The State of Crypto Regulation | Jake Chervinsky (SotN 8/17)

Jake Chervinsky is fighting on the front lines for the effective regulation of crypto, and he was a key contributor in the efforts to amend the United States Infrastructure Bill, which recently passed the Senate. On this State of the Nation, we discuss the unfolding events in US Legislation, and how we can move forward towards a cooperative and productive regulatory landscape. ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/ 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ ------ BANKLESS SPONSOR TOOLS: ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum 🍵 MATCHA | DECENTRALIZED EXCHANGE AGGREGATOR https://bankless.cc/Matcha 🔐 LEDGER | SECURE YOUR ASSETS https://bankless.cc/Ledger 🦄 UNISWAP | DECENTRALIZED FUNDING https://bankless.cc/UniGrants ------ 📣 TracerDAO | Building DeFi Infrastructure. Join the Discord! https://bankless.cc/TracerDAO ------ Resources: Jake on Twitter: https://twitter.com/jchervinsky?s=20 The Blockchain Association: https://twitter.com/BlockchainAssn?s=20 ----- 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://newsletter.banklesshq.com/p/bankless-disclosures

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

• 0:02Ryan Sean Adams?

  Hey Bankless Nation, this is Ryan Sean Adams. I'm here with David Hoffman. We are here to present you State of the Nation. That is our weekly live episode. David, we got a hot episode today. I can't wait to dive in. Why don't you give us a little preview?

• 0:16David Hoffman?

  We are talking to Jake Chervinsky, who is probably everyone's favorite crypto lawyer in this space. He's part of the Compound Protocol. That's where he got his really his first big foray into the world of crypto, but then he has become one of the most important resources for maintaining, just getting up to speed and staying up to date with what's going on in the world of crypto regulation. There has been a ton of drama in the last two weeks. So many different things to talk about. So much has happened. When I was DMing Jake about coming on to the show, he gave the line that it was one of those weeks where decades happened. And so we need to unpack what exactly happened and also where we are going with the world of crypto regulation.

• 0:59Ryan Sean Adams?

  Yeah, it's pretty crazy, David. Like crypto has been in the news. It's been in Washington DC, right? It was like a blocker, it seemed like, for the major infrastructure bill for a period of time. We're a little bit past that. So it'll be good to kind of recap what happened and get Jake's analysis on what this means for crypto, how we responded, how we might do it next time, what this means for the future of regulation in this space. So we are doing that. A few things. What's new in Bankless? David, we just dropped a Fireblocks podcast yesterday with the CEO of Fireblocks, just a fantastic episode, talking about the institutionalization of DeFi. This is one of those reasons where I'm actually hopeful on the regulatory front, because I think some of

• 1:44Ryan Sean Adams?

  the big players are coming into DeFi, putting a stake in the ground and saying like, hey, this is a useful asset class. It's not just for terrorists and criminals. This is a legitimate thing. But why don't you give folks a preview of that episode?

• 1:56David Hoffman?

  Yeah, on one side of the spectrum, we have the crypto regulation conversation, right? The one we had all of last week and the one that we're having today. And then we have the institutional conversation as well. And these are kind of very similar parts of the overall story of crypto. The people that are paying attention to regulation the most are the people like Michael over at Fireblocks and all of his customers. And so they are the ones that regulation really, really matters. And so if you want to get the institutional side of this of this story, and also just hear about what it's like to provide financial DeFi services towards institutions, that podcast episode is exactly what you want to hear.

• 2:32Ryan Sean Adams?

  Yeah, and tomorrow, David, we're hosting a panel on DAOs, decentralized autonomous organizations, maybe just digital organizations, as you and I also like to refer to them. Who's going to be on that panel? When's it going to be? How can folks tune in?

• 2:44David Hoffman?

  Yeah, it's going to be on the Bankless YouTube, live streamed. We got Kane from Synthetix, we got Cooper Turley, and we also got Tracheopteryx from Urn/Cordonape. And so these are people which with a ton of different perspectives, a lot of real world experience to, you know, what is it like to actually build out a DAO and be a part of a DAO? And DAOs are having a moment. So many things in the Ethereum world are having a moment, but DAOs are especially one of them. And so we want to pick their brains as to what it is like to be a DAO or to do DAO things. What is that like? Tell us, because they have the experience and I want to know about it.

• 3:21Ryan Sean Adams?

  We should also mention another opportunity that's coming down the pike for Bankless listeners. That opportunity is here. Tracer DAO, friends at Tracer DAO, they are launching a new perpetual pools primitive. So this is a new DeFi primitive for leveraged positions. So say you want to go 5X long on ETH. I don't know who would. Sometimes I feel that way. Maybe a 5X short on something else. Perpetual products are the way to do that. They're huge in traditional finance. They're huge on centralized exchanges. They're not yet huge in DeFi. The question is why? It's probably because no one's built out the best product for this yet. But Tracer DAO is doing that. We always say on Bankless, David, that the best way to immerse yourself in the crypto experiences is

• 4:04Ryan Sean Adams?

  to immerse yourself. Go join a DAO. This is an opportunity. To join the Tracer DAO and help them launch this product and govern it. They are looking for people to get involved. There will be a link in the show notes. You can click it. It'll take you to Tracer DAO's Discord and there will be some ways to get involved in the Tracer DAO launch. I believe they are launching these perpetual products sometime in September. We will keep you updated on that. Another DAO, another opportunity to get involved, another way to join the crypto revolution here. David, I gotta ask you the question I ask in each state of the nation before we get into our conversation with Jake. And that is this, what is the state of the nation today, sir?

• 4:42David Hoffman?

  Ryan, the state of the nation is rallied. We are rallied as an industry. I think one of the biggest takeaways, there were so many takeaways after the drama from the regulation last week and the week before. But the biggest, one of the biggest takeaways is that the crypto community showed up in Washington DC. We showed up as, we made phone calls, we sent emails, we tweeted at our senators. And then we had people like Jake and the team over at Coin Center and so many other, other people that participate in political discourse. They showed up and they, and I think everyone was a little bit surprised as to how much energy actually. And I think the, the just the regulators were also did not see how much strength there is in the crypto community.

• 5:22David Hoffman?

  And so I think everyone should be a little bit proud of themselves for, for, you know, doing what needed to be done when the moment came. And I think that's going to be indicative of the future. And also a line of questioning that we have for Jake as well is his own reflections on how rallied the crypto industry was all of last week.

• 5:39Ryan Sean Adams?

  Yeah, I'm super anxious to hear this take. I think rallied is the key word. David, I was proud of us, man. Like people called their senators. We got the word out. Crypto, crypto made its presence known for the first time, I think, at the national level in a way that it hasn't before. So super cool, good state of the nation today. Guys, we will be back with Jake in just a minute. But before we do, we want to thank the sponsors that made this episode possible.

• 6:04David Hoffman?

  Living a Bankless life requires taking control of your own private keys. Not your keys, not your crypto. That's why so many in the Bankless Nation already have their Ledger hardware wallets, which makes proper private key management a breeze. But the Ledger ecosystem is more than just a secure hardware wallet. Ledger is the combination of the Ledger hardware wallet and the Ledger Live app. And if you're used to seeing all of your crypto services and favorite D apps all in one place, Ledger is where you want to be. Not only does Ledger let you buy crypto assets straight from the app, but it also hooks into decentralized exchange aggregators like Paraswap, which makes sure that you are getting the best prices on your trades without your assets ever leaving your control. DeFi never stops growing, and the Ledger Live app grows alongside with it. So click the link in the show notes

• 6:49David Hoffman?

  to see all the DeFi apps that Ledger Live has. And stay tuned as more and more apps come online. And if you don't have a Ledger hardware wallet, what are you even waiting for? Go to ledger.com, grab your Ledger, download Ledger Live, and get all of your D apps all in one place.

• 7:06David Hoffman?

  Bankless is proud to be supported by Uniswap. Uniswap is a new paradigm in asset exchange infrastructure. Instead of a cumbersome order book system where trades are matched with other humans, Uniswap is an autonomous piece of software on Ethereum, which is what Ryan and I call a money robot. No human counterparties or centralized intermediaries, just autonomous code on Ethereum. Input the token you want to sell and receive the token you want to buy. Something brand new in the Uniswap ecosystem is the Uniswap Grants program is now accepting applications for grants. We have been saying this for a while, and we'll say it again. DAOs have money and they are in need of labor. If you think that you have something to contribute to the Uniswap DAO, apply for a grant to Uniswap.

• 7:50David Hoffman?

  Just look at the size of the Uniswap treasury. It's almost $3 billion. This mountain of capital is looking for labor. Do you have something of value to contribute to the Uniswap DAO? No matter how big or small your idea is, you can apply for a Uni-grant at unigrants.org and help steer Uniswap in the direction that you think it should go. That's exactly what we did to get Uniswap to be a sponsor for Bankless, and you can do the same for your project. Thank you, Uniswap, for sponsoring Bankless.

• 8:19Ryan Sean Adams?

  Guys, welcome back. We are so excited to present to you once again Jake Chervinsky, not his first time on the podcast. He is general counsel at Compound Finance. He's a strategic advisor to Variant Fund, DeFi Chair at the Blockchain Association. None of this is legal or financial advice. In fact, Jake, first I'm gonna ask you how you're doing, and then I'm gonna ask for your customary disclosures, but let me ask, how are you doing? Are you sleeping well these days?

• 8:46Speaker 02

  I'm doing great. It's great to be back with you guys. I am not sleeping as much as I'd like, but that's just part of the job, right? Crypto never sleeps. No complaints about that, and thanks for getting my disclaimer started. I'm sure this will sound familiar to everyone. I am a lawyer, but I am not your lawyer. I don't represent anyone in the audience, so nothing I say here is intended as legal advice. Also, as you mentioned, I am general counsel for Compound Labs Incorporated, but I'm not here to speak on behalf of the company, just here to share my personal thoughts on all the craziness that's been going on in DC lately.

• 9:19Ryan Sean Adams?

  Well, that's what we want, is your personal thoughts. And I'm gonna start with this question before you get into the story of the infrastructure build, but like, give us high level. Is crypto winning, or are we losing in Washington these days?

• 9:30Speaker 02

  Wow. Um, I would say both at the same time, if that's an acceptable answer. I think, look, I think we're sort of fighting a war on multiple different fronts in DC, and we're winning some of those fronts. And I don't want to say losing, but I would say we're struggling a little bit more, or we're fighting more of a war of attrition on some of those fronts. I think just like, a quick rundown there is, I think that in terms of our organization in DC, right, the strength and the coordination of our policy infrastructure, we're doing an unbelievably amazing job of that. We're building up really well. We're gaining more influence in DC. We're getting more effective. I think that's great. I think we are also getting through to a lot of elected officials. You know,

• 10:13Speaker 02

  you hear a lot of these senators and other members of Congress saying really positive things about crypto and the promise of innovation that we haven't heard before. So I think we are breaking through. I think the problem is, especially in the executive branch, and most especially within the Treasury Department, we have a tough fight ahead of us. So I guess we're sort of winning and also struggling a little bit as well.

• 10:36David Hoffman?

  Jake, I would like to ask, how did this thing come into your attention? Like, all of a sudden, like, people who don't pay attention to the legal and regulation side of things, we only know when something like this is relevant because people like you guys tell us. But how do you find out when something is relevant? And how did this story of the infrastructure bill come into your brain?

• 10:59Speaker 02

  Yeah, so usually with things like this, those of us who are working on policy get a heads up pretty far in advance of when something like this major legislation related to crypto, for example, is going to come out. And then we're sort of working behind the scenes to try to influence how that legislation will look before it becomes public, or to try to convince folks that they're either heading in the right direction or the wrong direction, et cetera. This was not one of those circumstances. We were all just as blindsided as everybody else out there watching this in the public. We found out, and when I say "we," what I mean is the Blockchain Association, which is the industry's premier trade association in DC, and that's the organization through which I do all of my policy work.

• 11:45Speaker 02

  We found out about the tax provision related to crypto and the infrastructure bill on a Friday, nine days before the language was released in public. And it was sort of an especially shocking situation because BA had been working with members of Congress, including Senator Portman, who was the lead Republican negotiator on the infrastructure bill for many months on what could be included in the infrastructure bill related to crypto. And when we finally saw the language expanding the definition of a broker, and we can get into all of that, we were totally blown away by this. So really, we had about a one-week lead time on everyone else finding out about this behind the scenes.

• 12:29Ryan Sean Adams?

  What's your explanation for why, Jake? Like 11th hour? I mean, it seems like it was, it was almost snuck in. It seems malicious. It seems nefarious. There seems to be something shady going on. Is that one possible explanation? Are there other explanations?

• 12:46Speaker 02

  It's definitely a possible explanation. I always try not to assume malice when you can assume it incompetence, or at least, you know, some other, some other reason other than someone really, you know, trying to pull one over on us. So I think to give the charitable view of how this happened, I think that the negotiation over the infrastructure bill was very tense and very hard for the senators to come to an agreement on what should be in the bill. And that had nothing to do with crypto. Like this was a major piece of legislation. It proposed 1.2 trillion dollars of new spending. And there was a huge effort within the Senate to try to work out pay for provisions,

• 13:29Speaker 02

  which are provisions in the bill that raise new revenue to offset the new spending. So in a perfect world, if you're going to spend 1.2 trillion dollars of new spending, you would also raise exactly 1.2 trillion dollars of new revenue so that you don't have to run the money printers anymore. Right. Which is at least in theory, something that the US government shouldn't be trying to do, right? To increase the size of the debt and the deficit. And there was a really hard time working out pay for provisions to cover enough of the new spending. And crypto just got caught up in that, right? That there is this, I guess you could call it a meme. There's sort of a narrative within DC about tax evasion in crypto. There's this idea that most of what crypto is used for

• 14:13Speaker 02

  is people who are either intentionally evading taxes or people who are just trading on decentralized exchanges, or even on centralized exchanges without a whole lot of oversight and who just aren't paying the taxes that they owe on capital gains. So the view in Congress was, hey, we need to raise more money in this infrastructure bill. Crypto is sort of just a natural, you know, industry for us to go after to try to raise more money. I think that's, that's. The charitable explanation, I think, maybe we'll get into this a little bit more. I think to put my tinfoil hat on for just a second. I think the other thing going on behind the scenes here is a push from the Treasury Department

• 14:53Speaker 02

  to achieve the goal that they tried to achieve in December and January with their proposed rule that Secretary Mnuchin was pushing. That was the last time I came on State of the Nation. I guess I only come on when there are crises in DC.

• 15:06Ryan Sean Adams?

  Yeah, when there's bad, when there's bad stuff happening.

• 15:08Speaker 02

  Yeah, exactly. That's okay. I'm happy to play that role. But yeah, I mean, I think part of this was Treasury trying to expand its jurisdiction and also to expand its warrantless surveillance over a peer-to-peer financial system through the infrastructure bill, even though they had failed at least so far to do so in the proposed rule from Secretary Mnuchin seven or eight months ago.

• 15:30Ryan Sean Adams?

  That that second possibility that it's not incompetence, that that is malice, that it's Treasury trying to push this in is one we're going to explore a little bit later and is particularly troubling. But but could you talk about the the language itself? Why was the language so troubling? What would it mean for the crypto industry? Just give people the TLDR.

• 15:52Speaker 02

  Yeah. So, you know, without reading you the very vague and and very hard to understand language from the bill, the short version is the tax code imposes reporting requirements on types of US persons called brokers. And by person, that could be an individual or a company or an association of any kind. Brokers under the tax code have to prepare Form 1099s. Everyone should be familiar with this, right? If you have a securities brokerage, you get a 1099 from them at the end of every year or at the beginning of every year to help you understand what your capital gains or losses were and therefore what taxes you owe to the IRS. And brokers also have to provide that same Form 1099 to the IRS,

• 16:37Speaker 02

  including all of the KYC, know your customer information that we always talk about. That means the name of whoever was, you know, committing some transaction and their

• 16:49Speaker 02

  Address, their phone number, their social security number, right? All of these other pieces of personal identifying information. The infrastructure bill's tax provision would expand the definition of these brokers who have these reporting requirements to include basically every single actor in the crypto markets. The definition says anyone who is in the business of regularly providing a service that effectuates transfers of digital assets is a broker. So what that means is, in theory, miners might have to do Form 1099s for any user for whom they, you know, include a transaction in a block.

• 17:31Speaker 02

  Potentially liquidity providers in decentralized exchange protocols could be captured by this requirement and have to KYC all of the users of a DEX protocol. Or DeFi interface providers, right? Which includes most of the major DeFi developers and also aggregators, in theory, could be captured by this. And then something we haven't even started to discuss publicly, I think, is how this impacts NFTs. You could imagine NFT marketplaces being captured by this. Even in theory, content creators themselves could be turned into brokers under the tax code. And of course, everyone who was listening to this probably understands there is fundamentally no way for these persons to comply with

• 18:13Speaker 02

  the IRS reporting requirements that are usually imposed on centralized custodial intermediaries. Those types of companies can do this type of reporting. They have direct legal relationships with their customers. They can ask for that type of KYC information. There is no way that a miner or a validator is going to get all of the KYC information for every person using a public blockchain. So that's hopefully a good sort of short explanation for what the issue was.

• 18:40Ryan Sean Adams?

  Jake, I was, I was joking about this on Twitter, but it's almost like the IRS wants you to tell them every time an Axie Infinity is mating. Do you know, like, that's how ridiculous this is, right? Like, these digital objects don't work the way this language thinks that they work.

• 18:59Speaker 02

  Right, and that's where, you know, so you said, you know, maybe it's treasury being malicious. I think it's possible that it's still just treasury being incompetent. I, I, I hope that, you know, for treasury folks listening to this, they don't take that personally. I don't mean it in an insulting way. I just, I honestly do not think that they understand the scope of this language. Um, because I think you're exactly right. The definition in the bill for a digital asset is any digital representation of value recorded on a cryptographically secured distributed ledger, which means basically anything on a blockchain. And it's just, it's insane to imagine that the treasury department actually wants people to have to do, you know, tax reporting for, for things like Axi.

• 19:44Speaker 02

  It just doesn't make any sense.

• 19:46David Hoffman?

  Maybe a possible explanation, and I want to get your take on this one, is that it doesn't even matter if they understood how overreaching and how nonsensical these asks are. Maybe they just wanted to, like you said, extend their jurisdiction as far as possible. And then at some point in time, it'll get rolled back to what's reasonable. But you know, you don't start with just asking the minimum amount. You start with asking the maximum amount regardless of whether it's, it makes sense or not. And then, and then through negotiations and compromises, it gets rolled back to a more reasonable level. But you still got a lot of what you were looking for. How, how does that like explanation land with you?

• 20:24Speaker 02

  That's spot on, and that's, it's a really good point. And, and the thing to remember here is what we're dealing with is an amendment to the tax code. But the amendment itself isn't all we will get before a law like this gets enforced. We will also in all likelihood have a rulemaking process from the IRS to further define who is actually captured by this new broker definition, right? If all you do is look at the broker definition, I think it is, is truly impossible to know who this applies to and who it doesn't. But just like we had that notice and comment period with FinCEN when they proposed rulemaking around the Bank Secrecy Act, so too will we likely have a notice and comment period and rulemaking from the IRS.

• 21:08Speaker 02

  That I think is where we will actually work out who does the Treasury Department, right? The IRS is part of Treasury. Who do they think that this should or should not apply to? But their goal, at least in Congress, in drafting the legislation, is to secure as much authority as possible to make it as hard for us as possible to challenge them if they do decide to have a very broad interpretation of this rule, right? Think of it as a weapon in their arsenal that they can use down the road if they want to, but it's up to them, right? And the more authority they have, right? The more room they have to interpret this language problem.

• 21:48David Hoffman?

  Well, we inevitably always knew that this fight was coming. As many Bitcoiners will illustrate, the state always wants to grow and grow and grow. And at some point, we are going to come to a head with that. And the industry, as we all know, stepped up and a lot of people started, you know, after they identified how big this problem was, a lot of people started working on trying to get compromises in. So Jake, who would you say were, what groups started to form in order to like, you know, fight this, if that's the right word to approach this? What coalitions, you know, coordinated around various amendments? Who were the groups that really came to the head when we, as an industry, realized that there was something that we needed to tackle here?

• 22:32Speaker 02

  Yeah, so I'll give you a few specifics for the folks who I think were most involved. But let me start by saying the entire industry, basically without exception, got together and coordinated to fight this. It was truly an unbelievable experience for me in DC, just seeing all of these different companies and different stakeholders, who frankly have a lot of different, you know, concerns and a lot of different things that matter to them, coming together to fight this one thing. And that's something we often see in crypto. When there's a real threat, we put aside all of our other disputes about which layer one is going to win the smart contract fight and Bitcoiners versus Ethereum and all this stuff. And we just focus and get the job done. And I think that really is amazing. So I don't mean to leave anybody out of this. I think everyone did a phenomenal job.

• 23:17Speaker 02

  But in terms of Of the core group that I was involved in and that was, you know, in touch with the senators who were trying to fix this. It starts with the policy organizations. So that's Coin Center, which is an independent nonprofit think tank in DC. And the Blockchain Association, like I said, the premier trade association for the industry in DC. Then there were also a bunch of the really large, well-established crypto companies in the US that have their own policy departments internally or have hired their own outside lobbyists. Primarily that was Coinbase, also Square, Ribbit Capital, a couple of other venture firms, some of these really big players.

• 23:58Speaker 02

  We all sort of got together, at least once we realized that we were really gonna have to fight this thing out. And once the language went public and we realized we weren't gonna find a fix, sort of through behind the scenes discussions. We sort of got together in a Signal chat and on many very long, sort of endless feeling, video calls to try to work out some kind of solutions to this.

• 24:21Ryan Sean Adams?

  What was weird about all this, Jake, is like the amendment process, right? So we had the initial infrastructure bill, had this language that makes everybody a broker, right? That's kind of the TLDR. And then we had some hope because Senator Lummis and some others, who I'm not gonna remember all the senators on the amendment, but they came up with a provision that would sort of carve out some key groups like software developers, stakers, miners that would be affected, carve them out and make sure that the bill didn't qualify those as brokers. So it felt almost like a mission accomplished, right?

• 25:05Ryan Sean Adams?

  Like it felt like we were headed towards it on a good track. And then some other amendments came out that were much more watered down versions of those, some of which maybe the Treasury got behind. I'm not actually sure, kind of the internal politics. But can you tell us like what happened with that amendment process? And I'm particularly interested in this, like it seemed like with one of the amendments, the more watered down one from Senator Mark Warner, it protect just mining, it didn't protect. DeFi, it didn't protect software developers, it didn't protect staking. And that was a compromise that some in Congress and maybe the Treasury were willing to make.

• 25:47Ryan Sean Adams?

  Like, why? Does that mean Treasury is more concerned about DeFi and staking and some of this this other area? Or does this not imply anything like that?

• 25:59Speaker 02

  Um, so, well, to answer your question directly, this is all about DeFi. I mean, I think we have to acknowledge that this is the Treasury Department wanting to figure out how to get jurisdiction over DeFi. The, the thing about Bitcoin alone, and this is why all of us are interested in DeFi in the first place, right, is if you are trading Bitcoin, you're doing it through a centralized exchange. The centralized exchange is already subject to the Treasury Department's jurisdiction. So the Treasury Department isn't that concerned about tax compliance or frankly, surveillance of Bitcoin transactions. DeFi is totally different. The Treasury Department wants to know if you're buying and selling assets on Uniswap or Sushi Swap, right, or some other decentralized exchange,

• 26:44Speaker 02

  who is responsible for reporting those transactions and those capital gains to the IRS? And how can they figure out who the people are who are transacting through those systems? That really is what this is about. But let me step back and give you sort of the short version of, of how the amendment process went from start to finish. When we first saw this language, we had about a week before the language was public. And so we thought at the time, this has to be a mistake. This doesn't make any sense. We just have to explain to the senators why they have gotten this wrong. We found out very quickly that it wasn't just the senators misunderstanding it, right? That the Treasury Department had played an important role in drafting the language. And also that any revision we proposed was going back to the Treasury Department for

• 27:29Speaker 02

  their approval or rejection.

• 27:31Ryan Sean Adams?

  Wow.

• 27:32Speaker 02

  So at first, we started by saying, let's just remove this provision. This is a huge mistake. We need to actually talk about how to solve this problem, not attach a very meaningful impactful provision to must pass legislation with only two weeks to actually discuss it. That was a nonstarter, again, because the purpose of the provision, at least in theory, was to raise new revenue to offset spending. And the provision had been scored as raising $28 billion in new tax revenue, right? In unpaid crypto taxes. No idea how they got that number, no idea how they even possibly could. But setting that aside, the story was, there's no way we're removing this. We need the money in the bill.

• 28:16Speaker 02

  We then tried to advocate for a different version that would only capture those centralized exchanges and custodians that had customers that are already doing KYC, that frankly, have already agreed they should be doing this reporting and have no problem with it. They just want guidance as to how to do it properly. And again, we were told the Treasury Department was not okay with that solution. And the reason we were given was they weren't sure that it would adequately capture DeFi. So that's why we couldn't get the language changed to only capture the centralized exchanges. The bill was then published, and that's when we started this public process of trying to work out a compromise amendment.

• 28:57Speaker 02

  We were very lucky to have Senators Wyden, Lummis, and Toomey, a bipartisan group, get together to propose language that carved out exemptions for some of these crypto market participants that just fundamentally cannot comply with the requirements. That included miners. And the way the original amendment read said, "The language should not be interpreted as applying to any person solely engaged in the business of validating distributed ledger transactions." Right? That would cover miners of any kind, whether it's proof of work or proof of stake or proof of authority or some other consensus mechanism that we've never, you know, thought of before.

• 29:39Speaker 02

  The Treasury Department, and again, this is what I'm told through hearsay, but this is at least as I understand it, the Treasury Department was worried that we, industry, would try to say validating distributed ledger transactions is what Dex LPs do or is what Lightning nodes do. We would try to say that exemption applies to more than just Layer 1 miners and stakers. And as I understand it, that's why we then got a competing amendment that specifically said the exemption is only for proof of work miners.

• 30:17Speaker 02

  And we, obviously, that's insane. So, well, I'm sorry to keep rambling on here, but just to finish the story. That proposal came from my Senator Mark Warner, a Democrat from Virginia. And the, the real issue there was, as we've heard from Elizabeth Warren for a while, there's a big environmental argument about proof of work mining. So the idea that you would carve out an exemption for what is viewed as the really bad, horrible climate change-causing ocean boiling, proof-of-work mining, but then not have that exemption for proof-of-state validators, that just made absolutely no sense. And so eventually, we were able to work out, at least the senators were able to work out a compromise amendment

• 31:01Speaker 02

  that did cover validators of all kinds. It wasn't a perfect amendment, but it was at least something that helped us clarify the boundaries of this new definition. And that's what we went into the very final day, hoping that we would get passed. And unfortunately, we were not successful.

• 31:17David Hoffman?

  There is so much to unpack here, and I really want to illustrate what I'm seeing as a result of this particular part of the story, because I think this particular part of the story has so much meaning and importance in it. The Treasury Department or the people that were trying to introduce all of this overbearing reporting requirements carved out, were okay to carve out a proof-of-work section to that protected miners because they were going after DeFi, because they needed some sort of route to, like you said, Jake, capture DeFi. All of these things, all the, you know, the LPs, validators, all the DeFi stuff.

• 31:54David Hoffman?

  If they, if everyone has to report as individuals, then that is how this, the Treasury Department or just regulation at large can capture DeFi. But it's all, but we know that it's completely nonsensical by the very nature of it because of all the, all the same, all the reasons that we've discussed. But this is exactly what Ryan and I talk about when we talk about the bankless thesis. You can't actually capture DeFi. That's the point. And I think one of the reasons why this has elevated itself to such a massive story, both inside of crypto and outside of crypto, is because of the inherent frictions between distributed blockchain technologies and the nation state. Like, it's designed to not be captured.

• 32:38David Hoffman?

  Meanwhile, the nation state is designed to capture. And I think one of the reasons why the story is so big is because this is the first big moment that these two things finally came to a head in the Senate. And will probably likely do that into the future. And to me, I actually feel a little bit validated by what happened here because it's explicitly validating of the bankless thesis, is that you need a distributed proof of stake smart contracting platform in order to "live a bankless life." Those are my takeaways from this part of the story. How do you feel about that?

• 33:14Speaker 02

  I think you're right on track. I mean, I do think there is, at least in terms of how traditional regulation has been done, there is, there's a deep conflict between how DeFi operates and what the government expects from a traditional financial institution, right? And I think this tax issue is a really perfect encapsulation of that. Typically, the way the IRS figures out what taxes it is owed is by deputizing intermediaries in the financial system to report to them who owes what. And that just doesn't work in a financial system, the purpose of which is to remove intermediaries from peer-to-peer or peer-to-protocol transactions.

• 33:56Speaker 02

  Now, my idealistic hope is we can find a way to make sure that people who owe taxes are paying the taxes that they owe without also saying the solution here is to require intermediaries in all of our financial transactions and also to require warrantless surveillance of every US person and everybody else in the world who could even possibly owe taxes. Because to me, that's just... The wrong approach to the financial system from the first place. Whether we will be able to figure something like that out, I think is an open question. I think you guys hopefully will agree with me that we spend way too much time trying to figure out how to pay our taxes. Right? Like most people here are not trying to dodge taxes.

• 34:41Speaker 02

  We would love to have better tools and better resources to get that right. It's just a question of is government going to try to fit the square peg of DeFi into the round hole of an intermediated regulatory regime? Or are we going to have the freedom to innovate and figure out a better way to make this work?

• 35:01Ryan Sean Adams?

  Yeah, what's so weird about this is like, and part of the bankless platform from like day one has been like, hey, like, if you're in a jurisdiction, pay your taxes or you have to like, these things are treated as capital gains. What's so interesting to me is like this, was it 28 million or billion? Excuse me. There's a, I don't understand where they're coming up with this number because crypto's tax obligations haven't really changed. What they've added is like surveillance and reporting type obligations. But the, the, the tax obligations themselves being treated as capital gains or not, hasn't changed at all. Which is super interesting. So this, this kind of begs the question because you kept going back to like talking about Treasury's influence on this.

• 35:45Ryan Sean Adams?

  And what's super interesting is like, I don't recall ever electing, you know, Treasury Secretary. Right? Like, why is Treasury so involved in an infrastructure bill? For one, like that's one. And then why are they involved in, in kind of setting this, this kind of policy? So can we have a conversation about like, who, who do you feel is, is out to get us? In this bill? And by us, I mean the DeFi movement, the bankless movement, the crypto movement. And why? What are their motivations, Jake?

• 36:17Speaker 02

  I totally agree with you. I find it pretty disturbing. I think I would say it's pretty un-American for the Treasury Department to both write the laws and enforce the laws. That is not how our system of government is supposed to work. It is Congress's job to write the laws and it's Treasury's job to enforce the laws. I think it is totally fair to say that Congress can consult with an agency that has expertise about how the law will be enforced, but the idea that secretly behind the scenes, it isn't the senators we're negotiating with or trying to explain these issues to, it's some unknown bureaucrat buried in the Treasury Department. To me, that's, that's, it's a deeply troubling situation

• 37:01Speaker 02

  to be in. In terms of who is it, I actually don't know. And again, that's part of the problem, right? There are folks over there who are having an outsized influence on the legislative process, who are unknown to us in industry and also unknown to the public. And the idea is, if we are being properly represented in DC, we should be able to hold our elected officials accountable for the decisions that they make. That's very hard to do when these decisions are coming from unknown sources within the executive branch. I think though, just to like give you my best answer to the question, I think it's the same people who we've been having this conversation slash debate with for a

• 37:43Speaker 02

  long time, which is folks within the Terrorism and Financial Intelligence Division. It's folks within FinCEN and within OFAC, the Office of Foreign Assets Control and the Financial Crimes Enforcement Network. And I think it's, it's people who are working with the FATF on new anti-money laundering regulations. I, I don't know that for sure. There could be folks in the IRS who are involved in this as well. To me, it's just, we should know who these folks are and what they think and be able to actually talk to them about it rather than having this process play out.

• 38:15Ryan Sean Adams?

  Take what are your best guesses on what they want? Like specifically, what do they want?

• 38:21Speaker 02

  So I guess two things. Um, one is it's really hard to say they, uh, even though I've been saying it already for the last half an hour. There are a lot of different people within government with a lot of different interests, and that's true even within treasury. And a great example of that is the former acting director of FinCEN, Michael Mosher, who was one of the greatest supporters of crypto innovation within treasury. And you would imagine FinCEN as being sort of the, you know, ultimate enemy of crypto because FinCEN's goal is to surveil everything. And crypto is a financial system that is hard to surveil. That's not true because there have been folks even before him,

• 39:03Speaker 02

  Director Blanco and before him, uh, you know, Director Calvary. There have been a lot of people at FinCEN who have actually been very constructive on the industry. So it's really hard just to say they and have any real sense of what you're talking about. But I think in terms of like, who are the stakeholders who have an interest in this? I think there are a few. I think there are the people who genuinely just want to want people to pay their taxes. And that is hard to disagree with, right? People should pay their taxes. And it's okay for the government to carry out efforts to figure out who is and who is not paying their taxes. Then there are folks who want more surveillance over DeFi in general because they think that DeFi is an illicit finance risk, right?

• 39:48Speaker 02

  This is the anti-money laundering piece of this. Maybe it's not really about taxes. It's just about knowing who is using this system so that the government can surveil their transactions and figure out if they're doing something that the government doesn't like. And then I think the furthest and maybe most problematic view that is held by some, but hopefully not many, is crypto is just bad. Right? A financial system with no intermediaries is simply worse than the financial system that we have. And really what should be done is we should use distributed ledgers only in the enterprise blockchain sense, where you create permissioned pools and all the same laws apply in exactly the same.

• 40:30Speaker 02

  Way they always have in the legacy system because why would we do this any differently? We should have financial exclusion as the presumption and only let people get access to financial services. If they can prove who they are and that they're not a bad guy. And that really this law is just leverage to try to accomplish that ultimate goal of basically destroying everything that we're building. And again, like I'm putting my tinfoil hat on, assuming that that is the policy position of the United States government. I do not actually think that it is, but there are some folks who I, I believe would prefer to see a world of, of, you know, only permissioned pools and nothing that looks like the DeFi that we're, that we're excited about here.

• 41:15David Hoffman?

  Jake, the last time we had you on, it was right after the FinCEN proposed rule, which was kind of the same energy as, as this whole debacle with it, with the tax bill, same sort of like reporting requirements or same sort of attempted capture of the industry by, by regulators, right? And we speculated at that time that, you know, well, it makes sense that Steve Mnuchin, who we, you know, suspected was really leading this effort. Well, he's like friends with a bunch of bankers and there's a lot of, you know, people in that particular industry, which would love for these, these regulations to come in and really disrupt our industry. There's definitely a, a side of the, the, of the world that could have been lobbying for this regulation and against our industry.

• 41:58David Hoffman?

  Do you think that showed that side of the conversation is even relevant? Were there people maybe lobbying behind closed doors that we don't really know about who are trying to get something like this included into the bill?

• 42:12Speaker 02

  It's possible. Um, and I understand the logic behind it, right? The assumption that the bank lobby is, is really behind all of this. I haven't actually encountered anything to suggest that that's the case. And nothing that I heard from, you know, Hill staff or, uh, you know, from any of the folks we were talking to suggested that the bank lobby was, was really a big player in this. I really do think this was much more about making the numbers look good on. The overall infrastructure bill and also accomplishing this somewhat hidden agenda that the Treasury Department has. Now, is the bank lobby, you know, supporting a provision like this? Yeah, sure. Of course, they they like this, right?

• 42:57Speaker 02

  They're not our friends. They've gone out of their way to write material that makes absolutely no sense, but attacks crypto as a whole, including just attacking Bitcoin. So, you know, I'm not saying that the the bank lobby is friendly to us at all. I'm just not sure that we can blame them for this.

• 43:14Ryan Sean Adams?

  You know, it's interesting, Jake, is I kind of contrast this position with like the position that that China is taking towards cryptocurrency. Right where, you know, China is much more explicit. Get it out. We don't like the Chinese government does not want free money cryptocurrency in their economy at all. They don't even want mining to occur within their borders. Right. What's really interesting is we had Richard Turner on the podcast, who who wrote a book called Cashless about the Chinese central bank digital currency. Is rather than stick with a status quo shitty banking system that they had, you know, analog paper garbage. They actually allowed their big tech to come in and eat that industry. And essentially become the new fintech, the new banking, which is an interesting approach.

• 43:59Ryan Sean Adams?

  Right. It's like very explicit, like China doesn't want crypto inside of its borders, the government at least. And so, but but it is digitizing its system through a centrally controlled apparatus, partially through big tech and then eventually their own central bank digital currency. Feels to me like the US is is like if they're against crypto, they're picking the worst of all worlds because they're just propping up the status quo banking system that is terrible in the United States, like our banking system compared to crypto, like writing checks versus sending USDC. It's absolutely insane, like the difference between those two. And so it feels like this, I don't know, half-ass authoritarianism where we're like not even doing that well.

• 44:45Ryan Sean Adams?

  We're just like keeping the status quo. We're not going full China on the thing and digitizing the system and making. Centralized, but actually making it good and centralized. And we're trying to suppress crypto. And I say we, and I'm not saying that the story is written and that this is the policy. But there are some in that third camp in government who clearly kind of want that, who clearly want to suppress crypto. But the irony is they're not even providing a better centralized solution, are they? They're just keeping with our status quo banking system. No wonder we're angry. No wonder we're rebellious, right? Like, we just want a better banking system. We see this in DeFi, and we're not getting it.

• 45:24Ryan Sean Adams?

  So I don't know if you have comments on that, but like, what is the US's approach to this digital currency revolution? Like, what's their strategic plan? Do they even know that they're playing in this game?

• 45:40Speaker 02

  I do not think they know, and I do not think that there is a strategic plan. And I think one thing coming out of the Trump administration, which had no national strategy for crypto, right? It was just sort of whatever agency had had a view on crypto, they did whatever they wanted within their own world. And that's why we had Secretary Mnuchin trying to go after crypto at the same time as we have Brian Brooks at the OCC, who was one of the most constructive of any regulator we've ever had. And I think coming into the Biden administration, there was a lot of hope that the administration would have its acts together

• 46:16Speaker 02

  and come up with a holistic national strategy about how digital assets would fit into the future of the financial system as supported by the United States of America. And we have not seen that yet. And unfortunately, because the administration, and I'm not blaming them at all, right? The administration has tons of other things to deal with. But I think what's happened in the void of a clear message from President Biden and his team on how the agencies should approach this issue, the void has been filled by other loud voices like the voice of Senator Warren. So this all kind of started a few months ago when she really decided to take on the mantle.

• 47:01Speaker 02

  Of hostility against crypto, right? She really decided, I think, very affirmatively that her view on crypto was she was going to be an antagonist and she was going to push negative narratives, even where I think those narratives are not true or not based in fact. And I think what's happening now is because she is a very influential member of the Senate, a lot of what we hear, even from folks like Gary Gensler, you know, I think this goes far outside of just the scope of the infrastructure bill. What we hear is language that follows what she is saying because she's the one who's setting the tone from the top. And I think that your reference to what's happening in China is so astute because this

• 47:45Speaker 02

  is the conversation we need to have with the administration. And it's not an anti-money laundering question or tax compliance question. It's a national security question and it's a geopolitical foreign policy question, right? Where are we positioning ourselves when we have one of our greatest foreign adversaries, China, trying to take over the world through the global financial system, right? And they have a very clear path that they're, that they're trying to sort of push their own interests through in, in the, you know, in the digital yuan that they're trying to spread around the globe. We need to have a, a policy to address that concern. And I think that is really where we're going to make progress in DC is talking to those

• 48:28Speaker 02

  folks who understand the more important US interests at stake more so than is there someone who traded on Uniswap who we can't identify, who like sold Matic at a 10x and isn't paying their taxes, right? I think that's the conversation we have to start having.

• 48:45David Hoffman?

  Jake, I want to get your perspective as to how center stage this, all this drama was. When we're inside of the crypto world, we kind of think that we're the center of the universe, right? And ultimately, every, everyone's coming to crypto no matter what. But from the outside of the crypto world, maybe this was just like a blip on the, on just the overall story of Congress, because that's what, this is what they do. They debate about things and then they move on. How big of a deal was crypto? Cause it's, it seems like it could have been like the center of the whole entire world for at least a brief moment in time. Like, can you kind of put into perspective how big this thing was?

• 49:21Speaker 02

  This is a big deal. I think we should not undersell this. A four-page section of a 2,700-page bill held up the entire bill for about four or five days just because of crypto. That's a really big deal. And as that was going on, you saw articles in all of the major newspapers about the crypto industry's newfound lobbying muscle in DC. And crypto hit the radar of a lot of people who had never thought about this before. I was getting calls and emails and texts from people all over the place who never talked to me about crypto, saying, hey, I just saw this news article

• 50:03Speaker 02

  or I just listened to this podcast and it was all about the crypto provision in the infrastructure bill. That is really, really crazy and it is a really big deal. Now, not to oversell it either. There were other amendments that also held up the process. We didn't ultimately succeed in getting the amendment that we wanted. So I don't think we can claim victory just because we made some headlines. But this really was a turning point, I think, for our position in DC and also just in the public consciousness, just because of how effective we were at spreading our message in the face of all this.

• 50:40Ryan Sean Adams?

  Jake, it had to be the first time that many senators were talking about these things, like terms like staking, terms like decentralized finance, actually understanding that. I wonder if the term uniswap was uttered on the Hill sometime that day. So that in and of itself, as Dave and I often say, the most bullish thing for crypto is to be understood. That in and of itself is a small victory, wouldn't you say?

• 51:04Speaker 02

  Yeah, definitely. And I think, you know, here's one weird thing throughout all of this. As we were explaining how potentially devastating this provision could be, the price of everything just kept going up, right? A lot of people reached out to me to be like, hey, if this is really so bad, why doesn't the market agree with you? And look, I'm not going to speculate on what the market is thinking because who knows what the crypto market is ever thinking about anything. But I think one good answer is Yes, this bill is a threat, but more important than that in the consciousness of market participants was how effectively the industry was able to rally and defend itself in DC. I think a lot of people came away from this, investors, thinking, man,

• 51:48Speaker 02

  the biggest fear I had about putting money into Bitcoin or Ether or what have you was regulatory risk, because I thought if the government decided it didn't like this industry, it would just steamroll the industry and there's nothing anyone could do to stop it. And that is obviously not true, right? This isn't even the final boss. We could talk about what the final boss is. This is like an intermediate fight and we did an extraordinarily good job of showing how powerful we are fighting against that. And to me, that's more bullish than it is anything else.

• 52:18David Hoffman?

  Well, Jake, you actually just answered the next question I was going to ask, which is like, you, you said, we, we lost the fight. We, the amendment did not, the amendments that we wanted did not get included. But everyone seems really optimistic about the future with regards to the relationship between the crypto industry and regulators. While the perspective I've had is that this regulation was so incredibly bad and backwards that it was actually bullish, right? It was, it's so unenforceable and, and no one like at me as like, uh, I mean, I guess I'm not much of a service provider, but like, even if I was, say, for example, I was Dan Finley at MetaMask. I, I personally wouldn't feel too threatened just because of how nonsensical this whole regulation was.

• 53:02David Hoffman?

  Meanwhile, we had like a fantastic, like real life fire drill that actually illustrated to the world and to ourselves that when the time comes, crypto shows up to protect itself when, uh, in, in DC, right? Uh, and so my opinion is that this is one of the most bullish events for crypto that we've ever seen. And largely to your point, uh, we are now starting the era of crypto regulation. This kind of feels like a starting pistol for that. And it starts off as something just like crazy and chaotic and weird, but at least it gets the, the ball rolling. And so people that perhaps were scared about this industry can now see the process of crypto

• 53:43David Hoffman?

  regulation, uh, begin to unfold and become more and more comfortable with it. Any reflections on that?

• 53:51Speaker 02

  I totally agree with that. I think, I think a couple of things about why it's okay to be bullish about something that seems so bad. And I could be accused of being too optimistic about this, but this is just my, this is my perspective. I think first of all, this fight is not over, right? We didn't get the language amended in the Senate, but we will have another shot in the House. Now, I don't want anyone to get too excited about that for procedural reasons. It may be difficult to get an amendment in the House. But even if we don't get that, we could in theory get new legislation pushed through that fixes this in the future, right? And we have friends in Congress who are already talking about the next bill that

• 54:32Speaker 02

  they can start moving through a fix to this, to this overbroad provision. Also, we have this rulemaking process that we expect with Treasury to actually define what does the broker definition mean? Who actually has to do this reporting? And I think that even though we didn't get the amendment through that we wanted, the Treasury Department has backed down a lot in public from its original position. So when this started, we heard reports that Secretary Yellen herself was making calls to senators to lobby against the Widen Amendment that we were in favor of. That Treasury was supporting the Warner Amendment, which was this competing amendment that only covered

• 55:14Speaker 02

  proof of work mining. But after we had had this whole fight, and I think after a couple of things happened, I think one was Senator Warner realizing that he had maybe not fully understood the, the impact of the language that he himself had proposed. I think also folks in the administration learning more about what was going on. I think Treasury realized it wasn't on as strong of ground as it thought it had been, realized that it really couldn't steamroll the industry, and backed down from its position about using this language to try to go after DeFi. So we're hearing now that there's going to be guidance from Treasury explaining who this really applies to. And maybe it is only going to be interpreted to apply to those traditional brokers, right?

• 55:57Speaker 02

  The centralized exchanges and custodians, et cetera. And if that's the interpretation, then great, that's not really going to impact the DeFi market at all. So that'd be a fantastic result. And then even in the worst case scenario, I don't think we could overestimate the capability of the developers in DeFi to engineer their way around regulatory issues. And that sounds kind of like an inappropriate thing to say. I don't mean it inappropriately at all. What I mean is, what we have done so far in DeFi is figure it out. What are the issues that regulations are trying to address in the traditional financial

• 56:37Speaker 02

  system? And then how do we build technology that natively solves those problems without having to coerce intermediaries into solving those problems for us? And I'm very confident that if you just tell us what the why is and give us 15 months of development time, the DeFi market structure could change in a pretty incredible way, but in a way that would be very resilient to a regulation like this, even if it's interpreted in a hostile way. So I'm still feeling really good about the future of DeFi. We've got a lot of fighting left to do. But yes, I think it's totally fair to be bullish coming out of this.

• 57:14Ryan Sean Adams?

  Well, that's really great. And Jake, we have so much more to talk about, including maybe other reasons you're bullish. Maybe we could talk about what good regulation looks like. Maybe we could talk a bit more about that final boss battle that's coming up and how to prepare for it. But before we do, guys, we want to thank the sponsors that made this episode possible.

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• 58:17David Hoffman?

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• 58:59David Hoffman?

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• 59:43David Hoffman?

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• 1:00:07Ryan Sean Adams?

  Hey guys, we are back here with Jake Trivitsky, talking all about the regulatory situation in Congress. Jake, Jake, I want to read something that Ryan Selkis said, by the way, Ryan's coming in the podcast bankless listeners pretty soon. So we'll get his take directly, but I think this tweet really resonated. I'm just going to read it out. Ryan Selkis said, "I'm sick of feeling like we have to apologize for our early stage and walk on eggshells around politicians and regulators. We built a $2 trillion financial market from scratch in less than a decade with absolutely no institutional help and active encumbrances from government." And then he goes on to say, meanwhile, banks give you point 025% interest.

• 1:00:47Ryan Sean Adams?

  I won't read the entire rant, but like that feeling of, man, why should we have to walk on eggshells about this stuff? Like crypto should be proud of what it's built. And we feel like, I think Ryan is speaking on behalf of the industry, like we feel like Congress should recognize that. Everything that America has helped innovate. I mean, many of these DeFi founders and entrepreneurs are based in the US. Like what we've built, we should be proud of that. What's your take on that tweet and that and that energy?

• 1:01:21Speaker 02

  Well, I agree, and it resonates with me too. And I think Ryan is really on to something here. So let me tell you first my thoughts about the tweet and then the context of like what Ryan is doing right now, which I think is exciting and worth talking about. It is very frustrating to feel like we have to apologize for everything that's happened in crypto. And I think there's sort of two ways that I personally experienced this. One is the view of crypto and this look, it's understandable for people who are not in this day to day. The view of crypto is more of Dogecoin than it is of DeFi, right? Most of the perception of what's going on in crypto is just speculative trading of meme coins and people who are going to get, you know, wrecked, putting money into

• 1:02:04Speaker 02

  illiquid JPEGs, just like they do putting money into call options on games, you know, GameStop at the top of, you know, Wall Street Bets powered rally. So I think a lot of what we have to do does feel like apologizing for what the industry has accomplished, even though the focus is on sort of the less important or the less exciting innovation, right? And more on sort of the messy trading of what's going on. And that that is frustrating. The other part of it is, we often get asked questions about the promises that we that we discuss that that DeFi could have for the world, right? We talk about financial inclusion. We talk about everyone having access

• 1:02:45Speaker 02

  to the same quality of financial services, no matter where they are and what their background is and all of these other major benefits of innovation. And what we get asked is, well, why isn't this happening yet? Why aren't there six billion people across the world using these systems? Why do you keep talking about financial inclusion? Where is the evidence for it? And it just feels like talking about the internet in the 1980s. And I, and I don't mean in the 1990s, right? We always have this conversation about, oh, is it 1992 in cryptocurrency? Or is it 1999 in cryptocurrency? I think we're so much earlier than that even. It took the internet decades to develop. Whereas Bitcoin has existed for what 13 years?

• 1:03:28Speaker 02

  Ether, you know, Ethereum's been around for six. DeFi has existed for three or four. It's just so early and it's very frustrating to have to apologize for the fact that we haven't already recreated the entire global financial system on DeFi rails. So I think that is, is very frustrating. The thing about what Ryan is up to, aside from the message, is Ryan is talking a lot now about having a new type of association or organization in DC that looks a lot more like the National Lifeful Association, the NRA. And say what you want about the NRA. We shouldn't get into like second amendment issues now.

• 1:04:10Speaker 02

  But the point is, the NRA is one of, if not the most effective lobbying organizations in the country just because of the passion of its members. It is an individual membership organization, right? Individual Americans pay whatever it is, 40 bucks a year to get a card saying they are a card carrying member of the NRA. And there are millions of them. And when something happens that threatens the rights of gun owners, those members of the NRA are extraordinarily passionate and effective in, in mobilizing their grassroots and having an impact in DC. What Ryan is talking about doing is creating something similar for crypto.

• 1:04:53Speaker 02

  I think it is probably true that there is no other industry aside from folks who are really excited about firearms, who are as passionate as we are about, you know, the, the technology that we are, are, you know. Engaged in and that we want to use and that we want to have the freedom to use. So I think his idea is a really good one. And I think if you're following him now, a lot of what he's doing is just testing messages for that type of organization. And I'm, I'm pretty excited for, uh, for what will come out of that.

• 1:05:23Ryan Sean Adams?

  Yeah, I, I just want to interject with one, one, one thing, one criticism that I've heard in, in mainstream. It's like, well, if crypto was this big decentralized system that you guys always talk about not needing sort of the nation state's blessing. How come you are obsessed with the nation state's blessing? How come you're going to, to Capitol Hill and saying like, you know, please save crypto. And my thing is this is not about saving crypto at all, right? This is about saving the U S from itself. Like crypto is going to be just fine, Jake. If it's not going to happen in U S borders, it's going to happen somewhere else around the world. And the U S will have just exited itself from the next innovation wave of the internet.

• 1:06:07Ryan Sean Adams?

  But like crypto is going to be fine. This is really a fight for the U S. Can the U S support innovation of the future? Can it support the freedom that cryptocurrency brings and the self sovereignty? What would you say to that?

• 1:06:22Speaker 02

  As the saying goes, you can't take crypto out of your country, but you can take your country out of crypto.

• 1:06:30Speaker 02

  That I think-

• 1:06:30Ryan Sean Adams?

  I've never heard that. It's amazing.

• 1:06:32Speaker 02

  Well, there you go. I think it's, you know, it's a little bit, um, uh,

• 1:06:36Ryan Sean Adams?

  You're gonna see a Ryan shot at a tweet later about this.

• 1:06:39Speaker 02

  But, uh, no, I mean, I think it's like mostly accurate. And I think that's what's going on here, right? Like crypto is not going anywhere. And I think one of the, one of the missing pieces here is we can argue all day and all night about what regulations we think should apply to DeFi protocols. And if a governance system should vote to create some new type of tax reporting, sort of like at the protocol level, or if there's some other kind of solution or what have you, there will always be a fork of that DeFi protocol that does not have whatever that compliance measure is, period, end of story. DeFi is not going any- The only question is, are we going to have two different crypto systems?

• 1:07:23Speaker 02

  One that is clean and custodial and intermediated and permissions that governments say, hey, if you're a company in our jurisdiction, this is the one that you get to use. And then a separate Wild West version where all the terrorists and criminals are. And this is at least like in the minds of of government. This is how I sort of think they view this. Or are we going to treat DeFi the way that we treat the internet? Which is, this is a really big open playground where where the interesting development happens, right? It's in the open source world. It's in the vibrant ecosystem where anybody in their basement can build new software and deploy it to the world and have it, you know, be tested live. Is that the world that we're going to have like we do with the internet?

• 1:08:07Speaker 02

  And hopefully, hopefully, that's where we'll end up. And I do think you're absolutely right to say the real impact here is not on crypto. It's on the United States' interests as they relate to crypto.

• 1:08:19David Hoffman?

  Jake, I'm in total agreement with you about what you said about the the massive amounts of of potential people that there are that might just be a single issue voter for crypto for the rest of their lives. And there's a reason why we address the bankless community as the bankless nation. That's more or less who we're talking about. There's so many people who have dedicated their lives to this whole entire revolution. Me and Ryan as two examples, you as well. And we have too much at stake. Both our all our money and our savings and our jobs to care about anything else. I mean, I'll only speak for myself at that point, but to care about anything else that really ends up on like the the Congress floor.

• 1:09:02David Hoffman?

  And there's and so the and it's it's kind of a fun little trap. It's like, oh, you find out about crypto, you buy some Bitcoin, you buy some ETH. Oh, you go down the rabbit hole, you get really interested in it. Then you kind of become like a crypto maximalist. And now all of a sudden, you're too invested to to not fight these fights. And one of the big stories that came out of of this is how many calls, emails and tweets were were sent to Senators and regulators out of individuals like ourselves. And so I want to pick your brain about that part of the story. When it comes time to do this again, what is the most effective thing that that we as individuals can do to help sway the regulators into the directions that we want them to go?

• 1:09:44David Hoffman?

  What did you see worked during the last two weeks that that helped the industry like represent itself?

• 1:09:51Speaker 02

  Yeah, great question. So at least in this fight, there were two things that I think were really extremely effective. One was making calls. The second was sending tweets. You know, emails are helpful too. But the thing about emails is the congressperson, right, the representative or the senator is not reading your emails. The emails go to an inbox. The inbox gets checked every couple of weeks by a staffer. The staffer will, you know, put together a report saying, here is how many emails we got on this issue. Here's how many of them encouraged us to do this or that. But emails are not that helpful in the moment.

• 1:10:30Speaker 02

  Calls are much more helpful, right? You're still not talking to the senator or representative, but you are taking up the time of their staffer who is on the call with you, and that's going to get back to the member much more quickly than an email does. So calls are way more effective than emails. Tweets are kind of a funny thing. So you might think, well, what's a tweet, right? That doesn't mean anything. But the truth is, most of these politicians have their phones in their pockets with them all day. And they're checking Twitter, right? I mean, think about President Trump. He conducted his presidency on Twitter and they are checking. And if you blow up their phones with tweets saying, hey, Senator, I'm one of your constituents, you better vote no on such and such.

• 1:11:13Speaker 02

  They do pay attention to that. That can actually be the most effective thing to do.

• 1:11:17David Hoffman?

  Because it's their eyeballs.

• 1:11:18Speaker 02

  Yeah, exactly. And getting their attention. And I think like in terms of how do we influence them? There's a bunch of things we need to do, but first and foremost, they just need to know that we are here and that we care and that there are a lot of us and that we are very, very loud. And that I think is something we did extremely effectively over the last few weeks.

• 1:11:40Ryan Sean Adams?

  Jake Trivinsky asking us to rally on Twitter. Can do, sir.

• 1:11:43David Hoffman?

  Oh, absolutely.

• 1:11:44Ryan Sean Adams?

  There every day. You know, it's funny, they say they've called Twitter sort of the digital town square, right? And like, it kind of is. If you can reach a politician that way, that's fantastic. I thought you would tell us that tweets would be the least effective because members of Congress never check Twitter. But I guess all of that has changed in the Trump era, hasn't it?

• 1:12:07Speaker 02

  It does. It has changed a lot. And the other thing is even more effective than just tweeting at them is if they tweet something that is positive, get them some engagement, right? They are human beings. They like the dopamine hit just as much as the rest of us. And one of the coolest things was I looked back when Senator Toomey tweeted something positive about, you know, he said, "The language in the infrastructure bill is unworkable. I'm going to propose an amendment to fix it." He got more engagement on that tweet within a few hours than any other tweet he had put out in 2021. And that's him with his phone tweeting, right? I'm guessing that, but I'm pretty sure. That's not just some staffer who has access to his Twitter account. That kind of stuff really, really matters.

• 1:12:52Speaker 02

  So I thank both of you guys and everyone else out there who is, you know, contributing to that effort to show the senators how much we care.

• 1:12:59Ryan Sean Adams?

  You definitely have our support there. Can I ask you a broader question about building coalitions in DC? So how, maybe we use sort of a case study, right? So how can we get senators and members of Congress on our side? Maybe through some examples? And why are some senators kind of pitted against us, right? So like, it's kind of a question of why is Elizabeth Warner, Warren, excuse me, so against crypto? It's kind of a question I'd pose to you. Does she see some political loss there? Like, what are the reasons? And then juxtapose that with why someone like Senator Lummis is so pro crypto? Can we repeat that story in other cases?

• 1:13:43Ryan Sean Adams?

  What are the wins for Senator Lummis in being pro crypto?

• 1:13:47Speaker 02

  So, big question. Let me, let me tell you what I think about Senators Warren and Lummis first, and then about sort of how we can move the ball forward in DC. I think for all elected officials, you have to consider both what they are saying and then what they really think, right? What their actual incentives are. And those are not always the same. In fact, I would say often they diverge. I think sometimes, though, you can learn a lot from what the senators or the members of Congress are actually saying. So let's listen to them. Senator Warren, I think, is an unfortunate case of someone who could be a huge supporter of crypto. And she gets almost all the way there. And then at the last minute, she just sort of turns the wrong direction.

• 1:14:29Speaker 02

  She is 1,000% with us on the problems with the traditional financial system, right? She, just as much as we do, thinks that the big banks should not have as much power and influence as they do, that our financial system should not be dominated by too big to fail institutions that privatize gains and socialize losses. She's as much a champion for that as anybody. I think the problem is when she looks at crypto, she doesn't see a solution to that problem. She just sees different problems. And again, a lot of this comes down to her focusing not on the promises of a decentralized financial system based on credibly neutral protocols.

• 1:15:11Speaker 02

  Rather, she's looking at things like Dogecoin and other, you know, stable coins, like Tether, for example, which has been a real hot button issue in DC, where promises are being made about the stability or the reliability of these systems. But in actuality, it just looks like a fraud or something that lacks the consumer protections that she wants to see. So someone like Senator Warren, I think, is looking at the banking problem and saying, "The solution is not to get rid of banks. The solution is to do a better job of regulating banks and to make banks stop being so bad through regulation." And that's why we see things like the Stable Act, which says, "We're okay with stable coins, it's just..."

• 1:15:56Speaker 02

  Many charter banks should be able to issue them. So that's, I think, what we see on that side. Um, with someone like Senator Lummis, again, you know, what she says is that she's a believer in decentralization. And I think her other policy positions and her general approach to how government should work is totally consistent with the idea of having a robust private sector, including private creation of money, which is the final battle, right? We probably won't get into that too much today, but like, that's the big question we have. Is it okay for private actors to create money? And that, I think, in a world of MMT, where government needs to have tight control over the money supply,

• 1:16:40Speaker 02

  the creation of money as well, um, through modern monetary theory, it's really hard to make an argument that private actors should be able to create money. I think the last thing to say about this is, how do we influence folks like Senator Warren? Or others who haven't decided really to take a position on crypto yet, like Senator Warner, who came in with this problematic amendment in the middle of this battle? And then I think realized, wait, I'm getting way too deep into a controversial issue that I'm not really up to speed on yet. Let me step back and figure out what's going on here. I think there's a couple of things. One is, we just need better arguments and we need better, we need to marshal the evidence more effectively so that we can have anecdotes

• 1:17:25Speaker 02

  of cases where this technology is genuinely helping real people in the world in a way that they could not have without crypto. And there are these anecdotes, we talk about them all the time. We just haven't done a really good job of stringing them together into a coherent narrative. And because we failed to do that, it's much more easy for the, you know, boiling the oceans narrative, or the money laundering narrative, or things like that to take hold. So we just have to do a better job of articulating our position. The other thing is, we need to show candidates for office that if they are there for us, we will be there for them.

• 1:18:06Speaker 02

  This is like lobbying 101. We need to show financial support for candidates who support pro crypto policy. And in the coming year in 2022, we're going to have a real opportunity in the primaries, right, where senators and representatives are trying to win their primaries so that they can go to the general election. We're going to have a massive opportunity to go into those primaries and say, you will get funding from these very motivated, very passionate supporters of the crypto industry.

• 1:18:40David Hoffman?

  Very capitalized supporters.

• 1:18:42Speaker 02

  Exactly. If you take a position that is beneficial to innovation in this country, and that doesn't mean that we're going out to try to buy influence, that's the wrong way to go about this. It's just showing candidates that this is a really important issue for lots of people who are willing to put money behind the issues that they care about. This is always how things get done in DC.

• 1:19:05David Hoffman?

  Jake, we have a tweet that we want to get you to elaborate on, and it is coming up right here. You tweeted this out, "Before this is all over, I expect to be in front of the Supreme Court arguing about Fourth Amendment limitations on the third-party doctrine in the cryptocurrency context." Bookmark this tweet. Can you elaborate on what you mean by that?

• 1:19:26Speaker 02

  Um, yes. This is also a big topic, so let me give you the sort of like short, non-legal, non-in-the-weeds explanation. The Fourth Amendment says that the government cannot search or seize our persons, houses, papers, and effects without a warrant. There are some exceptions to that warrant requirement, but this is our right of privacy as codified in the Bill of Rights to the US Constitution, right? This is where our rights of privacy flow from. That includes the right of financial privacy.

• 1:20:06Speaker 02

  Now, there are exceptions, or at least there is some wiggle room there, where the government has been able to pass legislation that permits warrantless surveillance of our financial transactions. But that is not an unlimited right of the government, right? We have the Bank Secrecy Act, uh, which was passed in nineteen, in the nineteen seventies. It was challenged at that time as a violation of our Fourth Amendment right of privacy. The Supreme Court held by a small margin that the Bank Secrecy Act did not violate the Fourth Amendment, even though it constituted warrantless surveillance of our financial transactions. But the court left open arguments that there are circumstances where financial surveillance

• 1:20:51Speaker 02

  could be so broad or so egregious that it would violate the Fourth Amendment. And in the last few years, the Supreme Court has actually been strengthening the Fourth Amendment and prohibiting certain types of warrantless surveillance by the government. A really good example of this was just three years ago, in a Supreme Court case called Carpenter of the United States. And just to give you the quick summary there, what the government was doing at the time was collecting data from cell site towers that showed where people were moving because their cell phones would ping the towers. And the government said, based on the same theory that upholds the Bank Secrecy Act,

• 1:21:32Speaker 02

  which is the third-party doctrine, because people are willfully or knowingly sharing their location with these third parties, the, you know, cell tower operators, there is no privacy interest in that information. So the government can look through cell site records showing where you are moving at all times without having to get a warrant. The Supreme Court said, no, that type of search of cell site tower data is unconstitutional because even though people are sharing that information with a third party, the location where a person is at all times is so important, it is such a fundamental, uh, element of our privacy, that it is

• 1:22:15Speaker 02

  Unacceptable for the government to surveil our movement at all times by searching these these sell side tower records. And I think the same argument can apply in the crypto context. Where Treasury says, we have a right to surveil every single transaction that happens on a blockchain, whether you like it or not. Just because the blockchain is public. I do not think that that is the right interpretation of the Fourth Amendment. So I think if we end up in a fight where Treasury says. It is impermissible for United States citizens to transact financially unless we know who they are. And who they are paying and how much they are paying. I would say that is a violation of the Fourth Amendment and the Supreme Court would agree with me.

• 1:22:58Speaker 02

  So I hope that I don't end up in front of the Supreme Court having this argument. But I fear at least when we look at the trend of increasing warrantless surveillance. And the trend of Treasury trying to expand its jurisdiction into peer to peer. You know, financial systems, that that is an argument that we are ultimately going to have to have. And it's one that I'm very ready and very excited to take on if we have to.

• 1:23:25Ryan Sean Adams?

  It's funny too, because we already have this right with cash, right? Hundred dollar bill, I give it to you. No one knows about it, not surveilled, no one knows about it. And yet this is kind of an erosion as we enter the digital world.

• 1:23:40Speaker 02

  Yeah, that's exactly right. And there are other circumstances where courts have protected the right. To have anonymous transactions. So for example, Supreme Court recently. Ruled on a case in California that had to do with anonymous donations to charitable organizations. California had passed a law saying it is unacceptable to take in anonymous donations. And the Supreme Court said that rule violates the Constitution. We have a right, a fundamental right guaranteed by the Bill of Rights to make anonymous donations for charitable purposes. And I think the same argument as you're, you know, making cash and that the Supreme Court.

• 1:24:19Speaker 02

  Made for anonymous charitable contributions applies to all kinds of other financial transactions. Given that they truly strike at the heart of who we are as people, right? You can never get more information about who someone is, what they believe, what matters to them. Than by surveilling their transactions, right? So that I think is something that we need to protect.

• 1:24:42David Hoffman?

  The bankless thesis, and overall the crypto thesis at large, is that these financial tools, these Ethereum and DeFi, become so ubiquitous that it won't become esoteric, it will become the norm. And just like how you were talking about cellphone towers back when cellphones were really becoming a thing in the 70s, 80s, 90s, no one can really ever opt out of cellphones anymore. Like, you can't really operate in society without a cellphone. And we kind of believe that that same thing is going to become true with Ethereum and DeFi and all the other crypto tools that we have at our disposal. First, it's in a corner of the internet, kind of only for the people that like to tinker and experiment

• 1:25:23David Hoffman?

  and who like live on the frontier. But as this ecosystem gets built out, the tools will be so useful and so powerful that operating a life without using DeFi is just going to become absolutely impossible. And so Jake, what you're saying is that in order to maintain our level of privacy that we've always been able to have previously throughout history as protected by the Bill of Rights, you think you might actually end up in the Supreme Court fighting that fight. That seems like the fight, the fundamental fight that is where the relationship between these crypto networks and the nation-state come to a head at. Would you agree with that perspective?

• 1:26:02Speaker 02

  Yes, I think it's one of two, right? One is our right to transact with each other freely without government intervention. The other is, as I said, our right to create money privately without being a nation-state. And I think those are the two major challenges. And frankly, I expect that eventually the Supreme Court will have to rule on both of them. So the second one is a whole different conversation, having to do with the gold clause cases from the FDR era. But let's save that for the next time I'm on, for that crisis.

• 1:26:33David Hoffman?

  The next crisis. We've got to save some content for later.

• 1:26:36Ryan Sean Adams?

  Exactly.

• 1:26:37David Hoffman?

  Well, Jake, thank you so much for joining us. It's very clear that this is going to be a long, drawn-out battle. The Bankless Nation is here behind you. We appreciate the work that you are doing in DC and the work in just getting the word out there and educating us on what the issues are, as we sort of educate the masses too.

• 1:26:59Ryan Sean Adams?

  I'm curious your take on this because earlier in the show you mentioned that this infrastructure bill issue through treasury is not even the final boss. It's just like a an intermediate fight, right? So like a mini boss or something to the level. What is the final boss? And what do you think the next few decades will look like with respect to crypto and government and that relationship?

• 1:27:22Speaker 02

  Right. So there are two major issues that I think ultimately governments will have with crypto. One is illicit finance risk, right? Are bad guys using these systems to achieve bad ends that they could not achieve in the traditional financial system? This is the money laundering and terrorist financing question. That is the issue that brings us to this this issue of financial surveillance over peer-to-peer transactions. The second major concern is monetary sovereignty. Do governments maintain their control over fiat currencies? Does the dollar remain the global reserve currency? Can the US government

• 1:28:04Speaker 02

  implement modern monetary theory which requires maintaining tight control over the money supply? Or is there a way for private sector participants to create private money? That is the second, and I think, real final boss. We see this right now in debates about stable coins, right? The Bitcoiners love to say, you know, the IMF and the World Bank and all these other folks are really terrified that Bitcoin is going to destroy the financial system. That's not true. They don't think that. They're not worried about that. That's not worried about Bitcoin. I'm sorry to tell you. Maybe they should be. And maybe we wish that they were, but that's that's not the case. What they're worried about

• 1:28:45Speaker 02

  is US dollar instruments created by private parties that they don't control. They view stable coins kind of like they view Euro dollar markets, which are a really big issue that frankly is way too complicated for a non-economist like me to fully understand. But that's their issue with stable coins. They do not like the idea of DAI, a decentralized stable coin that Can be created by any person, anywhere without government permission. So that I think is really the final boss. Because ultimately, the US government's control over the financial system flows from its control over the dollar. And if they lose control over the dollar, that means real problems.

• 1:29:28Speaker 02

  So that I think is a much bigger fight that we're going to have ultimately about what kinds of assets can private market participants create and interact with without the government being responsible for it or being able to censor or stop it.

• 1:29:43Ryan Sean Adams?

  Jake, this has been great. We always send these episodes sometimes with the kind of action items. So what can, what can people listening do at home to take in this fight?

• 1:29:55Speaker 02

  Um, so I think a few things depending on who you are. First of all, uh, just stay tuned, right? I thank you to everyone who has made it through listening all of this. Just being more informed is so important. There will be opportunities where it is critical for folks to get engaged and make those phone calls or send those tweets or like and retweet something that an elected official has put out. Just stay tuned and please be tapped in, you know, follow me on Twitter. I will always try to sort of like mobilize the grassroots through my own Twitter account. Keep following, you know, you guys at Bankless so that you know when those moments come. Um, otherwise, get involved in the political process if you want to, right? If this is something that you want to do, not everyone wants to, and I think it's important to recognize.

• 1:30:40Speaker 02

  A lot of people come to crypto explicitly because they do not want to ask their government for permission to build some system or to have access to, to some, uh, you know, asset. They literally are here to build systems that do not require permission. So if this isn't your thing, that's okay. The rest of us will take up this fight. But if you're interested, be involved in the political process. Uh, you know, go to a town hall, go to a debate, ask questions of people who are running for office. Tell them that you care about this issue. And also, I think most importantly, if you're a US crypto company, your voice

• 1:31:19Speaker 02

  Matters more than others. That's just the sad reality. You're a job creator. You are raising tax revenues. Right. Folks in government care even more about what you think, especially if what you tell them is, "Look, if this new broker provision goes into effect, I cannot comply with this. I am going to have to move my company offshore. I'm going to set up a Cayman Foundation," which is frankly what a lot of people in industry are doing right now. So make your voice heard. I think one way to do that is through the Blockchain Association. I'm a huge supporter, in case you can't tell, of BA. I think that crypto companies in the US should at least consider membership or reach out.

• 1:32:00Speaker 02

  And then the last thing I'll say is, a lot of folks want to get involved in their own lobbying efforts. I think that's wonderful. Just please try to coordinate in some way with the policy infrastructure that we've already set up in DC, right? There's a risk of people saying, "I just found out about the crypto lobby. I'm here to fix it." And we don't want to do that, right? We've just proven that we are extremely good at the work that we're doing. We have a really good strategy. What we need is support and resources. So I also think committing resources and supporting the efforts that are already going on in DC is the way to do this.

• 1:32:42Speaker 02

  We didn't talk today about the DeFi education funds, but efforts like that where DAOs can get involved in advocacy. I think there's a lot of room for creativity and innovation there, too. So I guess that's a whole lot of different action items and maybe too much for folks to tackle all at once, but stay tuned. There will be a lot more to come about how we can raise our voices and make sure that we are heard loud and clear here in DC.

• 1:33:09Ryan Sean Adams?

  There is definitely a lot of work to do, but I know the crypto community is up to the task. And one reason I know this is because we are building social coordination technology. In fact, financial social coordination technology. So we can use our own tools to help solve some of these problems. And I think last two weeks demonstrated that when the crypto community rallies, it can actually affect a big change in DC. Jake Chervinsky, thank you so much for joining us on Bankless. Excuse me. Thank you for leading the cause here. We appreciate all of your work and thanks for joining us.

• 1:33:44Speaker 02

  It's always a pleasure talking to you guys. Thanks for having me back.

• 1:33:48Ryan Sean Adams?

  Guys, risks and disclaimers. Crypto is risky. ETH is risky. DeFi is risky. Who knows when the next nation state might propose some bad legislation for this space, but we are not stopping. 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.