the facts right there's no real dispute about what happened the only disagreement is about how the law applies and both sides argued that even accepting the facts as they are they were entitled to judgment as a matter of law meaning there's no need to go to trial there's no need to do fact-finding kick said the law's on our side and the sec said no the lies on our side and the judge this past week sided with the sec right and said yes indeed the howie test applies where you sell a token that does

not have consumptive value that you're promising to carry out managerial and entrepreneurial efforts to bring value to the token the token represents an investment contract and must be registered under the securities laws and okay so jake so um how similar is this to the the like landmark eos case i think that happened last year although like time flies and crypto right so and then like the eos case was interesting because it seemed to me that basically um like the the fallout from that was that originally in the eos pre-sale the ico that u.s the token was a security right but then it it it crossed the chasm it

morphed into a token that is no longer a security first of all fact check me there to see if that's right and then how different is that from uh the the salt case and the kick kin case yeah so that's partly right and partly unknown so it's not wrong we're just not totally sure so in the eos case yes the eos token is very similar in a way to the kin token in that block one had made promises about what they were going to do to bring value to the eos token different promises from kik right kik promised to build this ecosystem around kin block one promised basically to build the eos blockchain uh initially eos was just an erc20 token trading on ethereum

that sort of like represented a claim on future els tokens that would later exist on the eos blockchain which hadn't been built yet but that was and a promise to carry out essential efforts that would bring value to the eos token so the sec basically said the eos token when it was in erc 20 was a security and should have been registered there was actually no direct conclusion about whether the eos token was still a security once it was on the eos blockchain right now block one had already finished carrying out this promise of building the blockchain but who knows what other promises there might have been that a purchaser of the real eos token

might think the only reason i'm buying this is because block one is going to carry out some managerial or entrepreneurial efforts to bring value to this token that question was just never litigated and the sec at least as we as far as we know never passed judgment on it so that's just a huge to be continued like we don't know aside from bitcoin and uh possibly ether that the scc has made some public comments on uh we we don't know about like you know eos or any of these other networks whether the sec deems them as securities or not yeah and that's i mean that's pretty typical for for the sec um they do not often say when something is outside of their jurisdiction right

they'll tell you when they think something should be regulated they don't often publish no action letters right which is a sort of like a formal letter saying either we think something violated the securities laws but we've decided not to take action against against it for policy reasons or based on our analysis we do not think that you know whatever the scheme was violated the securities laws they do that very rarely so it's sort of uh standard for us to live in this world of uncertainty about what the sec thinks wow well i guess that's where we're living right now i um you know the the third case that came up is maybe the most interesting in some ways for uh defy the topic that we're going to discuss soon because it

introduces uh two other government agencies regulatory bodies so we were dealing with the sec in the cases you just mentioned but now let me uh wrap up the the sec ico conversation ryan and then we'll get to that um so jake we've been dealing with the sec and icos and and this has been an ongoing topic of conversation every time the sec does something is there any new precedent here or is this just a continuation of you know the slow the slow march of the sec against like the the haphazardness of the 2017 mania um i would say 95 of it is not new um there's nothing particularly unique

about salt or kik that teaches us much i would say it is important because um an order from a federal court on a motion for summary judgment carries more presidential value than anything we've gotten so far right so these enforcement orders that the sec puts out like i said it's a negotiated settlement it's not the law it's just what the sec got someone to agree to settle a case based on when you have an order from a federal court that carries a lot more value it still isn't the law of the land another district court could find differently in another case on very similar facts but nonetheless it seems pretty obvious that the courts are adopting the sec's view

on these ico tokens very good so i get i guess we have some more information about how the scc is is handling these things but it seems pretty pretty consistent at least for the past couple of years um like back to kind of the the third big thing that happened last week with bit max where basically we introduced two other government us government regulators the cftc who had something to say about bitmex the uh the the derivatives exchange kind of like a bitcoin like bank if you will but certainly a derivative exchange and then also the doj i believe had something to say about it can you talk about what happened in the bipmex case last week and maybe some

of the implications or fallout from that jake sure um so yeah i mean just sort of to set the stage here we've been talking about the sec up until now like you said the sec is the federal regulator that has jurisdiction over securities meaning stocks bonds investment contracts etc the bitmex action involved three other agencies that are worth knowing one is the cftc the commodity futures trading commission they have jurisdiction over commodities derivatives so commodities are basically anything that trades in a futures contract literally anything right traditionally it's been things like wheat and oil and pig bellies you know

these kinds of things pork bellies rather um but also you know any other types of rights and interests can also be commodities the cftc has jurisdiction over trading in commodity derivatives meaning swaps options and futures so these are financial instruments that derive their value from the underlying commodity and bitmex was a derivatives exchange it traded perpetual swaps on bitcoin and other digital assets so that's why the cftc claims to have jurisdiction over bitmex um the case also involved the department of justice the doj the doj among other things is the

prosecutor of federal crimes so in this case the doj indicted big mex for federal crimes and i'll get into sort of what the theory of the case is uh for both the cftc and the doj um the other third agency to know which wasn't directly involved but is very important in all of these kinds of proceedings is fincen the financial crimes enforcement network which is a bureau of the treasury department they are responsible for um for uh regulation and enforcement with respect to the bank secrecy act which is the anti-money laundering know your customer rule in the united states and some of the charges against bitnext related to the bank secrecy act so

fincen was certainly behind the scenes uh you know involved in this investigation but just to give you a really quick summary of the facts and what the charges are um bitmex like i said was a derivatives exchange they were allowing customers to trade swaps on bitcoin and other digital assets uh they were allowing us customers at least according to the allegations to have access to their platform this meant that under the commodity exchange act they were a type of regulated entity called a designated contract market or a swap execution facility and had to register as one or the other with the cftc also because they were accepting and

soliciting orders in swaps they were a futures commission merchant another type of regulated entity under the commodity exchange act and by failing to register as they were required they violated the cea and that's the basis of the cftc's complaint against bitmex so the cftc filed a complaint in federal court against bit max for those regulatory violations and it's important to to realize right the reason the cftc has any jurisdiction there i think is because uh there are us citizens they charge that there are us citizens involved in bit max they don't regulate for other nations but because they

charge that u.s citizens were actually like using bit max derivative services that's when it falls into the cftc's court is that correct yeah that's right so you know all u.s regulators have jurisdiction in the united states to some extent they have extra territorial jurisdictions there are cases where u.s regulators can try to get jurisdiction over ex-u.s conduct but even then only when it is in some way affecting the united states markets and so the only reason that bit max could qualify as a futures commission merchant in the united states is if they are accepting or soliciting orders for derivatives products from u.s

citizens and you know i should mention um you know all of these are allegations bitmex plans to vigorously defend against those allegations and we shouldn't necessarily take the government at its word we've only heard one side of this story at the same time you know we can sort of discuss what the allegations are and compare that to our own experience of seeing bitmex in action right yeah and so like the the meme about bit mex is there there's this video of this uh guy who's like patting down people going into a concert and it's an older guy and he's like he's like kind of not paying attention and he's he's like barely loosely touching the people as he's patting them down and then he says okay you're good and that's like what people claim bit mex to bees like oh your ip

isn't from the united states you're clearly not a u.s citizen also we don't do kyc right and so like any amount of person with like basic computer skills could be inside of the us and then you use the bit the bitmex derivative platform and then there's it's also worthwhile we should probably talk about in in the 2018 uh consensus event which is like um crypto's biggest event yearly event bitmex uh rented out like three lambos and slapped their logos on the side of them and like parked them outside of consensus which is in new york right and so like why would you do that if you're not advertising what you're advertising to germans there like no we're in new york uh and so like people have known like bit max to pre

fly pretty close to the sun with what it should be doing versus what it's actually doing yeah i mean those are all really good points you know the lambos that's what we would call a bad fact in legal terms right not helpful for bitnex's defense um but look so you know um sort of diving into the nature of the cftc complaint qualifying as a futures commission merchant it's not um it's not an offense that that considers your intent or your knowledge right it's what you call a strict liability offense if you are serving a u.s citizen you qualify as a future commission merchant it doesn't matter sort of like what efforts you are taking to try to exclude u.s citizens

now there are other charges at issue which we'll get to in a second that do require some proof of intent meaning you know that you're serving u.s citizens or you've been negligent in trying to exclude u.s citizens or even that you've intended to solicit u.s citizens right these are all relevant to other types of charges but it's just important to remember from a regulatory perspective setting up geoblocking or you know an ip address filter it's not going to be enough that's one of the lessons from this action to escape cftc jurisdiction they're they're gonna they're going to exert their jurisdiction over you if you have u.s customers for sure i don't think anyone even thought that that would be enough

right like it was it was basically the bare minimum and like i i'm not a lawyer and you aren't bitmex is lawyers but i'm going to go ahead and hypothesize that the lawyers of bitmex informed the officers of bit max that you know we should really be doing kyc and the officers were like yeah i mean yeah i don't want to speculate i guess it is hard to imagine a lawyer signing off on this kind of system and when you read the allegations from the government it's clear that this wasn't one of these situations where you know bitmex was trying its best at least so far as the government alleges to keep us citizens off of their platform a lot of the allegations are that

arthur hayes and his co-founders explicitly knew that there were us citizens on the platform and they encouraged us citizens to join the platform in some cases they had even gone into their back end to change the designation of where some customers lived so that they wouldn't have to use a vpn to get onto the platform so this isn't uh you know that the kind of situation where it was just a mistake at least as far as the allegations say so before we get to uh the doj and fincen with respect to bit max yeah i want to ask the question like about the cftc and like the question of like why do they care so much right and this this also maybe applies to the to the sec so my impression of sec is uh our our mandate the sec might say is to

protect retail investors right um so is the cftc similar are they basically saying look like our overarching when you zoom out our overarching mandate is to protect u.s citizens retail investors from nefarious actors in the space and that is why we are taking action such as this this bit max action is that the purpose of the regulatory body um i'd say yes that is definitely part of this i think it's not all of it um so just like the sec right the sec has basically three main goals to protect investors to facilitate capital formation and to ensure fair and efficient markets the cftc has sort of similar uh goals in its mission

statement it is also looking to protect especially retail investors from overly risky financial products it also is trying to protect the systemic integrity of the derivatives markets in the united states and you know we've seen over the course of years at least a lot of um a lot of you know uh speculation at least looking at what happens when the price of bitcoin moves up and down that it can be tied to what's going on on bitmex right and the uh the complaint actually says that there have been trillions of dollars not billions trillions of dollars of notional trading in bitcoin uh you know swaps on bitmex so there's no question that bit max at least in the

eyes of the government is systemically important to market structure in digital assets and we've known for a really long time that that's something the us government wants to clean up this is one of the reasons of many that we don't have a bitcoin etf approved by the sec because of the immaturity of the bitcoin markets so part of this yes is protecting systemic risk that flows from 100 x leverage trading on bitcoins yeah i want to double down on that point the bitcoin etf is something that is like touted as like the the gateway to opening up access for everyone to bitcoin right if we get a bitcoin etf you know our grandmas can have bitcoin in there in

their retirement pensions our our parents can have you know and us can we can have bitcoin in our 401 case bitcoin with a bitcoin etf it can bitcoin can start to get like integrated with the rest of the world in a much more compliant and improved manner and the reason why one of the cited reasons why we haven't gotten a bitcoin etf approved is that uh because it was labeled that price discovery was happening offshore in offshore unregulated exchanges you might as well just put in bitmex there but in in the actual citation they they obviously obviously didn't cite bitmex specifically but you know what at what other offshore unregulated exchange does price discovery happen they were talking about bitmex right and so now and and so what would be much more

comfortable with regulators is if that price discovery happened on u.s regulated derivatives markets right in which we have those right now um and and so i i while you know a lot of bitcoiners will you know shed some tears at the loss of their favorite bitcoin bitcoin casino bitcoin bank you know i think over the long term i think it's a pretty decent commitment uh to to trade bit mix for a bitcoin etf yeah i think that's fair um and you know ryan the other thing is so i said you know that's that's part of it and and the other part of it will lead us to the department of justice uh action that went along with the cftc's complaint which is there is an anti-money laundering angle to all of this this is the big one right this is

like the big deal yeah i think this is the big deal and you know if the only violation had been of the commodity exchange act we probably wouldn't have seen action this strong uh as we did last week so so the deal is if you qualify as a futures commission merchant under the commodity exchange act you automatically have an obligation under the bank secrecy act to register with fincen and implement an anti-money laundering compliance program an anti-money laundering compliance program means you have to kyc all of your customers right customer due diligence and you also have to file any number of reports with

fincen either for very large transactions in ctrs currency transaction reports over ten thousand dollars in value you also have to file sars suspicious activity reports which tell fincen about anything shady going on on your exchange and as we all know for a very long time bitmex was not doing kyc for any of its customers now there haven't been as far as i've seen any allegations of actual money laundering going on through bitmex however who knows what the fbi sort of you know has figured out on its own behind the scenes i think it's reasonable to wonder if there were some other law enforcement concerns about hiding criminal activity or trying to

launder funds through bitmex so the doj in addition to the cftc indicted arthur hayes and his co-founders on criminal charges much more serious than just a civil complaint for a commodity exchange act violation for willfully violating the bank secrecy act in other words knowing that they had to set up this anti-money laundering compliance program and then willfully refusing and failing to do that and in the indictment there's a fair amount of of um of evidence you know at least in the doj's allegations that arthur hayes and his co-founders um you know knew that they were required to implement this this aml policy and

that they were intentionally avoiding doing that there's sort of one phrase that has has really stuck with people where arthur said during a debate i think with nouriel roubini that the reason that they had set up in the seychelles was it was a lot easier to bribe officials there you could bribe them with a coconut um so you know that doesn't look good and it does sort of show uh you know consciousness of guilt so to speak um about that violation okay so just to just to recap the meaningful what's meaningful about this is that like bitmex and because it wasn't doing kyc or all the other reporting requirements of financial activity on the bitmex platform was this massive black black box of inputs and outputs of bitcoin right and so what pisses off the us

regulators is that you know they don't know where that money is coming from and they don't know who that money is going to and so when we are trying to always perpetually get a grasp for where the world's money is in order for us to be able to stop the things that we don't want that money to be used for bitmex was a huge thorn in the side of the united states right like we want to know who's getting funded with what and bitmex isn't enabling us to understand that right and that's kind of what the bank secrecy act is all about yeah that's right the the bank secrecy act and it's not just the bsa it's really sort of like the the global system of financial surveillance so that includes 5 amld and it includes the fat f standards the

financial action task force um the point basically is to deputize trusted third parties who serve as financial intermediaries to perform surveillance over the transactions that they process on behalf of their customers and report to the governments of the world who that money belongs to where it's coming from and where it goes and bit max like you said was was sort of not playing along with that game and it allowed folks to send bitcoin to bitmex and then you know as far as a company like chain analysis or other blockchain analytics services were concerned they weren't able to track those transactions once they left bitnext they wouldn't know sort of who the money was going to or where so

that's why this was a an anti-money laundering concern for law enforcement right and and from what i've gathered there were confirmations of iranian individuals using bitmex and iran is definitely on the the don't touch money from this country uh country list and and i think i think listeners can start to get a feel for why this conversation is extremely relevant to defy and we're definitely going to go there but before we do i do want to ask like so one bitmex uh officer is in jail and uh [Music] arthur the the ceo i guess is been quoted to be at large not not not arrested but at large and so we can assume that he's like on the on the run

do i i know you don't like to speculate as a lawyer jake but what do you think is going on behind the scenes here are is there going to be a deal kind of written between bitmex and and the the regulators or or is are they doing the complete like you know middle finger where they're still processing withdrawals the domain hasn't been seized like bitmex continues to operate like what's your take here with like how this moves forward yeah so i mean i guess first of all it is important to remember that bit max like any other defendant is innocent until proven guilty beyond a reasonable doubt in a court of law right so bitmex is not required to shut down unless the government tries to shut them down i think it makes perfect sense that they

are still operating as long as they are maintaining their innocence and maintaining that they are still in compliance in terms of arthur being at large so you know i've heard reports that he's in singapore um the us has an extradition treaty with singapore so unless arthur is the kind of guy and you know again we're sort of speculating here but you know unless he's going to literally go on the run and try to hide from law enforcement for the next 20 years i mean and i don't see that happening right my guess is he's in contact with uh with the authorities in the u.s through his council and they're probably working out the details of a self-surrender and that's very typical so what you don't want

frankly is to land at an airport and the fbi is waiting for you and you get put in handcuffs right you lose all your leverage right yeah so what they're doing probably is talking about the terms of pre-trial release so you know the question is is arthur going to be held in jail pending trial or is he going to be released on bonds meaning if he flees and becomes a fugitive he has to give up some amount of money or is he released on some other conditions that will you know try to stop him from fleeing they're just going to work those those terms out and then my guess is arthur will will show up um and turn himself in at some point and then we'll see what happens in litigation you know we heard reports that bitmex was being investigated as early as july of last

year so that was the first time that there was a public report of a cftc investigation um also the the documents that were filed last week imply that there have been depositions and subpoenas that have been responded to so it seems like bimx has been working on this investigation for a long time my guess and you saw this in my tweet last week was that bitmex was probably trying to work out some kind of settlement just like these other players have and it sounds like the deal just fell through and they couldn't work out a deal and that's what led to the government filing charges interesting interesting well one thing that uh concerns me jake is is this was uh funnily enough eight on the eight year

anniversary of the silk road deal i think that's actually a coincidence uh more than anything but you know for those just as a quick recap the silk road was the uh dark net marketplace that leveraged bitcoin uh in order to facilitate the purchasing of you know illicit things you know whether it be drugs or you know fake documents or whatever uh and then ross albrecht got sentenced to eight years in prison and the silk road got seized and taken down and then a thousand silk roads came up in its place right like do new different dark dark net markets that you know now those get seized every once in a while but then 10 more crop up in their place right and and so what i'm what i'm worried about and what i think why maybe they haven't taken down the bitmex domain yet

is because as soon as you take down bit mix you create the incentive for you know a hundred other people to make you know bit mex round two right and then those become also unregulated what's is there any sort of you know previous action or historical lessons that we can learn about how this can be managed yeah i mean you know look bitmex is not the only bitcoin derivative exchange in the world uh it's not the only one that i think is accessible from the us it's also not the first one that's been the target of an enforcement action so you know one of the one of the sort of um unknown or lesser-known pieces of this is in 2016 bitfinex entered a settlement with the cftc for basically equivalent charges right

operating an unregistered derivatives exchange that was available to us customers it's just that bitfinex complied with the you know cooperated with the investigation and reached a settlement with the cftc and set up much better processes to exclude u.s citizens so you know bitfinex already went through all of this and as time has gone on we've seen enforcement orders against any number of other derivatives operators so you know there was one broker uh that was a marshall islands uh derivatives exchange that was allowing trading of equity swaps so like apple stock denominated in bitcoin uh there was abra which was pretty decent so this isn't really a new story um and you know it does seem just sort of like with the

sec and all these tokens that this is just the cftc going one by one by one cleaning up these unregistered derivatives exchanges bitmex just happens to be like the big one right so it's almost be like if the sec were to file an enforcement action against ripple for xrp it's like this big one and we finally you know got it last week jake uh we're gonna come back and talk about the implications for defy because i think on the the question on everyone's mind is what do all of these actions mean for defy but before we do uh we want to show you a couple of our sponsors for bank lists that made this episode possible

zapper is this new tool that i use to check out all of my assets in defy as you guys have known defy has absolutely exploded recently and so managing your assets is getting harder and harder because there's so many different places and so many different assets that it could be so i'm going to put my ethereum address in here and zapper is going to tell me where all of my assets are across ethereum right so here are all of the assets in this wallet there's there's a decent amount of them and it's also going to tell me where i've deposited assets into various defy protocols right so there's some yield farming going on there's some liquidity pooling going on we can also look more granularly at the specific protocols that it's involved with in this explore

feature so it's got some assets deposited into uniswap it's got some assets deposited into balancer and also with zapper you can just exchange straight from the zapper interface right so this is just another layer on top of uniswap or other exchanges on ethereum that allow you to swap assets right so check them out at zapper.fi it'll give you a nice clean portal to invest your assets in d5 and you can also connect to multiple wallets if you use multiple wallets all at once and it'll give you an aggregate of every single wallet that you own check them out at zapper.fi also this is definitely not my wallet unstoppable domains is helping the world become censorship resistant and permissionless if you are looking for a

censorship-resistant website that no one can take down go to unstoppabledomains.com and type in the domain that you think that you want so i'm going to type in the domain that i think that i want trustless date and it's going to tell me some of the options that i can get to get a permissionless domain trustastate.crypto and so what you can do with trustlessdate.crypto or whatever domain that you want is you can you can purchase it and then it can be a url that you direct people to that no nation state can take down that's what unstoppable domains is all about what's also really helpful with unstoppable domains is that wallets can integrate unstoppable domains so that the addresses that you send your crypto assets to can become human readable and this doesn't work for just ethereum you also can do this for bitcoin or litecoin

or any blockchain at all where wallets can resolve to your human readable name so you can tell bitcoiners to send you bitcoin to trustlessdate.crypto or yournamehere.edu check them out at unstoppabledomain.com okay guys we are back we've got jake chernvinski and we are talking about regulation and what it means for d5 you know jake part of me wonders like it it's like kind of regulators is it sort of like the the eye of sauron from like lord of the rings where just like it's sweeping the land and right now it's it it found uh bitmex and its eyes turned to bitmex and i i

think the question in everyone's mind is when what what are the regulators going to do with b5 because d5 is no longer a small niche market right so we have we have uniswap and it just last month surpassed coinbase in terms of uh trading volume like that's a pretty large market for crypto how long until the eye of sauron turns its eye on like decentralized exchanges for instance maybe a uniswap and d5 as a whole and once it does turn its eye on d5 what does it do yeah so um so it's a funny comparison i i guess it's more like the eye of sauron with a two-year lag right so like and also i

mean it's not really the eye of sauron because i think we you know have a little more respect for our regulators than that but um look regulators are already paying attention to d5 there's no question about that um there are different levels of understanding about d5 depending on which regulatory agency you're talking about but as you're showing here um you know there is some concern about defy and compliance with anti-money laundering laws like the bank secrecy act i think this article is a little bit sensational and i disagree uh with that headline which seems a little bit clickbaity to me but we can get into that um but you know fincen in particular is very sophisticated in thinking about d5 i guess if the

question is when if ever do we see enforcement actions or settlements related to defy um my senses before you go on jake uh just for the podcast listener so the headline i'm pulling up is called booming decentralized finance a potential haven for money laundering and this was published in bloomberg that was the headline you're referring to yeah so i yeah i i am i respectfully disagree uh the author on that one we can sort of get into why i think the risk is a lot lower than that might represent um but you know i think enforcement actions are a little bit far off i think that it will just take longer for regulators to understand the technology and then figure out who the right subjects are for

regulation and whether and to what extent uh there have been actual violations of those regulatory frameworks so i think it's you know it's the early days but just like in 2017 there was a lot of identification of activity that seemed pretty clearly to violate the securities laws you know i think there are various elements of i think what people may call defy but which i would dispute as to whether it's really decentralized uh that you know in a couple of years we'll be seeing some pretty obvious enforcement actions related to those so jake what are what are like the carve outs for d5 right now right so it seems to be there there is one like like point of differentiation from a bit mex versus a not something that's more defi uh is is certainly

custody of assets right so um with bitmex you have to deposit your bitcoin they retain custody of your assets in order to use their derivative services with with most d5 you don't have to like with with d5 that's actually more on the decentralized spectrum you don't have to do that a smart contract ideally autonomous non-controlled smart contract kind of takes takes ownership of that is that a key carve out i guess and maybe in particular i think it's more interesting to talk about sort of the eye of sauron with respect to like um the bank secrecy act and fincen um is that going is that a difference and what other differences will a group like vincent kind of uh make

yeah so i i wouldn't call it a carve out i would say it's it's an important fact that changes whether regulation applies or not and we always have to remember a couple things one is decentralization is not a magic cure right it's not a perfect defense to all regulation decentralization is a tool that reduces risk in certain ways and some of the ways in which it reduces risk means that traditional regulations no longer apply the way they do to centralized systems you also have to remember regulations don't apply to technology they apply to people and their conduct so the question isn't necessarily is defy regulated or is a d5 protocol regulated the question is

are there people using d5 protocols who are subject to regulation um in the example you give about whether a system is custodial or not that is really important for some regulatory frameworks and some classifications of regulated institutions under those frameworks including the bank secrecy act so the main question that we look at under the bank secrecy act and that fincen has provided a lot of guidance about is whether or not crypto systems are money transmitters or money services businesses a money transmitter is an entity that receives funds from one person and transmits those funds to another person

or location and a money transmitter needs to be registered with fincen and it needs to have an aml compliance program including kyc a centralized exchange is a money transmitter it's probably a number of other regulatory classifications as well but for starters it's a money transmitter it receives funds in the form of deposits from its customers it transmits those funds back to customers at different wallet addresses therefore it is regulated under the bank secrecy act a defy protocol which is non-custodial arguably does not perform money transmission and fincen has actually put out some really helpful guidance on this in particular

in may of last year may of 2019 they put out sort of a summary of their analysis of the different categories of market participants in crypto including users administrators and exchangers of digital assets and basically from that guidance the lesson to be learned is a purely non-custodial platform that does not have a centralized operator that is performing this service of money transmission is not a regulated financial institution and therefore does not need to have an aml compliance program um so that's why being non-custodial is very important the one thing i'll add to that though is

being a money transmitter is one of many types of regulated financial institutions that has to comply with the bsa another totally different classification is a futures commission merchant right what bitmex was classified as by the cftc if you are a futures commission merchant in fcm you also have bank secrecy act obligations whether your fcm is custodial or not so being non-custodial is not a cure for bank secrecy act regulation wow okay so like following the first category i get i guess traditionally you'd think of something like a wallet right so like a meta mask for instance you know not to put specific companies

or projects on this but that would be something that probably falls outside of the bank secrecy act and fincen's jurisdiction yes and fincen actually said in their guidance pretty clearly that in a quote-unquote unhosted wallet and by that what they mean is a wallet that is that is purely under the control of the user is not money transmission right the the creator of that unhosted wallet is basically just a software developer that put out a piece of software but that developer does not have custody of the user's funds and the user as long as they're using cryptocurrency on their own behalf right for their own account their own purposes then they're not performing money

transmission for other people so that's why an unhosted wallet is not subject to bank secrecy act regulation and that's kind of jake the case of like so far right that's that's how kind of vincent has has uh issued guidance that so far that seems to be the case i guess yeah you know maybe the question is right so we talked about earlier what c the sec and cftc what their goals are right um but uh fincen the bank secrecy act goals are completely different they're they're really like we're trying to prevent um like terrorist types of events we're trying to prevent a category of financial activity that um like child pornography these sorts of things that that kind of goes against um the laws and and ethics of the united

states right so like is it possible that this kind of mandate starts to creep into these other like transactions like what what about individual civil liberties right so like ken fincen um or like the bank secrecy act or the doj start to broaden their mandate to say well individual u.s citizens cannot use say a uniswap or some decentralized exchange like how broad is their mandate when their entire reason for existence is to stop terrorist activity it seems pretty broad yeah you're you're hitting a really important point and this i think is

going to be the policy battle for our space in the coming years and it's been heating up a lot in just even the last couple of months um so i guess a couple things on this the first is fincen is a regulatory agency they do not make the law they interpret the law they also can pass their own implementing regulations but if you want to have a change to the bank secrecy act that would have to come from the u.s congress right now the bank's secrecy act the statute is what says that only regulated financial institutions are subject to the aml compliance program obligations of the law and an unhosted wallet just doesn't fit any of those definitions of a regulated

financial institution so the question is number one to what extent might fincen want to exert more authority over unhosted wallets or peer-to-peer transactions and number two how could the law change to be more restrictive of these kinds of these kinds of transactions i think stepping back from the technical legal analysis it is important to note that what we are building is a parallel financial system that allows the transfer of basically any amount of value to anyone anywhere almost instantly almost for free without any ability of governments to censor or surveil those transactions right that is

a threatening sounding type of technology and there is just a really big ongoing policy question whether regulators are going to be okay with that david you look like you have something to add there yeah so this is kind of just like in in stark contrast with bit max like the reason why so many people like bitmex and why bitmex is under the under the view of the nation state in this present moment is that in addition to the service that it provides which is regulated by the cftc it also provides this by-product service of like a money laundering institution to people that we maybe don't want and like this take for example the iranian people that were using bit max and for what from what i hear were inappropriate ways

according to what the united states regulators view as appropriate right and that's that's why they're going after bitmex but unit swap is no different right and and or any or insert your you know decentralized exchange here like there's no there there's no unit swap the protocol will not be doing any reporting or kyc to any sort of regulation regulatory body at any time point in time right and so the value proposition for people that want to escape the the uh the nation state control that why there there was going and in motivation to go after bit max is going to be that same motivation to go after some sort of decentralized exchange on ethereum but now the game is just different the playing field is just

different things are constructed differently and so that's why we're talking about like the issue of like a custodial wallet versus a user controlled wallet and i and unless we want to tie off that previous conversation with with anything let me know but i think what i want to want to hear about is like there are platforms on ethereum where you need to deposit your assets into them in order to participate and then there are also platforms that you don't right for example uniswap you can use unit swap without depositing your assets there versus a an application more like dydx or loopering where you actually do deposit your funds into their system and then use their system and then you withdraw right so like this seems to be

where like the new line that we need to differentiate in order for regulators to come in and really uh understand what's going on here is there a line there or is there or is that just kind of a um an arbitrary difference um no i think you're i think you're on the right track i mean i guess you know the world we live in right now is a world where regulators are more or less comfortable having surveillance of the on-ramps and off-ramps into the crypto ecosystem right so if you want to get us dollars into ether or ether back into us dollars you're gonna have to do that through a regulated exchange that's why you have an account at coinbase or gemini or kraken or you know name your your um

your on-ramp or off-ramp into crypto but then the transactions once you're in the crypto ecosystem right once you have your ether in your metamask wallet and you're you know moving it around between different d5 protocols there is basically no regulation or at least no um requirement of reporting or kyc at that point i think where we're heading there's basically two directions we can go from here one is um policymakers understand the benefits and the value of that kind of financial activity right the whole point of what we're building is a system where people can actually own their own assets they don't have to rely on trusted third parties centralized custodians to manage

their assets for them and also manage their personal identifying information for them we know how that goes right not terribly well um and also policymakers who understand the civil liberties issues that ryan was mentioning right i believe that financial privacy is a really important right and i believe the right to own your own assets is really important the other version though and this frankly is what we're hearing more from policy makers now and i can tell you you know i do a lot of work here in washington dc where i'm based uh you know talking to regulators and legislators about these issues is a desire to create a fully custodial system right where you cannot withdraw

crypto assets from a traditional intermediated financial system and the way that they're sort of right now thinking about creating that barrier between the custodial system and sort of the open defy system is to say that exchanges those on-ramps and off-ramps are not allowed to perform transactions with unhosted wallets or that they have to kyc unhosted wallets before they can do the transaction in other words you have to prove that your ledger hardware wallet or your meta mask account is yours before the exchange can allow you to withdraw to that wallet oh my god there could be transaction limits right you can only withdraw 500 a day

something like that um and this is actually heating up as an issue and i think in the next six months or so this is something that we need to start arguing about that sounds like a direct attack on the bankless nation it is and and it's not look it sounds you know pessimistic but this is what has happened in switzerland so there is uh the swiss rule which says that vasps virtual asset service providers have to verify the beneficial owner of an unhosted wallet before they can do a transaction to that unhosted wallet this is all under the auspices of the travel rule which you've probably heard about before and the result of this basically is swiss institutions refuse to process transactions to unhosted wallets because

they don't know how to comply with that requirement this is okay so um david you wrote a piece on bankless on monday about kind of the bitmex case being sort of like like dividing the crypto community a little bit and i've got to say i'm somewhat divided on it too right so on the one hand i i totally agree with regulator mandate to basically let's let's get the bad actors out of the space so to the extent that bitmex can like you know cheat or like um you know take funds away or basically have their have their service operated as a black box so you have no transparency into going what's going on and and therefore allegedly trade against their own customers exactly right so to the extent they were doing

that like that's a bad actor okay regulator like you know there's a bad actor in the space do your job and thank you yes uh but but but the other side of this is to the extent that uh regulators not just regulators nation states uh want to clamp down on civil liberties like things that like if i pay you in cash money david right there's no aml kyc going on if i give you a bar of gold the transaction has completed and the nation state doesn't need to get involved and that that's where jake like i'm i've got to be honest i'm pessimistic and it's concerning to me because like even even this week we get stuff like this i'm going to show it on my screen i

tweeted this but the uh the earn it act is in front of congress right now and this is basically uh legislation that is attacking internet encryption and privacy on the internet this is in front of the house right now with some supporters bipartisan support and it's like we need we need help with covet we like we don't need this kind of thing like so i'm worried quite frankly jake that our boomer um our boomer legislators are gonna go with option two and instead try to institute this whole authoritarian we need to know every single transaction in and out there are no peer-to-peer money transmissions that the government doesn't have an eye into there's no such thing as financial

privacy anymore now that it's digital we somehow have a right to see everything that happens if you're a citizen of the nation and quite frankly that is terrifying to me jake is there any hope here like please say say that someone is willing to preserve our civil liberties at the nation-state level there is hope there's definitely hope um i am worried that i'm probably one of the more worried people you know working on these policy issues and i do think we need to take it seriously but i do think there's hope i think we have really good arguments and you know i hate to um you know i hate to be sort of like too much of a patriotic american but i do think especially we have really strong

constitutional arguments you know arguments that really speak to american principles about uh first amendment rights fourth amendment rights i think financial privacy is something that we care about a lot in america i don't think we want to have a system like a more authoritarian country like china has set up where the government can see absolutely everything that everyone is doing at all times um so i do think we have good constitutional arguments good principled arguments i also think we have to look at this from the other side of the equation so when you go to policy makers and all you do is hand wave about how amazing this new innovative technology is they don't really hear those arguments as much as they do when you say

the risk that you're concerned about is actually pretty low right what think about what the policymakers are concerned about they're concerned that terrorists are going to use this technology to perpetrate attacks on our country to hurt innocent people to carry out crimes that none of us want to happen right we do not want to see child abuse in the world or terrorist attacks in the world we don't want to see defy being used by isis and hamas and al-qaeda that is not something that we want so what we have to do is also make arguments about why those risks aren't that serious right now and why concerns about some future world where terrorists are all of a sudden doing all of their business through defy which is not

what's happening now don't get me wrong right there is is basically none of that happening right now there's very little actual use of crypto i mean they're doing it with um bills right with benjamin's with cash the us dollars dollars by far and away the most used currency for for criminal purposes and so you want to say to policymakers look we understand the risk there are ways to mitigate those risks we're fine with regulation of those on-ramps and off-ramps right it's okay for something like bit max to have to perform kyc of its customers um but also don't kill the innovation that's happening in this new world that is trying to compete with the

centralized version that china is building right or that other uh you know i guess you could call them foreign adversaries of the us and and the sort of western world where they will control everything that happens on these on these systems um don't kill that version of this technology for fear of something that isn't really happening right now and instead consider other ways to attack the problem other than the overbroad act of just shutting down all innovation completely i feel like it's the case jake that we have a kind of a fight on our hands and what i mean is like uh so many in kind of crypto they they want to remove themselves from nation state politics right um personally i don't advocate that at all right so like i think that

if we want to preserve our civil liberties right we actually have to engage in political discussions we actually have to vote we actually have to uh persuade lawmakers as to our case like it's almost like we have to re-fight for our constitutional rights in the digital age like because they they do seem to be eroding all around us so like what what can people do jake i mean um it feels like so much of this is um just pushed on us and foisted on us uh are there groups talking to legislators in in washington about these issues like

uh should we inform ourselves on who to vote for what what kinds of things can the people do the bankless nation do to um like push these in the direction of option one rather than option two where we go full authoritarian yeah there's there's a lot that we can do and i think everyone needs to be engaged in this issue because if they're not it's very easy for elected officials to crush this space right at the end of the day our politicians say what you want about american democracy and the state in which it finds itself today they are supposed to uh carry out the will of the people and so we need to make clear what the benefits of this technology are and make clear what we

want to see happen in the space there's a couple organizations to know about that are working on these issues um one is coin center coin center has put out some amazing research and papers on this very issue one of my favorite papers is by their executive director jerry britto on digital cash and financial privacy uh arguing why this is extremely important to a free society that's a really important uh piece of work to read um there's the blockchain association which is a trade association here in dc uh i'm one of the co-chairs of its d5 working group along with jason so mansato at xerox and brian avello who's the general

counsel at maker and we are engaging with policymakers often to discuss these issues and you know argue about why onerous regulation isn't necessary there's the chicago defy alliance we're working on a task force to also advance some of these policy arguments but really what people need to do is start getting educated about what the policy arguments are why it is important to a free society to have digital cash why we should not trans uh should not treat um a public blockchain like ethereum like a wire transfer system in the traditional financial system and and sort of you know why we should allow innovation to flourish what the benefits

are and why they outweigh the risks you know i i guess uh dangling that carrot in front of our lawmakers is important and this is all not all bad news um we saw sdc chair uh clayton talk about tokens like all stocks becoming tokenized at some point in the future so on the flip side to what you're saying jake there does seem to be kind of a carrot in front of the us the nation state lawmakers to say look you don't want to get left behind of this innovative technology the future is is quite clearly digital it's internet native it's programmable if we can somehow preserve our civil liberties in

the process right then the bankless nation wins but but that is i guess the uh the challenge that's in front of us last question for you jake and you thank you so much for spending time with us on these subjects it's hard to to wrap our heads around when we hear these headlines and you've distilled it quite well but i guess the question is um how long will it take for all of this stuff to shake out do you think so are we talking on the order of years like are we talking on the order of decades if things go the optimistic route where do you see us in 10 years um i do think it's it's years to decades um it depends it depends on a lot of different factors

um i it depends on how effective we are in making these arguments and i mean just to to um to wrap up the the thought that you just put out about um jay clayton sort of seeming to approve for the first time i've seen about you know tokenizing securities there are policy makers who are on our side this is not us versus them um brian brooks who's the uh the controller of the currency is a big fan of of crypto in general the deputy director at fincen is you know sort of a fan of what we're doing so there are people who sort of uh identify with with the mission um or at least are you know interested in sort of the benefits that these technologies can offer but you know where do we go in the

next 10 years um i think that it partly depends on what the traditional financial system's response is to crypto as it grows so one of the fights we haven't really had yet is with the banks right so i mean bring this full circle right we're on the bankless state of the nation today the question is does jp morgan and morgan stanley and bank of america and et cetera et cetera did they all decide that it's us versus them did they decide that they need to start pushing policymakers to tamp down on uh what we're building in the d5 space or is there some world where we play together where there's some new role for

those banks to serve um and that's something that we've been talking about a lot in the d5 space you know there are ways where it's not necessarily a bankless world it's just that banks look very different from how they look today right they're not custodying our assets um they're not performing this very capital intensive role they're serving a different purpose they're service providers they're sort of launching their own products and services on top of blockchain-based decentralized finance protocols i think if we can get to that world where this doesn't seem like such a threat and we can then make a really strong argument that

um supporting innovation in defy is good for american citizens and it's good for free enterprise and for for fair and and open markets that in a way it is a good response to the geopolitical threat that we're facing now where there are other countries going more toward a socialist or even more of a communist approach to their own financial systems then in 10 years we could be in an extremely good situation where defy is the financial infrastructure of the western world and no one even thinks twice about the fact that under the hood of the app that you have on your phone

is a defy protocol uh as opposed to a traditional financial software on a server or something like that um we just really need to pay attention to what the risks are that we go in the other direction and do our best to sort of guide policy makers to the right place i i'm glad we're ending on an optimistic note here because i do think everything you said is optimistic jake and you know one one other thing i'll say is uh we largely got through the open communication protocol of the internet with a fairly free and neutral and open internet we did that with the the help of regulators and legislators there were bumps along the road it was not perfect

but but largely the internet that we had in the 1990s and the 2000s came through relatively unscathed it's possible we might be able to do that uh with with d5 and these open finance protocols uh david you have anything else that's optimistic man yeah jake you were talking about how a lot of this depends on what legacy financial institutions do and i'm reminded of the podcast that we just released on molok where it would take a lot for every single legacy financial system to all agree to be on the same page as be anti-crypto or anti-d5 right because the the more banks that sign up to be anti-crypto or anti-defy the more likely it is for one to defect and become like the the c5 d5

bank that spans across both right and so that that makes me optimistic that there's always going to be the incentive to be that one bank that's crypto friendly and then hopefully the market rewards them and then i think the other thing that makes me optimistic jake is that you you rattled off a list of uh defy working groups along with coin center that there are actual people like you so thank you tip of the hat jake for for defending the nation there are people coordinating around the need to uh to get ahead of this problem right and to make sure that when the boomers leading this country are get informed with what's actually going on from people that are in the space and so jake i do see that as your role as perhaps protector of of the d5 nation so so

thank you with everything you do and also thank you for coming on the bankless state of the nation to get us educated as to what's going on in this world my pleasure guys great to talk to you cheers all right guys this has been state of the nation thanks so much of course none of this was legal advice as jake will be the first to tell you this was also not financial advice eat this risky crypto is risky so is defy it's clear that we have some things to work out in the years to come with the nation state you could also lose what you put in but we are headed west this is the frontier it's not for everyone but we're glad you're with us in the bankless journey thanks a lot

i don't think we've done a live stream or a podcast that was more accurately reflected your sign off ryan it's so