Why the Binance Case Against the WSJ ‘Is Probably Not a Winner’: DEX in the City

Transcript

Hi all, and welcome to Dux in the City, where the wallets are cold and the takes are hot. We're going to get to it in a minute, but before we continue, here's a word from our sponsors that make the show possible. This episode is brought to you by Adaptive Security, the first cybersecurity company backed by OpenAI. As AI makes deepfakes and synthetic identities easier than ever, Adaptive helps companies test and strengthen their defenses. Learn more at adaptivesecurity.com. Quick note before we get into today's episode. [music] Bits and Bits now has its dedicated feed. We're spinning off from the Unchained feed and moving to a new podcast and YouTube [music] channel.

So, if you want to keep up with our weekly livestreams and macro meets crypto breakdowns, make sure to subscribe to Bits and Bits directly. We won't publish there until March, but subscribe today so you can be ready for launch. Be sure to subscribe [music] to the new feeds at unchainedcrypto.com/bitsandbits. Hi everybody, and welcome back, and happy St. Patrick's Day. I'm pinching Jesse across the screen for not wearing green, but we'll forgive her. >> I even celebrated it in Chicago, which is like the ultimate place to [laughter] do it.

With all the children. Bucket list. Go watch the river get dyed green, but make sure you leave the city by about noon, otherwise you'll be overwhelmed. >> home. Yeah. >> [laughter] >> Overwhelmed by drunk people. Exactly. So yes. First, we have Jesse, web3 Web3 [laughter] protector. Turned web3 protector and wearer of not green today, every day is green. >> to have to teach everyone what St. Patrick's Day is about, cuz I think 90% of the people celebrating did not know. If we have time at the end, I will go into historical depth on that.

>> [laughter] >> And I'm your host, Katherine or KK, fluent in TradFi and conversant in deep tech over at StarKware. V is out today, so we have a very, very special guest with us today. Jane Rhee Korhawksy. She is a sanctions expert, very strong in everything AML, anti-money laundering, illicit finance, a very storied career as a federal prosecutor, and also a friend and a fabulous person. We are so lucky to have her here today. I didn't know Jane very well until recently, when we traveled back from Cayman Crypto Week together, and one of the reasons I truly love Jane is the previous night I had

had one too many glasses of wine, so I was feeling a little rough at the airport. Jane sat across from me eating an apple while I took down a foot-long sub from Subway. She sat there without judgement. So, welcome to the show, Jane. We are so happy to have you. How do you know that there wasn't judgement? There was no judgement. There was no judgement? Nope. >> [laughter] >> But I can't wait to hear more of Jane's insights. Before we get going, as always, remember we're lawyers, but we're not your lawyers. Nothing you hear on Dux in the City is legal or financial advice, and it doesn't create an attorney-client relationship. And for all the fine print, check unchainedcrypto.com.

So, let's get to it. Our first topic today is a very interesting one. We hear about Binance all the time in the news, good, bad, everywhere in the middle, but the latest development is that Binance is suing the Wall Street Journal for defamation. So, Jane, why don't you tell us more about this? Yeah, thanks, and thanks so much for having me. Always exciting to see my friends and be here with you. Um, yeah, I think we can stop and go back a little bit just to for context for our the audience, which is back in 2023, there was obviously there was a long sort of more than three, four year investigation

into Binance by different government agencies in the US, including the Department of Justice, FinCEN within the Department of the Treasury, and OFAC around and we'll talk about sanctions. But, in in 2023, there was a resolution, there was monitors put in place from the Department of Justice as part of that resolution, and also from FinCEN. And there was a large fine that Binance had to pay. Obviously, people heard about CZ and his four month sentence, and then his pardon. And then most recently, last month in February, in the Wall Street Journal, there were allegations that that about $1.7 billion in cryptocurrency flowed through Binance

that was tied to Iran. And just for a bit more context, in the US under our sanctions regime, there are certain countries that are called what we call comprehensively sanctioned jurisdictions, where any US person or company is not allowed to engage or provide any services in those countries. And so, Iran is one of those comprehensively sanctioned jurisdictions. Obviously, we hear a lot about it like currently with the war in Iran, and specifically the Islamic Revolutionary Guard Corps, which is the IRGC, which is really at the heart of these allegations in the Wall Street Journal. And Jane, be- before you go on really quick, I

wanted to educate our listeners on two things. One, corporate monitors are basically babysitters, and they're often attached to settlements, and they basically ensure that the company is adhering to new specific kind of upgraded compliance requirements. I also want to correct a mass area of confusion. A lot of people assume that there's a a bunch of jurisdictions or companies that are just sanctioned, like you can't touch all of Russia, for example. In the US sanctions sanctions regime, most of the time an entire country isn't being sanctioned. Like, all of Russia is not sanctioned. US companies can still deal with Russian individuals. It's specific entities in

Russia. However, what Jane is talking about is very specific, heavily sanctioned countries, like North Korea or Iran. Please go on, Jane. No, that's right. It's it's a geographic sanctions that apply to the country, and that's why I think there was so much attention on these allegations that were raised by the Wall Street Journal. And we have to say Binance very clearly have stated that they dispute these facts, they believe that they're categorically false, and in fact sued the Wall Street Journal civilly for defamation.

But, what happened as a result of these the reporting was that there were senators who have called on the Department of Justice to investigate Binance related to these allegations. Again. Yes, again. Yeah, exactly. Well, and I think this is one of the things that I know we've talked about before before the pod, but I think it's important because I think people are asking a lot of questions, like wouldn't have this come up before? And one of the things that is important is the time frame. So, the 2023 settlement and the the monitors that KK mentioned were put in place, we're looking at a time frame

between 2017 and 2022. And so, the allegations that Wall Street Journal has raised are actually much more recent. And so, the investigation, if there is one by DOJ, and we don't know if there's going to be a parallel investigation by FinCEN, right? Because the the sort of conclusion to the first investigation was a joint one between all of the different US regulators and DOJ. We can't take for granted that they're all working together now if there is a new investigation, but it is something that we'll have to watch and see what happens. This story has everything in it. It has the Iranian war, which is

very current. It has bad guys. It has like cross-jurisdictional collaboration/conspiracy, if you believe the allegations. It has Binance that pretty much everybody wants to talk about. There's political implications. There's the Wall Street Journal. There's behemoths here. And I, you know, it's part of the reason why we wanted to have Jane on, because she's like everyone's outside counsel for sanctions, including me. Um, so I think it's worth digging in for a second, since this is a lot of content and a lot of topics, but I'm not sure if people fully understand how sanctions evasion works in crypto, and why it's such an important topic. Like, there are arguments to be made pro sanction regimes and anti-sanction regimes.

There's definitely pros and cons of the way the US deploys it and other countries deploy it. But remember that every country, well, not every country, but every country you can think of has some sort of sanction regime, and they're not all copy and paste of the United States. They all sort of manage different lists. OFAC is the one that is relevant for the US and the one that we talk about a lot here. But essentially, it's when you think about sanctions in crypto, it's not like one person in Iran with a laptop trying to use a VPN, essentially. Like, maybe that's the case, but that's not the sophisticated actors that we're talking about here.

Because because of all this sanctions behavior and the fact that Iran is still comprehensively sanctioned, Iran really can't touch the financial system. They're locked out of it, and so they need a middle person, middle man, someone who has access to other platforms and is willing to move money on their behalf and misrepresent what they're doing. Now, this could be Iran could really be the perfect example for crypto, because we're talking about IRGC here, the bad actors in Iran, but there are a lot of civilians in Iran that can't touch financial services and that's part of the reasoning behind sanctions, right?

To make the civilization of a sanctioned, you know, community push back and say, "Hey, you know, leaders, we need to get these sanctions off." And that's like one reason why, you know, countries are sanctioned, but it does hurt a lot of people on the ground, right? So, you know, there is like a big crypto push in Iran and they have a huge exchange called Nobitex, which is like the Coinbase of Iran, but there's also a lot of IRGC behavior on there because remember, Nobitex doesn't follow OFAC sanctions. They have their own sort of rules associated with it. So, essentially, the playbook here and the allegations say that Chinese actors or actors that were based in China and Hong

Kong sort of facilitated opening Binance accounts and then taking money and crypto through that avenue and getting it to Iran and then that's how it end up with the IRGC. And so, Binance could essentially argue like, "We don't really know who they're sending their money to, etc." But there are allegations of a lot of flags that compliance experts or even compliance 101, 102 people should really have flagged associated with these accounts. And so, that's sort of the argument here, not that necessarily the accounts opened at Binance were Iranian, but rather that Binance should have seen and were either willfully ignorant, blind to, willfully

blind to what the activity was and they shouldn't have allowed this money to move because it was so obviously being used for either money laundering or sanction evasion. Really quick, I want to point something out. So, we talk about OFAC a lot, the Office of Foreign Assets Control. It actually gets its powers or sanctions exist because of a law. Um I'm just going to give you the acronym cuz it's a mouthful. It's called IEEPA. But there's a reason why OFAC is so powerful. OFAC, unlike the Department of Justice or the SEC or anyone else, cuts off company access. And so, if if OFAC puts a company on the Specially Designated Nationals, the SDN list, that

effectively freezes US assets, prohibits US persons and banks from touching them. It completely severs access to the US financial system and markets. And obviously, that's game over even for foreign banks, for example. If they have a correspondent banking relationship with a US bank, if they have a rep office, it's game over. So, it becomes very powerful because the US really is the epicenter of global financial markets. So, that's why we're talking so much about OFAC. It is very powerful, but I do want to just note that it is a tiny office. And so, we give it like this

huge import of power and it does because if it acts, it will have a huge impact, but it takes a long time to act. And we're we see that with like the designation of specific crypto addresses, right? Like, I don't know, it was 5 years ago or so, I was still at the DOJ when like the first crypto address was designated. But as we all know, it doesn't really matter if you designate a crypto address because a new one can be created. So, OFAC's speed of acting doesn't really work all the time with how crypto operates. And so, a lot of people get confused like OFAC and how it works with the sanction list as and DOJ and prosecuting cases under

sanction, IEEPA, all the statutes associated with that because prosecuting sanctions is actually really, really difficult because it's not strict liability. It's in fact the highest standard of cases that I had to prosecute cuz you had to, in most jurisdictions, know that the sanction law existed, which is a very high standard and we don't see in a lot of criminal activity. So, just to make that clear is like OFAC is different than DOJ bringing cases and sometimes they work together and sometimes they work at different speeds, so it doesn't always overlap in the way that we'd want it to be. We don't have time to go into all of the OFAC laws because there's a lot to unpack here. I'll just say for our non-lawyer listening listeners, strict liability basically means you're in

trouble even if you didn't have intent to commit the crime. But one of the things I wanted to cover briefly before we move on to the next topic is we haven't even talked about defamation itself right? >> Oh, sorry. Like Defamation, what does that mean? It it's a long history in in the laws of of defamation. It basically means you have defamed me. You have talked S-H-I-T about me and it is not >> know we were allowed to curse on this. I hope so cuz all I do is curse on this. Okay, good. Sorry, I'm still in mom mode from St. Patrick's Day and the leprechaun trap this morning. Anyway, um the standard for defamation in this case, cuz it actually varies depending on who you're talking about these the defamation, is that the Wall Street Journal needed to know that this information was false

and disregard that to go ahead and publish. And Binance is alleging that they had responded to the Wall Street Journal's claims by disproving these claims and the Wall Street Journal disregarded this and moved forward. I think that that valid or not, this case is going to be very difficult to win, but I would love to hear, Jane, your perspective on it. Jesse, any thoughts you have there as well. I will say I think every defamation case is hard because you have to prove that someone really knew that what they were publishing was going to be false. I think we also have to remember that some of the allegations in the original investigation into Binance, to Jesse's

point, were around the fact that they were an exchange, a centralized exchange, which is different than some of the other crypto projects and products that are out there and that they're being held to a different standard because they're centralized and were responsible for various anti-money laundering and know who you're who you're opening those accounts for and letting people move their money. But I I do think that with a civil case, there is also a civil discovery process. And that will be interesting to see what happens in parallel if there is a DOJ investigation because some of those same people that

may, you know, were responsible for compliance at Binance may have to be interviewed as part of a civil case, which I'm not sure, you know, if they'd want to be given that there may be a parallel criminal investigation where they also may be subject to interviews by law enforcement in the US. Yeah, and I think the legal standard that you described, Katherine, is worth using because actual malice is what they need to prove on behalf of the Wall Street Journal if you see Binance as a public figure and I think it would be hard for them to argue otherwise and it doesn't seem like they are, right? So, the Wall Street Journal has to act in actual malice

and that is the only way that the defamation case succeeds. So, as we've all sort of been saying, it's probably not a winner here, but there is a PR aspect of this before, you know, as well for Binance because they have had, and I'll say the word, [ __ ] thrown at them over and over and over again and we can argue whether they deserve it or not. Like that's sort of besides the point. There is an argument here to be made that like Binance has said, "We've turned around. We are not the operators that we were 5, 10 years ago, whatever. We have done so much work. Look at how many compliance people we've hired. It's like a significant percentage of Binance employees at this point." Um and so, we are not going to just like let you say

whatever you want about us because we are actually good actors now and we want to be seen as such. Absolutely. A lot to unpack here. I'm actually very interested in hearing how this progresses. I this is not going to be the last we hear about Binance and litigation and regulatory. And look, to give Binance some credit, they have very good outside counsel and I'll say, look, like the big dogs are always going to be fighting in the courts about something. Like I think people don't realize that any company of any size is going to be litigating on something all the time.

So, watch this space. >> not being replaced by AI. >> Yeah, exactly. They still need us. Lawyers are going to be skivvy like we're going to be, you know, around like the cockroaches. It's going to be us, the cockroaches, and the Twinkies. Okay, can I talk about a cockroach story for a second? It involves AI. Yes. Essentially, there is a government deploying cockroaches with backpacks of like cameras and or like AI tracking tools to help try and collect intelligence and be like its own form of espionage.

Okay, I love that one. Every week, Jesse has a story and I'm just like I don't even know how to respond to that. I'm just going to let that sink in. They're using real cockroaches. Yeah, we can use rats in New York if they have that. Yeah, I would prefer rats. The rats would make me feel better. Also, the cameras must be so small with the >> cute. They're cute. >> [laughter] >> Okay, so I'm just really impressed. I hope the produced version has a photo of the cockroach camera on the side. I'll I'll I'll talk to our team about that. So, I want to move to our next topic and I think it's a it's a very interesting one. I'll just say there's a lot going on again with the CFTC and the SEC. So, a couple things to to brief everybody on

first. The CFTC issued guidance on prediction markets and everybody was really excited about this. I'm going to spend 2 seconds on this cuz I can tell you it's really a nothing burger. >> [snorts] >> The guidance really said designated contract markets or DCMs, which are the CFTC regulated effectively derivatives exchanges permitted to list these contracts in the United States, should abide by DCM rules. And a lot of those rules are not offering contracts that can be subject to manipulation and policing contracts adequately that could be, you know, more susceptible to manipulation than others. So, they really kind of reaffirmed existing regulations around DCMs. The one interesting thing about it

I'll just note is they did specifically represent they did specifically reference sports related events contracts and potentially communicating with the leagues themselves. So, that that I thought was interesting. Yet another sign that they're really kind of taking on a very clear tone like, "Hey, states get off our lawn." Like, this is squarely in our jurisdictional purview, which again I I agree with them. That is appropriately CFTC regulated. The second thing that happened actually right before this show started filming is that the CFTC issued a no-action letter in response to Phantom's self-custodial wallet. And as most people will know,

Phantom's is self-custodial crypto asset wallet provider and it wants to expand its platform to allow users to trade CFTC regulated derivatives like uh futures, perps, event contracts through partner exchanges and brokers. So, through regulated parties. And the CFTC said, "Hey, you're good. We're not going to move against you for operating without registering as what is called an introducing broker." And that's a person that solicits or accepts orders for regulated derivatives.

But the trader still needs to plug in with a regulated player. This is very different than any front end. This is not like clearance. Hey, all you front ends don't have to worry about CFTC regulation, but there was a lot of happiness within crypto at this development because in part the CFTC basically said Phantom's role is passive enough. Like, no discretion, no involvement in individual orders, no buy or sell signals. And they gave a fairly clear roadmap for what is acceptable in playing this role. So, I love to see this guidance and I definitely think it helps the market to kind of understand the parameters of regulatory enforcement. So, You know, I am here to

always hate on crypto Twitter, but I'm going to give crypto Twitter a compliment for a moment. I don't think there is any other industry, especially in the tech space, that pays [laughter] such close attention to every regulatory announcement that there needs to be like a hundred people on crypto Twitter commenting, "No, this is great. This is not great. This means this. This means this." Everyone is a crypto lawyer on crypto Twitter. Everyone is trying to read the tea leaves. It's just sort of fascinating how much hubbub can be made around like one agency making one potential guidance statement when like if if you look at AI or any other tech industry, there's a bazillion of those a

day that no one's paying attention to. So, I'm going to give crypto Twitter and the crypto industry some credit for understanding that these kind of announcements can be really really useful. Although, I'm not sure, you know, how many of the announcements from, you know, this past week are that useful other than the Phantom one that you just mentioned. >> I just wish they really understood these. No, I know. You're asking too much. It's a social media platform filled with filth and also some education. I have not tweeted about this despite the fact that I probably understand it better than the vast majority of crypto Twitter because I was busy doing work this morning.

So, yes, I 100% agree with you. It's good that we're on top of this. I just wish most of the tweets were a little bit more accurate as opposed to tweets that I saw saying, "Hey guys, all front ends are good in interacting with derivatives." I'm like, And then they signed that legal memo. Yeah. Yeah. So, I also think to Catherine's your your point earlier, we'll have to see how other agencies within the US government who also are looking at the interaction between different applications and trading react to this and what guidance they put out. Cuz to Jesse's to your point, like I think people pay attention but don't always think like, "Oh, there may be another agency within the US government

that may have a similar or different perspective on this guidance. It's a it's a great point, Jane, because we can't take one regulator's no-action to mean that there's some sort of okay from the regulators in the US or globally. And that actually brings us to the final development where we saw this memorandum of understanding between the SEC and the CFTC. A lot was made of this. And I would love to get Jane, your take, Jesse, your take as ex-federal prosecutors. In my experience, as some of you may recall, I spent 12 years doing white-collar defense, you know, representing companies in US government

investigations. And the collaboration between agencies was very random and pretty much entirely relationship-based. But Jane, what is your take on this? Do you think this MOU, this like commitment to collaboration, while it sounds great in theory, do you think it's going to change anything? I think it's consistent with what we have been hearing from both the head of the CFTC and the SEC with this new administration, which is which is helpful and it is aligned with what they've been saying publicly for a long time. And I do think we're seeing more like events where they're both speak at, you know, both agencies are speaking at the same time and and aligned and sort of trying to work out who is going to be

responsible for overseeing what. I think it's always good in my experience when I was at DOJ, you know, taking a whole-of-government approach where the agencies are aligned and give clear rules of the road to an industry or to private actors is always a good thing. So, I I hope that this will continue to to like build and give the industry clear rules of the road, lead to rule making that's helpful to actual guidance, right? To even just these no-action letters we're seeing from the CFTC. But I agree that it really depends on the people in these in, you know, in these agencies.

And how long that will last is really, I think, still to be determined and we'll have to watch. But kind of circling back to the Binance piece, this also matters, right? Because that settlement in 2023, that resolution was DOJ, FinCEN, OFAC, and the CFTC. So, we have seen precedent where even enforcement action is in concert working together with all of the agencies. So, we'll see. The world is fighting right now. So, I'll take some Kumbaya, especially from our regulators.

So, even if it's a nothing burger, let's just all hold hands. Let's all be friends. Live in peace. Well, and also it is it is a huge advantage that, you know, Chair Gensler came from the SEC. He has those pre-existing relationships. There's clearly a lot of mutual respect. That is not always the case. [laughter] So, regulators don't always see eye to eye. So, obviously that's just a built-in advantage. Great points. We're going to get into some more fun topics. Um the Aave debacle, some really interesting AI 402 payments developments when we return from a break

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You can also find us by searching Bits N' Bips on YouTube, [music] Apple Podcast, Spotify, or wherever you listen. And we're back. Okay, so another fun one in crypto. Last Thursday, somebody took 50 million in Tether in USDT and turned it into $36,000. You got that right. So, just another day in crypto. In one single DeFi transaction. So, this popped up on my radar because I saw a tweet from the CEO of Aave, Stani. Um obviously an OG in crypto. And he was really defending this and he said, "Hey,

everything worked the way it was supposed to." And there was a lot of emphasis on the fact that this user had been warned that there was a lack of liquidity. And of course, I'm summarizing. That meant that his swap of a 50 million into a, you know, a single pool um meant that he was going to get this kind of shocking amount of slippage. Um and despite that warning, this user checked the box, okay? Obviously, it's horrifying for so many reasons. And it got extra interesting because after all of this happened, Aave and, you know, uh CowSwap, which was the actual kind of um protocol that converted the deposit

tokens uh back to USDT through, you know, Aave V3, uh they they published completely different postmortems. So, Aave really focused this focused on kind of this being a liquidity problem. Uh you know, not necessarily slippage, but price impact. Like the market couldn't absorb an order of the size. And CowSwap's postmortem was very different. They basically said this was an infrastructure failure. I The whole thing is horrifying, right? Like this this just shouldn't happen. And it is incredibly frustrating. And one of my big areas of frustration is that I think DeFi has a little bit of a problem here in that DeFi wants to be the future of finance. And a lot of DeFi

is heavily attempting or marketing itself as a good institutional partner. Or come and diversify with DeFi and we want regulated parties and we want institutional parties to, you know, engage with DeFi. And it's very hard to do that and then see this kind of thing happen. So, really quick, I want to hear from the others, but I just want to say the crux of this issue legally is best execution. And the concept of that, it means that brokers, regulated parties, need to do everything they can to get the best possible outcome when executing orders on behalf of clients. So, of course this rule makes sense when you're talking about humans, centralized counterparties, intermediaries. There's

a very specific FINRA rule, and you know, we're talking securities, that says a broker-dealer must use reasonable diligence to find the most favorable price for the customer, not allowing a client to execute a trade that's obviously destructive. There are also historically rules like Regulation NMS and Regulation Best Interest, which aren't specifically best execution, but they require brokers to act in the best interest of their clients and, you know, ensure that they get get the best pricing. So, in TradFi, there would have been serious regulatory consequences from this situation. It's DeFi. DeFi isn't regulated. There aren't regulatory consequences.

There's also very specific rules abroad on best execution. You know, for example, in the EU under the Markets in Financial Instruments Directive II, MiFID II, which is the TradFi regime. And this all has kind of common law roots. Brokers are considered agents with fiduciary duties and a duty of care to their clients. DeFi is not regulated, right? Maybe it shouldn't be regulated. And it shouldn't be regulated by CeFi. But my question for my co-hosts is uh should there be any consequences? Like what the hell happened?

I don't even know what to say about this, but I do want to say that there were two articles that flashed up while you were talking about the story. And both had different images of people's face in their palm, which [laughter] is sort of how I feel about this right now because I don't even know how to defend this. And the fact that like there's continuous excuses from different protocols of like, "Well, the user clicked on the okay, and so they should have known." Like, is that really what we want here? And then we're supposed to go to the hill, we're supposed to go to regulators and say, "Clarity should explicitly exclude DeFi because of XYZ reason. And this doesn't count as DeFi

because of XYZ reason." And I I just don't know how to like have a straight face and say that. We're trying to talk out of both sides of our mouths here as an industry by saying, "Nobody DeFi is safe. It's safer than CeFi. It's safer than TradFi. And it's the best thing for consumers. And oh, but not don't don't look at this hack. And don't look behind this curtain at what happened at Aave cuz it was just like a user not reading things correctly." Like And then the other side of it is, "Well, we don't want to be regulated because we don't need you to be reg- we don't need to be regulated cuz it's all software."

But at the same time, we have people fighting on Twitter about who's to blame. And I just I don't know how to have a holistic conversation about DeFi when things like this are happening in the background. And what I worry is like this is the same conversation we all were having last year, the year before, years ago about DeFi. And I just don't know if we're growing up at all. Yeah. Yeah. Yeah. I would say Go. Oh, sorry. Go on. Go on. No, I was just I was just going to say I do think we have to frame that, you know, the the goal with DeFi has always been to have disintermediated rails, right? And that should still be the goal or I think hopefully is sort of the litmus test of what is

decentralized. But that doesn't mean that we shouldn't care as an industry about users. We also do have the benefit because things are happening on chain of knowing about things in real time, right? In a way that in a very intermediated system, we may not know who is the victim of a fraud or where a mistake, right, happened in a bank or a broker-dealer. So, some of it is the framing around how do we know about these issues, right?

The postmortems that come out. But at the same time, I think to Jesse, to your point, I think what we should be looking for is solutions, technical solutions, right? Software solutions, where there is user protection in a way where we don't have these types of events that are going to be headline grabbers, but we're going to know about them because they're on chain. And so, I think it's a end to the earlier point, I do think we're going to need to find those solutions as an industry if we are going to have large financial institutions or traditional companies who are responsible, right? Because they are

regulated and have to know that they're not engaging with a sanctioned person, that there isn't going to be an illiquid event that will cause catastrophic failure for their users or their clients. That's where the gap has to be is less finger-pointing and more how do we fix these going forward? And what are the best practices even from a just a technology perspective that can be built in so that we have less of these It's a great point. And look, we need to have at some point we're going to have Rebecca Rettig, a good friend of ours, on the show, who I affectionately refer to as the Duchess of DeFi, because I will say the interesting thing is there is not a consensus about what to do

here. A lot of very, very smart people, they take the perspective of we should do nothing. Um you know, intermediated DeFi, permissioned DeFi is not DeFi. And there is an important perspective there. And there is also a fear that when these events happen, there will be kind of retribution in the form of regulation that is overly broad. Um so, using a scalpel here as opposed to a sledgehammer is appropriate. But it's hard to say that there is not a problem when 50 million dollars disappears effectively. I also really want to shout out. I wish we had Dee on this episode just to talk talk about this topic

specifically. She wrote a really fantastic academic article on this exact topic basically on the persistent difficulty of enforcing the duty of best execution. It's called Fairness by Design, Verifiable Execution in On-Chain Markets. We'll link it in the show notes. Um it obviously takes a scholarly perspective on these issues, but it's something that needs to be discussed. And if we decide not to do anything about it, and I use we very loosely. I mean America, the world, regulators, legislators, then we need to understand that this kind of stuff will probably keep happening. Not this exact scenario because Aave has put something in place to avoid it going forward. Um but issues

like this, hiccups. I think it also depends on the point. No, go for it. You have to You have to have an answer to Jesse, to your point about if there are questions in the US from legislators or policy makers or even law enforcement or regulators. Because they may have questions about how are you thinking about or what are the ways that you can mitigate the risk. You're never going to get to zero risk. There's never zero risk in any industry or business. It's more what are the guardrails that are reasonable to put in place. And they may be very different than for a centralized or a regulated entity because these are disintermediated

platforms and protocols. Yeah. Absolutely. So, we could keep talking about this, but we have one final topic before we go to our most amazing crypto good news to round us out. And I also don't want to take too much time because right after the show, we have Unchained live with Laura interviewing the co-founder and CIO of Teya uh Felipe Montealegre. And Felipe, I think I just butchered your name. Apologies. And Ryan Lee, founder of a company called OG. So, it's going to be a great episode. I don't want to take up too much time to run into that. But our last topic, okay, a lot of you may have heard about 402.

Um and it is really everywhere. But if you haven't, I'm going to pass it to Jesse to tell you all about it and what's going on there. You know I'm going to make us talk about AI today. So, here I am. So, big agentic news as every week, the behemoth Stripe, which we've all heard of, just integrated something called XPRL2, which I've talked about here before, but it's a crypto payment protocol that was built by Coinbase and Cloudflare. It's a usable enabling the required payment. So, if your AI agent hits a paid resource like a newsletter or the Wall Street Journal to read the Binance article, the server can say, "Hey, give me 2 cents." And your agent will send money over.

>> [snorts] >> And XPRL2 allows it to be crypto on chain. So, the pitch is simple. This is how AI agents are going to work. It's how you pay on the internet, machine-to-machine commerce, and the internet has a payment layer that has been missing, right? And look, like crypto has been thirsty for AI's attention, and this is a real like use case that is tangible. And for crypto to say, "Hey, see AI, like you need us, too." But there's a big gap between Oh, this is so cool, which I think it is, and I've been thinking for a long time, and this is real because right now usage is pretty tiny. So, there's all these announcements, but daily volume is about 30k. And CoinDesk dug in this week or last week. Um so, over the past 30 days,

volume is about 1.6 million, even though people have sort of been saying 24 million, which I'm not really sure where they're getting their numbers. So, I'm not really sure if the hype is worth it at this point, especially because it's worth being a tiny bit skeptical and zooming out because is crypto really necessary here? There's so many other things being built outside crypto. Visa has intelligent commerce. Mastercard has agent pay. PayPal has agent ready infrastructure. I mean, there's many more, and I'm just reading them from a list right now. They all let AI agents transact, and Stripe doesn't even need XPRL2. It's just one option of many. So, what does it actually solve? The argument is micro payments. Um even

though that's debated, I think there's a pretty good argument there to be honest. Um so, you know, I want to be skeptical, but I also want to lean into the fact that this is a real use case, and even though it's only FOMO right now, a lot of players are building in the FOMO. But they're not, in my mind, thinking enough about the legal side of it, and it's another reason why I wanted to have Jane on here today because one of the biggest like questions that's hanging out there is money transmission. Now, we talk about money transmission here all the time, 1960, Tornado Cash. What is money transmission? How does it apply to crypto? But the same like muddy water exists for agentic commerce because in XPRL2, just a quick explainer, there's something called a facilitator, takes

payment from one party, verifies it on chain, settles it. Sounds sort of like DeFi, except it's not like an immutable contract that just sort of lets things happen. Facilitators are doing a lot more than that. Um and you have to read the docs to really understand what they are. And sure, like Coinbase has the proper licenses, but they're doing this in an open-source way. So, like all these players building on there, I wonder whether they're thinking about money transmission and whether this is going to be the next avenue of the fight of like is money transmission how we should be regulating this or is there another way to think about it? And for all my money transmission questions, I call my favorite outside counsel, Jane. So, I'd love for you to weigh in if you have

thoughts. Yeah, I think we don't know the answer yet, right? If money transmission will apply and to whom because, Jesse, to your point, there are so many different options right now, and people are still iterating on how they're going to be integrating 402 into their products. Um and I think one of the things that stood out to me about the news today about World integrating a kit basically into Coinbase's 402 is around identity. So, proving who you are because what will be required, right? And this is a bit in the realm of money transmission, but going back sort of to the very beginning of the pod around

sanctions is in understanding who's actually engaging in this e-commerce using these agentic payments and how they're doing them. So, you want to understand who the person is and whether or not the user is going to allow these payments to happen without them, right? I think about a lot of like consumer protection is like how do we know that the agent will continue to do and operate the way that they're supposed to on behalf of their user even if it is fully decentralized, if they never touch, you know, any traditional payment rails. So, to me, I put it in the We have to understand the technology. I always say I need to see the flow, as

Jesse knows. I want to know where the points of control are because that's really the crux of, you know, is this really money transmission? Meaning is there really somebody in the middle who is taking custody and control of someone else's funds and able to do whatever they want with them or Jane has told its agent, "This is what I want to do, and this is how I want you to spend my $5." Right? So, I think it's um it's in a very interesting space, and I'm definitely seeing a lot of projects in DeFi trying to figure out how to integrate this. Um but we do have to think about, again, consumer protection, right? You want users to be able to really use and to have mass adoption or

more adoption and use, we really have to test the resilience of this tech and how it really is going to improve um our lives without letting illicit actors, right? The sanctioned parties or persons from using this tech um to, you know, do really bad things, which we don't want them using the tech for. But I do think, Jesse, this goes to the point as as the tech has de- evolved so quickly, that question around developer protections and how that inter- like interacts with all of the money transmission or the DOJ's position on 1960, I think we're going to see a lot more debate and maybe even papers, right? Academic papers

around this about how the the government or regulators should be thinking. By the way, thank you for that lead-in, Jane. Yeah, I did a little wink. No episode would be complete without some shameless self-promotion. Jesse and I have been spending all of our free time because we are that cool working on a paper, a follow-up to our programmable risk management paper that was spicy in DeFi, talking about programmable risk management and how it applies to autonomous agents. So, once that comes out, we will obviously promote it on the show and set more time to kind of go deep in these issues cuz I think look, like everything we're talking about now proves how much this technology is going

to change the landscape. And how many legal issues remain to be fleshed out and considered with emerging technology. Like I am the biggest advocate of young lawyers, for example, going deep into crypto, into emerging tech cuz I think despite agents taking all of our jobs, there's going to be a demand for legal services in these areas because there's just a lot of gray for lack of a better word. Okay, so I want to round us out with maybe my favorite piece of good news that we've ever had on the show. So, Jesse, please tell us more cuz we need good news. There's been a lot of bad [ __ ] I'll use that word. Oh my

goodness, going on. So, give us the good news. Oh, it's not even crypto good news because this one was too good. It's tech good news, and it includes dogs. It includes AI. It includes Australia, one of my favorite places in the sun. So, essentially, there's this guy from Sydney who's a tech entrepreneur, data scientist, but not a vaccine expert in any way. He has a rescue dog, Rosie, who gets diagnosed I mean, I get the goosies saying it out loud. But like he gets diagnosed with essentially a form of cancer. And chemo fails, surgery fails, vets tell this guy that his dog only has a few months, which makes me so sad.

So, what does he do? He says, "No, I'm going to figure it out. Isn't this what AI is for?" And he uses ChatGPT to learn all about vaccines, learn all about this type of cancer. And then he works with Google DeepMind's AlphaFold, which is like a tool that Google has used to help sort of with sequencing. And he was able to work with these outside parties, all just starting with an AI tool though, to create a custom vaccine. Now, think about that, a custom vaccine. Now, what if that is the future of vaccines? And he did this in fewer than 2 months so to save Rosie's life or at least prolong it. So, she got her first injection injection a few months ago and the tumor has shrunk 75%. Rosie

is doing so much better and it doesn't it's not a cure, but it's means that Rosie is going to be able to survive a lot longer and like who knows what this is going to do for all of our pups. I'm just obsessed with this because look, talk about an example of technology for good, right? Like crypto is often demonized. We know that there's incredible use cases. That's why we like to highlight it. AI is often demonized, but AI in healthcare for dogs and humans, it's it's really exciting and what a beautiful story and you know, good for that guy.

Yeah, and good for Rosie. We will link to more details on this story and you know, humans don't even deserve dogs. Like my dog, Piggle, is a very special part of my life. So, cheers to all of our animals and our friends and all the good news. Um and you know, my new plant, if anyone is watching and and monitoring the plant situation, rest in peace to the olive tree. So, that's it for this week's Dex in the City. Stay tuned. In a few minutes, we have Unchained Live with Laura interviewing really some outstanding individuals from Tea and OG. So, stay on and we will see you next week on next week's episode

of Dex in the City. Thanks, Jane, for coming. Thanks for having me.