Why the Supreme Court's FTC Ruling Could Rewire Crypto Regulation: DEX in the City

Transcript

Why do you think the bill is named clarity? The opposite effect is going to happen here where it's never certain and things are going to change at a whim depending on how the president is feeling that day. Hi all and welcome to Dex in the City where the wallets are cold and the takes are hot. Before we get going, remember as always, we're lawyers but we're not your lawyers. Nothing you hear on Dex in the City is legal or financial advice and it doesn't create an attorney client relationship. through the fine print. Check unchaincrypto.com. We'll be back in a minute with tons of great content, but for now, let's hear a word from our sponsors.

This episode is brought to you by Cape, America's privacy first mobile carrier. Same premium service you'd expect from any other carrier, but designed so your number, your location, and your data actually stay yours. Get 33% off six months at cape.co/chained. co/chained and we're back. First, we have Jesse, web 3 prosecutor turned web 3 protector at Rivet Capital and V from the SEC to web 3. And I'm your host KK Catherine, fluent in trad and conversing in deep tech. So, I have to say I'm just going to start us off, guys, by jumping right in and being like, what is going on in

Europe? Okay. All of a sudden, Europe has woken up and we're going to talk about Mika in a minute. The markets in crypto asset comprehensive market structure bill for Europe and the changes to come with Mika. But before that, you know, I often I'm I'm using Europe as a term, but but for a minute, I'm going to talk about the United Kingdom, which has had kind of a confusing relationship with crypto over the years. I can't decide if the UK hates crypto or loves crypto. I mean, obviously there's partisan components to this, but they've done a lot of kind of confusing things where one minute it seems like they're very pro crypto and

and another minute, for example, there was there was some disturbing action around stable coins that seems like it's a terrible jurisdiction. But the latest development is actually a pretty big deal. And as always, I really didn't see that much chatter about it, which was surprising. >> I agree. Sorry to interrupt. I agree. I have been shocked how little interaction there has been with these FCA rules. They are significant. They're positive in a lot of ways. They show where industry was able to be successful in pushing things the right way. And there's also some really interesting flags in it that are slightly concerning that I'm sure you're going to talk

about. So, I am really, really shocked and I'm thrilled that we're touching on these topics. We have not talked a lot about outside the US regulation. So hopefully we can begin to incorporate that because you're right like we could do multiple episodes on this >> a thousand%. My only thought is that these rules were released on June 30th. So they got kind of you know a little like drown drowned out by um drowned out by the July 4th holiday and you know the the state of clarity in the United States. But anyway, okay we should tell our listeners viewers what's going on.

So on June 30th, the UK's Financial Conduct Authority, the FCA, their primary financial regulator, published a pretty massive package of final policy statements and guidance for crypto in the UK. So this is considered the final piece of the UK's crypto roadmap. And I'm summarizing here, it was actually four final policy statements plus guidance, like effectively a comprehensive rule book. And in this they covered a ton of stuff. I mean they covered everything from stable coin issuance to market abuse, credential capital requirements, disclosures, DeFi.

We'll get to that in a second. It is a lot. And this now encompasses all kinds of crypto companies including you know obvious suspects like custodians and stable coin issuers and crypto finance platforms but also arguably in the future certain DeFi protocols. Um, I want to hear from from V and Jesse on their thoughts, but my thoughts, okay, there's good and bad in this. On a high level, the framework treats crypto like Tradfi. Okay, but the good news is that the FCA, as Jesse referenced, cut capital requirements for stable coins in response to industry feedback. The regime also doesn't take effect till the

fall of 2027. So, everyone really has some time to consider this, percolate on it, get in line, get ready. And then there are also two consultation papers covering FCA handbook aspects that aren't finalized yet. And those two cover market making and DeFi. So, we have to stay tuned here. And you know they have promised to listen to a lot of industry feedback specific to regulating DeFi. And obviously this is a real hot button issue with clarity in the United States. But the FCA said defi it will consult further on things like objective indicators of decentralization whatever that means.

We can have a separate talk about that. And expectations for financial crime. So they recognize the tension here and the fact that shoving DeFi into trii regulation doesn't make sense. So I like the certainty here. I like guidance. Guidance progress on regulation is good. This will make the UK more attractive particularly to institutional crypto and tradi institutions. And I like to see the theoretical openness on DeFi specifically and the progress like in response to industry feedback on things like capital requirements, but this regime is no joke. Like this will be very hard on smaller firms and essentially

philosophically they're applying Trafy regulation to crypto. So my biggest takeaway here is this is going to be a really tough question for crypto firms. Meaning is it worth it? Is adherence to all of this worth it to keep their UK customers? And I don't really know how this is going to shake out. Thoughts? >> I I think it's worth taking a step back a little bit because, you know, people aren't maybe on the dayto-day as deep in regulation as we are. We talk a lot about the US, what's been happening, is there a law going to be passed? Everything's sort of happening through like guidelines, rulemaking at agencies.

We have genius obviously. We have stable coin regulation being implemented. we don't have a bigger bill. Europe is way ahead of us, right? Like Nico was passed years ago. I don't have it at the tip of my tongue. And they have been working on trying to implement that for years. And recently, and we'll get to this, they, you know, are deciding to maybe revisit some components of it, right? And so when Nika first got passed, there was I think general excitement from those that believe in regulation at least for crypto saying this is an idea that's being put out there and that's really really great. And I think since then with the implementation of Mika

there's been some concerns about whether it's actually working. Now that's not shocking when it comes to big EU regulation. If you follow how EU regulates, they always sort of start big, right? Um, and then we have the UK coming in. The UK has been talking about these rules for I don't know. I feel like I went to the UK five years ago and talked to them about these potential rules, right? And it wasn't that they weren't informed when I went like they were still trying to figure out how to balance exactly what you said at the beginning. Are we pro crypto? Do we want to be pro- innovation or do we not?

Right. And it seems like we're at the point now where they are really leaning into saying like we want to be the place for crypto. And so it's interesting to see the dynamic of all these different jurisdictions because we all talk about how crypto, blockchain, etc. We want it to be sort of borderless technology in a lot of ways and you obviously need to operate differently in different jurisdictions. That's just how things work. But how does that work when the big packages are beginning to diverge in a certain way? And so to me that's really interesting because if you look at like GDPR from from the EU, everyone has sort of heard of that, right? That is like the biggest privacy for our listeners who aren't

familiar, the big privacy regime that is pretty ownorous uh you know entered into force from the EU perspective. Go ahead. It's the annoying reason why when you go to a website, you have to say cookies or no cookies. And I don't know about you guys, but like it just sort of depends on my mood whether I decide to. >> Sometimes I feel like it's this thing that like puts tags on all the pillows that you rip off. But go on. Like >> no, I mean like GDPR was passed I don't know how many years ago, but a long time ago, right? And it was a huge law that has a lot of great to it, but obviously is incredibly burdensome. and it became the template for privacy laws. Not everyone has adopted that but you can see it's slightly different when you go

to the Europe and go online but there are a lot of repetition particularly in California and other regul like heavily regulated states like New York right so in that realm we've always sort of seen EU create the model and then them then sort of pick at it it depending on other jurisdictions here it seems a little bit different and I wonder if it's because technology is changing so much that Mika was the GDPR for crypto, right? There's a lot of good in it. It's very big. But like technology has changed so much since Miko was passed. Concepts, thinking through what's important, right? Like when Miko was passed, stable coins were important, but they weren't nearly the important infrastructure layer that we sort of see crypto

becoming, right? Not to me even mention like crypto and prediction markets, right? So the UK is arriving late and lighter and you can say they spent so long trying to get here, but they're being more soft touch and giving, you know, a slightly reduced level of regulation than NA in some ways at least. And so to me, there's an argument here that UK was taking its time and learning from the tech and in some ways it's maybe a race to the bottom at some components. So I'm I think like the narrative is sort of shifting on like how we think about regulation and it could just be because Europe is changing so much as well.

>> Yeah. I so like one really interesting aspect of this I think is you know people always talk about like first mover advantage right and like I think the EU does deserve a lot of credit for being the first to like pass really comprehensive crypto legislation but sometimes the the benefit of not being first is that you get to learn from the mistakes right and so I think you see this when you look at what the UK is proposing now I feel like what you see that's very different from Mika and is probably a lesson learned from Mika is that it's a lot more flexible, right? So like the legislation sort of lays out the general framework, but it looks like

most of the actual rules are going to come through like consultations and the FCA handbook, right? Which I think is like it just gives them more flexibility to adapt to crypto, right? So like if you've been wa you know like what you just said with stable coins anyone in crypto knows that stuff evolves really really quickly. So I think one of the lessons they learned from Mika is that they need to give themselves that flexibility and I think you do see it in all of the stuff that came out on June 30th. I think you sort of like I wonder sometimes with the US too right like we've also been slower to ad I mean we passed genius. Um >> that's one way of saying >> right but like I I wonder if like we

have taken lessons from you know ma sort of being um in place for the last few years now and how that's impacted like how much flexibility maybe we think we need to build into the law and and how the discussions over clarity have changed over time. I I also would love us to sort of talk about DeFi in this realm, right? And I know that it's like a separate topic from a lot of the other sort of regulated activities we're talking about, but I know we all went to Europe throughout the development of Mika and talked to them about the rules. And I remember once again like fiveish years ago, the discussion of like, well, how do we regulate DeFi? How do we think

about DeFi? How do we keep it safe? Right? And Europe is reopening that conversation again for like Mika 2.0. But the UK 5 yearsish later, the US the same. We're still in the same question mark when it comes to DeFi. And whether that's good or bad, I mean, we could have that argument here. There's definitely a lot of good on that. But I wonder when we're going to get to the point of okay, this is how we regulate or don't regulate DeFi because I don't know how much progress regulators have made. They understand it more for sure.

I want to give like regulators a lot of credit there. But the answer of how to keep it safe, whatever that means to the person that's defining safe for them, I don't know if we're any closer. >> It's it's a great question, Jesse. And that is the perfect transition. I want to talk about this in the context of the recent Mika developments. So this is actually crazy to think about. The first iteration or the first part of Mika entered into force in 2023. And that's a that's a long time in crypto world. Okay. And and to be clear, I want to clarify one thing. When we say the EU was the first, we mean like the first European country like set of

countries. There were obviously a slew of other countries globally that had crypto laws and rules prior to Europe, but this was one of the most comprehensive packages the earliest and it and it encompassed a lot of the crypto business frankly because obviously there's an enormous amount of activity in Europe. So it came into force in 2023. It's been sitting here for three years and we all got very excited. I think the, you know, crypto good news the other week was how excited we were that very recently MA came into full force like the final transition for grandfathered legacy crypto firms. It was July 1st, but we got too excited too soon because as we've been alluding to

is the other big breaking news out of Europe that we definitely want to cover is the Europe European Commission is uh seeking comment to potentially expand MA to cover tokenized assets and stable coins. Exactly what Jesse was saying. Like if we rewind to 2023, everyone probably forgets this, but when you went to a conference, no one was talking about tokenization or stable coins. Or maybe they were talking about it, but it wasn't the the focus of discussion. The volume has really grown exponentially with tokenization and stable coins, particularly tokenized um equities and similar products. So that's a big deal, right? And this would also I mean the the the big difference here is

obviously um they they want to cover tokenized assets more generally but they want to cover stable coins that are issued by noneu stable coin issuers. So one of the things that is a source of frustration for anyone that works at a global crypto company is that the stable coin requirements under Genius conflict with the stable coin requirements under Mika. And that is, I mean, candidly, nonsensical considering the whole point of crypto and stable coins. So, you have a slew of different stable coin issuers that either either have a single issuance model, um, I believe Circle has a single issuance, although someone call me out if I'm wrong, versus a multi-issuance model like Moon where, you know, Moon has multiple different

entities in different jurisdictions issuing different stables. Um I I believe circle's working at po working on policy overseas in Europe to kind of change this this whole model. So what ma is now saying is sorry US stable coin issuers and non-EU stable coin issuers. You have to get in line like you're going to have comparable standards as to the EU stable coin issuers. Now everyone has a few months I think till September to provide input. So we won't see proposed regulatory revisions for at least a year probably. But what's happening in my mind is that Europe's kind of freaking out in response to the growth of tokenization and stables and they're figuring out how to fix this. So

is this going to keep happening? And still no mention of DeFi in Mika. Like DeFi was ruled out by design which everyone was happy about but DeFi is still pretty big CBD, right? What's going to happen there? >> Yeah. I guess just to take a step back and like think about the regulator conundrum or just like legislative conundrum and how we should think about that in light of potential clarity that you know I haven't thought it was going to now technology is moving really really fast you know I can't go through an episode without talking about AI in some way right like what laws are going to need to be changed and passed in a few years right because of a new

technology ology and crypto is not the first one that this happened to. We can even just focus just on financial instruments. Like financial instruments have completely changed and evolved and developed and they've gotten more complex, less complex, more regulated, less regulated. And trying to figure out how to fit any financial instrument into existing rules that's new and novel is something that we do. Like that is the point of being a lawyer and the point of working in like innovative tech and regulation. So sometimes I wonder if like crypto thinks it's this own unicorn, right? That like oh our technology is moving so fast, how are we going to regulate it? When in fact like

all techn most technologies you can say that about and definitely ones that came before and that are existing now. >> Yeah. >> Yeah. It's always a tricky balance to strike, right, between like how how like prescriptive do you want to be versus how much flexibility you want to to give uh the regulators and and commercial. >> It's not an easy balance. You're absolutely right. I give the regulators credit here. Like this this whole industry is not easy to regulate. I mean, look, if you look at the diversity of the products and types of companies that exist under the crypto umbrella, I mean, talk about apples and oranges.

It's it's really difficult to regulate everything from NFTTS to tokenized securities. It's so, >> you know, I get I give them credit. I give the EU credit for passing something and for passing something that is certainly not terrible. I mean, we've talked about this before, but any legislation, you can't let the perfect be the enemy of the good. I think the other lesson to take from all of this is don't sleep on other jurisdictions. There's a lot of focus on the US at all times. And I'm not even speaking from kind of the American perspective or US company perspective, even non- US companies. There's a lot of focus on the US regulatory environment and the US legislative environment. Of course, that

makes sense, particularly with the regulatory environment because it often presents the most risk and everyone needs to be conscious of team America, World Police. Okay? But at the same time, you can't sleep on other major jurisdictions. Particularly, even if you're a US company, you're touching other jurisdictions. You're touching Europe. You're touching the UK. It takes a lot to wall off a jurisdiction effectively. Um, I think the UK in particular got a bad rep to some degree because of its infamous UK marketing rule uh directed at crypto which really curtailed the ability for crypto companies to market in the UK. Um, that's one example of companies that

just got in trouble by being like sloppy or or not being particularly aware of legislative developments outside of their home country or outside of the United States. This is also why lawyering in crypto is exceptionally hard because occasionally I do feel like someone asks me a question and I'm like just give me a few minutes while I check all the laws entire world and whether they've changed in the past month like no big deal not a big deal. Okay. So, we are going to go to break, but before I do that, I'm just going to mention a few other things really, really quickly on the European front because I feel like I I just have to mention this. The other big things that are happening is that you

have a slew of blue chip crypto and tradey firms joining the UK government tokenization task force. You have the U E EU parliament voting in favor of the creation of a digital euro and also separately adopting a crypto policy position calling for further review of a bunch of crypto like DeFi included. By the way, you have the European Central Bank picking, I believe this broke today, 36 banks and payment firms to join a pilot of the digital euro. We have to do a CBDC um central bank digital currency episode at some point in the future, ladies. And then the European Securities and Markets Authority is reviewing crypto custody security. So the the segment title of this was not just directed at Mika and

the UK FCA. This is another gentle reminder for everybody to, you know, book that European trip so you can >> read the European news about all the the fun crypto stuff. So, we're going to take a break to hear from our fantastic sponsors, and when we come back, we're going to hear about maybe one of the most important Supreme Court cases that's going to affect everyone that no one is talking about. So, stay tuned. >> If you hold crypto on your phone, your biggest vulnerability isn't your wallet, it's your carrier. AT&T, Verizon, and T-Mobile have been breached again and again, and SIM swaps are still one of the easiest ways for attackers to drain accounts. That's where Cape comes in.

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>> Okay, before we move on to the next segment, I do have to share something be said while we were on break. What is Europe doing? Like, don't they know it's summer? Like I thought all Americans dreamed of moving to Europe where they just take summer off. Like what's going on? Aren't they all in vaca on vacation? >> They're strange. >> Come on. >> It's too hot there. >> No AC. >> They're all working in their offices because it's air conditioned. Every call I've had with someone in Europe, >> um they are even if they're remote optional, they're always at their office lately because they're like, "It's the only place that they >> This is why they're getting so much work

done." Okay, >> it all makes sense. I >> climate change. It's great for productivity. >> Boom. I love it. >> Okay, so this is not, as you guys know, a legal podcast. We discuss a spectrum of issues. We are strategic leaders and often not even wearing legal hats at our jobs. That being said, we're going to talk about a Supreme Court case >> and we are nerds. Nerds. >> We are nerds. Okay. So, that is fine. Nerds win. We've discussed this before.

Okay. But be tell us what happened because this is actually a pretty big deal for our listeners. >> Yes. like you were saying. So, this is actually one of the biggest Supreme Court decisions this term and maybe like in a long time. Um, and I haven't really seen that many crypto people talking about it, but I think it could have a really big impact on how the industry is regulated, which I'll get to in a minute. Um, but the court just overturned a 91-year-old case, right? So, this does not happen every day. It just overturned a case that's almost a century old called Humphrey's Exeutor.

And that case said that the president can't fire a commissioner of an independent federal agency at will. Um so the plaintiff in this case was an FTC commissioner, federal uh trade commission. Um commissioner, her name is Rebecca Slaughter. She's actually a friend of mine and a law school classmate. So hi Becca if you're if you're listening. Um so she along with a fellow Democratic commissioner who also went to law school with me actually. um were removed by the president last year without cause. Um so first of all just to give a little bit of context um we have a you know obviously as everyone knows we have a lot of federal agencies in the US uh but they're not all the same right so some like the DOJ and Treasury answer directly to the

president um and he he or she can generally remove them at will the leaders of these agencies but then you have agencies like the SEC the CFTC the FTC and the FCC these are called independent agencies because Congress designed them to be somewhat insulated from politics, right? So, they're run uh by bipartisan commissions that who have staggered terms. And for like the past century, those commissioners generally could only be removed for cause. And what that means is uh the president could only remove them for things like being ine inefficient or neglecting their duty or committing fraud or or other kinds of malf. did bad stuff and

sorry to interrupt mention like FCC, Federal Communications Commission, FTC, Federal Trade Commission, just to give the listeners an example of these commissions that you >> the right so these agencies that are supposed to be quote unquote independent, right? So um what that meant is the president could not remove them without cause. He couldn't just remove them because he disagreed with their policy or political views. And this all goes back to a 1935 case called Humphre's Executive. Um, and what happened in that case was that President Franklin Roosevelt fired an FTC commissioner, William Humphrey, over policy disagreements, and the Supreme Court said that he couldn't do that. So,

the facts of this case are basically identical. Um, the president removed the two Democratic FTC commissioners on the commission. One of them, Rebecca, challenged the removals relying on this 90-year-old case. So, the Supreme Court just said, um, we're going to overturn, we're throwing that case out, we're overturning that precedent. And they held that because FTC commissioners exercise a form of executive power, the president generally must have the authority to remove them. So, that was the holding of this case. Um, and the reason this matters, including for crypto, is it's because it's about who controls the administrative state,

right? So, the Supreme Court has now said that Congress's ability to create agencies that are insulated from presidential politics is limited by the Constitution. So, I do think it's worth noting um that independent never really meant completely independent anyway, right? So, Presidents nominate commissioners, the Senate confirms them, um the president selects the chair of the agency, and Congress controls the agency's budgets. They can, you know, call them in for hearings and conduct oversight and all of that. So, that's always been the case. Um, what this case changes is that commissioners are no longer protected from removal. So, I

mentioned like this could have a really big impact on crypto and people just aren't talking about it enough, right? So this doesn't change like the securities laws or the commodities laws or anything like that, but it could potentially affect how policy gets made, right? So the president now has greater leverage over commissioners who are already serving. So if you have a commissioner who you know the president thinks is blocking the administration's agenda, the president now has uh significantly more ability to replace that commissioner with someone who is more aligned with his administration's priorities. So what that means is agency policy, right? So everything from rulemaking and enforcement priorities to granting exemptive relief that can all

become much more closely aligned with the White House and these things could potentially change a lot more quickly from one administration to the next. So I think what you'll see happen is that presidential elections will now have like a much more immediate effect on crypto regulation and just like regulation in general, right? So instead of waiting years for agency leadership to gradually turn over when commissioner's terms expired, a new administration could come in, replace, you know, all the commissioners presumably and start like reshaping uh regulatory policy from like very early on. Um so I think like that that could potentially have like a really big

impact on on policy. Um and I don't I don't know like if you guys want to weigh in on the fact that the timing here is really interesting, right? because as many of us know, there have been empty commissioner seats on both the SEC and the CFTC for a while now. Um, and I don't know that any of those are getting replaced anytime soon, which has just been like I think another way in which the president can potentially influence how agencies like carry out policy. I don't know. What do you guys think? Thank you for doing that in such a reasoned way because this case really makes my blood boil and I have been like sort of stewing over here about it. Um,

but I think you sort of laid it out really well and there are a lot of really good deep dives on the legal side of it and how it relates to another case that came out I think the same day about you not being able to do this with the Fed, which let's not get into this time, but maybe for a future episode. But to me, the thing that really grinds my gears or scares me about this whole thing uh for crypto, for tech, for really just like democracy is that the removal power what you described and mentioned it to me is a question of like who are you afraid of? A commissioner who has a fixed term is going to be afraid of the law and the record and doing the right thing, whatever that

means per their mandate. But a commissioner can be fired tomorrow by one person that is making this decision no matter what political because they said something bad about them because they don't agree with every single policy whatever fears the president right and that means that everything sort of flows back to the one person in charge and to me that's like the opposite of what the point of our constitution is and the opposite of why we have these agencies with specialists in securities law or energy law or whatever. And the push back is bipartisan here. There was a really

interesting article or letter by former FK chairs that you know that's like they deal with nuclear energy. They they deal with sort of our entire energy system which you can imagine how important that is especially right now. And they are saying like this is one bad, two unconstitutional, but three, and this goes to your like empty seat narrative, no one's going to want to take these roles because you just have to be a lap dog to whoever is in power. And I just don't think that is the purpose of these agencies because otherwise what are we doing? And like all crypto, all tech, all innovators, all entrepreneurs, all

they want, maybe there's some other things they want, but a big thing about what they want is like certainty and clarity. Why do you think the bill is named clarity? The opposite effect is going to happen here where it's never certain and things are going to change at a whim depending on how the president is feeling that day. It's really interesting to give some more background here. So there's terms like there are two terms. One is textualist and textualism means that it's the judicial like the judge a judge's philosophy that the constitution should be interpreted very strictly by the plain meaning of its actual words without speculating on the framer's intentions. And then a a very related

term is originalist who believes that the constitution should be interpreted based on what the text originally meant to the people who ratified it. And all the Republicanapp appointed members of this Supreme Court identify >> as textualists or originalists. So you know when I was hearing this overview like I I assume that you know if I hadn't done a deep dive in in preparation to this pod my question would have been like well why did the court do this? And the court I mean there were there are a number of arguments that we're not going to go into but I would say at the high level is that the court concluded that Humphrey's executive which was overturned was was wrong from the beginning. Meaning the majority began

with the text in the constitution that says the executive power shall be vested in a president and then they said well wait if Congress is giving an officer the president executive authority the president must be able to supervise and remove that officer. So I'm not opining on whether this is wrong or not like from a judicial reasoning perspective like I'm I'm going to respect the right of the Supreme Court to do this but I wanted to provide that reasoning. I will also say that it there is a big exception. Um there are a couple of agencies as V mentioned that were never truly independent. But what is also nice

is they simultaneously held in Trump v Cook that the Fed board is constitutionally protected. So they they're they're still and the Fed is still independent to some degree. So So that's hey that's something that's something you guys but like it is crazy to think that you know it's not just the CFTC and the SEC that this is going to affect. like this is going to affect I mean I I just while we were talking googled like what agencies were considered like give me a list that were considered independent before slaughter.

It is a long and powerful list. >> It just like makes you realize how many agencies we have and how like how vast the administrative state is. some of them are kind of, you know, important too and like meaning I I I would have liked or I I appreciated a system that gave the leaders of those agencies with specialized expertise as you guys mentioned a degree of independence like the Nuclear Regulatory Commission or the Equal Opportunity Employment Opportunity Commission, the Federal Election Commission. These are all things that I don't know maybe it's a good idea if the president can't fire the leader of these agencies and crypto of all industries

has seen how powerful the the change in leadership of an agency can be like they set the mandate they set the tone from the top they set the agency's priorities they can shift the enforcement landscape and I'm not saying they're they do this willy-nilly they don't but obviously this is going to have a trick trickle down effect across America. Like this is effectively reshaping the entirety of the federal government. So crypto is going to feel it. Other industries are going to feel it. Crypto is definitely going to feel it if the administration flips, guys, because Supreme Court decisions, they survive with Democrats or Republicans. So, you know, Republicans might be excited about this.

Trump might be excited about this, but I would I would imagine that Republicans are going to be very upset by this if there's a Democrat in office >> fired a number of election commissioners since this. So, it's this isn't hypothetical. This is what the world will look like now, you know? >> Yeah. >> And I think like, you know, we say this all the time on this pod like reminding the industry that this sort of thing cuts both ways, right? A decision that gives a pro- crypto administration more influence and power over the SEC and the CFTC would give exactly the same authority to a future administration with very different policy priorities.

So we always need to keep that in mind. >> Yeah. Yeah. Which is something that there's a lot happening now where crypto in particular is happy about it. Okay. Obviously, the change in regulatory agency posturing is at the top of that list, but I still remain concerned about a potential scenario. And this is all like this is where I think a cryptogc really adds value is mapping out different scenarios, okay? Like mapping out bull market, bare market, bad enforcement, good enforcement, M&A. Like there is a very real scenario that in a few years is going to be a reckoning.

loveied at the CFTC and the SEC and it's gonna rain down on us. Um, so I hope that doesn't happen. >> A little graphic like rain down on us, but you know, it's like >> I was just thinking about the Lady Gaga song because I feel like we need um something a little lighter. This is this is getting >> perspectives. It will change our perspectives. It will make our jobs more challenging. But hey, maybe at that point, hopefully at that point, we'll be insulated by things like legislation, DBD. Okay, we'll see. Um, so on actually not a happier note at all, but an

important note, we have to have our AI segment of the week. Now, we don't have an AI segment every week, but there is certainly enough going on in AI and crypto in the mix of both that we've had a lot to cover lately. Jesse, tell us the latest disturbing robot development. >> I don't always want my stories to be disturbing, and I feel like we sort of just ended that last one on a negative note, but I'm going to bring y'all down even further. So, deep breath for this one everyone.

>> There's like really good happy crypto good news at the end, guys. >> Like, this is super important in my mind. Um, so just take from this what what you can. But there is a new Cambridge report out that came out this week that is just scary and no one who cares about tech should be ignoring this because the TLDDR of this report is that there's a brutal terrorist group Boo Haram that loves AI as much as the rest of us do. They've been using LLMs extensively for weapons troubleshooting, explosive device design, attack planning, and then reviewing attacks after to improve. So, for anyone who doesn't know exactly or haven't heard

that much about Boka Haram, they're the ones, and this was a big news story that kidnapped 276 Nigerian school girls in 2014. Over 80 of those girls are still missing. They've also forced over 2,000 women into sex slavery, murdered tens of thousands of people, displaced more than two million. Like, you might not hear about them a lot, but in that region, they're really brutal and dangerous. So, the Cambridge report was based on actual interviews with former members of Bahar describing how AI has been used in the organization to make them more effective and effective means murderous, right? So the clearest way to explain why this AI

incorporation was such a big deal for them is to give you two frames um split by seven years. So in 2017, the fighters talk about how they captured these really powerful rifles that they wouldn't have access to from the Nigerian military, but they couldn't get them to work. They were able to Google, they were able to get the manuals, they were able to watch YouTube videos online, but they couldn't get the weapons to work, right? So, they had access to some tech, but it changed. Fast forward seven years later, and now it's very different. With those same weapons and many others that they're able to capture, they type in the identifying number of the weapon into a chatbot. And that chatbot is their co-conspirator, their co-terrorist, and

telling them how to use it, how to load it, how to service it. and the technical specialists. And for those who haven't worked in sort of terrorist elicit finance work, some terrorist groups are like super technical and have like a CTO essentially. So their CTO is an AI specialist now. And to me, this is all about like the before and after story of the AI world that we live in now. Dangerous information was always online. There was bad crap online. What changes the distance distance between having the information and being able to act on it because like the more you understand agents and loops the better you can get and making it work for you.

And this was not just like one fighter here and there using a chatbot. They have decided to devote significant resources to build an industrial operation where they have specialist AI units. some of them who just sit in vehicles near the front trying to figure out how to make the next move. So they are doing AI governance in a way that like a lot of startups should be doing but in a horrible like the worst possible way. And they're learning how to do all this through jihadist networks. So like terrorists can talk to each other and share information and they were trained by other terrorists, right? So, you may have heard that LLMs have these safeguards, right? Like if

you ask about a weapon, it will say, "No, I can't answer that." Those are super easy to get around. Um, and so they in the article in the report, which I highly recommend reading with maybe a glass of wine, I would talk about um I would I would look into what they did to work around it because there's a lot of examples, but essentially it's for a movie or they have different accounts, etc., etc. And I don't want to like turn this into AI panic porn. I don't I don't know if that is like what the point of this is because then we'll just sort of say robots are evil and move on with our

lives because there's nothing we can do. But to me it's like we know bad actors are going to use technology and we know they're going to use AI. The question is like what is responsibility look like for AI but also more broadly for crypto like for neutral technology. So crypto's been dealing with this crap for a decade, right? Technology can be neutral. People can use it for bad. What do we do about that? There are still hacks. There's still DPRK. There's still lots of people getting scammed. And I want to give crypto some credit here because I think we've done some really positive work. We didn't ban straight out. Instead, blockchain analytics screening auditing bug

bounties. Like this work is continuous and it's not perfect. I know we've talked about that, but they are trying, right? Um, and the lesson was never that like neutral technology needs to stop being neutral. Like that is crypto's lesson for AI. Like it shouldn't be Daario, even though you know I love him most of the time. It shouldn't be open AI like making these decisions. Like we can find a way to keep it neutral. But I do wonder, and this is where I'd love your guys' input, like is AI different because it's participating. It's a co-terrorist. It's a co-conspirator.

And is more friction required in AI than in our other tech? And should we be thinking about incorporating friction back into our tools that we used? Because that was sort of the goal of lots of this technology. We hand over this data to you and there's no friction. But now, like, it's so easy to say Boka Haram is so far away. Sure, I'm saying the word 4,000 women forced into sex slavery, but that that's across the world, you know, like let's just say it and move on with our lives. Like to me, we can't build this tech and ask for this tech to be global and borderless and then ignore what happens and the consequences across

those borders. So >> yeah, >> I guess I'm just like sitting here being like I feel like crypto has a pretty good narrative here and maybe AI can learn from it a little bit because we know there's no perfect lock but there's it can't just be not our problem. >> Yeah, I think like all of those things that you just asked, right? Like what should the constraints be? What sorts of friction um should there be? I think those questions are important, but I think equally important is who should decide, right? Like I I mean I talk about this all the time when it comes to AI, but it's like are we really okay with just these like I mean they're they're private businesses at the end of the day

run by like individuals, right? Should they be making these decisions? They're very consequential. Like I always say, this does remind me a little bit of um I don't know if you guys remember, but must have been like a decade or so ago when like social media like Facebook was being used to help facilitate a lot of like violence in parts of the world. And I remember this sort of brought up the exact same debates about you know technology and and what is our responsibility um both as a society but also with respect to the platforms themselves like what is our responsibility to to make sure that the technology is not being

used for that sort of stuff >> and I think we've talked about this in the past but if we haven't it's important but section 230 is a foundational law from the 90s that shields websites and online platforms from liability for content posted by third parties. So it >> make an attempt to do some regulation and >> even like it well it gives them good Samaritan immunity to like to remove bad stuff in good faith which means like okay there's sex trafficking on Facebook. We know this. Okay. But Facebook can't be sued for doing so even if and Facebook is trying to remove that material but they're clearly not getting

it all. They're not even coming close but they can't be sued because of section 230. There is no section 230 and section 230 is controversial. Like it may be overturned at some point. Um but there's no section 230 equivalent for crypto. I've said for years if only there was like from the chain perspective that would be incredible for crypto. But the background of uh section 230 is it was passed at a time when legislators actively wanted to support the internet >> and it doesn't work with financial regulations. Like I think that's the difference, right? like crypto is under financial realms. Where AI is really interesting to me, and I don't mean to interrupt you, but like where AI is really interesting is like it sort of

sits closer to social media when you have the financial rails, but what you're seeing in like the UK, speaking of across the pond, came out with something um this week or last week, um the EU as well about sort of regulating the financial aspect of AI and using that as like a backdoor. or I don't know if we should call it a back door into regulating AWS, Cloudflare, etc. And so that seems to be like a way in. I don't know if it's the right way in >> but if you so just to take the other side of that though, it's very easy to say crypto is more finance than you know the internet or Facebook. But obviously section 230 applies broadly to the internet. So there's so many financial

applications. You could have also peeled off crypto to the underlying chains themselves and made it made a section 230 law exclusive to the chain. But we know that's never going to happen because the environment is different. The legislators don't want to immunize crypto from anything like this. So now we're here with AI. It's the same question. It's the same problem. There's no section 230 shield. So part of me thinks a lot of this is ultimately going to be resolved or not resolved but improved by good old-fashioned civil liability. Like people can and will and are suing AI platforms. We're already seeing precedent being formed real time saying you facilitated ex crime. You

gave advice to to my child who ultimately took their own life. you gave advice to this criminal who perpetrated this crime. So, a lot of I think what's going to happen with the rails around this are going to be informed by good oldfashioned suing. >> The plaintiffs, right? Like they get a bad rap, but sometimes that really is the only way to like get things to change. We also I mean we talked about this on a previous episode about how the plaintiffs are pursu actually pursuing these cases under like a products liability theory which I thought was super interesting but but I think we'll see a lot more of that >> huge >> I guess I just want to leave this with like plaintiffs can help

>> testing please no just >> regulated places that have legislation right Boo Haram and their victims do not sort of have that side of it So, I just want everyone to pause and not just be like, "Oh, these are bad people using neutral tech because that is true, but and then what?" Like, let's just sit in that a little bit. >> It's such a tough question. It's such a balance because you always know any n industry, any new technology is going to be misused, but you can't suffocate it. So, finding that balance like crypto's been trying to do that, AI is now doing that real time. And I agree with what was said earlier where hopefully they'll learn lessons from how crypto is dealing

with these risks. So, we've had a very serious episode and I'm just going to take a minute to end on a very happy, delightful piece of crypto good news. So, this good news was actually brought to our attention by our good friend Ary Redboard from TRM. We recently did a pod with him. This is the pengalin. Okay. And I candidly was not aware of the existence of this animal until this post. >> Really? They were blamed for COVID briefly.

>> Wait, really? Okay. >> Sorry. No, I'm glad they're having a glow up with this story. >> I mean, I have to admit they do look a little bit like dinosaurs. So, keeping on theme with Jesse's love and and our, you know, some of our other good news pieces. But, okay. So, it's actually crazy. it. The pengalin is the most trafficked mammal on the planet. So, animal trafficking, they are critically endangered. Poachers kill them for scales, used in traditional medicine. They're also, you know, poached for their meat. It's terrible. And what pengalins did is it shone, you know, it really shined a light on illegal wildlife trafficking and trade worldwide. That trade, in the words of

Ary, runs on money. And increasingly the illegal wildlife trade runs like that money moves on chain on blockchains. So using blockchain technology TRM and you know I'm I'm I have to figure out if some of the other blockchain analytics providers are also doing this. I'll give them the benefit of the doubt and say I hope they're also helping with this incredibly valuable effort. CRM traced 15 million in crypto through a single Southeast Asia based network moving tiger parts, ivory, rhin rhino horn across Asia and you know in doing so is actively assisting law enforcement on trying to you know

improve the world for these critically endangered um animals. And the financial side of this trade has really drawn little enforcement attention, but we all know that money talks. Things come down to money. Bad guys, it's the easiest way to find them. It's money. So, good on CRM. >> Yeah. >> For for protecting the penglins and all the other wildlife. I do want to say that like I had um a few of these kinds of cases in national security realm and they are the most complicated money flow money laundering that exists and blockchain can really help with these kinds of cases and so I am just really happy to see people

taking this on because animals can't fight for themselves. >> Yes. Yes. And I'm I am shook that penglins were blamed for CO too. I'm going to I'm going to start googling that right after this. That was like a co rumor, but it was a >> Leave the penguins alone. They have it hard enough. Okay, so that's it for us on Dex in the City. Thanks for hanging with Jesse B and me. So we'll see you next week on Dex in the City. Hey.