The SEC Declares War on Crypto with Ryan & David

In today's episode, Ryan and David bring on Mike Selig to chat about everything need to know about crypto regulation. Mike is a crypto lawyer at Willkie Farr & Gallagher, former a regulator at the CFTC, and a frequent contributor to Coindesk about the state of crypto regulation. Operation Chokepoint is in full effect. Tune in to understand everything you need to know. ------ MetaMask Learn https://bankless.cc/metamaskshow ------ JOIN BANKLESS PREMIUM: https://newsletter.banklesshq.com/subscribe ------ BANKLESS SPONSOR TOOLS: KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://bankless.cc/kraken UNISWAP | ON-CHAIN MARKETPLACE https://bankless.cc/uniswap ️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum EARNIFI | CLAIM YOUR UNCLAIMED AIRDROPS https://bankless.cc/earnifi ------ Timestamps: 0:00 Intro 6:18 2023 Regulation Playbook 7:15 SEC Charging Kraken 11:27 SEC Rolling Out Regulation 14:09 SEC Patronizing Approach 15:44 Wells Notice 19:45 Kaken Staking Crackdown 28:00 Driving Crypto Offshore 30:05 Staking Pools Next? 35:05 SEC Scoring Points 40:50 Paxos & BUSD 44:40 Circle 50:55 Banks Servicing the Crypto Industry 57:55 Net Effects 59:27 U. S. Crypto Regulation History 1:02:49 Why the U. S. Hates Crypto 1:06:26 Banks vs. Crypto 1:08:14 Will Crypto Survive? 1:10:25 Closing & Disclaimers ------ Resources: Regulation vs. Decentralization https://www.coindesk.com/consensus-magazine/2022/12/23/2023-the-year-of-regulation-vs-decentralization/ Gensler Statement https://twitter.com/SquawkCNBC/status/1624041483241156608 ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Ryan Sean Adams?

  Bankless Nation, I hope you're doing well. We spun up this episode in a hurry for you. This topic evolved late last week. David, it feels like the SEC has declared war on crypto. Staking is not a crime, or is it? I don't even know anymore with respect to what the SEC is doing. What are we going to cover today and who do we have on as our guest?

• 0:23David Hoffman?

  Yeah, not just the SEC. There is an entire cross-governmental agency-coordinated effort to really apply pressure to the industry across many different vectors. What is going on? We're bringing on Mike Selig, who is going to, it's his second time on Bankless. This is the first time we, he, perfect timing, at the end of December, called 2023 the year of regulation.

• 0:49Ryan Sean Adams?

  Oh, he did?

• 0:50David Hoffman?

  Yes, and we are now just six weeks later, and here we are. And so perhaps he called it, and so my first question to Mike is going to be, is this what you expected? But overall, we're just going to get a lay of the land. And now that we have more insight into what the SEC is up to, along with all the other agencies that are also showing face, showing force, what is going on and what do we do about this?

• 1:16Ryan Sean Adams?

  Last we left you guys was the roll-up, which we recorded Thursday. And there was rumors that maybe the SEC was going to say something about staking. And they did more than say something. Since we recorded our last episode on this subject, they actually went about and banned staking on Kraken. Like, what's that about? We're going to talk about that. And then also Paxos, there be USD stablecoin is under attack. So not only staking, also stablecoins, staking stablecoins under attack by the SEC.

• 1:44David Hoffman?

  How is a stablecoin a security? Is a good question that I'd like to know.

• 1:49Ryan Sean Adams?

  It's the fifth prong of the Howie test. Does Gary Gensler hate it? You gotta check that box and see if he does. Well, anyway, we've got to explore all of this today and give you guys an update on what's going on. Speaking of updates, David, I want to thank our friends and sponsors at Metamask Learn for building this phenomenal product for onboarding people into Web3 and crypto. It is called Metamask Learn. That is learn.meta mask.io to go check this out. David, what's on my screen? What are we looking at here?

• 2:16David Hoffman?

  So yeah, MetaMask Learn is a brand new educational and entertainment platform. It's an entertaining platform designed to get you immersed into the world of Web 3. So of course, you will go through the onboarding flow of what is Web 3? What's a crypto wallet? How do I set up my crypto wallet? What does it mean to do self custody? What is digital identity? Starts to unpack some of these very, very big questions to help get people on boarded into the world of crypto. So maybe you are just beginning your crypto journey. Maybe your parents are annoying you, trying to get you to onboard them into crypto. If you are so lucky to have parents like this. But MetaMask Learn is the place to send them either way. So like Ryan said, learn.metamask.io.

• 2:59David Hoffman?

  There is a link in the show notes to learn all things important about Web 3.

• 3:03Ryan Sean Adams?

  This is the Khan Academy for crypto. So go check that out, guys. All right, David, maybe tell listeners what they can expect to hear from Mike in this episode. What should we be looking out for?

• 3:15David Hoffman?

  Yeah, so for every single topic, there's been a number of topics that are all announced, announced, revealed in the last like week or so. There is SEC versus Kraken. What about Kraken staking product really triggered the ire of the SEC? There's, there's the SEC versus Paxos. Why did whatever Paxos is doing with Binance stablecoin? Why did that trigger the ire of the SEC? Then there's the rest of Operation Choke Point, which involves just Senate Banking Committee, the Treasury, like all of these different cross-governmental organizations overarching the Biden administration. Why are they out? Why is this all happening at once? Is this the end of the onslaught? Or is there another barrage coming? So these are all the angles that we are going to talk about, just to be informed about,

• 4:00David Hoffman?

  like, all right, this is, we're six weeks into 2023. Is this what the rest of the year is like? Or is this?

• 4:06Ryan Sean Adams?

  What a brutal year. Like, why do they hate us so much? I don't understand. We'll ask Mike that question too. Guys, we're going to get right to the episode, but before we do, we want to thank the sponsors that made this episode possible, including Kraken, our recommended exchange for 2023. I guess you can't stake there if you're in the US, but you can in Europe.

• 4:25David Hoffman?

  You can in Europe.

• 4:26Ryan Sean Adams?

  We'll talk to Mike about that. We'll be right back.

• 4:28David Hoffman?

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• 5:13David Hoffman?

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• 5:56David Hoffman?

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• 6:19David Hoffman?

  Bankless Nation, I want to introduce you to Mike Selig, who's the counsel for the Digital Asset Department over at Willkie Farr & Gallagher, an international law firm based here in New York City. And Mike has been on Bankless before, not too long ago, talking about the year ahead for crypto regulation. And at the start of this year, Mike, you wrote an article where you said, "In the year ahead, the SEC and the CFTC will likely push the boundaries of their existing authorities through novel enforcement actions." Mike, we are only six weeks into 2023. Is this what you thought would happen? Is this the playbook that you thought would be coming?

• 6:55Speaker 02

  You know, it's a little bit more coordinated than even I anticipated. I think you've seen actions by the CFTC, the SEC, Treasury, within Treasury, FinCEN and OFAC evaluating this stuff, state regulators like the New York Department of Financial Services. There's a clear coordination of efforts amongst regulators, and that's a lot more than even I expected here.

• 7:17David Hoffman?

  So to really kick these things off, there's Operation Choke Point, which is not really an official title. That's a title that the community has come up with. It's intergovernmental coordination that's really all seemingly happening at once. But we want to talk about the details on some of the intricacies, starting with the SEC. SEC and staking. Is staking now illegal? Or what are the nuances here? Do I have to go to jail if I run a validator?

• 7:44Speaker 02

  And so I'm gonna lock you up.

• 7:45David Hoffman?

  Right. So the SEC came in with a settlement with Kraken. Kraken agreed to pay a $30 million fine to settle with the SEC. What is exactly, what did the SEC charge Kraken with? And can you just help us unpack this?

• 8:02Speaker 02

  Yeah. And just first of all, it's all the anons out there. I'm not your lawyer, and nothing I say is legal advice today. So what's going on with Kraken and staking? First of all, the SEC is not saying that all forms of staking are securities. Yet, they might, we'll see. But today, the focus is on these staking programs offered through centralized platforms here at Kraken. And all of this was settled between the agency and Kraken, and so none of this is necessarily law. It's not binding precedent. Kraken chose to settle here, but others may not. And so even custodial staking programs may be outside the scope of the securities laws. It's just a settlement. But what's happening here is

• 8:42Speaker 02

  the SEC is glomming on to centralized custodial staking programs. And what happens in these programs is somebody wants to stake Ether. They don't want to run the software themselves and stake directly through the deposit contract. Maybe they don't have 32 ETH. They decide to go to a custodial provider here at Kraken, provide their crypto assets to Kraken, or they buy crypto assets on the exchange. Kraken pools those crypto assets and then deposits some of them in the staking contract and others it held in reserve. And so the SEC is really focused on this this program, the pooling of the assets together and providing a return to the to the staker. The return is not necessarily the same return you would get if you staked directly.

• 9:27Speaker 02

  Kraken published a return amount and that could be higher or lower at times than the actual amount that you would earn by staking directly. The rewards are more consistent because if you've got a big pool of crypto assets that you're staking, you're going to get rewards much more often, not necessarily higher rewards. And in fact, the rewards very well could have been lower because if you're staking directly, you don't pay fees. But the the idea that there's some crypto assets that don't get staked, Kraken's potentially managing this reserve and then providing instant liquidity. So you don't have the bonding and unbonding periods that you would have. And with Ethereum, you know, you can't withdraw until until we get the unlock. And so just some of the mechanics look a lot different from staking directly or even liquid staking. And that's important.

• 10:11Speaker 02

  But not every crypto custodial staking program is necessarily even comparable to this. So you could have a program where you have a state licensed money transmitter. So most of these exchanges and custodians are licensed at the state level. They may hold a trust charter, which we'll discuss the making stuff later, or they might have state money transmitter licenses and they register with Vincen as a money services business. They have the ability to move funds on behalf of customers. And so if you deposit crypto assets with one of these third parties, they move the funds and there's a deposit contract for you, stake it for you. They're really just routing funds to another person or location. And that's kind of within the scope of what these guys do, like a PayPal or Venmo. So that direct

• 10:55Speaker 02

  model is a little bit different than this pooling type model where you have some held back, some staked, you know, a promised fixed return. And then, of course, the SEC is very focused on marketing. And so they didn't like some of the marketing language promoting a fixed return, promoting, you know, the expertise and security of the validators operated by Kraken here. So whether any of this is really fair game or right within the sense of the Howey test and the law, these are the arguments the SEC made and Kraken chose to settle here.

• 11:28Ryan Sean Adams?

  I guess I want to ask you a few things about this, Mike. What's like one is in the manner by which the SEC is sort of rolling this out. And this was the video that Gary Gensler put out and has a slight classroom with Gary is actually the title. And like this is, this is Gary explaining staking to us with some nice background music. And, you know, it's hilarious that it's actually a picture of a steak as in meat. Office hours with Gary Gensler. The way this was approached is very interesting to me. So it was focused on Kraken. There was this settlement. But what's interesting about the approach is like, they didn't like ask Kraken to sort

• 12:12Ryan Sean Adams?

  of re-register or tweak certain things and then come back to them. It was sort of a flat out, you can no longer do this. And then a settlement by Kraken. I tweeted this under Gary's like, you could have mandated proof of reserves, required staking transparency, supported decentralized staking. Instead, we got another Gary G ban hammer to the head. That's really what it's felt like from the crypto industry. Is this typically the way the SEC kind of rolls out its, what you'd call this penalties or like prohibitions? Or is this somewhat unique to this particular case and to the crypto industry?

• 12:55Speaker 02

  The SEC has the power to both issue rules and to bring enforcement actions. These are the two ways that they regulate. In most contexts with a new technology, a new type of financial product, the SEC has open meetings where the industry can come in, talk to the regulators, work collaboratively with the industry. They propose rules, industry comments on those rules, and then they get finalized. The SEC, rather than engaging with this industry, you know, under the current administration, is putting out influencer YouTube videos comparing proof of stake to stake, putting out enforcement actions, sending Wells notices to everybody, really trying to diminish the industry. And it shows that they don't.

• 13:37Speaker 02

  At least this administration doesn't view it in the same way that they view the asset management industry more broadly, or view private equity or hedge funds. They're looking down on the industry, putting out office hours with Gary as if this is child's, you know, child's finance. You know, Matt Levine's calling it, you know, fake, you know, a toy economy of crypto. And I think that's really the messaging that they're pushing. And so rather than engage and have real hearings and open meetings on this stuff, they're just going to bring lawsuits and try and sue everybody and the industry is probably going to push back.

• 14:09Ryan Sean Adams?

  Mike, the feeling of this video was just patronizing AF. Like, that's what I felt like. You're explaining staking to people who have Ether staked inside of Kraken as if we don't know anything and we're just gullible dumb investors, you know, and you're trying to teach a classroom. I don't understand the patronizing approach. Is that, is that a vibe that he's going for, do you think? Or is this just like how he views the industry? What's happening here?

• 14:42Speaker 02

  Yeah, I think, I think this is the Gensler vibe. This is what he wants to do, right? He wants to delegitimize and minimize the industry. Whereas what we saw with the Clayton administration, which a lot of us were frustrated with, right? During the ICO years and the token sale years where there were so many scams out there. So it was, it was somewhat reasonable, but there were a lot of legitimate companies trying to sell tokens and building the space. And we were frustrated with the, the lack of clarity and guidance, but they put out a framework. They've put out guidance on various items. They put out, which we can talk about later, something on stable coins, which is helpful here with respect to other things that are going on with the Gensler administration.

• 15:24Speaker 02

  But there's really just been from this administration, a condescending attitude. And if you come in, you walk out with a subpoena. It's, it's not the same. I was talking to someone earlier about going in a meeting with the SEC. You can't really do that anymore because you walk out with a subpoena or you get welz. And it's just not a friendly environment to operate.

• 15:44Ryan Sean Adams?

  Just a quick definition for us. What does getting welz mean?

• 15:48Speaker 02

  So a Wells notice is essentially the the beginning of an investigation by a regulator such as the SEC or the CFTC. They send you a letter that says, we're considering bringing a full investigation and enforcement action where we're going to seek civil monetary penalties and other relief and tell us why you don't think we should do that. And they give you a period of time to respond. And this current SEC is not giving a whole lot of time to respond. And the CFTC frankly is not either. And so there's this hurry up and settle with us attitude. And they're they're wellzing a lot of these crypto industry participants. So they're collecting a lot of information and really trying to find pressure points, really trying to find

• 16:31Speaker 02

  points of centralization. You know, we talked about my article that I wrote last year, kind of on the predictions for this year. I think it predicted that it would be a year of decentralization versus regulation where the crypto protocol developers are really looking to find ways to decentralize aspects of their product, same with even centralized platforms incorporating things like MPC and DeFi and Web3 into their platforms to further decentralize their offerings so that the SEC can't point to these kind of centralized points of failure like they're dealing with with Kraken and some of these actions.

• 17:04David Hoffman?

  There's a tweet here on screen that I this conversation has reminded me I saw not too long ago. This is from Jason Gottlieb. He says, I find the SEC's all crypto projects have to do is come in and register line unbelievably insulting. It assumes that there's this vast quantity of sophisticated securities lawyers who are advising their crypto clients. Nah, man, screw the SEC, YOLO, baby, and do whatever you want. And this is the communication that Gary Gensler and the SEC have put out there. It's like, oh, you are free to come in and be compliant with us, which is just taking the voice out of so much of the crypto industry and saying that like, oh, it's it's simple. You just come in and do this process. And

• 17:48David Hoffman?

  I'm my my skepticism hat is like, oh, Gary Gensler is putting on a show. He's putting on a face for the rest of the world to say like, oh, the wild west of the crypto world isn't doing what we're asking and coming in and complying. Meanwhile, there are very smart, very talented lawyers in the crypto space who see the predicament that we are in like, and it is not matched by the language out of the SEC. I'm assuming, Mike, that for your conversations with lawyers all over the space that this is kind of a consensus view.

• 18:18Speaker 02

  Yeah, absolutely. I mean, I worked with the former chair of the CFDC, worked with him at the CFDC when he was commissioner. You know, we have credible people in the room trying to work with the regulators. There are commissioners at both the SEC and CFDC, Commissioner Hester Purse, Commissioner Caroline Pham, that want this stuff to move forward, want rules, want reasonable regulation. But it's very difficult to, you know, Gary Gensler said on CNBC the other day, you just come file a form. It's on our website and Jesse Powell tweeted about it like, yeah, that's exactly why we have a $30 million settlement here. Because it's not that easy to just file a form. None of this stuff works within the existing paradigm for securities regulation, which is kind of what we talked about the last time I was on.

• 19:03Speaker 02

  And without exemptive relief and changes to some of the market structure, we're not going to be able to have crypto within a securities framework. It's just going to be equity on, you know, equity securities on a blockchain.

• 19:15David Hoffman?

  Okay, so we've hammered out the SEC has a bias against the crypto industry details. Like, that's kind of no surprise to people. I want to actually go back to the Kraken case specifically because you talked about in the ways that all of the Kraken staking product was different from just raw protocol staking. Can you talk about just like the line that, the line that was drawn by the SEC that differentiated Kraken specific flavoring of staking versus like, I think you like differentiated it between liquid staking. Just talk about the nuances about like what the SEC specifically was going after here and how Kraken staking was different from just any other centralized staking as a service provider.

• 19:58Speaker 02

  Yeah, absolutely. So staking directly is the cleanest form in that you're on Ethereum, pulling together your own 32 ETH, sending it to the deposit contract, staking it directly. You accrue your staking rewards. The rewards are generated by the Ethereum network. They don't come from any sort of third party or centralized intermediary. It's very similar to, you know, in a proof of work chain, you earn rewards in the same kind of programmatic fashion. So the SEC hasn't really. Cast any thought on on directly staking or running a proof of work node or any of that.

• 20:35Ryan Sean Adams?

  So I want to also be clear. So that includes running your own validator from your house, right? Directed protocol. Does that also include using some sort of decentralized staking service? Like a maybe a rocket pool or in the future, Lido? Have they weighed in on that at all?

• 20:52Speaker 02

  So the SEC is not made a view public on on any of that. I think that is the next step, right? So we feel most comfortable with staking directly, liquid staking and rocket pool and Lido and others like Liquid Collective. These other types of of staking methods, you know, the SEC is not weighed in on, but they're much closer to staking directly than staking through any centralized custodian, because everybody is putting their ETH together in a single smart contract. There's no person running a program or collecting that ETH and saying, oh, some of these are going to be staked and others aren't. And in even if that were to occur with respect to the programming of the smart contract, it's all open source.

• 21:35Speaker 02

  There's there's no information asymmetries. The code's out there. It goes into a smart contract. You get your receipt token and we should be calling these liquid staking tokens instead of liquid staking derivatives. That's another point. They're not derivatives, but you put your token into the the smart contract. You receive your receipt token and those crypto assets that were that are in the smart contract get associated delegated to a validator node and they get staked and you get your your rewards from the Ethereum network. They're passed on to your receipt. It looks a lot like regular staking. It looks similar to, you know, if the three of us got together and like, we don't have 32 ETH. Let's pull our ETH together, run a node and stake it together.

• 22:16Speaker 02

  And that's the idea with with these liquid staking protocols as opposed to some centralized program where there's other features. And I think it's important to note that in the SEC's complaints against Kraken, they compare Kraken's program to staking directly. They say that there are these other features that make it investment like that bring it within the scope of the Howey test that presumably staking directly or even under.

• 22:41Speaker 02

  Like with staking protocol, but you don't have all of these other features. And an important point here as well is that there's terms of use. There's terms and conditions associated with a centralized platform where you're staking through a program. And depending on what's in those terms of use, as the SEC pointed out in this instance with Kraken, the term said that Kraken's creditors could encumber the assets. So it looked a lot more like what Gemini is being investigated for, what BlockFi was offering. Next, so some of these other lending programs where users put in assets, they're kind of pooled together. They may be deployed in whatever way they're deployed, but you earn a return on that.

• 23:24Speaker 02

  And I think in staking, from a policy perspective and from just a reasonable person's perspective, the two are not the same. Some of the features on top of staking are almost not the essential managerial efforts that you would look to. The rewards are still coming from the network. And so the SEC should be more focused on these instances where they're being thrown into 3AC and into other speculative projects as opposed to being deposited in the Ethereum smart contract and receiving rewards.

• 23:57Ryan Sean Adams?

  And Mike, to be clear, other centralized exchanges offer staking as well. I mean, maybe notably Coinbase, that is custodial staking in similar ways that Kraken is. Why it wasn't Coinbase, why doesn't Coinbase have to shut down its staking program right now?

• 24:13Speaker 02

  You know, the facts and circumstances of every program are going to determine what the, you know, whether the SEC views it as a security or whether it meets the definition of a security. So without speaking to any particular program, it's really hard to say. And we don't know what the SEC is looking at frankly, behind the scenes. But every program's different. The terms and conditions are different for every program. I think it's important, if there is a, you know, a staking program, that you look to the terms and conditions. And if you have legal and beneficial ownership of your crypto assets and they're just forwarded on to the protocol for staking and you can pull them out at any time, there's no Features that make it investment-like, there's not a reserve of tokens. All these features that the SEC focused on in Kraken, that can be used as a checklist and framework for evaluating other programs.

• 24:58Speaker 02

  But it's not to say that Kraken chose to settle this. It's not law. This is only an out-of-court settlement.

• 25:06Ryan Sean Adams?

  Yeah, this is what's confusing to me. So I think staking revenue, at least because we can track this for Coinbase, was like 13% of their revenue last year or something, right? It's like, that's a lot of money for centralized exchanges. So, one, it's just a point of evidence that Coinbase is still operating a staking service in the United States, has not shut that down, has not been required to shut that down. And then another point of fact is Kraken has. And it seems like if what you're saying is true, is like, there could be some things tweaked to the policy or changed about the way Kraken does it. And honestly, I wouldn't see why Kraken would have any material reason not to make these changes if that was requested.

• 25:50Ryan Sean Adams?

  Why wouldn't they just go through the process of like, okay, fine, you've raised some good points, SEC. There could be some more transparency here. We could safeguard investors, make sure that this is not kind of something, an asset that some debtor can claim. Once we do all of that, will you allow us to resume our program? Instead, it's just like, discontinued, pay $30 million fine. And then we have like, people like Jesse Powell tweeting like, look, we didn't even, there was no form to fill out, there was no office hours with Gary where I could have a discussion with you and be reasonable about what we should do for the industry. You just turned it off. And I don't understand why that hasn't happened. And there just doesn't seem to be consistency here.

• 26:35Ryan Sean Adams?

  Is this story making sense to you?

• 26:38Speaker 02

  Yeah, you know, in, under the prior administration, the Clayton administration, they set up this thing called FinHub, which is their, you know, come in and talk to the crypto team at the SEC and in a collaborative way, we'll work through exemptive relief and other sorts of issues. That was a path for many projects back in the day. There were three new action letters granted to crypto projects. I worked on one of them, the most recent of the three, and this was in, you know, 2019, 2020, that we were granted a letter actually for something that looked a lot like a stablecoin, which is interesting with respect to some of their other actions. And it was very collaborative. The FinHub was open to meeting with industry and providing relief. Under the current administration, that's not the case. And so

• 27:20Speaker 02

  it makes it very difficult for centralized exchanges or anybody in the space that wants to comply because they can't come in and ask for these sorts of targeted pieces of relief. Maybe they wanted to offer a program that looks a lot like a security under the guise of the, you know, securities laws. The relief they would need, they'd need to go to the SEC and ask for that relief. And typically, you would get that in other contexts. But here, the SEC is antagonistic and won't grant that relief. And it makes it very difficult. You have to run the risk of the product either being a, you know, being characterized as a security and having to settle with the SEC, or not being able to offer the product at all.

• 27:59Ryan Sean Adams?

  I think that's why the crypto industry is not convinced that this chairman is actually trying to help investors in crypto. It seems much more like this is some sort of theater to score points in some game that, you know, is not, has nothing to do with protecting retail, but is maybe political or motivated in other ways. I want to make the point, and check me if this is true, Mike. Kraken services in Europe are still fully functional. Europe obviously has sophisticated regulatory bodies as well that are clearly not taking the same position as the SEC. So is Gensler and this administration not in net effect, driving this business offshore and making American companies and American cryptocurrency exchanges

• 28:44Ryan Sean Adams?

  less competitive in the global market and doing a disservice potentially to retail, removing an option from the ranks? Is that the net effect of this?

• 28:54Speaker 02

  That's exactly what's happening here. We've got MICA in Europe. There's progress towards crypto laws and regulations overseas. We don't have that here. There was some momentum and FTX kind of blew everything up, right? And so we don't have any sort of legislation that's being seriously considered at the moment. Maybe we will. But without that legislative package, it makes it really hard because the regulators are just doing their thing. They're following the administrations. We'll talk about Operation Choke Point later, but following this kind of general antagonism towards crypto. And they have this broad enforcement authority and without a legislative mandate to go out and pass rules.

• 29:35Speaker 02

  They're just going to keep bringing these actions and they just want to beat it down over and over again until it's gone. And of course, it's not going anywhere except for overseas. And Europe's been a lot more sensible in not regulating DeFi right out the gate. They want to focus on the centralized intermediaries. Which in the United States, that seems to be where the SEC is somewhat focused. We can talk about Mango and some of the, you know, the actions related to DeFi as well. But they're primarily looking for these centralized intermediaries in their actions.

• 30:05Ryan Sean Adams?

  I know David's going to summarize this in a second, but just, I just want to say two more things like, okay, so. First is, I don't have assurances that Gensler won't come after staking pools next.

• 30:21Ryan Sean Adams?

  Because it seems like it's somewhat arbitrary in terms of what he comes after. And what the SEC comes after. I'm somewhat worried that maybe some staking, what was the term used? Not derivative, but like, you know. A token, liquid staking token might be deemed a security by this administration next, right? So like, some people are saying, well, this is great, isn't it? Net effect is it decentralizes staking? And I don't actually think it's great because one, it removes an option from the market and increases the barrier to entry to staking. But also number two, I don't have confidence or trust that this administration won't come after decentralized staking pool services next.

• 31:03Ryan Sean Adams?

  Is that an unfounded kind of your take? Or do you think that's a serious threat here?

• 31:10Speaker 02

  I think the more decentralized the liquid staking protocol and the option to the staker, the less likely the SEC is going to be able to bring a strong case against the developer of that protocol or the DAO associated with that protocol. I would not put it past the SEC to investigate some of these DAOs and in particular, some of the governance tokens. But the way that liquid staking protocols can be designed to really focus on decentralization, the users all coming together with their own efforts as opposed to the efforts of Kraken or Coinbase or any of the other providers you mentioned earlier. That's a little bit different in the context of liquid staking. So I do think there are arguments there, but this SEC is throwing everything at the

• 31:55Speaker 02

  wall and seeing what sticks.

• 31:56Ryan Sean Adams?

  The last... I think if the... You want to finish your thought, Ron? Sorry, yeah, just the last thing I wanted to check is an instinct of like, okay, so the Machiavellian playbook for, you know, maybe a Gary Gensler is like, wouldn't they want to incent more American centralized exchanges to pool together stake? Because that is a vector for control for the SEC and for the state, rather than what the net effect is they're driving it outside of their borders. Not only that, they're also just driving it towards more centralized providers. Like, if I was actually trying to control an industry and I'm Gary Gensler, I actually want to like promote centralized staking services that are based in the US that are

• 32:40Ryan Sean Adams?

  under my jurisdiction and that I can control rather than banning it. And so like, I'm kind of even questioning whether Gary Gensler is actually good at this. You know, if we think maybe he is out for control, this seems to be like counterproductive to that. This is why I still can't wrap my head around that, like, just seems like very capricious. And I don't have a firm sense of why he's doing it. Like, it doesn't seem like just control is kind of the element here. Is there something else I'm missing about this?

• 33:15Speaker 02

  It's hard to say what's in Gary Gensler's mind at the moment, aside from a hatred towards the end of time forgetting. It's really hard to say. I think there's this sense at the SEC that a lot of these crypto products are being offered by a centralized party and there are investment-like features that bring them within the scope of the securities laws because there's this counterparty risk where you're relying upon somebody's efforts at managing a pool of money or otherwise to generate returns for the user. And the SEC hasn't really looked under the hood at the technology to say, hey, this looks a lot different from a money market fund or some other financial product. They're just grouping it all together

• 34:00Speaker 02

  and they frankly don't care. The view of the SEC is essentially this industry should exist within the securities regulatory framework, but we're not going to change any of the rules associated with traditional securities such that what you wind up with is equity securities on a blockchain and all of the benefits and innovation of the technology withers away. I mean, the security token days where people were just issuing these security tokens, it didn't go anywhere because it was so restrictive. And we could talk about a credit investor issues and all of that, but the burden of registering a security is massive. You have to have a prospectus, you have to issue a registration

• 34:45Speaker 02

  statement. There's a pre-effective period. There's all of these things that you have to do to comply with the securities laws that are very complex. And that's why you have massive companies that decide to go public and there's a ton of legal work associated with it and other work that gets invested there. And that's just not going to work for crypto when you have smaller development companies issuing tokens.

• 35:06David Hoffman?

  I think if you view this enforcement action by the SEC to Kraken in silo, that's it'll tell some certain story and maybe yes, there are extra services that Kraken, as a result of the economies of scale, was able to provide this particular project that did meaningfully change its nature away from just being a facilitator of staking as a service to something additional, a prepackaged product that started to look like a security, at least from the eyes of the SEC. I think we took that this story in silo, that interpreting it would produce a certain outcome, a certain interpretation. But the thing is like, there's all these other data points to consider, which is like Gary

• 35:48David Hoffman?

  Gensler's weird office hours PR campaign that's also infantilizing of the crypto industry. And then you also take in the effect that like, sure, maybe it maybe it crosses some sort of Howey test secure SEC line of like that starts to look like a security. But also like, what are the risks and downsides? And does this also inhibit the mandate of the SEC, which is like to if and to create capital, facilitate capital formation, right? And like, and so like, sure, maybe I'll get we give the SEC the benefit of the doubt that maybe it does start to look like a security. But the also the alternative of that is like, there are no risks here because the income is coming from a protocol. They are just being a service operator.

• 36:33David Hoffman?

  And so it to me, it's like the SEC is just trying to score points more than it is actually doing its mandate. And it's doing this in a way it's like, oh, like we could, we could go after Kraken because on this technicality that they haven't considered because they it's of common sense. Am I onto something here, Mike?

• 36:55Speaker 02

  Yeah, you know, when, when the merge happened, there were all these rumors that Gary Gensler viewed ETH as a security and was going to come out and say, you know, now that we have proof of stake and people are staking, these are securities, ignoring all of the decentralization factors, everything related to the fourth prong of Howey, efforts of others, where got a massive decentralized network. He focused on this expectation of profits prong, which you have to, you just have to feed one prong. Staking doesn't make it a security, right? But, but there was that rumor that the SEC was looking at it. There is a security. I think this is the SEC's way of indirectly trying to, to go back to that position. They're, they're going after the staking as a service providers, potentially.

• 37:37Speaker 02

  And, and they're looking at different types of staking solutions to effectively make it very difficult to stake, to hold ETH, to use ETH. So, so I, I think it's, it's a little bit of a backtracking, but also a, a, just, just a way to get, get at Ether.

• 37:50David Hoffman?

  I want to point out- Is it fair to say that Gary Gensler and the SEC, they are playing a game of scoring points? And it is adjacent to the actual mandate of the SEC, which is to, you know, protect customers from risk, facilitate capital formation. Cause that's what it seems like as a, you know, retail crypto person. It seems like Gary Gensler is just trying to score points and so is the SEC. Is that a fair take?

• 38:14Speaker 02

  It's hard to say with the fallout of FTX. There's definitely this concern of what happened with FTX happening at other exchanges. And so there's, there's this sense of urgency to go and, and look under the hood of different exchanges. That's fair, but I think that if that's the case, they should issue rules that allow these exchanges to come into compliance and, and do the sorts of things that the SEC is looking for them to do, as opposed to just bringing these enforcement actions. Because I, I a hundred percent feel confident that most exchanges would walk in the front door if the SEC would work with them, give them exemptive relief that doesn't kill the rest of the industry.

• 38:50Ryan Sean Adams?

  I, I do want to make one point, which we haven't talked about so far. So far, we've been doing this broad strokes thing about the kind of the SEC and that's true. There are dissenters in the SEC. Commissioner Hester Purse, whom you mentioned earlier, wrote, and then like, I consider this brave. I don't know, it's like, how common it is to sort of disagree with your boss. I know it's not quite that sort of a relationship, as, you know, you have different commissioners who kind of vote on these, on these various enforcement actions. But Hester Purse dissented. And this is a quote from CNBC, from, from her dissent post. Using enforcement actions to tell people what the law is in an emerging industry- is not an efficient or fair way of regulating.

• 39:35Ryan Sean Adams?

  And I feel like somebody in the SEC like Commissioner Hester Purse has been consistently fair. I mean, I've, we've had the opportunity to both talk to her on the Bankless podcast because she engages with the crypto community. Imagine that Chairman Gensler, imagine actually talking to us evil people rather than just giving us office hours, editorials. And she has consistently had a fair approach, which is like, yes, some regulation is needed, particularly where there is centralization. Regulation is needed. I even think that some staking regulation is certainly needed, some custodial staking regulation to encourage transparency. But this ain't it. Anyway, I just wanted to point that out because there are people in the SEC

• 40:20Ryan Sean Adams?

  and we have tons of people in various government agencies that actually listen to Bankless. And so if you are fighting the good fight internally for the core values and the reasons that your institution exists, know that we support you in that fight. And I don't want to paint too broad a brush on the SEC, but certainly under Gensler's leadership, this has been increasingly hostile towards crypto. Is it time, David, to talk a little bit about not just staking, but about Paxos and stable coins? Because what is happening with that? And I feel like I'm barely up to speed with what's been an emerging story over the last couple of days.

• 40:59David Hoffman?

  Yeah, so, so Michael, we'll get your take on this too, because I would love to understand how a stable coin can become a security. So February 13th, that was yesterday, Paxos receives SEC notice over Binance's stablecoin BUSD, which is a product that Paxos provides to Binance. So the New York Department of Financial Services, I think, NYDFS, instructed Paxos to stop minting BUSD due to concerns about its relationship with Binance and is considering action that the BUSD is a security and that Paxos should have registered the offering under federal securities law. How does that make sense? Now, why would BUSD be a security? And just like, what's the real story here?

• 41:42David Hoffman?

  If this is all like what the SEC is telling and showing us, can you just tell us what's actually going on?

• 41:49Speaker 02

  So we all know the Howey test, right? You know, an investment of money in a common enterprise with a reasonable expectation of profits based on the efforts of others. What sort of profits do you expect with a stablecoin, right? It's fixed value. So it boggles the mind to think through what they're considering when it comes to a stablecoin. I mentioned earlier, there was a new action letter that the SEC issued that I was involved with for Vcoin, which was issued by Inview, and it's a stable value coin as well. The letter explains that you put a certain fixed amount in and you can use the token and then they'll, you know, allow you to redeem it for that same amount. And the SEC didn't view that to be a security.

• 42:28Speaker 02

  There was also an SEC interpretation from September 2020 where they say that stablecoins can be issued as non-securities. They specifically say that whether, you know, one stablecoin is a security depends on the facts and circumstances and they do a case by case analysis. Gary Gensler, in a speech several months ago, similarly kind of said that stablecoins may be securities based on the facts and circumstances of the offering, whether there's interest involved, whether there's an algorithm involved or whatever, they can resemble a money market fund, for example, where you have an interest in a fund that maintains a stable dollar value, or it could be something else. The definition of a security is broader than just investment contracts.

• 43:11Speaker 02

  There's other categories, things like notes, and then there's also what's called evidence of indebtedness, which is super broad, that they could be looking at with respect to stablecoins, because an evidence of indebtedness is just what it sounds like. You put something in and then you have this receipt that evidences that you put that in and that you have the value of it. But historically, all these sorts of stored value products have been regulated at the state level and by Treasury as like gift cards, basically. You can load funds into Venmo or PayPal or any of these other custodians and they're regulated at the state and federal level and you can send those funds to people and stablecoins aren't so different from that. So it's a bit unusual that we'd see the SEC encroaching here.

• 43:56Speaker 02

  Gary Gensler has also implied that they could be security-based swaps, which is another type of security. But it's interesting to think about what they're so focused on here. The policy concern seems to be that these are the the entry points into DeFi, that people are purchasing these stable coins and then using them as a substitute for cash in DeFi, and they're able to earn returns through DeFi, through yield programs and things like that. And then some of these are exchange tokens and people are staking them on the exchanges and earning yield. So it's really hard to say where the SEC is focused here. This is all allegations that there's, you know, there's a Wells notice out there. There's, I think Paxos has confirmed that they've received a Wells notice.

• 44:38Speaker 02

  I saw that the other day, but we just don't know what's in there or what's going on.

• 44:42Ryan Sean Adams?

  And Mike, what about this story of Circle? This is from Coinbase, I believe, from today, no, yesterday. Circle sounded the alarm on Paxos. I don't know if this is rumor or a confirmation.

• 44:55Ryan Sean Adams?

  What is, what is this about? Is this relevant to the story at all? And like, if BUSD is a security potentially, then why isn't USDC?

• 45:06Speaker 02

  It's really hard to say. Every single one of these stable coins will be analyzed on a facts and circumstances basis. There is, as I mentioned, some very good precedent that would cut against what the SEC is potentially trying to do here in characterizing some stable coins as securities. We really have to look at the individual facts of each product. But, but this is very much a, when we think about Operation Choke Point 2.0, an attempt to cut off banking products, stable coins, access to banks, qualified custodians, all of that from the broader sector, and potentially a way just, even if they're just casting fut on all of it, as opposed to really having the ability to bring an enforcement action.

• 45:48Speaker 02

  Because remember, with Wells notices, it's just an intent to potentially bring enforcement action. It doesn't mean that they necessarily will. They're investigating. So it's very possible that they've got nothing, but maybe they are looking at evidence of indebtedness or some very odd category of security here.

• 46:04David Hoffman?

  So I'm wondering if you know anything that's going on behind the scenes or can speculate about that. I know lawyers don't like to speculate about things, but I'm going to ask you to see what I can get out of you, Mike. NYDFS spokesperson is quoted saying that Paxos violated his obligation to conduct tailored periodic risk assessments and due diligence refreshes of Binance and Binance customers to prevent bad actors from using the platform. And I know we're going to turn to this idea of Operation Choke Point, which the kind of the theme here is that there are multiple government agencies who have desires and goals, and they all come to a table. And maybe somebody is like, hey, there's a bunch

• 46:44David Hoffman?

  of money laundering going around with Binance, SEC, any way you can take them down. And the SEC is like, oh, well, BUSD kind of looks like a security. I'll scratch your back. Is there anything to this sort of like speculation?

• 46:59Speaker 02

  I don't know. I mean, it's really hard to say. I don't know if I have much to add on that. You know, it's, there's a whole lot of news going on at the moment. And I think everybody's got a new story that they're trying to break. And it, some of it may be true, some of it may not. But I think we're going to have to wait and see on some of this.

• 47:16Ryan Sean Adams?

  And the current status with BUSD is, has Paxos like disbanded it?

• 47:21David Hoffman?

  It is a down only supply. So they have agreed to no longer issue any new supply of BUSD. And so the supply of BUSD is down only.

• 47:31Ryan Sean Adams?

  And as far as we know, BUSD was a product similar to USDC, and that it's just a stable coin kind of backed by fiat in a bank account somewhere. Is that right?

• 47:41David Hoffman?

  With some speculation that there might have been fractional reserve at some point.

• 47:46Speaker 02

  And the one, one important distinction. So we talked about some of these state money transmitter licenses that, that many of the exchanges and custodians have obtained. There's also what's called a trust charter. And so Paxos is a New York limited purpose trust charter. They are regulated by the New York Department of Financial Services as opposed to many of these other stablecoin issuers. Circle, for example, has money transmitter licenses and is regulated by regulators across, across the country. And, and there's what's called a bit license that, that many of these state money transmitters have to get. The trust companies, if they're incorporated in New York, don't have to get that bit license, but they're directly regulated by DFS. And so DFS can say, hey, we don't like this product,

• 48:28Speaker 02

  turn it off. And they can say, hey, no, no new listings for coins. They can really exercise a lot of control over these entities. And so if the DFS doesn't like a product or wants to turn off your ability to self-certify products, they can do that. And that's a real choke point that the regulator has over these guys.

• 48:51David Hoffman?

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• 50:45David Hoffman?

  bridge your assets, and start building your first app. With Arbitrum, experience Web 3 development the way it was meant to be: secure, fast, cheap, and friction-free. And we are back. Mike, I want to run through some recent events and I'm going to try and speedrun this as fast as possible. December 7, Signature, one of the most active banks serving crypto clients, announces they'll give their customers all their money back, shut down their accounts, drawing crypto deposits down from 23 billion down to 10 billion. They're also exiting their stablecoin business. January 3, the Fed, FDIC, OCC, released a statement on the risks to banks engaging with crypto, not explicitly banning banks, but strongly discouraging them from a safety and soundness basis. January 6, Silvergate

• 51:28David Hoffman?

  hit with an $8 billion in crypto withdrawals because of fear of bank run and insolvency. January 9, Metropolitan Commercial Bank announces total shutdown of crypto asset-related verticals. January 21, Binance announced that due to policy at Signature Bank, they can only process user fiat transactions worth more than $100,000. January 27, the Federal Reserve denied crypto bank's custodians' banks two-year application to become a member of the Federal Reserve system, citing safety and soundness risks. I'm about one-third through of a very long list that includes Binance, Department of Justice Fraud Unit, more Silvergate stuff, Protego and Paxos, more Silvergate Bank hit with a class action lawsuit. Anyways, if I had the time, I would go through every single one of those things,

• 52:09David Hoffman?

  but I think listeners get the point, is that there is a bunch of bad stuff happening in the world of banks servicing the crypto industry. This has all started in the last eight to 12 weeks. Now, the SEC comes out with some very big enforcement actions. There seems to be a bunch of bad things happening. Mike, why? Why now? How did this, all of this coordination happen? What's the motivation here? Just like, how should we think about all of this?

• 52:41Speaker 02

  Yeah, so there was this presidential order related to crypto put out last year, kind of encouraging this coordination, encouraging some reports and working groups and thinking on crypto.

• 52:54Speaker 02

  Didn't expect necessarily for this to be such a coordinated effort to take down crypto. It seemed more positive at the time and many had that view. But what really seems to happen here after FTX is that all of these regulators start working together under the executive branch and working to choke off access to the banking system and then also minimize the ability for financial institutions to really access crypto, for investment advisors to provide access to crypto to their investors, for financial institutions to go and invest in crypto or offer custody of crypto, all these sorts of products that you'd need for crypto to really take off within the institutional sector.

• 53:38Speaker 02

  The SEC, Treasury, OFAC and FinCEN within the Treasury and the CFTC seem to be cracking down on based on some of these actions and many of which you just named. I think it's important to take a step back and just think about how the banking sector is kind of regulated. So you have these state banks that are chartered with the state. So Wyoming is a great example because they offer the special purpose depository institution, which Custodia is one of. And so that's a charter you get from the regulator at the state level. And if you want access to the Federal Reserve, you have to go to the Federal Reserve and request a master account. And FDIC, the Federal Deposit Insurance Corporation, you have to go to that regulator

• 54:23Speaker 02

  and get that coverage for your customers. So there's kind of this two-tiered system. They also, there's federal banks as well. So you might be like Anchorage National Trust Bank and they're regulated by the OCC. So there's just various banking regulators at both the federal and state level. What's happening here, and you also have these New York limited purpose trust companies, you have state trust companies, and these are banking institutions, but they're not depository banks. And so all of the big names that you'll hear about in the institutional custody space are mostly New York limited purpose trust companies like Coinbase Custody and others. So they have this charter that they got from the New York Department of Financial Services

• 55:08Speaker 02

  to operate. What's happening here is that the Federal regulators are putting out these releases, policy releases, that they've now entered into the federal register, essentially saying that they don't view crypto custody and crypto investment as principal and lots of different types of crypto activities as safe and sound banking. And they're saying that these state banks that want to be insured by the FDIC or want to access the Federal Reserve or do anything else really related to the federal regulators, they have to not engage in crypto activities. And so it makes it very difficult, for example, for these Wyoming SPDIs like Custodia to go and get Federal Reserve master

• 55:51Speaker 02

  accounts. And so they've been declined. This is really a tricky situation for custodians. The SEC, so there's a rumor, actually started by one of my colleagues, Justin Browder, that the SEC might propose amendments to the custody rule tomorrow that would make it very difficult, if not impossible potentially, for investment advisors that are registered with the SEC to custody crypto assets and offer crypto assets to their investors. And so, you know, if you're a fund manager and you're registered as an investment advisor and you have a crypto fund, the crypto under the custody rule needs to be custody with what's called a qualified

• 56:33Speaker 02

  custodian. And there's a number of different things that meet the definition of a qualified custodian that's set out in this SEC rule. Today, as a trust company, arguably, you're able to custody crypto as a qualified custodian. So you can go to a trust company and put your crypto there, they hold it for you. And that's, that's all kosher with the SEC. If they change that definition, they would make it impossible or very difficult potentially for all of these investment advisors to custody crypto assets. So they would have to, before whatever effective date of the rule, if it goes into effect, withdraw, sell and get rid of those crypto assets, because they couldn't offer those products, wind down those funds, all of that. And this is all rumored, it's speculative, but, but there seems to be a leak within, you

• 57:18Speaker 02

  know, the SEC, because there's a Bloomberg article that dropped today confirming that this may be happening. And it would be proposed as a rule, it would go through notice and comment, but we saw, you know, in the prior administration, when they were trying to crack down on non-custodial wallets within the Treasury, they put these things out potentially very quickly and give 30 days for notice and comment and just ram it through. And Chair Gensler has done this at the CFDC when he was enacting all the Dodd-Frank regulations after the financial crisis, pushed them through very, very fast. And so if this happens, it can happen very quickly. And that would really take, you know, give a hit to the institutional sector.

• 57:56David Hoffman?

  Is the net effect of this that it becomes harder to self custody crypto assets? As in who, where all the crypto assets become custody to go into a smaller, more centralized, more perhaps like state aligned entities than what is previous, which is a more, you know, per, not permissionless, permissionless isn't the right word, but like a more open set of people that can custody crypto assets, that gets confined to a much smaller set of people. And those people who are able to custody crypto assets are much, much more state aligned. Is that a fair description of the net effect of this all?

• 58:32Speaker 02

  As a net effect, I think that there's going to be less institutional access to the banking sector. You know, as, as it stands today, it's very difficult to get a crypto, a bank account as a crypto company. And it was even more difficult years ago. There were a handful of banks like Silvergate and Signature that were offering access. It's broadened out and you see more banks offering access. But we saw the other day Signature was, was winding down a lot of its crypto clients. And so just as any business, you know, whether you're a small business, large business in the crypto sector, access to banking is really important. And investors that want, you know, asset managers that want to offer crypto products, not being able to custody, that's going to make it very difficult. So yes, I think there's going to be a lot more high net worth individuals

• 59:17Speaker 02

  that just go out and buy crypto on their own and custody it themselves and all of that, rather than using, you know, a fund manager.

• 59:23David Hoffman?

  And so is the motivation for this, like there, what, what is the motivation for this? Because it kind of just seems like they want to squash the industry. From the external perspectives, like, oh, they're like literally just cut off the oxygen and eventually the thing will just wither on the vine.

• 59:39Ryan Sean Adams?

  Yeah, it sounds like the, like the executive branch on the back of like SBF and everything, everyone, you know, everything that happened in 2022, we're just like, hey, now's our chance. And let's like all get together and see what we can do to choke off this fledgling industry in all of our vectors for control. We control the banks. So what can we do to make it real hard to get a bank account for any sort of crypto company or institution? Okay, check mark. Let's do that. We could see that in process. We control vectors of kind of what securities are. And so how can we make that piece difficult as well? And it's like, it seems like this coordinated effort of some meeting that none of us know

• 1:00:21Ryan Sean Adams?

  about, nor we're present for, of a kind of the executive branch going after a divide and conquer strategy to choke out this fledgling industry from like a serious investor circles inside of the United States. That's what it feels like happened. Is that really what's happening? And has anything like this happened in kind of the US regulatory history with respect to crypto previously? Is there any sort of analogy here?

• 1:00:53Speaker 02

  Yeah, I really think there's an analogy to the 90s when we had what was called the crypto wars. And it was really this war on encryption and cryptography. And there was this case Bernstein versus United States, where a professor developed this cryptography technology that he put out on his website for his students to use and experiment with for teaching purposes. And he wanted to broaden it out and distribute it more across borders, outside the United States, all of that. So he went to the State Department and said, is this okay? And they essentially said, no, you're exporting munitions. They compared cryptography to WMDs, firearms, all of these illegal weapons at the time, and exporting

• 1:01:33Speaker 02

  that outside the United States was illegal. He fought that to the Ninth Circuit. The Ninth Circuit agreed that this was a free speech issue, a First Amendment issue. And that really opened up the ability to export cryptography.

• 1:01:48Speaker 02

  It was actually a threat for a lot of these programs like Netscape and others where they incorporate encryption and there's no ability to protect credit card information or other things and this really broadened up the e-commerce industry and all of that. I think here we're seeing the opposite where it's almost this import embargo placed on crypto where they want to keep all of this outside the United States. They don't want it here. And so they're cracking down on the industry to push it all offshore. And there's tokens that have been sold offshore in the past and all of that. But for the most part, we've had exchanges here. They're regulated as money transmitters at the state level as money services businesses at the federal level. There's become kind of a regulatory

• 1:02:29Speaker 02

  framework to offer compliant legal crypto products. But if they say they're all securities and the SEC is not willing to work with the industry to develop a framework for it, it all just goes offshore. If you can't have a bank account in the United States, you've got to go offshore to a foreign bank and start your business there. Cayman Foundations, all this sort of stuff are seeing it all go offshore.

• 1:02:49Ryan Sean Adams?

  Mike, are they dumb? Like, are they stupid? Like, here's what I don't understand about this. This seems so self sabotaging, the United States, right? Here's a fledgling technology that could be as impactful as the internet and the US is-

• 1:03:05David Hoffman?

  But you know that, Ryan. What do you think they know? Do they know that? Because like, how many of these people are just doing a job and their job is like, oh, I've got the hammer and who am I going to hit today?

• 1:03:15Ryan Sean Adams?

  How did we ever get the internet to happen in the 1990s? Like, how did we ever get kind of like regulators and our legislators on board with opening up a communication protocol? If like, they can't see the potential of this fledgling industry and like, they're so willing to drive it outside of the borders of the US? Like, I don't know if those in power realize, maybe they just don't care what's at stake for future generations and for the United States. Like, we've always said on Bankless, this isn't about whether crypto will succeed or fail. The best they can do in the US is like, slow it down a

• 1:03:54Ryan Sean Adams?

  little. But they can absolutely harm the US. They can make sure that all of this innovation happens outside of the United States, but they can't like-

• 1:04:06Ryan Sean Adams?

  They can't put this back in the in the bottle. I mean, like, the toothpaste has been squeezed out of the tube and they can't like, put it back in. So like, what are they doing? It this just just doesn't have coherence. Are they just hopeful that? Yeah, we'll just like block it in the US and drive it outside of the and then in a few years, it'll just go away. You know, like, is that what they expect to happen? I know this is probably outside of the The like lawyers don't like to speculate. Yeah, this is I know this isn't a legal question, but I'm just trying to make sense of of any of this, and it seems to be the most self sabotaging move that the United States could do. The most that most anti capitalist, anti entrepreneurial, anti freedom response that they could take.

• 1:04:50Ryan Sean Adams?

  And it is seeming like the inside of the United States is one of the most hostile countries on earth to this freedom giving technology. And I'm just like, what gives? Like, this is so dumb. I don't understand it. And that now I'm getting into rant territory, but like, is there anything you would say about this, Mike?

• 1:05:11Speaker 02

  Well, if you look at the terms of service for many crypto products out there, they will have the United States listed right next to North Korea and Iran on their terms of service. It's a really bad look for the United States that rather than embracing the technology, they're pushing it offshore. And and the United States is now in line with Iran and North Korea on every terms of service. I think there's a huge opportunity here and there are many on the hill that get it right, right? Like Tom Emmer, McCarthy, but others are just pushing against it. And I think after FTX, there was this idea amongst many on the hill that we just don't pass any legislation. We just let it go. Treat it, you know, as a

• 1:05:55Speaker 02

  an asset class that doesn't belong here that we don't want to recognize in any legislation. And then let Gary Gensler and regulatory agencies go after it and police it in the United States and push it out. And this won't last, right? We're going to get new administrations in the future. The stuff's gonna flourish here. But in order to get there, we really need to make our voices heard and To communicate, educate regulators to help them understand that the technology is a generational technology that deserves to be here.

• 1:06:25David Hoffman?

  I can't help but to ask a large amount of what the net effect of the SEC's actions and other agencies like the SEC is, we call it investor protection in the front, but incumbent protection in the back. And so I'm wondering, Mike, is there anything worthwhile to speculate here about how much the banking sector is involved here? Because if you look at the one category of winners here, it's the fact that the banking sector doesn't have to compete with crypto. Is there anything to this speculation?

• 1:06:56Speaker 02

  It's possible. I mean, I think the banks ultimately all see the merit in this technology. So that, you know, the CEO of Goldman Sachs wrote an op ed in the Wall Street Journal praising blockchain technology. And I don't think it's that, you know, blockchain, not Bitcoin kind of movement. I think they actually get that there are public permissionless networks like Ethereum and others out there that they view as being important for the banking sector as well. So I wouldn't necessarily say the banks are aligned against this, but I do think there is this investor protection mantra amongst some in the sector and some on the hill that view this as kind of a shady asset class. Like when I got into Bitcoin, I remember it was like, everybody believed that it was magic internet money that the

• 1:07:41Speaker 02

  drug dealers were accepting on the internet. It wasn't this legitimate asset class. And I think today you have people trying to throw the same sort of fear on top of it again.

• 1:07:54Ryan Sean Adams?

  Well, Mike, we're going to be fighting the fight for hearts and minds, of course, on Bankless as we do, and encourage our community to get involved where they can, whether that's calling their senator, or a member of Congress, or writing someone, or just making your voice heard. We'll continue to call for that for sure. I'm curious, Mike, if maybe you could sort of close us out on a ray of hope here. So some of your comments a little earlier almost gave the spirit of like, yes, this too shall pass. This is so A phase. This is not a permanent situation that the US finds itself in. We've gotten, we've, you know, gone through dips and then it come to the other side of accepting

• 1:08:39Ryan Sean Adams?

  new technologies in the past that, you know, scared the nation state at first and ultimately passed. What is your hopeful case for how we come out of this on the other side? Where this technology can actually flourish in the borders of the United States? You have a path for that happening?

• 1:09:00Speaker 02

  Yeah, you know, cryptography survived through the 90s. There was this crypto wars. Maybe we're in crypto wars 2.0 now, but crypto will survive in the United States. It will take time. We need to work with the regulators. We need to to fight some of these cases in court. And unfortunately, without new rules for crypto, it really will be the the builders versus the regulators. The the dev teams need to kind of think through thoughtfully how they're building products. Decentralization is is an option for for many of these protocols and and and teams out there, thinking through how they either trip into the securities laws or don't. That's important, but I think we'll all survive this. Probably a future administrations are going to hopefully be a lot more friendly to crypto assets.

• 1:09:45Speaker 02

  And it will just become such an economic

• 1:09:50Speaker 02

  case that that this needs to be here that I I don't think the people on the Hill will be able to ignore it. And and as I mentioned earlier, you know, got McCarthy, we've got Emmer, we've got many on the the Hill that are fighting the good fight. The industry needs to just continue to stand with with people like that and and frankly, you know, frankly, fight some of these cases in court if it comes to it. I think that there are good arguments that the many of these companies are going to be able to to raise against the SEC. And they shouldn't let them, you know, intimidate them into into basically just going with it with the guns their way.

• 1:10:24Ryan Sean Adams?

  Well, thank you, Mike, for walking us through this and Bankless Nation. I I hope you felt educated in what's going on with this seeming war on crypto that the US has has launched recently. If nothing else, we certainly have demographics on our side in another couple of decades, certainly. Those that are young now and in crypto will be those in power in in our in our halls of Congress and on Capitol Hill. So we got that going for us. Anyway, we just have to wait them out. Mike, this has been a lot of help. Thanks for joining us today on Bankless.

• 1:10:57Speaker 02

  Glad to be here.

• 1:10:58Ryan Sean Adams?

  Recent disclaimers, guys, of course, I gotta say for Mike and for all of us, none of this has been legal advice, not anything like it. Neither has this been financial advice. Of course, as we always say, crypto is risky, so is DeFi. You could definitely lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.