The State of Crypto Regulation | Rebecca Rettig and Jake Chervinsky

Transcript

regulation is coming and so for those people in the space who say like no you know we're sticking with the cypherpunk ethos just buckle regulation that's not particularly realistic uh and so i think engaging with regulators is real end policymakers is really important because if we don't the banks will and then this will become fintech and that takes away some of the interest and fun and promise of what this technology can really bring [Music] all right everyone i have a big smile on my face as we kick this episode off two of my favorite people actually three i'll include santia's one of my favorite people so we got santi joining us and then two of my favorite people and two of the brightest people in our entire

industry jake travinsky uh head of policy of the blockchain association and then rebecca reddig uh gc at the ave companies welcome to the show jake and rebecca thanks for having me very much yeah yeah of course uh really i think an important episode should be a fun episode but also an important episode uh i i feel like there are two statements that are just these like tried and true statements since all of us got into crypto that everyone says a the institutions are coming and b the regulators are coming this is going to get more regulated and i feel like the last month is just uh one of those like oh my god moments where it's like oh wow the regulators have arrived and so i'm curious rebecca maybe i'd throw this first one to you just starting really broadly like what do you think is almost the state of

the nation for for regulation and crypto and i feel like the space has been getting more and more regulated but did this tornado cash moment take you by surprise um so two parts to that uh in terms of the answer you're right that regulation is coming i think this summer was um a big moment for that with the implementation of mika in europe which is the markets in crypto asset regulation and it is really intended to be a comprehensive set of regulations in the eu to regulate really centralized crypto actors uh and then there's a second piece coming in europe people are calling it mika too where they're studying d5 they're going to put out a big report and also some recommendations for regulation although that's coming

six nine months twelve months down the road um the same types of things are happening in other jurisdictions as well uh the uk right now is doing big calls for evidence for both centralized and def centralized crypto and d5 and a lot is going on in the u.s as we've seen coming out right the various bills that have come out which i know jake has a lot of intimate knowledge about um and some discussions of studies and the president's executive order there's a lot of engagement with stakeholders and you know a lot of the agencies that were commissioned by the eo but as for tornado cash um i think that falls outside of at least what i feel is the sort of course that regulation has been running down to both centralized and defy

it's very unprecedented i don't think we've ever seen a piece of software be sanctioned in the past and i think that um either there's a misunderstanding of how tornado cash worked against what blender io was because ofac or the united states office of foreign asset control which is part of the treasury department did sanction blender.io back in may but blender was a bitcoin mixer it was run by individuals and there were centralized actors there tornado cache is especially in the d5 world highly decentralized no admin key no dow that can actually even change the smart contracts themselves

and so i think um in that respect it's a very different piece of regulation and i don't even know if i'd call it that um i know sanctions are a very powerful tool in the regulatory world but definitely outside the scope of what i've seen so far what do you think jake was this was this like to me it felt like i mean it almost felt like you like i was picturing a house when this happened you have a house and i felt like people the regulators were almost like taking apart pieces of the house with like with taking out nails with a hammer and like they're kind of taken apart kind of piece by piece and then they just brought in the wrecking ball and just like smashed the house and i was like oh my god like this is this feels overly drastic to me but i'm also very biased

i'm curious to get your take on this no i think that's fair and i i generally agree with with everything rebecca said which is also true in life i generally agree with everything that rebecca says so we'll see if we disagree with anything uh you know on this podcast but um no look i think that's true and i think the way to understand this in part is regulators and policy makers probably are responsive to facts on the ground right they're responding to reality and i think what we've seen over the last six to 12 months or so is first of all we saw an extraordinary speculative mania in the bull market right things got pretty silly last year and then we saw a pretty spectacular collapse of that sort of bull market in a way that was was not only volatile in the markets

but also caused real losses to us retail investors that's where regulators and policymakers start to get really concerned we also saw hacks and you know other scams and frauds and you know errors and things like this in the crypto ecosystem that not only resulted in losses to us retail but also resulted in profit for bad actors like the lazarus group which is the hacking group in in north korea and i think that's really how we have to understand the tornado cash sanctions everything rebecca said about this being novel and in my view anyway an overreach of u.s sanctions authority all that is true on the other hand if you put yourself in the shoes of folks at the treasury department what they are seeing

is north korea one of our our most serious foreign adversaries and indeed a brutal dictatorial regime making over a billion dollars by hacking defy protocols and then laundering those funds through tornado cash so i don't know that they are thinking about you know bringing a wrecking ball to the crypto ecosystem broadly speaking what they're thinking about is we want to stop these bad guys from abusing this technology and i think that might be as far as they thought about this and didn't really think about those unintended or uncertain consequences that would come from sanctioning a decentralized protocol right an inanimate piece of software as opposed to a person or entity which is how sanctions typically

work yeah i guess for the folks listening like um wouldn't it be more sensible to regulate the off ramps because at some point you can use tornado to try to um i guess anonymize or like make it the funds that have been hacked but at the end of the day like you can tornado produces a proof of the origin of those funds like i'm not sure regulators understand that but i'm curious you both of you are actively talking to regulators one just from a general understanding how savvy are they about this technology um and do they even take an interest or do they just take the approach of like as you said uh you know jake do they care about actually learning

about this technology or just kind of using a chainsaw to try to stop this thing that cannot be stopped actually i mean i'll give you my answer just based on my interactions i guess there's maybe two two things here one is whenever we say they and we're referring to the government we have to remember they is a very big category right it's very idiosyncratic and there are different people in different places of government with different interests and also with different levels of understanding i think when we when we talk specifically about the treasury department and the folks who are making decisions about anti-money laundering and countering the financing of terrorism policy i think these folks actually have a very strong understanding of how the technology works i think the issue is sometimes

they are subject to political pressure to make decisions that are not necessarily in line even with their own understanding of how the technology works and that's a big open question in the tornado cash story right was this a consequential shift of policy from ofac where they are moving now to a new world where software is on the table permanently for sanctions or was this instead a moment where someone else in the federal government with political interests rather than policy interests said we need to show that we're tough on north korea what are the options available to us and this was one of the options that was viewed as being legally available and the reason why i look i'm speculating i don't know exactly what the the decision-making process was here

but one really important piece of information is the announcement about the sanctions came not from the people who focus on policy in ofac but rather from political appointees from the under secretary for terrorism and financial intelligence in the treasury department that's someone who is chosen by the president and confirmed by the senate and also by secretary blinken at the state department not even at the treasury department so it may be that this was more a political decision than a sort of sophisticated technological decision about how the the you know ecosystem or the space should be regulated yeah and i'll just add on to what jake said in terms of giving credit to let's say policy makers as opposed to regulators the policy makers who are thinking about creating legislation

right now are really deeply trying to understand and make sure that any legislation they create is compatible with the technology and the way it works and i've seen that across the globe both blockchain association the defy education fund and others are really in there in many places both in the u.s and around the world educating policy makers and regulators we do the same we do our own policy work to make sure that we're out there trying to to educate about defy and there's an interest look it's not as widespread yet as we'd all want it to be but i think everybody is out there trying to do their best to educate and um i think it has slowed down in a positive way the snap um

reaction to wanting to regulate in the wake of what jake said um you know these crashes or other losses that have been sustained by by investors you know as and just to go back to what jake said to the point about tornado cash whether it's political or not there was this real there is this real sense of urgency about being tough on north korea and so i think they are looking for every tool in their toolbox to do that but santi to go back to your original question i do think the off-ramps are the place to go when thinking about cracking down on north korea and one of the things i am hopeful happens is that these analytics companies may do tracing of the wallets out of tornado cash and to see which exchanges they're going to

if at all to cash out in sofia but i think as we know north korea has been north korea doesn't always use cash right they can do a lot of bartering in the dark web system from what i understand where eath just may be accepted as eth and they don't need you know they've traded cigarettes for you know uranium in the past and things like that so it also may be very difficult to crack down on some of the centralized offshore exchanges that they may be using yeah because to me it's always felt like if you're a regulator and i've had conversations with them it's like wouldn't you want the entire financial system flow of funds to happen through open transparent systems um and you can use tools like chain analysis to crack down on

on where the the the on and off ramp happens yeah absolutely go really hard on exchanges that need a kyc everything that goes in and out the same way that you should regulate banks and deutsche bank and starter you know standard charter all these banks you know have laundered money like humans could be corrupted but nonetheless like if you're a regulator like this is like the perfect system to tax individuals to trace activity like you talk about like sentence against russia like it's super hard to enforce these things oh but if you use programmable money then all of a sudden it becomes easier to enforce these sanctions and i i'm i don't know like it would seem like this is as you guys said a very political action not so much one that is from a policy perspective really sensible um but i guess like what

what's your how do you see this like what's next what is most at risk here um on the whole tornado situation and and where do you see this going i mean i don't think anything is going to be changed or rolled back i think the tornado cash sanctions are going to remain i am hopeful that ofac will put out faqs there's a lot of push from industry um about and giving draft faqs to ofac to consider to put out to give clarity on the dustings that happen shortly after the sanctions whether there will be enforcement against those individuals or not and i'm hopeful that they will also consider general licenses which will allow people who've had money frozen in there legitimately now

right u.s persons who may have been you know putting their money through and take salaries you know people have put all sorts of types of funds through for legitimate financial privacy reasons i'm hopeful that there will be a general license to allow those people to at least withdraw those funds and maybe some even further clarity um from ofac as well i well you know agree with that and i think a lot of what rebecca described i would call sort of the short-term unintended consequences that we have to clarify and you know rebecca and i are both members of the board of the dfi education fund we're doing a ton to try to get some of that clarity like she said you know applying for a general license or faqs there's also separately though the more long-range systemic questions that that this action raises

for us right and i think there's at least two that are really important one is where where is the line where ofac will sanction the next decentralized protocol because they think it's being used too much by bad actors right in in this case the numbers suggested that tornado cash was maybe 30 to 40 percent uh comprised of illicit uh you know finance flowing through the protocol that's a lot it's still not a majority but it's a very large number the question is what is the percentage where ofac will sanction the next address right if you look at all of the d5 protocols across you know the crypto world just like if you look at all the financial institutions in the traditional finance industry the amount of illicit finance is not zero for any

of them right there's some amount of illicit conduct where is that line and i think we need an answer to that question the second issue is what do the sanctions that have already been imposed to require for other systemic players in the crypto world particularly what i mean is validators on ethereum right how are miners or validators how are they going to comply with sanctions does this require censoring blocks does it require reorging the chain if the immediate you know passed block includes a sanctioned transaction these are all questions i think we need to answer going forward and to jake's point just to out of my point on it you know the real question that i have for the miners and validators question is uh you're not supposed to provide what's

called material assistance right and i think there's a lot of anonymizing technology that's out there now where potential validators on ethereum may not even know what's in the what they're validating and so the question is can you be held liable for materially assisting a sanctioned transaction if you don't have any requisite knowledge um so i do think to jake's point some of that needs to be clarified as well um and i think that the other thing that those of us who are building and define need to think about is what can we do proactively to work on educating ofac and others uh about how this technology works so we don't have another one of these situations and the

last piece of it is um i hope that we become and regulators also come to have a more nuanced understanding so you know while there may have been 30 to 40 percent on tornado cash it wasn't in the 0.1 east pool you know north korea was not breaking up 14 million dollars worth of hacked funds and so there has been at least anecdotal discussion about a lot of the sanctioned funds go or a lot of the illicit funds going through some of the larger pools and so maybe sanctioning those pools rather than an entire protocol may have been appropriate so i hope we also can work on having more nuanced understandings of how this all works as well let's dig into the protocol strategy because i'm really curious about that i mean how does i i think jake you said it

right like where did they draw the line right tornado cache uh even though i explicitly disagree with the actions it doesn't actually impact the industry that much i would say but if they start sanctioning something like uh capital usdc that flows through maker right that impacts dye which impacts all of d5 right so how like when you're when you're thinking about how protocols are are thinking about this maybe rebecca i'd throw this to you um how should folks be thinking about it like do you do you i i feel like it used to be decentralized to the community like don't like get rid of all entities and now it's like oh wait shoot maybe that's the wrong strategy but i'm curious how how folks should be thinking about this

right now um i think it goes to one of these core issues which is if you're a d5 software developer where's the line and santi and i actually talked about this yesterday where's the line between the company and the protocol and the dow and there should be some transparency around that so in our case um obviously dave companies built and developed the ave protocol uh we put out uh you know a v1 v2 v3 but we can't do anything with respect to any of those uh without the dow voting and the dow really does have complete control over the protocol now the separate piece of it is there are front ends um that are run typically by centralized actors and as of today i'm not sure of any front end that you know

has an ens that's controlled by the dow but i hope that's coming uh because i do think that there are pieces of that that will be beneficial just from you know a decentralized ethos perspective um but the question is everybody from uh from a company side should be thinking one what's your involvement in the protocol and what kind of control do you have so the question isn't any more custody when you're in d5 right they're all non-custodial and if they're not then it's not defy um but if you have some form of control over the protocol and this is general this is not with respect to the ave companies because we don't have control over the protocol um what should you be doing should you be working with a blockchain analytics company to monitor as you know as jake said the amount of illicit funds coming

through your protocol and if so what do you do what type of actions do you need to take um so you actually have to be thinking critically about the two questions of at what level of decentralization are you and two if you're not fully decentralized what are your obligations to ensure that you're complying either with regulations or at least taking good faith steps to make sure you're aware of how your protocol is being used i will say and maybe we're going to get to this later the biggest question that i get and i think jake gets it a lot too is are any of these really decentralized like is decentralization just a myth so anytime i'm talking to you know regulators or policy makers i really have to walk through what decentralization means and how you can

gauge that because it's hard and somewhat nebulous i have a three-prong definition of decentralization um so it's three parts so it's technological is your code open source um you know and is it deployed to a permissionless blockchain that's run by a variety of nodes but i think the open source part is the most important you want everyone to have the transparency as you were talking about santi to see what's happening with the code where it's coming from sort of the clear rules of the road and an understanding of what's going to happen when they interact with the protocol governance as we were talking about do you have any form do the original software developers have control over the protocol uh and can they affect user funds and then something i call like ecosystem we

can call it community um but you know do you otherwise or does the community otherwise believe that the software developer is controlling or otherwise affecting your funds or is there a large decentralized system of actors who are contributing you know is gauntlet doing risk analysis do you have sertora making proposals to do audits or ongoing risk monitoring do you have separate developers who are contributing to the development so that's my definition of decentralization i mean i think that's a great definition i think of it a bit more um maybe from the practical perspective in terms of the goals of decentralization which i think are to provide security and assurance to the users of a protocol

that the protocol itself is going to be credibly neutral right in other words that there is not a person or a small group of people who have the power to change the protocol or who could be compelled by any third party you know whether that's a nation state or someone else to make a change to the protocol and i think that sort of gets us back to this question of how should builders be thinking about decentralizing you know either layer ones or d5 protocols and to me i think a big challenge here is um there are protocols where you could imagine the government you know getting court orders and sending them to the largest of governance holders who have the power to make any kind of change to the protocol especially protocols that are proxy

upgradable and those people are going to be required to comply with that court order right that's a problem so i think when we consider what could happen next if there is a protocol that's under um you know the the sort of control of governance token holders who are primarily located in the united states who could be ordered by ofac to make some change to the protocol whether that's to shut down the protocol or to include some kind of kyc or to exclude certain addresses right i think that is an insufficient level of decentralization and we should be looking for ways to maybe ungovern some of these protocols right this is an idea that the reflexer folks talk about a lot on governance maybe we have pushed the idea of governance a little bit far

rebecca could disagree with me about this and we should really be sort of working our way in the opposite direction and removing some of these elements of human discretion and control over these protocols i was just on vacation i just read the cryptopians and one of the questions that really struck me uh that they were all asking themselves as they were building ethereum was uh you know what is going to happen if a nation state thinks that they can compel uh you know ethereum or people behind ethereum to do something that we don't want to do so it's just i it's an interesting read because so many of the issues that they were grappling with and they when they were building ethereum are things we still are grappling with today yeah it's such a good point because i think we've been on this journey over the last two three years

around governance tokens because we haven't had regulatory clarity and so you sort of try to dress it up or you know just say this is a pure governance token it doesn't have any features of a security it's just purely for voting but that again now we're faced in this idea that if you are governing and you have some sort of control then they can target specific entities whether it's a fund or a font and or core developers that can effectively if you sum that up have greater than 51 governance power i.e they can change certain parts of the code and can have control over user assets and so i i don't know like i feel like we're in this crux and i guess the question is would you say that there it is more

important from a decentralized decentralization standpoint that the the contracts are not upgradable or that contracts can be operatable it's just that the voting power is spread out across a credibly like decentralized set that it is really really hard to twist an arm of a particular entity or entities that makes it kind of really hard to corrupt if you will i mean i think the hallmark of true decentralization is censorship resistance and how we get there is i think still part of our evolution um so you know i think there are there are potentials for real benefits with decentralized governance i also

think there are a lot of good potentials for the future of work with dows um but we're certainly not there yet yeah i i agree with that i mean i think look i think both are good but i think that having contracts that are actually immutable is the ideal right that's sort of the principle that drives everything into space and i think that that is better not just for regulatory reasons but for again sort of the principles of the space than having just very broadly distributed governance powers you know among holders in many different countries and look this comes out especially in the anti-money laundering context and you mentioned the securities laws i'm not i'm not saying any of this from a securities laws perspective i

think that's a totally separate bundle of legal and regulatory issues but when we hear anti-money laundering regulators talk about whether a d5 protocol can be treated as a financial institution they are looking at whether there is a group of people who can make decisions about how the protocol works and it doesn't matter necessarily how distributed those people are to the anti-money laundering regulators who expect everybody in the world to simply operate like a bank because that's what they're used to so i think from again from that regulatory perspective it's better if we can say these protocols cannot be changed that is the purpose of them they are immutable they are not the property of any person or persons uh rather than to

just say yeah but all the voters are so dispersed around the world it's just going to be too hard for us to make those changes so sorry nothing we can do about it and the latter point that jake is making is actually found in the dao report too where they actually say governance was and it's so when i've re-read it a few times i think it's so stark because they say governance was so decentralized that nobody could actually make an impact and so the curators were the real people that they could hold liable along with slokket um to move forward i think the other thing and jake sort of brought it back to this is you know we've started talking about decentralization so much as a regulatory panacea in some way um but it is an ethos thing right like that

is really why bitcam bitcoin came into existence right decentralization censorship resistance all of that stuff and so i think to jake's point we need to stay true to that as well yeah you guys have been around the space for a number of years um and have you know joined these kind of organizations there's been a lot of things that have gone wrong the last you know six months you know you have celsius voyager um luna terra um anonymous founders gone like rugging and and a lot of stuff what has been but at the same time it's been i feel like we've done a lot of progress over the last two years like regulars are across the world i think increasingly as you said rebecca understanding this technology i appreciate that it has a lot of like

technological impact and innovation but what has been like the most damaging out of all the things that have transpired most recently to setting us back from a regulatory standpoint people using the word defy when it's actually centralized crypto that's why that's my personal part right everyone thinks celsius is defy it's not everything everyone thought tara and anchor were defy it wasn't so i think from the d5 perspective um i think that's been really damaging and i think people also not acknowledging as jake and i have sort of been talking about that they are real centralized crypto actors um or centralized actors in a financial system who may have obligations um has has hurt the long-term narrative that there are a

lot of responsible actors in the space who are actually trying to build a new um a new system that has a lot of promise we i don't i wouldn't say we've gotten there yet but i think the people who have not acknowledged that there may be real obligations from a regulatory perspective um given what they've built is has i think set us back jake may feel differently jake before you go rebecca i am curious if you could just clarify because this gets confused a lot like can you just define d5 and make the distinction between d5 and c5 just for for basic listeners out there and everyone probably sure so c5 is relating to centralized crypto uh and centralized finance those are things like

centralized exchanges and the like but it's really where there are actors who have control over other users assets so as you'd expected in a traditional financial system it's just with a different asset class right crypto assets or digital assets d5 and there are a number of hallmarks of d5 we can get into it is where there are no real intermediaries it goes back to the the definitions of decentralization that jake and i were talking about but where there's an immutable or a set of smart contracts that are self-executing uh and completely non-custodial and you do not have a centralized actor who has control over it but this is one of the reasons why i say you need to make sure the software is open source right people

need to see where and how things are happening and understand that there's not a centralized actor somewhere so if you can't figure out from the code and let's put aside whether people read code or not because i know that's a big issue but if you can't see where something in the system is coming from you have to know that there is a centralized actor somewhere that's making it happen so i mean that's a that's a good point and that also bleeds over into the securities context because the sec especially chair gensler seems to have this idea that there is no such thing as a d5 that everything is decentralized in name only and i think that's confusion introduced by by a misunderstanding around what define even means i guess my answer

if i had to give you just one answer it would be three errors capital i mean just no comparison the damage that three arrows has done i i think we still don't have a good sense of how much damage there really is but it has been just unbelievable and and not just what three arrows did itself but i mean they really were a systemically risky element of the crypto market there's no way around that and i think we have to admit that and the fact that that was sort of allowed to happen i mean this gets to a point that santi's been making for a number of weeks about self-policing right our ability to sort of reveal some of these issues on our own i think this this really did show that there is some part of the crypto market the centralized part of the crypto market that does have

the same types of systemic risks that we see in traditional finance and that kind of stuff needs to be addressed you know i think if i were to give you sort of the top three it would be three arrows um terra just because i mean i don't have to explain to you guys how serious the terra collapse was uh and then the ronin hack i i think we really underestimate that and i think that again is the primary explanation for the tornado cash sanctions north korea stole 600 million dollars i think even more than that in one fell swoop that is a meaningful amount of money for a country that everyone else in the world is trying to stop from developing nuclear weapons this is a much more serious issue than just some people were speculating on fun tokens and lost some money this is like a really serious

geopolitical question so i those are my sort of top three yeah definitely i guess like transitioning a little bit um you know there's been some commentary from folks like brian armstrong he went on saying on the legs freeman podcast he thinks around like 50 to 60 percent of regulators at least in dc see like true innovation in crypto they just want to kind of understand it and regulate it sensibly um do you agree with that do you and are there particular sectors where regulators are more focused on and yeah maybe we could start i think i think i would also add to that like should is that who we should be catering to like should we be catering to the the right the regulators right so i

think there's a question inside some protocols right now which is like do i cater to the u.s regulators or do i cater to the world and try to think about like am i a global protocol or am i trying to basically confine my protocol and my product to a small group of u.s regulators who doesn't understand what we do so i'm just curious how you think about approaching that what i'm saying is like the question is i feel like most of the time people say use regular radios don't understand this thing but i think like i've actually in my interactions and this is like years back like 2016-17 i've actually felt that they're pretty knowledgeable as jake said like especially people that are not like maybe the public official but like staff treasury cftc like they're actually

really smart like like and they know this stuff they're actually maybe using this stuff and i just want to make like that that was my question to you guys because i feel like most people just fought especially now that like a regulars don't really care about the stuff which i disagree with i'm curious to get your take they definitely care and i think um yes we should be considering you know how we can address their valid concerns using the technology i think that's the point look i think one of the the most exciting things from a regulatory perspective about crypto and rebecca and i have been talking about this for years is that you can address risks that usually require coercive regulation to address in the traditional financial system just with the technology i think self-custody is

the best example of this the entire body of money transmission laws in all 50 u.s states is designed for the specific purpose of stopping some money transmitter who has custody of customer funds from running off with the money or from losing it in one way or another and the technology that we've developed in crypto literally solves that problem you don't need money transmission licensing to address custody risk if you can just eliminate the custody risk from the uh you know base of the technology that's the kind of stuff i think we need to explain to regulators but then again there's going to be some other risks that still persist in crypto that the technology does not solve some of the secondary market regulatory issues for example we have not solved market

manipulation in decentralized protocols there may be some room for regulation to address that kind of issue and frankly none of us want to see pump and dump schemes or you know frauds and scams and crypto so i think that's the key we have to explain to regulators where we've solved the risks with the technology where we haven't and then work out some kind of compromise and look the last thing i'll say about this and then turn it over to rebecca is like we are not going to live in a world with this level of low regulation forever crypto's not unregulated when when people say it's a wild west that's not true at all right there's a lot of regulations that do apply but there will be more before crypto goes as mainstream and sort of takes over the financial system as i

think we all think it will there will be more regulation before that happens and it's incumbent on us not to as jason said um you know ignore u.s regulators and hope that we'll just find a gray market or a black market in other countries and that's the future of crypto but rather to try to work out something that honors the benefits of the technology but also satisfies those valid concerns that regulators have i agree completely with everything jake said you guys are gonna have to work hard maybe by the end to fight find a question where jake and i don't agree but uh i want to make a couple different distinctions that we're talking about though one is let's make a distinction between policymakers and regulators right there are regulatory agencies um and there are different arms of those

agencies who understand the technology in different ways right innovation arms so forward thinking really understand spend so much of their time in the past have possibly used the technology enforcement arms may feel differently uh and see these bad acts and hacks and things like that and not get down to the nitty-gritty you know at the basic level that the innovation arms have been doing too then there are policy makers right who are writing legislation so in the u.s people in congress and there are different levels of understanding between different members of congress different you know the house financial services committee does see crypto in their ambit so does the senate banking committee uh and the senate ag committee

but there are other you know other members of congress possibly on other committees who may not have as much knowledge because it just doesn't fall within what they do so we need to make those distinctions clear we also need to make the distinctions clear between centralized you know c5 and d5 as you guys have done earlier and where the regulation is coming first i think as we've seen in europe they understand that regulating centralized crypto actors including you know payment stable coins uh is an easier way to go and i think we'll see a lot of that in the us too but defy is not far behind and the one message i want to give to you know people in the space is we aren't we aren't unregulated now completely agree with jake but it's gonna get as you sort of started out

with this jason the regulation is coming and so for those people in the space who say like no you know we're sticking with the cypherpunk ethos just buck all regulation that's not particularly realistic uh and so i think engaging with regulators is real end policymakers is really important because if we don't the banks will and then this will become fintech and that takes away some of the interest and fun and promise of what this technology can really bring so we really need to be out there and jake has been doing this very proactively for a long time same with others the t5 education fund and you know other actual projects are getting involved in doing this too and i've been sort of

banging this drum for a while now be out there give them ideas because if you don't give them ideas somebody else will and it won't be ones that we can actually live with yeah i guess like if you were to in a perfect world you can wave a wand and i love harry potter so like let's use this nowadays like so you wave one where would you start like what is there one particular idea of regulation that you would enact today that you've thought about i'll give you my answer and and first the principle behind this answer which is don't let perfect be the enemy of good right don't let the edge cases or the sort of nuanced complexities at the edges stop you from doing the easy things and i think the

easy thing here is to regulate the centralized custodial intermediaries in crypto where their business models are very similar to traditional financial institutions that are already regulated so what i mean by that is the centralized exchanges that do take custody of customer funds i think everyone at this point agrees that there should be some regulation there right secondary markets in crypto are not regulated now i think it's fair to say most digital assets are commodities not securities and commodities markets at least spot markets are not regulated in general right there's no regulation for gold spot markets or for wheat spot markets right only for for derivatives which are regulated by the cftc

i think that most people at this point understand that digital assets are at least different enough from physical commodities like gold or wheat or corn or what have you that it makes sense to have some secondary market regulation and i think the question is just who is the right regulator and what do those regulations look like but if i had that magic wand i think that's the first thing that i would do and i think that that folks in congress agree with me because we've seen these three bills that came out just this year that give the cftc spot jurisdiction over crypto markets and i think that's something we'll see happen within the next year or two rebecca i'm really curious to get like when you make when some of this stuff gets more tangible um uh what one of the things you said like

20 minutes ago or 15 minutes ago was was about censorship resistance being one of the one of the end goals here and obviously the end goal is you build an amazing product that's better than existing products but also censorship resistance it fits into the ethos of really where where we're going and what we're building here how do you like maybe thinking more i don't know how much you can talk about what ave and the ave companies are building but you can't that's totally fine but like when you guys are thinking about introducing a stable coin like if we look at maker for example maker is debating like should we have usdc as collateral should real-world assets be collateral what that does it makes it di it makes dye incredibly scalable but it also means we're uh that maker and dye is more uh exposed probably to regulatory risks

and censorship so how do you think about like building an amazing product scalable but maybe you're more exposed to regulatory risks and censorship versus like only having kryptos collateral for the stablecoin like i'm just curious how you think through those problems so i will talk generally how we think about problems because donnie's been very vocal about just how he thinks about building software and the things that are most important to him generally i won't talk about any specific project or what we're doing but um stani's number one priority is security uh and and user security really um so any time and that some of that comes with censorship resistance some of that comes with ensuring that you build appropriately when things are still

centralized and you don't necessarily have um a dow in charge so you can even look at something like the lens protocol which is a social media protocol it's totally out of the d5 realm of things but even there it's in beta it's going through a gated launch to ensure that even at that level uh it's working as intended especially because it's so novel um and then we do a ton of security audits just to keep going on the security point for a while um we obviously have the luxury of doing that because we are a larger company right now as we're building and smaller companies may not have the luxury to do three four five six seven audits before they put out um put out uh software but i think the point of that goes to jake's point about

how we're already regulated like there are certain things you need to do from a consumer protection perspective as you are building a product that applies to any company and so security right there is the hallmark of it um as far as censorship resistance uh we don't um you know that's not sort of how we think about things from a first principles perspective obviously stani is very very crypto native um this is a very pulled itself up by the bootstraps like not vc backed from day one company uh and one of the reasons why i'm here is because donnie really can balance this idea of staying crypto native and true to the roots but also thinking about consumer protection and really cares

about building like being a responsible innovator right as everybody sort of talks about it's a hard line to walk um but we try to do both of those things as well so stay true to what you know whatever what web 3 means or what everyone has intended from a decentralization ethos perspective while also really caring about user protection and things like that yeah rebecca i also want to give you an opportunity to answer the question if you're away want like what what specific piece of if you're a regulator like what would you do today um that's tough because i spend a lot of my time thinking about where the desire for regulators or policy makers to have some sort of regulation

of defy come in uh and how we can make that work without turning defu without regulating speech and the writing of code and without turning software developers into financial intermediaries but i don't think we can wave a wand there yet because i think it is so much more nuanced and there is more work to be done between both stakeholders so this is why i always tell people please engage talk to policymakers talk to regulators so they understand and so you can put your ideas out there um waving a wand i think what i'd like to see is as the stable coin regulation is being built out and coming down in the u.s to make sure that there are very nuanced distinctions between different types of stable coins so payment stable coins

that are centralized um stable coins that are like die over collateralized and decentralized and then things that are much more truly algorithmic right like ample fourth uh and uh any other types of categories so i'd like to see nuance in any stable coin regulation if i could wave a wand how much um on this point how much do regulators do you feel regulators actually listen to you um it depends is my lawyer answer um uh i think i i do a lot more so in the us i do a lot more engagement with policymakers and they do listen and depends on who you're talking to what committee they're on the time of day what they're working on immediately

versus not so a lot of it is timing that's just a human thing um i do talk to regulators outside the united states a lot um and in the uk they care so much i do the fca the hmt um they there is a real push to see the uk as a global crypto hub and they they are they want to do risk mitigation they want to have um a good regulatory scheme but they they care deeply and have been engaging with stakeholders for years now to make sure they're building out something that's compatible with the technology and also protects consumers that's largely my experience as well i would say overwhelmingly they listen because they're interested

right i mean they also want to know what's going on in this space and how they can do their jobs to address it and most of them are well-meaning people right i think like we view regulators as this sort of separate category of being but they're just people right they're just people with the same kinds of interests and and um you know lives and concerns as the rest of us i think there are a couple of exceptions and the exceptions are where you have regulators who are not focused on doing their jobs but rather focused on some other separate interest and i mean it won't surprise you that you know i'm thinking about the chair of the sec here and there have been a lot of reports that um chair gensler's political ambitions

override his desire to regulate crypto in a way that actually makes sense i think that's a real shame because there is a real opportunity for the sec to be an important player in the future of crypto and at this point we just don't have an sec that's open to those conversations so it is sort of idiosyncratic in that sense but i think the the overwhelming majority are not like that they're you know genuinely curious and they want to understand doesn't mean they're going to agree but they do listen yeah totally there with you in terms of the going back just to tornado for a minute it is as you said it felt like it was more driven by that central figure that head of the department that said listen guys the staff may have thought otherwise but they just said it's not going to happen and so again the risk of

centralization um and too much power in the individual in the hands of one individual that wants to get ahead and place his interests above like consumer good i guess um but like what is the hope and what is your view on the state of regulation today and like going forward like i think we all feel that this space is going to be more regulated probably accelerated by recent kind of consumer losses and people getting hurt where do you see regulation coming and what can we do as an industry particularly builders founders in the space to get ahead of that and maybe influence that in a positive manner this um it's a great question this gets

directly back to the distinction rebecca made earlier between regulators and policymakers specifically what i mean is the elected officials in congress and in the executive branch right the president and the people he appoints as opposed to the regulators the the issue with regulating crypto is that the laws on the books now just don't make a lot of sense right we have laws that are designed for an analog physical world and we're trying to take those laws and then apply them to a digital blockchain based space does not make sense in most cases what that means is we need congress to make new laws and a lot of the uncertainty and the trouble that we have now is regulators who have limited authority under existing law trying to stretch that authority as much

as possible to apply it to crypto but really i think where the action is going to be is in congress and that's also where i think that the you know the listeners to this podcast can have the biggest influence unlike regulators elected officials are responsible to their constituencies in other words they want to do what gets them more votes and that's where they need to listen to the people who are voting for them and listen to their interests if there is sort of a changed american consciousness about crypto that is what will influence congress to pass new laws that are constructive for the space that's a challenge right now frankly because crypto does not look very good to the american public if you you know look at the new york times or the washington

post or even the wall street journal half of the time most of the stories are very negative and i think what we need to do is like rebecca said start telling these stories about the power of crypto and not just from a theoretical perspective but from a real practical perspective where is this changing human lives where is this helping people to launch businesses they couldn't launch before or conduct activity they couldn't do in the traditional financial system that's what's going to change the voters perspective on crypto and that's what's going to change the policy makers view on crypto and set us up for for good legislation in the future yeah totally replica i mean i agree with i do sorry come up with a question where we're gonna diverge but i do agree on i do agree with everything that um jake said

that the stories and the education are the most important thing everyone can be doing and there are really important um policy groups out there and um industry associations like the blockchain association but i will say when you come from a builder right an actual software developer and you have the real stories of how your software has worked has touched people and the like it it makes an impact i always tell this story that i have of somebody i know who used the ave protocol to supply certain crypto assets borrow usdz usdc and convert it into fiat and then bought their refrigerator with it and

that always lands really well because people say like isn't this just for speculation and you know that's all the things that we've heard about from a negative perspective and when you have these real stories and that's just a small one and one but um it really starts making this real as to how it can be you how the technology can be used going forward so that's really important and as i've sort of threaded through the entire part of this podcast like please come with your ideas um about one how to be responsible innovators and where the regulation can appropriately intersect with the technology because if we don't come with ideas as i said they'll come up with their own and they won't be ones that we want to live with honor transition limits is something you said jake which is

uh most of these digital assets being deemed commodities we saw recently coinbase the sec go after a particular coinbase um employee that was front-running i guess you had information around coinbase being you know the exchange that it is um listings from assets and him trading and tipping a few of his friends or family members and profiting as a result of that which is known as like what is that like that the wire like it was charged with wire fraud i guess um i am curious how you interpret that in the context of are they deeming these securities not commodities they listed specifically mine tokens um and what the implications of all of

this is for for the industry yeah um well uh also great question let me let me separate this out into two different pieces one is the insider trading allegations and look no one likes insider trading that's not something that we should support and we don't condone that in any way insider trading by the way like you said does not require there to be a security involved there's such thing as commodities insider trading the charge that the department of justice uh had in their indictment was not you know securities fraud it was wire fraud so set that aside right no one here is looking to defend you know insider trading where someone is taking advantage of confidential information to get an edge in the market but the second

and totally separate issue here is the sec using this opportunity to accuse 10 different companies of violating the securities laws without actually charging or or putting forward a claim in federal court against any of them and this is something we've seen from the sec a lot right this tactic of regulation by enforcement that they engage in where instead of giving guidance to the industry to say here's our view of the securities laws here's how we think that the howie test should be interpreted in the crypto context here's how you can comply with our view of what the howie test means and then sort of you know helping the industry to comply instead they make

these pronouncements of policy in the form of enforcement actions whether that's settlements or it's complaints that they file in federal court and here the complaint they filed in federal court didn't even give the people they are accusing the opportunity to respond to me this is just irresponsible and i mean that's um maybe a strong word but i think uh we deserve better from from an agency that's uh should indeed be helping everyone in the crypto space understand what their obligations might be under the securities laws and they said that's that's not what we've seen so far so look i i don't know how that case is going to play out but i think um it's pretty obvious that the sec is setting itself up i think possibly

very soon and maybe in the next four weeks before the end of the sec's fiscal year for a broader attack on crypto and it's sad to say um but i do think that this is the beginning not the end of uh of their enforcement strategy and what would that attack look like um so i'm totally speculating here so take this all with a with a grain of salt but if i were guessing what i would say is um we should take chair gensler at his word there's often this this tendency when you hear sort of um big uh pronouncements or you know tough talk from uh you know either elected officials or appointed officials to sort of dismiss it and i think that that does

them an injustice i think we should take him at his word what he says is centralized exchanges should come in and register with the sec in fact he says centralized and decentralized he doesn't seem to understand the distinction between those two things what he's saying is these entities whatever they may be are in violation of the securities exchange act requirement to register as a national securities exchange or an alternative trading system that's a violation of the securities laws if you take him at his word what that suggests is the sec will file enforcement actions against those types of platforms now who exactly that is i don't know but you could probably run through the list of the biggest us-based centralized exchanges and

possibly even decentralized protocols and you could imagine seeing an enforcement action against any or all of them again potentially very soon so the sec's fiscal year ends at the end of september they have a pretty consistent pattern of filing big enforcement actions right before the end of the fiscal year and the reason for that is they have to put together their budget request for the next year and they want to show that they did as much as possible literally in the prior fiscal year so it could be that in the next month or so uh we're going to see those types of enforcement actions from the sec and then just go down the list of other you know market participants who you've heard sheriff genzler uh you know sort of casting aspersions about in his public

statements whether that's token issuers or venture capital firms or market makers i mean i i know this sounds a bit grim but i think any or all of those could be on the table i don't have anything you know specific to add to the question of like what are we going to see from the sec because as jake said all of that is speculation as to the sec's um complaints against wahi and the claim in the coinbase case we were talking about i do think they're it's important and a lot of this has been discussed um to make the distinction as jake made between the doj's indictment so right criminal indictment for wire fraud they wire fraud does not have a requirement as to what the instrument is so all wire

fraud uh really requires is that you've knowingly devised or intended to devise a scheme uh to defraud or obtain money and property by means of like false pretenses so that's all they are saying that happened there from the criminal perspective and that seems like a fairly easy case frequently when you have both competing criminal and civil cases the civil case gets stayed in favor of the criminal case being completed i am not aware of any you know stay being requested yet but um the timing on that you know may not have passed um but the the other piece that jake um sort of alluded to but hasn't gone into is i don't know what the financial means are of any of the

defendants in the sec's case but they're individuals and presumably not individuals who have significant means to defend a case so it's possible that there could be a settlement um like we've seen in a lot of these in fort with these enforcement orders and while it doesn't necessarily set precedent from a federal perspective to say that there was a settlement for securities fraud um uh sorry for insider trading on securities and that these nine tokens then there's this implicit acknowledgement that they were securities um could be a really big problem from a precedent setting perspective just um you know in the sec's ambit and potentially can be used you know in other ways as well so if you

brought in a coin base right to say coinbase we think you are improperly allowing securities to be traded on your platform and they were brought into the case coinbase has significant means just like we've seen with ripple honestly to hire some of the best lawyers to really take the sec to test to think really critically um and maybe that you know this is not saying about anything about um the lawyers that these defendants may have hired i don't know anything about them but obviously there's there can be a difference in means in who you hire to defend yourself and the type of work they're doing so not bringing in coinbase or any of these other you know companies that may have greater money to defend themselves obviously puts the sec potentially on better footing yeah

there's another point to add here that's all correct but there's another point to add here which is all of what we just discussed focuses on the enforcement context that's not all the sec is doing so i mean i think the sec has sort of a two-pronged um approach to crypto the first is enforcement the second is rulemaking so earlier this year the sec proposed two rule making changes that would vastly expand the federal securities laws to apply to any number of crypto market participants and so again this is a federal agency trying to expand its own authority under existing law even though that existing law is not really intended to expand that far the first was to expand the definition of an exchange to

apply to communication protocol systems which is not even defined in the proposed rulemaking but probably it captures all sorts of participants in the in the d5 ecosystem right front end operators maybe you know governance token holders who knows who else and the second was an expansion on the dealer rule which would probably capture a bunch of of institutional firms that are acting as market makers in decentralized exchange protocols both of those rules are currently pending the sec says at least on their agenda that they will finalize that first rule the exchange rule this october so that's coming up in you know just about two months now and if that happens

i think the only thing that can result is is litigation uh and you know we at the blockchain association filed a comment letter explaining why we thought that that rule making would be unlawful as as um outside the scope of the sec's authority uh we also at the dfi education fund filed a similar letter many other participants uh you know paradigm and coinbase and uh the crypto council for innovation i mean basically everyone in crypto filed one of these comment letters like hundreds of pages on file explaining why this rule making would not only be a bad idea as a policy matter but would would you know indeed violate the law um i don't know that that will stop the sec from adopting that rule so it may be that before the end of the year

we will be in litigation against the sec to challenge that rulemaking so we'll just have to see how that plays out as well yeah yeah definitely something to watch um and it's really insightful that you know around this fiscal year end of the sec um i guess if we could transition a bit over to there's two topics that i want to cover maybe three time permitting and we've got 30 minutes one is the unit swap feeds which all kind of the implications how you were interpreting that um particularly because people are voting on it and so potentially liability there what this all means from the security context the second one is kind of the censorship of each validator this is tied to like tornado and we talked a little bit about that um but it's very topical given the merge that

is happening you know imminently and the third is kind of daos and generally kind of how you see that space i don't know if you have a preference about i know rebecca has a preference but uh jason jake uh maybe we could start with you and swap fee switch and how you see that and then we can tackle the rest um well i guess i mean i can give you my thoughts on the unisoft v-switch but what's um i mean what part of it is of of most interest to you yeah i mean i i think there's a big conversation right now just in d5 in general which is uh we've we've kind of taken the web 2 model of like subsidizing uh users right so if you look like uber rides in manhattan used to be five bucks now they're 50 bucks uh we've done something

similar with d5 which is uh we've kind of subsidized some of these some of the fees and now folks are saying like i know uniswap and many other protocols are saying well should we turn on the fee should we basically turn on the fees and start capturing more and more of the revenue um and i think there's a conversation right now about what if uniswap turns on the fee switch well now you're basically now you have a secure or now you have a token that generates revenue and pulls revenue back to the token holders uh so maybe by some definitions that could look like a security so i think the first part of the question is probably like do are we understanding the definition of a security right and are folks who are writing twitter threads about this on uh threads on twitter about this are

are they correct or like are folks misunderstanding this uh well i well i haven't seen the twitter thread so i i've i haven't seen any particular analysis i also i i don't have an opinion about sort of the commercial decision right about whether it's the right thing or not um to turn the fee switch on but i guess just from the legal perspective um well maybe now is a good time for my disclaimer i'm a lawyer but i am not your lawyer i don't represent anyone in the audience here nothing is intended as legal advice uh if you if you have your own legal concerns get your own lawyer that having been said i do not think my personal opinion is i do not think that turning on the fee switch somehow converts the token into a security that doesn't make sense uh as a

matter of law when you look at the securities laws the question is not does this financial instrument promise to go up in value or does it yield a dividend in some way that is not the test for a security right there's a million different types of financial instruments that can go up in value or even in theory perhaps they could throw off some type of dividend or cash flow that are not treated as securities that is not the beginning and end of the analysis the question is are the holders of the instrument who are expecting profit either in the form of increasing value or some other type of profit and dividend etc do they expect that profit reasonably because of the essential efforts of others in other

words are they looking to the issuer of the instrument to carry out ongoing managerial and entrepreneurial efforts without which they would not be able to reasonably expect profit and i think if you look at something like uniswap turning on the fee switch does not create that type of securities-like dependence of the holder of the instrument on the initial creator of the instrument right if you expect to make money from holding the uniform governance token because the fee switch is on it's because you think there's going to be an organic market for use of the uniswap protocol that does not depend on some third party that should be making disclosures under the securities laws in order for you the holder of the instrument to understand

the value of your investment it may be a relevant fact if you were to be looking for some type of securities-like relationship but i mean i think look my honest opinion is i think people who have the uniform governance token are probably expecting profit anyway it's not a relevant piece of the analysis as to whether the token is a security the question is why are they expecting profit is it because of the original creator of the asset or other reasons and in my opinion the answer is other reasons so no i don't think it's it's dispositive of the securities question yeah and without wading into the i agree with jake's analysis obviously the one thing you did say jason that we have to sort of distinguish is you said uniswap is thinking about turning on the fee switch but it's not uniswap labs the

company it is users who are making proposals to the dow to do it so you know to jake's point of well where is the expectation of profit coming from the unispot protocol no admin key nobody you know able to make changes to the protocol or really to the token um and then having to rely on the dow and now potentially the foundation because as of today that we're recording it uh the vote by the unit swap dow to create a foundation um has also passed so you know where is the expectation coming from it's the users who are moving this forward not you know the original software developer that's a great point yeah that's a great point um

so if you were i guess this is more of a business model question but so you you two would not be concerned about and rebecca i don't know how much you can comment on this but you two would not be concerned about turning on the fee switch and and maybe the negative impacts that regulators that it could have on the regulatory side of things no i don't think i said that specifically but i think jake's point and i don't want to put words in his mouth and mine too are you have to look at the facts and circumstances as everybody says under howie to see and to do a real analysis um of what that means from an efforts of others perspective and this goes to you know your question about how do we define decentralization you know as far as let's say the uniform protocol goes

uh certainly open sourced um even though there's a license on it as of now uh you know diffuse governance uh and then you have to look at the ecosystem and where it's really coming from to look at the different pieces of the facts and circumstances around decentralization and the efforts of others that that's well said i i wouldn't go quite so far as to be totally unconcerned but i just i think it's one fact of many and it wouldn't be you know the dispositive factor in that analysis i don't think in other words that the uniform governance token is not a security before the fee switch gets turned on and then automatically a security just because it is um so yeah that's my take on it what's really important just for this conversation um is to go back and look at the coinbase uh complaint that we were just talking

about the insider trading one um because they focus so much on the efforts of others prong when they are talking about the nine different tokens and how they're deciding that those are securities so that's really the key when you are thinking about this analysis um and i the coinbase complaint is a great place to learn um whether and what the sec thinks is important in the efforts of others analysis yeah absolutely yeah um i guess transitioning a bit to the validators um i guess i'm really curious to get your take on you know as we all know theorems transitioning to proof of stake uh you know september 16 17 merge um given the recent kind of tornado

um you know enforcement and the actions that other protocols have had to take jake or maybe you build this earlier which is this kind of uh enabling of the enemy of the state if you're validating blocks that have you know funds that are you know tied to north korea or some enemy of the state and what that means for for the network what that means for people that are validating like centralized institutions decentralized institutions like lido um and exchanges like coinbase i mean it's fairly concentrated set um of folks that have these deposits and perhaps a validator set um so i am curious how you are interpreting this and thinking about it um generally for for ethereum and then just proof of stake networks

that are i guess to set the precedent and this is my understanding you correct me here but unlike bitcoin which is deterministic if you're a miner you're competing to solve and broadcast the answer to the puzzle and then there continues to be like these kind of multiple chains if you will and then the truth and sort of is agreed upon but it's probabilistic whereas if you're a validator you may have some there there's nuance to this but in a simplistic manner for the sake of time is you get sort of chosen to put a rubber stamp on and validate that particular block and and so it's different than from a miner in the sense that you can trace back a particular block um approval if you will that can be

contested by other validators but approval to a particular entity if you will so that i think is an important distinction between a proof of work network well no the ultimate question is like do we think they should be uh blocking sanctioned transactions you know what what's the ultimate question hmm i mean all of us are thinking looking at this and saying what's going to happen we're all excited about the murders i mean but again it's like oh wait a minute this isn't the big isn't the big question right now is like there are there are a couple major validators right and the question is like do they adhere do they should they adhere to ofac regulations right like if a regulator comes to you and you are

kraken or staked or coinbase or lido and they ask you to censor at the ethereum protocol level uh with your validators do you a comply and censor the protocol level or b do you kind of shut down the staking service and preserve network integrity to not be you know the censored ethereum blockchain um but you sacrifice all the revenue that you generate i think that's the the question at hand here yeah and more fun philosophically fundamentally does that compromise the network full stop because then who's going to be validating well it's people that only don't care about complying with the you know developed nations like regulators which i don't know

i'm not true jake we'll throw this one to you first and see we'll kick it off yeah well there's a third option right which is which is to validate the block and have a legal argument as to why that is permissible under the sanctions laws that's very risky and i think that's maybe where i'll start here and again right not your lawyer not trying to give legal advice to coinbase or anybody who's you know um providing staking as a service or anything like that but look sanctions laws are extremely broad what they say is if you are a u.s person you cannot transact with an address that has been listed on the sdn list and also you cannot facilitate any other transactions with that address like rebecca said providing material

assistance so i think there's a couple of questions that if i'm outside counsel for a coinbase i'm i'm thinking through and advising them on right now one is are you facilitating a transaction that violates sanctions laws if you validate a block that contains a transaction with a sanctioned address the second question is if you are validating a block that builds on top of a state that includes sanctioned transactions in the last block or some time before are you violating sanctions or do you in fact have to try to reorg the entire chain just to avoid right to sort of remove all of those sanctioned transactions um those are both really hard questions but the problem is if you violate sanctions

laws it's a criminal offense and so most compliance lawyers are going to give very conservative very risk-averse advice and they're going to say don't mess with this if you're clearly subject to u.s jurisdiction don't be playing around with sanctioned transactions i'm sure that that is the advice that circle got when they decided to freeze usdc in tornado cash very interestingly we saw yesterday tether say they do not agree and they did not decide to freeze usdt in tornado cash i don't know exactly what their argument is but i'm guessing their argument is we don't actually control these transactions so we're not facilitating sanctioned transactions just by allowing tether to continue to exist in tornado

cache maybe validators could make a similar type of argument i don't know but i think you have to assume if you're thinking about this from a game theoretic perspective trying to understand what is the security offered by proof of stake under you know the current sort of market structure for ethereum i think you have to assume that a us person right a company that is organized and headquartered in the united states is not going to directly facilitate any transaction that could be viewed as violating the sanctions laws um so yes i think you have to assume that uh a u.s staking service is going to censor those transactions that's that's very likely what would happen but it does compromise the security of the network and for the way it's intended to

work right to what you're bringing it back to i mean i think even outside the sanctions contest context we've seen a lot of discussion now about some of the new either alt ones or layer twos and how many nodes do they have how many validators do they have and if there are the fewer um that there are maybe it's less secure so or certainly and it's certainly less censorship resistant so um you know that's part of the the whole discussion as well but i guess it also depends on what you mean by security but i think you know if you have people stopping validating transactions um it does make it lesser yeah so i'll tell you because i was running a i was thinking of setting up uh seeking service um way back and i reached out to actually a chair of the sec when i'm

meeting in san francisco and talked about this i this was the main issue that i had which is and i asked them the question look what happens if north korea delegates at the time was like tisos over to my validator i can't stop that actor from delegating their assets to my death like to my validator i guess and so they were like kind of like i don't know if they were not as focused on that but the fca kind of we also reached out to the fcc and they were like fine with it now of course it's different now i guess because of tornado i i guess but i think what is key about architecting a network was there are certain proof of state networks where the validator can block

the payment of the reward to the delegators so if i'm the validator in certain networks i can't control the payout if i deploy the smart like i deploy the contract and i pay out the reward to delegates and then some networks you can actually withhold the payment until the kyc until they email until they whatever so you block it and i think to me that feels like the right to a compliant way to do group mistake which is anyone can validate to your to your validator but the validator can have some discretion at least i don't say having custody but blocking the payment if only if that particular address has been in the

list and you can do a check really easily and if it's on the list then that person doesn't get paid and so you at least are not at least that particular entity is not like profiting from the service but anyways yeah but there's the nuance right which is are you on the list or are you trying to tran right with no tornado cash now it's not is your wallet on the list are you transacting with a smart contract that is on the list so it's it there is that nuance yeah yeah i know i mean go ahead oh no i was just going to say i mean to your point right it's different um but it's also the same right it's like the same but different but same in the sense that bitcoin miners have had to think about avoiding sanctioned bitcoin

addresses for at least the last four years when the first bitcoin addresses were added to the list and they've sort of come up i think with an industry standard which is they don't include those transactions in their own blocks but they do not have any problem building on top of a prior block that does include those transactions and so it may be that those transactions just get validated by non-us persons and then the us persons i mean this doesn't solve some of the sort of stickier questions like the delegation issue you mentioned but i think you know we develop industry standards around these things hopefully in coordination with regulators and the last thing i'll say is um this is where we have to ask this question what is in the hearts and minds of the folks over at ofac and in the treasury

department is it their goal to take down ethereum or are they really just trying to exclude north korea from having access to this one tool that was being used quite a lot by the lazarus group and honestly i'm going to be optimistic and say i think it's the latter i do not think that this is an attempt to undermine the security of the ethereum blockchain broadly and these are the kinds of questions we should ask them and have them explain look here's what we expect you to do and here's where it's going to be okay and just like they're seemingly fine with miners who are building on top of blocks that have sanctioned transactions in them hopefully we can work out some kind of understanding where we're satisfying again the very valid concerns that they have about bad actors abusing this system while also not undermining the

security of the blockchain itself that's that's my thought there's actually a really important point that jake made baked into there that we haven't talked about here but is important for i think the the ecosystem to take away which is it i acknowledge this does feel like an existential threat in some way right to see the sanctioning of actual software but i do not think ofac or any regulator or policy maker in the united states wants to well i can't say none but i i don't think that there is an intention to shut down this innovation in full and so while there has been a large outcry again against what was done and how unprecedented it is and stuff like that we have to remember that as jake sort of started this podcast off with this was a national security issue

this is how they thought they could best address it um and while it is new and novel i don't think it means that ofac is going to go around and try to shut down every single d5 protocol that's out there yeah are we going maybe i know we're coming up on time here and i want to just make sure we're respectful of you guys this time we're back on jake are we going in the way of will there be permission to defy and permissionless d5 will there be maybe even at a deeper level like could you see a permissioned eath chain and then like a censored east east chain and a nonsense censored eth chain is is that where the space is heading i i hope not honestly um

i i hope that there is a way that we can find an intermediary position where we have one defy that holds true to a lot of the principles here especially something like you know um having the permissionless nature right and not bringing it back to the old antiquated kyc that we do under the bank secrecy act that excludes as we know now 1.7 billion people across the world from the financial system so we can keep the possibility and the promise that this technology holds uh while also bringing in some of the compliance user protection anti-fraud anti-money laundering things like that all the regulatory goals we have but i hope there are not two systems i

really i really am hopeful that if we work hard enough that we can find some compromise and i'll admit that won't make everyone happy anyway so for everybody on twitter right now i know people hate that answer um but i do not want to see two systems i i think um i think the beauty of crypto is that everything will be tried right i mean that that's the nature of crypto it is permissionless someone is going to show up to try everything you can imagine including permission to defy even though to me that's sort of an oxymoron i don't think you can be decentralized and permissioned at the same time but i think again the beauty of it is everything will be tried and the market will decide what wins and in my mind open source always wins right the the

more neutral the more open and inclusive and accessible version will win out over the permission version i think we have decades of history from before crypto that that shows that the market forces tend to select the open source version over the proprietary one and i don't see why it would be any different here so yes i do think we'll hear a lot of discussion about how do we permission these protocols to make them safer or what have you but i think ultimately that's not where we're going i think we will end up with at least something that approximates this this decentralized uh permissionless inclusive world that we're all trying to build here yeah yeah i think the key takeaways have always been if you're a founder focus on consumer protection having credible immutable code and

working towards decentralization without compromising the security it's a fine balance but i think like in my assessment regulators really really hate it when consumer consumers are hurt and and so if you build with that in mind and with that intention you know all you can really do otherwise is focus on helping you guys out there at the forefront talking to these folks that i think from what i've heard in this podcast is that they are receptive they are they care they are paying attention and they want to they kind of want to do the right thing they want to regulate it sensibly because it is a big economic impact and their constituents are care about it and increasingly so so i think uh you know um that's the hopeful optimistic side of all of this

so we'll probably have to have you guys on well we'll see if jake's uh theory that the sec comes out with a you know broad-based attack in the next couple of months if that's the case we'd love to have you on and discuss that you guys always put out really good content on twitter for everyone uh and of course none of this is legal or financial advice and they're not your lawyers but still you should go follow them on twitter because they they are at the forefront and they're probably i will just say thank you thanks for uh fighting a good fight jake and rebecca this is uh yeah i think a lot of folks don't see the work that you guys are doing behind the scenes and it's um yeah oh yeah and by the way like the fight is not so much like it is with a regulator

to some extent but it's also with the media i think the media does probably more damage than like regulators we always keep talking about the fights with regulars if it's like new fortune and financial times all the idiots that are like just like want to sell news and are protecting this industry as a you know evil i think that's a problem yeah i mean earlier this week the new york times put out a request for whistleblowers in the crypto space and who's seen something bad so your point your voice stands on tv i looked at the last 50 pieces the new york times have wrote have written about crypto and 40 not or no i think it was all 50 50 out of 50 were all bad i was like this is remarkable so yeah well i was just gonna say but to that point you guys deserve a

huge amount of credit at block works right i think you guys are the solution to that problem you are targeting that same audience and you're doing a phenomenal job i don't think you're biased in any way i think you tell it like it is but i mean having that sort of you know credible but unbiased reporting i think is hugely important so thank you guys for all the work you're doing and thanks for having us on yeah appreciate it jake any parting thoughts guys before we go i think the last part um that the last point that you guys made is important that like we need to stay optimistic right um that we can't take what's going on in the media and tornado cache and that regulation is coming and that institutions want to co-op some of this technology those kinds of things that there's a lot of bombardment on that um

these days if you really believe in the technology stay optimistic that there is a path forward to see the technology bring a lot of the promise maybe not in exactly the way that you had hoped uh or the way that we all envisioned it when we got involved five six ten years ago whenever you got involved um but that there's a path forward that will hopefully let this technology bring uh all the things we hope it will unfortunately we did not find anything to disagree about today yeah next time we'll find something to fight about but no look i think my parting thought is you know if anyone is coming away from this conversation feeling concerned or scared about the future of uh you know regulatory impact on crypto i would say

don't i'm not worried about any of this yes there's some rough waters ahead it might get worse before it gets better but i am still exactly as confident in the future of crypto as i've ever been and so i think for people out there the the only thing i would say is if you want to contribute just keep building because the more you build and the cooler this stuff is and the more it gets used the faster we're going to get to a good outcome on the other side of whatever trouble is ahead so um have no fear and uh yeah keep moving forward it's an amazing place and open source always wins keep building have no fear and stay optimistic i can't think of a better ending than that jake rebecca thank you guys santi thank you for leading this conversation this was fun i

got to sit back and enjoy this it's a lot of fun i've known these two folks for a long time and i'll definitely sleep better tonight so thank you for coming around and uh let's not see much on the sequel but anyways thank you i'd love to have you soon uh and yeah all right take care everyone thanks so much guys [Music] you