Crypto vs. The World | Jake Chervinsky & Amanda Tuminelli

While there is always a lot of activity on Crypto Legal Front, this particular moment in time feels especially active. Today on the show we have Jake Chervinsky and Amanda Tuminelli, two of crypto’s most impressive lawyers. Every single court case, of which there are 5 different ones discussed in this episode today, brings new precedent and new clarity to the crypto space. The theme of this episode today might be… crypto bites back. ------ 📣SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24 https://bankless.cc/spotify-premium ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2 ⁠ 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle 🏙️ CONSENSUS | SAVE 20% WITH CODE BANKLESS https://go.coindesk.com/4cBztCA 🏠 CASA | SECURE YOUR GENERATIONAL WEALTH https://bankless.cc/Casa 🔗CELO | CEL2 COMING SOON https://bankless.cc/Celo 🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/toku ------ TIMESTAMPS 00:00:00 Start 00:05:18 Life as a Crypto lawyer 00:10:20 Coinbase Court Case 00:15:21 Are Airdrops Securities 00:19:34 Amanda's Take 00:22:22 Some Bad News 00:27:32 When Can We Expect Clarity? 00:30:11 Politics vs Policy 00:32:39 SEC vs ETH ETFs 00:36:55 ETH ETF Denial? 00:42:59 SEC Lying? 00:50:41 Leveraging Against Corruption 00:55:17 DeFi Education Fund vs SEC 01:03:56 Roman Storm 01:15:06 Can Courts Remain Impartial? 01:16:57 Elections Impact ------ RESOURCES Amanda https://twitter.com/amandatums Jake https://twitter.com/jchervinsky ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures⁠

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

• 0:00Speaker 00

  I want to also zoom out a little bit just to explain a little bit what I think is going on behind the scenes here, which is an existential battle for the heart of this industry. We've spent a lot of this conversation about the securities laws and the financial markets issues are important, but they are not likely to spell the end of this industry. The national security issue is fundamentally different.

• 0:25David Hoffman?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. And today on Bankless, we explore the frontier of our industry's confrontations with the powers that be. Crypto versus the SEC, crypto versus the Department of Justice. Sometimes it feels crypto versus the world. Well, there's always a lot of activity on the crypto legal front. This particular moment in time feels particularly active. Today on the show, we have Jake Stravinsky and Amanda Tuminelli, two of crypto's most chad lawyers. Amanda, Chief Legal Officer to the DeFi Education Fund, is taking the SEC to court on multiple counts, every single court case of which there are five different ones discussed in this episode today, brings new precedent and new clarity to the crypto space. The theme of this episode today might be crypto bites back.

• 1:08David Hoffman?

  Rather than the SEC ruling by enforcement, the crypto industry is claiming clarity by capturing new ground from hopefully winning legal battles versus the SEC. Jake Stravinsky as well is always useful to discuss the between the lines, behind the scenes perspectives about what's really going on in the machinations of the legal entities that are giving crypto trouble. Bankless Nation, listening to this episode will give you a very comprehensive overview as to the state of crypto's legal battles, where we are, where we're going, what the 2024 elections means for us, and also the state of crypto versus the final boss, the Department of Justice. That one's at the very, very end. So let's go ahead and get right into this episode with Jake and Amanda. But first, a moment to talk about some of these fantastic sponsors that make this show possible,

• 1:50David Hoffman?

  especially Kraken, our preferred crypto exchange for 2024. If you do not have an account with Kraken, consider clicking the links in the show notes to getting started with Kraken today. If you want a crypto trading experience backed by world-class security and award-winning support teams, then head over to Kraken, one of the longest-standing and most secure crypto platforms in the world. Kraken is on a journey to build a more accessible inclusive and fair financial system making it simple and secure for everyone everywhere to trade crypto Kraken's intuitive trading tools are designed to grow with you empowering you to make your first or your hundredth trade in just a few clicks and there's an award winning client support team available 24 7 to help you along the way along with a whole range of educational guides articles and videos with products and features like Kraken Pro and Kraken NFT Marketplace

• 2:33David Hoffman?

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• 3:15David Hoffman?

  but consensus is more than just discussions and presentations badge holders get access to witness 10 professional karate combat fights and one unprofessional one between myself and Nick Carter for the visionaries pitch fest is your spotlight presenting a stage for the most promising early stage web 3 companies and for the devs the hackathon offers a unique chance to build your next project or take your existing project to the next level immerse yourself in hundreds of side events and hacker houses scattered around Austin register for consensus 2024 today and save 20% with code bankless taking self custody of your crypto is one of the most important things you can do on your bankless journey it's also one of the hardest things to get right with huge consequences if you don't if you want help going bankless talk to Casa Casa helps you take custody of your crypto assets so you don't have to wonder

• 3:57David Hoffman?

  whether you're doing it right Casa is a one stop shop for doing self custody the right way with Casa vaults you can hold ether bitcoins stable coins all with one simple app and multiple keys for the ultimate peace of mind with a support team to help you every step of the way but it doesn't stop at self custody because even though crypto is forever you are not we all plan on making life changing wealth in crypto but with As inheritance product, life-changing wealth can elevate to generational wealth for your kids and your loved ones who don't know anything about crypto. With CASA, you won't lose your private keys and you won't accidentally take them to the grave either. Click the link in the description to get started securing your generational wealth. Bankless Nation, super honored to introduce you to Jake Stravinsky, Chief Legal Officer over at Variant on the Board of the DeFi Education Fund.

• 4:41David Hoffman?

  Jake's everyone's favorite lawyer on crypto Twitter, but doesn't mean he's your lawyer. We've had on the show, Jake's been on the show countless times because he's always on the frontier of the industry's legal battles. Jake, welcome back to Bankless.

• 4:52Speaker 00

  Awesome to be back.

• 4:54David Hoffman?

  Amanda Tuminelli, Chief Legal Officer of the DeFi Education Fund, which has taken a main character role versus the SEC lately. Amanda and the DeFi Education Fund are fighting to make sure that US citizens can claim our airdrops, among many, many other things. Amanda, also, welcome back to Bankless.

• 5:11Speaker 02

  Thank you. Thanks for having me.

• 5:13David Hoffman?

  So guys, things seem to be particularly busy in the realm of crypto and legal. Things are kind of like always busy in that realm, but like especially right now, things seem to be like some of their busiest. There's a lot going on. There's the ETF conversation. We are suing the SEC. Amanda's suing the SEC. There's like Roman Storm's case. There's Coinbase. So overall, before we get into what I think is just going to be kind of just like a total landscape as to the current events of legal versus the powers that be. Overall, what's it like to be a lawyer in crypto these days? Amanda, you want to, you want to start?

• 5:51Speaker 02

  Sure. Yeah, it does feel a little bit like every day brings something different. I have a plan for each day and then I wake up and see like which regulator has decided to say something new and totally disrupt my entire day. But it is, I think it has been heartening to see the industry going on the offense. I think we're seeing it happen more and more. We're seeing people be proactive and vocal and that has been really fun to be a part of recently.

• 6:18David Hoffman?

  Yeah, especially as we get into some of the concrete current events, the they said, then we said, then they said kind of stuff. I think overall, just to set the tone of the conversation, it's really helpful just to get like a vibe check. So like Jake, vibe check for you. Just how are you feeling as a lawyer in crypto right now?

• 6:34Speaker 00

  Yeah, I mean, I think vibes are pretty good. So I, you know, one interesting thing since the last time I spoke with you, David, is I joined Varian. So I'm in the venture world now, getting to work with founders, which is a ton of fun. Thanks very much. And I think, you know, that's, that's sort of where the good vibes are coming from for me is, is I think the industry is really making a lot of progress. We've spent a lot of time in the crypto law and policy and regulation worlds, feeling sort of stuck in a rut, like nothing is moving and there's nothing we can do. And we're just sort of sitting ducks, being attacked by regulators left and right, or being attacked by Congress and other policymakers. And I feel like in the last six months or so, almost, you know, coincident with the start of the bull market, we've also had sort of a bull market rally in progress on the legal front.

• 7:17Speaker 00

  And that's in a number of different ways, both in terms of the offensive litigation strategy that the DeFi Education Fund has been carrying out. Also, some of the news that we've gotten from courts, you know, not all good, but all progress. And I think that's really meaningful. And then also a lot of new designs in the industry, things like the Duna, which maybe we'll talk, this new Wyoming structure that DAOs might be able to use. So I think a lot of innovation happening on the legal side, which, which feels really good, you know, for once, a bit of a change.

• 7:46David Hoffman?

  Jake, since you're on the venture side, maybe you could kind of give us a vibe check of like the disposition of founders that you're talking to? Maybe a United States based founders versus abroad founders. I know like in 2022, being a United States based founder, I would like characterize as like timid and fearful. What would you say is like the disposition of the founders that you're talking to today?

• 8:08Speaker 00

  Yeah, I mean, I think founders are excited and I think what they're looking for is a way to do business in the United States. And as I'm sure you know, for a long time, the sort of conventional wisdom among lawyers under Gary Gensler's SEC was just don't do business in the United States, right? Block US users, don't do airdrops to US users, don't offer your platform to US users, right? Do geo fencing and all this kind of stuff. And I feel like what we're starting to figure out is a way that we can work through some of these legal issues so that we can get these new assets and new products and services into the hands of folks in the US. So I think founders are really excited about that. It's obviously not all positive. There is still a ton of fear and a lot of time and

• 8:51Speaker 00

  resources and effort being put into regulatory and legal strategy at a very early stage for crypto companies. So you know, the typical tech company doesn't hire a lawyer until they have maybe 25, even maybe 50 employees. And they don't have to spend a whole lot of money on outside counsel. Very different in crypto, right? Crypto companies are hiring lawyers as employee number 10 or even earlier, and they're spending hundreds of thousands or even millions of dollars on outside counsel. That's obviously very distracting and very unfortunate, very different from the traditional tech world. But I think founders are seeing a path through the issues. And I think that's giving people a lot of confidence.

• 9:29David Hoffman?

  Amanda, what's your kind of conversation with external companies or the people that you chat with in the same regard? Any perspective you want to add here?

• 9:37Speaker 02

  Yeah, I think I'd echo a lot of what Jake said. I also think that there's, even though we have had a lot of different regulatory and enforcement actions, people are still trying to figure out solutions to the problems that are based on the technology. And that's been really great to see. I think a lot of the zero knowledge projects and projects that are trying to figure out a way forward to meet some of the compliance obligations that they might face at some point are still, they're still going forward. They're still doing that work. So I think that it's, I feel positive. I also think vibes are good and I think people are going to keep building. So that's good.

• 10:17David Hoffman?

  So let's go ahead and get into the current events of the day. I think we can start with Coinbase versus the SEC, just simply because the news about this was was most recent. I think for each one of these current events that we're going to go through, I'm going to kind of give my like, high level summary of what the details are that I can remember, which is probably going to approximate what the listeners know about it as well. Coinbase versus the SEC, the way that I would summarize this current event here is that not too long ago Coinbase Filed for a motion to dismiss the SEC's case versus Coinbase with the court, just saying like, "Hey, this entire court case is arbitrary, capricious, frivolous. You should dismiss the whole entire thing." And then recently, the court came back and said, "No to..." "No, but also yes."

• 11:01David Hoffman?

  And they said, "No to the staking contract part of the SEC case versus Coinbase, "and yes to the, "We're going to dismiss the wallet side of things." And so this was more or less like a, kind of like a half-court shot by Coinbase, "like, kind of a big stretch for them to just say, "Hey, court, like, throw away this entire case." So we got like a partial victory there with Coinbase, with the court throwing out the wallet side of things, "but we are going to proceed with the staking contract side of things." Jake, maybe you can kind of just like wind us all the way back. How did this court case come to be at all? And then where do we stand today?

• 11:36Speaker 00

  Yeah, so let me do a little bit of stage setting, as you suggested, "and then we can talk a little bit about the substance of the court's order on the motion for judgment on the pleadings." So the SEC filed this enforcement action against Coinbase last June. And it was really big news, because obviously Coinbase is one of, if not the most important crypto companies "in the United States, maybe even in the world, right? "This is where a lot of people get their first exposure to this space." And what the SEC alleged against Coinbase is that it was "an unregistered national securities exchange, "because it allows trading in assets that are themselves unregistered securities." And in the complaint, the SEC lists 13 different tokens "that it alleges are unregistered securities, "among a handful of other allegations, including that Coinbase was a broker

• 12:21Speaker 00

  "by virtue of having a wallet that allowed swap functionality, right? "access to DEXs, and also allegations that their staking service was itself an unregistered security. "The fact that they were offering a staking account, basically, was a security, "totally irrespective of what the assets were." There's a little bit more to their allegations about the Coinbase prime offering and whether that also makes Coinbase a broker and some other sort of minor things. But I think those are the three most important points that have a broad industry impact beyond just Coinbase, right? And in a really significant way, Coinbase is fighting this battle not just for the company. It's not just a bet the company case. In many ways, it's a bet the industry case, right? If Coinbase loses, all of us are in a whole lot of trouble. So that's why we're watching

• 13:04Speaker 00

  this case so closely. And Coinbase filed this motion for judgment on the pleadings arguing that even if the court accepts all of the SEC's factual allegations as true, nonetheless, the SEC is wrong as a matter of law, and so the case should be dismissed. And I think that's a really important framing for the court's ruling, because the court did have to assume that the SEC was telling the truth throughout the complaint. Now, if you ask us, I think we tell you the SEC is not telling the truth about a lot of the facts in the complaint. But that's sort of the stage that we're at. So let me get a little bit into what the court said in the order. There's a couple positives, couple negatives, and a whole lot of remaining uncertainty. On the positive side, Coinbase won the argument that it is not a broker

• 13:49Speaker 00

  as a result of offering a wallet with swap functionality. This is a massive win, not just for Coinbase, but frankly, for the entire DeFi space, because there's been this question about whether a wallet, or a front end, or some other user interface that allows users to access an underlying DeFi protocol, makes the provider of that piece of software into a broker. And what the court basically says is, these providers are not brokers, because they are not in a principal agent relationship with the user, where the user is relying on the provider to make some decision for them, right? To decide how or where to execute some transaction, where the user is relying on their skill and expertise in order to perform

• 14:31Speaker 00

  that service. Instead, the providers are basically just information providers. They're giving the user information about price discovery, and allowing them to make the decision whether they want to execute the trade or not. But the key is, at all times, the user is in control of their assets, and the user is the only one who gets to decide whether the trade is executed or not. So again, huge win, not just for Coinbase, but I think for the entire DeFi space.

• 14:56David Hoffman?

  Just to really drill this point home, this basically is concerning any sort of wallet. So of course, not just Coinbase Wallet, but like you and a swap wallet based in the United States. You know, anything like Zapper or Zerion, any sort of front end. Any sort of, any sort of front end that touches DeFi in the backend, you are saying has been given some precedent about how they do not have a principal agent problem, a principal agent relationship with their users and therefore are just like software, not like broker. And so any, this entire sector of what you're calling globally DeFi is now, has very strong precedent protecting them.

• 15:36Speaker 00

  I think that's right. I would describe it as being significantly de-risked. That's like the lawyer way of saying, I'm not giving anyone legal advice. Disclaimer, you know, don't do or not do anything based on what we say on this podcast. But yes, a massive win for all of those types of services, including aggregators. So I think that's, that's a big win for DeFi. The other win in the case is some really helpful language, actually in the context of staking related to airdrops. And you know, I'm not going to repeat the Howey test because I'm sure everyone listening is

• 16:05David Hoffman?

  Yeah, too many times.

• 16:06Speaker 00

  familiar with the Howey test. But you know, we talk a lot about the first prong of the Howey test, the investment of money prong. And this is why many people believe that airdrops are not securities, right? The tokens that are airdropped are not themselves securities and the airdrop itself is not a securities transaction because the recipient does not invest any money in the creator and distributor of the token. And the court has some really interesting language that helps us understand where the line is to see an investment of money or not. What the court says is you have to look to see if there is a risk of loss for the recipient of the token, a financial risk of loss.

• 16:45Speaker 00

  And if the recipient of the token isn't putting some capital on the line where they could actually lose money in the transaction, then there's not an investment of money in the court's opinion. And I think that's really helpful for us to understand the modern theory of token distribution. Which is not just this sort of surprise airdrop, right? No one knew it was gonna happen. And then all of a sudden, you have the right to claim tokens, but rather airdrops that incentivize specific types of user behavior and also waves of recurring airdrops, one after another, to incentivize different types of behavior. What this risk of loss analysis tells us is there's a lot more freedom for distributors of tokens to ensure that they are not running afoul of the securities laws as long as the recipients of those tokens

• 17:29Speaker 00

  are not risking financial loss as a result of receiving that token. So another big win in the case.

• 17:34David Hoffman?

  Well, there's a couple of conditions I think are worth bringing up here. There's like the airdrop condition of like, I have a pudgy penguin and somebody distributes me a token because I hold a pudgy penguin. I never, as a result of that token airdrop, my pudgy penguin was never at risk of loss. But then that's one circumstance. A different circumstance is like, I am putting my ETH inside of some sort of contract inside of a particular protocol that has like maybe exploit or like bug risk or just economic risk as a result of that protocol. Like maybe it's a leveraged protocol, maybe it's a reselling protocol. And so like, I'm not selling my ether. I'm not doing anything other than like moving my ether into some sort of like smart contract

• 18:18David Hoffman?

  that is owned by the airdropper. But I'm doing something and they have some sort of, I'm putting it into their contracts. And as a result of that, I'm getting an airdrop. That seems to be a different circumstance where like, it might be a little bit easier to argue that there is risk of loss there. Is there, am I parsing on some nuance here? Like, what would you have to say about this?

• 18:39Speaker 00

  You're totally spot on and you zoomed right into the gray area, sort of in the middle of this issue where there is still uncertainty, right?

• 18:46David Hoffman?

  Okay.

• 18:47Speaker 00

  Obviously, there is an investment of money in the case of an ICO, where the person who receives the token has literally paid the creator of the token in order to get it. I think there's obviously not an investment of money if you literally are surprised by an airdrop that you never gave up anything for. The gray area is this case where the recipient has parted with some financial asset in some way, but they have not actually invested. That money in the creator of the token. Now, we in the industry are going to argue that is not an investment of money for the securities laws purposes, because it doesn't create the same type of entrepreneur investor relationship, where the securities laws are supposed to come in and ensure there's no information asymmetry between the entrepreneur and the investor.

• 19:31Speaker 00

  This is a totally different situation if the alleged investor is simply putting some asset into a decentralized protocol, where they don't need disclosures from the creator of the asset. I'm guessing the SEC is going to disagree with that, because the SEC thinks literally everything in the world is a security. So we're still in the gray area of uncertainty on that point.

• 19:50David Hoffman?

  Amanda, we're going to get to the DeFi educations fund case against the SEC. That's like pretty proximate to what we're talking about now. But like before we get there, like overall, just what's your perspective on this whole conversation? I'm sure you have a bunch to add.

• 20:02Speaker 02

  Yeah, I was gonna say this is a really good segue to our airdrop case. But on Coinbase, I agree with everything that Jake said. I would say that, yes, it would be very bad for the industry if this whole case gets resolved against Coinbase. We're very far away from that. There's going to be a discovery period. There will be more motions. And I do think that parts of this opinion can change with more facts added to the case. So it's possible that, I think really in the staking section in particular, when Judge Vela has a full record in front of her, including specific factual details about staking,

• 20:41Speaker 02

  my hope is that she will realize that some parts of what the SEC has said about staking is just factually inaccurate and doesn't get the tech right. So I think that there is room for this decision to be different at summary judgment. But even if like we just lose entirely, I would just say it is one judge in one district court, and there are other courts around this country that are going to be hearing very similar issues. I'm not sure if you're familiar with the Legilex and CFAT case that was filed in the in Texas District Court. So it's possible that there they're seeking a court order that Legilex is not an unregistered securities exchange. There are very relevant facts here

• 21:24Speaker 02

  that would apply to any digital asset trading platform. If they get that court order that Legilex is not an unregistered securities exchange, that also sets really good precedent around the country. And if there's one case going one way and another case going another way, that just means it's ripe for an appeal. And I think everyone knows we're in it for the long haul across the industry. Like if we need to appeal all the way up to the Supreme Court, we will. So I would just say all hope is not lost. Yes, it would be massively helpful if Coinbase wins the whole thing, of course. But even if it's not a full win, it's still, you know, it's not the end of all hope.

• 22:03David Hoffman?

  So of the three pillars that I kind of identified, the the staking contract, the wallet, and then Coinbase as an actual securities exchange, the wallet, we've got a nice big fat green check mark on, like we have won that pillar. The the airdrop thing is like a partial victory with a potential full victory. The staking contract TBD. And then also the actual Coinbase like is is a securities exchange or not. No, no progress there, but like a lot left to a lot, a lot left of like time and like stuff to actually have happen there. Is that is that correct?

• 22:38Speaker 00

  Yeah, yeah, that's right. There's, there's a lot left. I would say, though, you know, not to be too Pollyannaish about this, there is some bad news here. And it is on that sort of main question, whether Coinbase might be an unregistered national securities exchange. Because aside from the investment of money prong, the court analyzes the other prongs of the Howey test, and in many ways, unfortunately, validates the SEC's theories on when and whether those prongs of the Howey test are satisfied. So without getting super deep into the weeds, the court basically says it's much easier to have a common enterprise than the industry would argue. And I think that she's wrong about that in many ways. Much easier to have a reasonable expectation of profit than The industry would argue much easier to have reliance on the managerial and entrepreneurial

• 23:21Speaker 00

  efforts of others than than the industry would argue. So very broad interpretation of the Howey test. Happy to dig into any elements of that that you'd like. But the other piece of this, and I think the unfortunate loss is that Coinbase's main argument was you have to distinguish between primary sales of tokens, as in the creator of a token, selling or distributing the token in the primary transaction versus transactions in a secondary market. And Coinbase's argument basically is tokens themselves are not securities. They can be sold or transferred pursuant to an investment contract, but they themselves do not embody that investment contract. And so as

• 24:03Speaker 00

  the tokens move around secondary markets like Coinbase, the tokens do not represent securities, even if they were sold in an ICO, where the ICO is an investment contract. And the court basically rejects this argument and says, no, the tokens actually can embody the original investment contract. And even though a secondary transaction may occur between third parties, totally unrelated to the initial creator of the token, with no contractual relationship whatsoever with that original creator, nonetheless, the token can represent a security. And that's a really unfortunate ruling for the industry, I think, an incorrect one. It's an issue that, as Amanda described, will be tested in many other cases, offensively by the industry in

• 24:45Speaker 00

  the Legalex case in Texas, also defensively in other enforcement actions the SEC has brought, like the Kraken case in the Northern District of California, the Binance case in the District of Columbia. So we're going to get a whole bunch of courts to weigh in on this issue. And even though this court went a way that I think is incorrect, it doesn't mean the law is resolved. And we'll just have to see how that plays out over time.

• 25:06David Hoffman?

  So like, there is this gray area about the nature of these assets. And of course, so of course Coinbase, a crypto exchange, listed them because they're not registered as securities. And so Coinbase, I'm assuming, is like, okay, well, then we can list them because they are not registered as securities. But then the SEC is like, telling Coinbase that they're a securities exchange when they have unregistered securities. Shouldn't the correct order of operations be the SEC goes after the unregistered securities, proves that one of these things is actually a security, and then makes Coinbase a securities exchange, which they would then probably just delist the token? Isn't the order of operations here just kind of weird, Jake?

• 25:42Speaker 02

  Oh, sorry.

• 25:43David Hoffman?

  Amanda, Amanda, yeah.

• 25:44Speaker 02

  The order of operations should be that they should do rulemaking, saying what they think digital assets are, and then they could go after whatever they, you know, feel like they want to spend all their enforcement resources on. But I would just, I'll let Jake answer, but I would just want to jump in that I think the correct order of operations would be rulemaking.

• 26:03David Hoffman?

  Goes even earlier. Yeah. Uh huh.

• 26:05Speaker 00

  No, spot on. And this is, you know, this is, I think, a real problem in the SEC's strategy of regulation by enforcement, which is they have to show that one of these tokens is a security in order for Coinbase to be an unregistered securities exchange. So they list these 13 tokens, saying all of them are unregistered securities, but none of the creators of those tokens are part of the case. So none of them get to show up to argue.

• 26:29David Hoffman?

  They don't get their day in court.

• 26:31Speaker 00

  Right.

• 26:31David Hoffman?

  They don't have a voice.

• 26:32Speaker 00

  Right. So basically Coinbase has to represent each and every single one of them. And the trial is going to require basically 13 mini-trials in which the court has to determine which, if any, of these assets are securities. Now, as you said, the ultimate result of this is, let's imagine the court says, yes, one of these assets, the Chili's token, for example, which is one of the ones that the court analyzes in the order, is a security. That doesn't mean Coinbase is forevermore an unregistered national securities exchange. They can just de-list the token and then keep doing business. And I think that this gives Coinbase an extraordinary structural advantage in this litigation. The SEC is not going to be able to regulate this industry simply through enforcement. The

• 27:14Speaker 00

  best that it can do is try to scare people away from the industry and maybe spend, you know, force us to spend so much money in legal fees and fines that we decide to just abandon the United States. That's a really sad state of affairs, but I do think that's what their strategy is right now.

• 27:28David Hoffman?

  It gives Coinbase a structural advantage to be like right and legal and compliant, but it gives the SEC a strategic advantage to be a complete mess and convoluted and like a spaghetti mess of like strategy that they can just eke out in a very below-the-belt fashion, right?

• 27:46Speaker 00

  Totally.

• 27:48David Hoffman?

  Okay, well, that's lovely. With timing on this, the whole thing, like, this could take a really long time to play out, right? Like, when can we get clarity on this?

• 27:59Speaker 02

  So I think it's going to be months, if not years, because what we're, what the next phase of the Coinbase case is going to be the discovery portion. So both sides get to ask for discovery from the others. I would imagine there will be some fights over what the SEC is willing to turn over, like we saw in the Ripple case. There may be fights over privilege and getting their internal documents. And then after all that, there's expert discovery. I'm sure both sides are going to want to have experts come in to support their positions. And then we get to summary judgment motions. And then it's another six months, probably, before the judge rules on summary judgment motions. So this really could last a very long time. But, you know, I think certainly Coinbase

• 28:40Speaker 02

  has been pursuing an appropriately aggressive strategy, right? Moving for judgment on the pleadings to begin with was their way of trying to make, to get a resolution quickly on the merits. So I feel like there will be, they will, they're not going to try to drag their feet. I think they're going to try to keep this moving forward as much as they can.

• 28:58David Hoffman?

  Right. Well, the SEC, I'm assuming, just like understanding kind of the culture and vibe that we've seen out of the SEC, which we've gotten plenty of data from, whenever there is a potential possibility to have a fight and to litigate and to like, slow things down and spread things out, they will take that. And then Coinbase is kind of like the inverse of that. They are trying to speed things up and move things along. Because, like Jake said, there's a, they have the structural advantage. They have the actual like law on their side. And so like these, this is like what the tug of war is just going to be like for the next like months to years?

• 29:27Speaker 00

  I think that's right. And even beyond that, let's imagine that there are all of these conflicting court orders and all of these different districts across the country, as Amanda said. What that means is we're going to see appeals to the circuit courts. And then we could also see different rulings from the various circuit courts. And eventually, we think this issue has to get up to the United States Supreme Court. And in a sense, it's really hard to know what the law is going to end up being five years from now because one district judge in the state of New York, for example, may not be Representative of the conservative majority on the United States Supreme Court that I think will have a much more dim view of the SEC's claim of regulatory authority over an industry that Congress has clearly never decided to give it authority over. So I do think that, you know, this is all very important.

• 30:11Speaker 00

  It's very instructive for founders who are launching new products now, but it's really hard to know in the end what the law is going to look like. And before we get a ruling from the Supreme Court, there also could be legislation from Congress or some other, you know, way that we sort of resolve these issues. So a lot of uncertainty going forward.

• 30:26David Hoffman?

  Well, Gensler's term ends in 2026. He might be reappointed, especially if Biden gets elected. Maybe he has his victory, which he becomes elevated to the treasury, which is what he wants. But I think that's a minority case. But like, there's also the world where like, Gensler leaves in 2026, and then we're still stuck with this mess. And Gensler's like, well, I don't really care about that anymore. And it's like, moves on, right? That's a potential version of this future.

• 30:53Speaker 00

  It's possible. I mean, I think there's sort of three ways that that goes. If we want to talk a little bit about, you know, the political side of this whole issue. And indeed, a lot of this is more politics than it is policy or law. You know, one question is which, you know, who wins the presidential election? Let's assume that we have a second Biden administration. I think it's fair to say that Chair Gensler is going to move on. You know, it's just very hard to imagine that he would be reappointed. That's not typical for the Chair of any organization. It also seems like he might be sick of this, to be honest. I mean, this does not seem like a whole lot of fun for him. So I'd expect that we get a new Chair. And then the question is, is that Chair picked by the same progressives like Elizabeth Warren, who handpicked Gary Gensler and some of the other heads of the agencies, who frankly, take a very anti-business, anti-innovation approach to regulation?

• 31:38Speaker 00

  Or might we have someone in charge of the SEC who is a Democrat, but a moderate pro-business Democrat, of which there are many? And it's very hard to know who would get selected by the Biden administration moving forward. The other option is that Donald Trump wins the presidency. And I think it's very difficult to predict who he would put in charge of the SEC. It would be wonderful, obviously, if we had a Chair of Purse. Hester Purse would be a phenomenal leader of the SEC, but hard to know if that would happen. And I don't frankly think that, you know, Trump has a very strong view on crypto. And I don't know that we can just trust that he would put someone in charge who would take a positive view of our space.

• 32:15David Hoffman?

  Well, I just can't really say that this makes me feel all that that good. The timeline on this is long and crypto moves very fast. So we have like, you know, at least like, you know, a bunch of different crypto cycles to get through before this even becomes relevant. After talking to Hester Purcell, I think she is also as much as fed up with the SEC as as Gensler is with fighting other people on behalf of the SEC. Just with my conversations with her. So I think there's a decent chance that like the SEC looks completely new in 2026. But then we run into that sadly pessimistic side of things where like it doesn't it's still kind of like the same the same vibe, same culture there either way. Okay, let's let's try and move on to the next of many, very many current events in

• 33:00David Hoffman?

  this space. Maybe we can talk about the SEC versus the Ethereum ETFs. Since the approval of the Bitcoin ETFs, the SEC seems to have taken a very hostile turn of events towards specifically Ether, the asset, and in the face of potentially having to delay, approve, or deny the Ethereum ETFs. There was this weird thing with the Ethereum Foundation where there was this like process of discovery with the Ethereum Foundation. And now like there is this perception of like a coordinated onslaught against the status of ETH as a commodity or a security, which now the CFTC has also gotten involved with. Amanda, maybe you can kind of take us through the current events on this one and get us up to speed here.

• 33:40Speaker 02

  Sure. So yeah, I was also very interested to see the CFTC just assert that Ether is a commodity in the Q coin case. And I think it's going to be really interesting to see how this plays out, also given Prometheum and their intention to list Ether. So in light of all of that, and as you said, these reports that there's an investigation into the Ethereum Foundation, it seems like we're setting ourselves up for kind of a turf war between the SEC and the CFTC. The SEC has been conspicuously silent about Ether in the past few years, although they have taken very aggressive stances about other tokens, right? They've only really ever come out and

• 34:22Speaker 02

  said Bitcoin is not a security. So, but if you read their ecosystem theory, which is basically that, you know, they think any token plus an ecosystem somehow forms an investment contract, it would, it makes sense that they then think Ethereum is a security, but they haven't said that. And there has got to be a reason they haven't said that up to this point. But it seems like they may be gearing up to say that and then have the CFTC tell them that they're wrong. I think it's also worth mentioning that their theory would apply to any collectibles, right? So if they are going to now take the position that Ethereum has this, you know, this common enterprise because of the ecosystem,

• 35:03Speaker 02

  which I imagine is the basis of the Ethereum Foundation investigation, then I don't see how they're not, how they're going to get around this argument that this applies to all collectibles, all kind of like Nike sneakers, Pokemon, I think Coinbase used the Chia Pet example, like all these other tokens or things or collectible items that have a growing ecosystem around them. But I'm sure Jake could speak more to the ETF than I could.

• 35:31Speaker 00

  Yeah. Well, I mean, first of all, I agree, it would be crazy for the SEC at this point to come out and say that Ether is a security. And my hope, although I'm just speculating, is that this is all for show. It's just all for the press. And that is frankly, something the SEC really loves to do under, under, you know, Chair Gensler, is to freak people out and get press, but then not actually move forward with the legal arguments that would, I think, embarrass them in court if they tried to make it. And also embarrass the Biden administration by showing basically an open and hostile civil war between the two financial markets regulators, the SEC and the CFTC. That's bad business in an election here. So I am hoping that the SEC is not so out of bounds that they're

• 36:11Speaker 00

  going to go after Ether as a security. That said, I do not think that the SEC is going to approve any Ether ETF. It pains me to say that. Hopefully, everyone listening knows how much I love Ethereum. I've, you know, based my career in many ways on Ethereum over the last five years. It hurts me to be a bear on Ether ETF. But I just cannot imagine this SEC, given how hostile they are to everything in this industry. Even frankly, to this point, a little bit Bitcoin, given how much political blowback they got for approving the Bitcoin ETF, it is just extraordinarily difficult from a political perspective to see the SEC approving E3 ETF. We can talk about what the legal arguments are that the SEC might invoke in order to deny the E3 ETF despite what happened in the

• 36:56Speaker 00

  Grayscale case, which sort of forced them in a way to approve the Bitcoin ETF. But I think just politically, before we get to the law, this SEC is not looking to do us any favors, and it would be a massive favor for them to approve an E3 ETF in 2024.

• 37:10David Hoffman?

  So Jake, yeah, okay, so 2024, there's two different things I want to parse out here. There's the timing of the ETH ETF. We have a May deadline. We also have a later, I think, August deadline. But then also, you're saying like, this SEC administration, you are bearish on this administration approving an ETF. Is it more one or the other, or is it both? Like, what's kind of the deal here?

• 37:33Speaker 00

  It's really this administration. And so, I mean, look at what happened with the Bitcoin ETF. The SEC denied the Bitcoin ETF even before Chair Gensler for almost an entire decade. And they denied the Grayscale ETF for sort of the last time before Grayscale decided, we're never going to convince these people. We just have to take them to court. And they won a really important ruling in the D.C. Circuit that basically said, the SEC could not invoke a distinction between futures markets and spot markets in order to deny a spot ETF where a futures ETF was already trading, and the correlation between futures and spot markets is strong enough that there shouldn't be a fear of fraud or manipulation in only the spot market that would not also affect the futures market. And the argument

• 38:17Speaker 00

  is, hey, we can make the same argument for the E3 ETF. The thing is, if you look at what happened with the Bitcoin ETF, it was a split vote of the commission. It was a three to two vote where Chair Gensler actually sided with the Republican-appointed commissioners in order to approve the Bitcoin ETF, but there are dissents written by the other democratically-appointed commissioners, Commissioner Crenshaw and Lozraga, in which they outline in excruciating detail why they thought the SEC still should have Denied the Bitcoin ETF despite the D C Circuit's ruling. And I think if you just look at what Commissioner Crenshaw wrote especially, given the detail that she put in her dissent, you can imagine Chair Gensler just adopting all of her logic for the Ether ETF.

• 39:00Speaker 00

  And you see all of this really telegraphed in the S E C's order instituting proceedings related to disapproval of the Ether ETF proposals. They've already said what they think the grounds for disapproval are. And I think that just telegraphs this administration is not going to give us an Ether ETF and we're going to be fighting about this in 2025 and beyond.

• 39:20David Hoffman?

  I don't want to try and read too many tea leaves here, but I remember when the Bitcoin ETF was approved. Like you said, it was three to two and the two that dissented were the two Democrats. And they cited the correlation stuff. They cited just like political disinterest in the ETFs. Like the kind of the like, untotally educated conclusion that I remember coming to was, well, Gary Gensler voted to approve the ETFs because he was forced into a corner by the grayscale court case. And like politically, it just kind of looked the best. If it was a split vote where the Democrats could appease the Democrats and said, well, the Democrats denied it. The Republicans voted for it.

• 40:05David Hoffman?

  And Gary Gensler, who was forced by the court case, also had to vote for it. That's why it's three to two. And so politically, it just looks the best if the Democrats like come out vehemently against this whole decision. And Gary Gensler just says, hey, like my hands were tied. And so to me, like, and even the rationale that the Democrats gave was kind of nuts. Like it was citing like bad, in my opinion, bad evidence about the whole like lack of correlation. When we know that the correlation is actually very, very strong. And so to me, it's all went back down to just like, will the S E C get sued? Because that seems to be the really the stronger signal here. Because that's the thing that ultimately forced Gary Gensler to thumbs up the Bitcoin ETF.

• 40:48David Hoffman?

  That was my like, you know, legal analysis and I'm a podcaster. So what do I know? But that was like my interpretation of this whole thing. Like, how do you reflect upon that?

• 40:56Speaker 00

  I mean, I think that's a valid take, and I'm not saying I know that the Ether ETF will be denied. I think there are good arguments for it. I also should add, it should be approved. I think as a matter of law, there isn't a good argument the SEC has to deny the Ether ETF, especially given that there are Ether Futures ETFs already trading. That said, I think there's sort of two different things that I think you're maybe underemphasizing or missing here. One is, the SEC may have arguments that could prevail, that they just didn't deploy in the great scale case. The D C Circuit's order was very harsh toward the SEC, but it didn't say the SEC could never decide that denying the Bitcoin ETF is appropriate.

• 41:39Speaker 00

  It said the SEC did not do enough work to put evidence onto the record and then explain that evidence in order to justify its denial. And we all thought it was possible the SEC could have gone back and denied the Bitcoin ETF again, and either done a better job of explaining why correlation should not justify approval, or could have raised some other totally different issue. And it just so happened, as you said, I think politically, it was better for the SEC, especially for Chair Gensler, to just approve the thing and then move on. But the second thing is, even if the SEC was going to lose in court, the question is, does Chair Gensler actually care about that? And I think that he has shown, and many other progressives have been encouraging him

• 42:19Speaker 00

  to take the position that litigation risk is a good thing for a regulatory agency to take. That basically, if you're not losing in court, then you're not fighting hard enough. And this might be one of those places where they'll say, look, we've decided as a matter of policy that Bitcoin is special. We're going to enable Bitcoin in some way, but we're not going to enable anything else in the crypto industry. And that would put a pretty strong barrier between a Bitcoin ETF and an Ethereum ETF. And that's just sort of where I think this is going to play out for this year.

• 42:49David Hoffman?

  Yeah, so maybe one perspective to keep in mind is that if the S if like the startups that we are familiar with in the crypto space, if they lose in court, like is sometimes it means death for the startups. If the SEC loses in court, the taxpayers just pay the court bill and then we just do this whole thing all over again. So there's actually like no real consequences here. Maybe Gary Genzer is a little bit embarrassed, but maybe he's also not at the same time. Amanda, what do you want to add to this conversation? What's your perspective here?

• 43:15Speaker 02

  I would just add that the SEC can lose in court, but they cannot lie in court. Thinking about the recent debt box decision, I don't know how familiar you are with it, but I could give background if that's helpful. But if not, I just, okay, I think the, I think that order was remarkable and had language in it that I have frankly never seen a judge say about a government regulator before.

• 43:40David Hoffman?

  Can you give us some context on this order? Set the stage and then give us the lay of the land here?

• 43:45Speaker 02

  Yeah, absolutely. So in the case, this is an action brought by the SEC against that box and some individuals associated with debt box. And as part of the beginning of this action, the SEC brought an ex parte motion for a TRO and a receiver. An ex parte means that they do it alone and the defendants are not there. So there's a hearing with just the SEC lawyers and the judge, and there's no representation by the defense. And they do that because in cases unlike this one, there may be things that the defendants are doing that the SEC or, you know, whoever's moving for the TRO want to stop really quickly. It's a really expedited motion. So in order to get a TRO is a temporary restraining order.

• 44:26Speaker 02

  So what the SEC wanted to do was prevent the defendants from moving any money and they wanted to appoint a receiver over the company. The problem was that they completely lied about the facts underlining their motion. So they stood in front of a judge and they made statements like debt box closed 33 bank accounts in the days just before the hearing. They said that the co-founder went on YouTube and was talking about relocating to outside the United States so as to like avoid the court's reach. They make all these statements alleging that debt box has done all these things to make it seem really dire, like the court needs to step in and prevent them from moving funds.

• 45:08Speaker 02

  And the court grants the TRO on the basis of these representations.

• 45:13David Hoffman?

  When you say that the SEC completely lied, are these like, is the SEC taking some statements and like extrapolating them into something that they didn't say? Is it them completely fabricating something out of absolutely nothing? Is there just like any sort of gray area that the SEC can like claim here?

• 45:31Speaker 02

  So in the order ordering sanctions against the SEC, the judge goes misrepresentation by misrepresentation and answers the exact question you asked. But for context on some of the ones that I just mentioned, on the statement that there we that bank accounts are being closed, it was a complete misrepresentation. The bank had closed Debtbox's bank accounts. Debtbox had done absolutely nothing to close any accounts. The bank had done that of their own volition and none had been closed in the 48 hours prior to the hearing. It was like previous months or weeks in advance. So that was just a complete misrepresentation of the truth. And then on this, the YouTube video point, I think the CEO went on YouTube and was saying

• 46:15Speaker 02

  that there there's a relatively clearer regulatory scheme in the UAE, not that the company was moving and like that they, you know, there was some emergency here. So the SEC completely took that out of context and misrepresented it. And there's this great footnote in the Debtbox order where the judge just like mansplains what a lie is to the SEC. The SEC is like, well, these weren't lies, they were inaccurate. And the judge was like, here's what inaccurate means and here's what a lie is.

• 46:48Speaker 02

  There's such great language in this order. I have never seen the words bad faith appear so many times in one order. But the judge, the judge went, so then what happens is Debtbox moves to dissolve the TRO, to remove that TRO and the receiver. And in addition to that, they move for sanctions. And the SEC moves to dismiss the case. So instead of having to have the judge rule on their inaccuracies, they ask for the judge to just throw the whole case out. So they basically like, don't have to deal with it.

• 47:18David Hoffman?

  Which is, wait, they asked for the judge to throw out the case, which is their case that they brought to the court. So they're like, you know what? Just kidding. Oopsies. Command Z. Just like, let's just forget about this whole thing.

• 47:29Speaker 02

  Here's how we fix this. We just undo it.

• 47:32David Hoffman?

  And it never happened.

• 47:33Speaker 02

  Yeah. And what's also so disingenuous about that is they could just bring it again. Like, they could dismiss it and start over and bring the case again. Luckily, the judge was not buying that. And the judge took the extraordinary step of issuing sanctions against the SEC, which means that the SEC has to pay for all of debt box's legal fees in dealing with the TRO. Now, of course, that means taxpayers have to pay for it, but the SEC had, like, their, the sanctions were ordered. And the judge said, and I'll, I'll pull up the quote because it's just so good. The judge said, "The pervasive misconduct by the SEC demonstrates a pattern of organizational bad faith

• 48:15Speaker 02

  and broadly implicates the commission itself and not just isolated individuals." And I think that is like the theme that we have all been living the past few years. This is not just one line attorney who is zealously advocating for the outcome they want. This is a commission-based stance against this industry. And they are so overreaching and overpleading in their effort to eradicate the industry that now they're just lying. I mean, I think that is what we have all seen. But thankfully, a court actually is acknowledging that that's going on and issued these sanctions. So, and I would just say, Rule 11 sanctions are really rare. So the fact that the judge ordered them against government attorneys and a government regulator is extraordinary.

• 49:00David Hoffman?

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• 50:29David Hoffman?

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• 51:14David Hoffman?

  With Cello Layer 2, gas fees will stay low and you can even pay for gas natively using ERC20 tokens, sending crypto to phone numbers across wallets using social connect. But Cello is a community-governed protocol. This means that Cello needs you to weigh in and make your voice heard. Join the conversation in the Cello forums. Follow Cello on Twitter and visit cello.org to shape the future of Ethereum. Are we, as an industry, able to turn this into leverage in other unrelated court cases against the SEC? Is this like some precedent that has been set that we can now say, hey, this is SEC versus crypto company numbers 123? Remember, the SEC has shown precedent of being totally unfair and lying to crypto companies. This is another crypto company versus the SEC.

• 51:59David Hoffman?

  Therefore, please take that into context. Or is this like staying isolated in this one little circumstance? Like, how, as an industry, are we able to leverage this?

• 52:06Speaker 02

  Well, we cited it in our complaint. We cited it as an example of the SEC's over-righteousness in their advocacy against the industry. It is precedential in that the way the judge comes to the conclusion that sanctions should be ordered has precedential value. Other people who seek sanctions could cite this order for that reason. But I think it is notable. And I think the court generally doesn't like when lawyers lie to the court. You are appearing in front of the court as an officer of the court, and judges need to be able to take a lawyer at their word, that they're not just bold-faced lying to the court in an oral argument. So I think it will matter to other judges that there is this atmospheric, even if it

• 52:50Speaker 02

  doesn't matter from a precedential standpoint. But we invoked it in our lawsuit to say, this is an example of this crusade the SEC has been on when it's taken to its worst conclusion.

• 53:02David Hoffman?

  Jake, do you have any thoughts here, anything you want to add?

• 53:06Speaker 00

  Yeah, I mean, I think the key here is optics matter. And typically, the optics of the SEC are that it is an organization, it's an agency that is trying to do the right thing, and so it gets the benefit of the doubt. And that is the benefit of a policy perspective among the regulatory agencies that says, we will only bring enforcement actions when we are absolutely certain that the target we are going after has done something wrong. And that way, we will always be above reproaching, we will always get the benefit of the doubt. And that's the downside of taking this perspective that the current SEC has taken, which is, litigation risk is a good thing, it's okay if we boost some If we're not losing any cases, then we're not trying hard enough.

• 53:48Speaker 00

  It means not only that they lose the benefit of the doubt because they lose credibility in court, but also it means that the businesses that they're supposed to regulate also do not respect what they are saying anymore because they feel like they're being treated unfairly. So this is not only bad for the crypto industry. I think it's actually bad as a matter of policy for the United States of America for our regulatory agencies to take a perspective like this.

• 54:11Speaker 02

  And the judge even says it is a gross abuse of the power entrusted to the agency by Congress and kind of tips a hat at Congress like, hey, do you want to do something about this without coming right out and saying it? So just like everything that Jake said is spot on. And I think even if it doesn't, even if this order can like stand on its facts here, I just think that the repercussions were felt everywhere. There was so much media coverage about it. It certainly matters on optics levels everywhere.

• 54:43David Hoffman?

  I kind of feel like I'm just having deja vu here. It seems to be like anytime we discuss on the podcast with lawyers, even before like I started Bankless and doing this podcast, my previous podcast, same kind of thing. We would talk about like some sort of regulation, the SEC or CFTC or something. People would be acting in bad faith. The legal perspective would be like, ultimately, we just need congressional regulation. And this is like bad, bad policy. It's like bad for jobs inside. It's like the same kind of spiel. It's been like crescendoing in severity. Like this is the first time we've had like SEC lawyers lie to a judge. So like it seems to be coming to a head. But overall, I kind of just feel like deja vu and we're in the same kind of spot that we always seem to be.

• 55:30Speaker 00

  It's disappointing and I think it doesn't have to be this way, right? And we've seen other jurisdictions around the world where there are regulators that take a much more constructive approach. And I think that sadly, other countries are setting a better example as role models for regulation than the United States. But again, we're at least making progress, right? And this is the benefit of the courts and our ability to use the courts in order to get some clarity here. I mean, this is a good opportunity for Amanda to talk a little bit about the BEBA case. But I do think that's the best thing we have here in the United States that frankly is not present in most other jurisdictions. We have a very strong judiciary that is willing to enforce the rule of law. And that's what the industry's strategy is right now.

• 56:11David Hoffman?

  Okay, perfect. So that's exactly where we're going next. The DeFi Education Fund versus the SEC is the title of this section. I'm not sure if that's actually the actual court case. I think it's Beba versus the SEC. Amanda, what's Beba and what's going on here?

• 56:22Speaker 02

  Sure. So Beba, our co-plaintiff, is a small apparel company in Texas. They make duffel bags and backpacks, and they recently did a free airdrop of their new Beba token. This is all for marketing, for promotional purposes. They want to reach a larger customer base, so they airdropped Beba tokens to people. And if you accumulate 200 Beba tokens, it entitles you to a discount on an exclusive duffel bag only open to token holders. So this was their way of, you know, getting outside their normal audience and getting some more attention to the brand. So they fear, rightfully, that because they have done this free airdrop, the SEC will take the position that this airdrop is a securities transaction, simply

• 57:07Speaker 02

  because it involves tokens. And Beba is seeking a court order that their token is not an investment contract in and of itself, and that also the free airdrop is not a securities transaction. This is called a pre-enforcement challenge. It's basically saying, before you get a chance to enforce against me, I'm going to get a court order declaring that what I did was legal and doesn't violate the securities laws. So that's-

• 57:31David Hoffman?

  It's a preemptive strike.

• 57:33Speaker 02

  Exactly. It's a proactive action. You do not have to wait to get a subpoena or a WELLS. You can go to a court and get clarity before that happens. So, and as you were saying earlier, it would be an existential threat to Beba, right? If they got a subpoena that they had to respond to, it's tens of thousands, if not hundreds of thousands of dollars, just to collect the documents and turn them over, let alone deal with whatever's on the other end of it. So this is a way to get out in front of it and be proactive. And then together with Beba, DEF and Beba together bring an Administrative Procedures Act challenge. So, under the Administrative Procedures Act, and this gets at what we were talking about earlier, the SEC should have done rulemaking. They should have written a rule down that

• 58:16Speaker 02

  reflects what they're actually enforcing in all of these enforcement actions and submitted it for public notice and comment and potentially a challenge in court. And we say that the rule that they are enforcing is that nearly all digital assets are investment contracts, and nearly all digital asset transactions are securities transactions. And we know this to be the case, because if you look at the dozens of enforcement actions that they have filed in the past few years, that is the through line. They might take like different litigation positions, they might get there a different way in a particular case, but there is clearly a presumption that if a token is involved, the SEC thinks it has authority and it thinks that it's a security. So, we're saying, you cannot have finalized that policy without writing it down and submitting it for public notice

• 59:01Speaker 02

  and comment without violating the APA. So, that's the basis of our second claim. And we're hoping that the court will recognize that the SEC has been on this crusade of regulation by enforcement, and there is a policy they are enforcing that they just adopted behind closed doors and didn't write down for us to know about.

• 59:21David Hoffman?

  So, under the assumption that you win the case versus the SEC, what precedent does that provide the crypto industry? What kind of clarity do we get from that?

• 59:29Speaker 02

  So, I think the most immediately helpful thing would be that BEBA's court order declaring its free airdrop is not a securities transaction would probably be of the most immediate benefit to the industry, because it gives a clear path for how people can distribute tokens without running afoul of the securities laws. And on the second count, if we have a court that says the SEC has violated the APA, and that there is this final rule that they are enforcing in violation of the law, it essentially stops their crusade against the industry. It stops their ability to keep bringing these cases with this policy as the backdrop without submitting it for notice and comment. The court could rule differently, like the court could order them to do rulemaking, which is also the basis

• 1:00:13Speaker 02

  of the Coinbase petition for rulemaking. Like, we're asking for similar things, but in different, on different legal grounds. So, the court could order them to do rulemaking, or it could just say they violated the APA and it has to stop violating the APA.

• 1:00:26David Hoffman?

  Okay, so this seems like a medium victory, I'd call it. Circumstantial in like different, like in the airdrops, then also like the crusade. And then, but then like the frontier progresses forward, then we have to keep on chasing it, right?

• 1:00:41Speaker 02

  Yeah, exactly. I think that this is step one. Like when you think about impact litigation generally, you don't, you can't get everything you want in the first case. You kind of have to build step by step the law that you want to see and that you think is right. And I think saying a free airdrop is not a securities transaction is a really good first building block towards the law that we, that we think is correct and should be concrete for people to understand.

• 1:01:06David Hoffman?

  So this particular airdrop, which is basically a fractional discount on a duffel bag, which one token is a fractional discount on a duffel bag, is like my interpretation of this, is like the safest airdrop of all time. And now we are protecting that. Will that be able to extend to more of the airdrops that we are familiar with? Like in the, in the more crypto native space where our like tokens generally represent some sort of like governance token inside of it, like a DeFi protocol? Like, how, how well does this extend that far?

• 1:01:38Speaker 02

  I think it's the first step on the path to what you just described. And I'm interested to hear what Jake thinks about this too. But I think that it's, it's, it's step one. Like it's not going to get you all the way there, but I, I think it is the first step towards that.

• 1:01:52Speaker 02

  Because it's, it would be crazy, right? If this free airdrop is a marketing promotion, is a security and a securities transaction, that would be crazy. There are giant consumer brands that use digital assets just to market their products, like, you know, household name kind of brands that use NFTs and tokens to do that. So I think it would certainly be a shock to them if the SEC was to start filing complaints against them. But I think it doesn't get us all the way there. And that's case two, three and four, you know?

• 1:02:22David Hoffman?

  Yeah.

• 1:02:22Speaker 00

  Yeah, I mean, I totally agree with that. And I think there is a strong possibility that a ruling here would go beyond just the context of a fractionalized discount on a duffel bag. Because again, it could give us clarity on this question of what is an investment of money? And the SEC's perspective is literally anything can be money for the purpose of the investment of money prong. If the recipient of an airdrop gives their email address to the creator of a token, well, an email address has some sort of intangible value. So therefore, it is money for the purpose of the Howey test. And I think that is a preposterous perspective, and a court order that says an investment of money means, like we were discussing before, a risk of financial loss, because an investor has given capital to an entrepreneur and then

• 1:03:07Speaker 00

  trusted the entrepreneur to use that capital to build a business on the promise of profit if they succeed. That's where you have a security. And outside that context, you do not. And that type of ruling would apply to any type of digital asset that gets airdropped in any type of context.

• 1:03:23David Hoffman?

  I think one of the biggest, easiest things to talk about as the win coming out of this is that the SEC thinks that the form factor of a token is a security. And this is like the easiest way to prove that, like, no, that's actually not the case. Like, the details matter. Like, the fact that it is a ERC20 token, or some token on a public blockchain, is by no means therefore creates a security. Is like the simplest way to like, kind of articulate the way victory coming on here, in the event that this case is actually won.

• 1:03:55Speaker 02

  Yeah, that's very well said. And some of the cases that we rely on make the point that you just made and the point Jake just made. So like, if you look at the hydro case, the hydrogen case with hydro tokens, and the Justin Sun case, the SEC takes the position that just liking something on social media counts as an investment of money. So if you get the airdrop simply because you participated in an emoji contest, that's the Justin Sun case, then therefore you have invested money back to the creator of the token. And that cannot be the law. Like, that cannot be the case. So this, our case puts that right in the, like, the target of the court to say that, no, money means money. It means you've paid something real to the token creator, and then you have an investment of money,

• 1:04:39Speaker 02

  and then we're at least getting somewhat closer to a correct Howey analysis. So that is the central issue in this case, is the investment of money prong, as Jake was talking about.

• 1:04:50David Hoffman?

  All right. Well, guys, we are on a roll. Bankless Nation, we are not done. We also have Roman Storm in his case. And there is an incoming amicus brief for the DeFi Education Fund regarding the Roman Storm tornado cash case. Amanda, can you kind of walk us through this?

• 1:05:06Speaker 02

  Sure. So yeah, so just to do a little table setting here, the United States brought a criminal case against Roman Storm and Roman Semenov, who are two of the founders of the tornado cash protocol. And in that criminal case, they bring three different charges. They allege that the Romans conspired to run an unlicensed money transmitter business, that they conspired to launder money, and they conspired to violate AIPA, which is the law that governs sanctions essentially. So they have alleged three conspiracies without actually alleging the underlying violations themselves. But the way they do that is by saying that basically because the founders released the protocol into the world,

• 1:05:49Speaker 02

  and there was also an associated user interface, and there was also an associated DAO. The government packages those things together and mislabels all of that a service, and says that the Romans were running a service that laundered money and did all these other bad things because other people were using the protocol in connection with a hack or in connection with North Korea using the protocol. So the way that we talk about the overlying theory of the indictment is basically a software developer has created software, and years later, it is used by a sanctioned entity or someone else who's committing a crime.

• 1:06:33Speaker 02

  And somehow the token creator, the software developer is held responsible for that third party's use just because they become aware of it. Even when they can do nothing to stop it, even when they can't keep somebody out of the protocol because it lives forever on the blockchain, the token creator is being held responsible. And our amicus makes the argument that the law has just simply never been used that way before. This would be a huge, massive expansion of the law. It would not just affect the Romans, it would affect all software developers in any industry and would create like huge amounts of liability for people who never thought that they would be liable for these kinds of things.

• 1:07:14Speaker 02

  So our amicus covers a couple of different issues, including that sanctions issue and the money laundering issue, but it all relates back to this idea of developer liability.

• 1:07:25David Hoffman?

  So the central point, the focus point of this particular court case is, I think it just kind of boils down to the whole idea of like code of speech, right? Like, can you write code and release that code into the public and be without liability of the people that leverage that code in any particular way, shape or form in any sort of like timeframe later than that? And so like, I think the, the argument here is that the SEC is arguing that there is a, a strict relationship with like tornado cash and the agency and responsibility and choices of the Romans, or there's not that relationship. That relationship is absolutely meaningfully severed because the Romans have no further agency than anyone else in the

• 1:08:09David Hoffman?

  world. And just because they wrote the code in the first place doesn't actually imbue them with any sort of agency or control. That is just like facts and circumstances. They, they just happened to write the code. That doesn't imbue them with any sort of additional responsibility beyond the average layperson, which is fundamentally true because you can look at the code on Ethereum. Is this a way to like kind of summarize this, this issue?

• 1:08:29Speaker 02

  Yeah, I think, I think the code of speech issue is there. It is real in the case. And by the time that your listeners are listening to this, I think you will also get to see that there are other amicus briefs filed that are going to squarely address the First Amendment issue. I think Coin Center will put in an amicus brief dealing with the First Amendment issue of code of speech. But that is definitely a part of this case. That is an important issue in this case. And in the additional issues are exactly where you got to at the end, which is that if you take the government's theory to its logical end, it is basically going to require any developer of any software, I mean, something even as benign as like Adobe, to think about all the potential ways that some bad guy could use their software down

• 1:09:12Speaker 02

  the road and wall that off, even if it's not possible, somehow lest they be held responsible for that bad guy's use of their software later. So I think that it is taking the responsibility for doing crime away from the actual criminal and putting it on the shoulders of the software developer, which is totally inappropriate and not the basis for our criminal justice system. And I think, and what we talk about in our amicus is there are maybe 98 to 100 recent AIPA cases, two dealt with software developers. And in those cases, the software developers specifically created software for a sanctioned entity. One created software for Iran, went to Iran, marketed it to Iranian companies.

• 1:09:55Speaker 02

  So in that case, there's a direct and active engagement between the developer and the sanctioned entity. But in tornado cash, there is no allegation that when the protocol was released in 2020, that the Romans had anybody in mind, let alone a sanctioned entity, and that they ever intended or knew or directly engaged with a sanctioned entity at any point in time. There's no allegation in this case that that exists. So I think that's the key fact here, that just because this spontaneous use happens later by somebody who is accused of a crime, the developers should not be held responsible for that.

• 1:10:35David Hoffman?

  And isn't even in the case where the software developer actually engaged with the Iranian government, that's a different crime. Like, I don't know what the crime is, like treason or conspiracy to do something, I don't know. But like, not writing code, not writing software, that's a different circumstance, correct?

• 1:10:53Speaker 02

  Yes, that's direct and active engagement with a sanctioned entity. That's the AIPA charge. That's what it's meant to do, right? It's meant to say, if you knowingly engage with a sanctioned entity and you directly do that, then you are violating AIPA. And you know you're violating AIPA, right? There is like a mens rea, a mental state required here, which requires a person to know that they are committing a crime or doing something wrong. So in that case, that was certainly alleged and was present in the indictment. It is not the case, at least in the indictment as it's written right now with the Romans, that is not alleged.

• 1:11:26Speaker 00

  So I strongly agree with that, and I want to also zoom out a little bit just to explain a little bit what I think is going on behind the scenes here, which is an existential battle for the heart of this industry, right? We've spent a lot of this conversation about the securities laws and the financial markets issues are important, but they are not likely to spell the end of this industry. The national security issue is fundamentally different. The main concern that the government has about crypto right now is that it is being used by North Korea to fund its missile program, and that is no joking matter. And that motivates the government to think, how can we stop this technology from proliferating in the world?

• 1:12:08David Hoffman?

  At all costs.

• 1:12:09Speaker 00

  At all costs, no matter what they have to do, including stretching the law far beyond what it actually means. But look, our mission is to go bankless. And when you talk to a lot of folks in law enforcement about that, who rely on the presence of banks as intermediaries in the global financial system in order to exclude bad actors, they do not support that mission, right? They are centralization maxis. And so they look at software developers who are doing nothing more than expressing their views in the form of code, and they say, how do we stop these people from doing this? It's leading to this bad result. And the way that they're trying to do that, unfortunately, is by imprisoning software developers. So, you know, Amanda and I care very deeply about this issue.

• 1:12:52Speaker 00

  I was very proud to co-write the amicus brief that the D E F will file with her. I think this is an extremely important issue, and it's one that everyone needs to focus on.

• 1:13:01David Hoffman?

  So what does the future of this case mean for the Romans? This is a very core part of their case versus United States government. How does this proceed forward? Give us like the hypothesized like next set of events here.

• 1:13:15Speaker 02

  Sure. So one of the Romans, Roman Semenov, has not appeared in the case. My understanding is he's not in the United States, but we're not sure where. So we'll put him aside for a second. For Roman Storm, he moved to dismiss. He moved to suppress certain evidence that was collected from hardware devices that were taken from him when he was arrested, and he moved to compel certain discovery. So the judge has three motions in front of her, and just to flag, this is Judge Phaila again. So this is Judge Phaila who wrote the Coinbase decision. She also wrote Rizley v. Uniswap, which I think the industry likes much more than the Coinbase decision because

• 1:13:54Speaker 02

  in that case, she did a really beautiful job of distinguishing between token creators, a trading platform, Uniswap, and the users of that platform. And I think that we are hoping that she brings that level of technical nuance to this case as well. But she will have to rule on those motions relatively quickly. Trial set for the fall.

• 1:14:17David Hoffman?

  One quick hot take that I have that I want you to check, Amanda, is that I'm kind of happy that this one particular judge is being the judge for all of these crypto cases because crypto is complicated. So I would like to have this one judge invest their time and knowledge and education, getting up to speed with how crypto works. That's just like a hot take. How do you feel about that?

• 1:14:36Speaker 02

  I completely agree with you. I think that she has already demonstrated a desire to understand the technology and a good level of understanding. In the Rizley v. Uniswap decision, she totally gets it. I mean, I think we all were really pleased with that decision because it was one of the few times we felt like a judge really dug in and came to the right conclusion on the tech. And then I understand the Coinbase order is what it is. But at the Coinbase oral argument on the motion, I think she said on the record, I have 14 pages of questions. And her questions demonstrated a real understanding and curiosity to get it right. So I am hoping that she will bring that to this case. I know that

• 1:15:20Speaker 02

  the injection of North Korea in any case is obviously a lightning rod. Nobody is here saying that we want to in any way facilitate the financing of North Korea. But I'm hoping that she recognizes that this case actually really isn't about North Korea. It really is about developer liability with any potential bad actor and that she stays true to the technology.

• 1:15:46David Hoffman?

  Yeah, so Jake, on that North Korea point, like Amanda said, like lightning rod, the Department of Defense is nothing to like joke around about. They're going to be extremely well resourced. They're going to take this to all the way to the very end, I'm sure. And on the other side of things, inside of America, we enjoy our courts to be impartial and take all sides equally. Are, do you feel secure in the idea that just because this is a matter of national defense, just because this is a matter of like North Korea and the Department of Defense and all these things, that the courts will be able to remain impartial and neutral despite having like, you know, national defense as like one of the big concerns here?

• 1:16:29Speaker 00

  I wish I could say yes, but honestly, the answer is no, I don't. And I think that's very unfortunate, but it is the case that when judges see national security issues, they don't be, they don't want to be the one who rules one way and then something very bad happens and then they feel responsible for having ruled in a way that did not, you know, crack down on what they were told by the government was some criminal threat or some other type of bad behavior. And, you know, a lot of times, even with judges who tend to be more pro-business or more pro-innovation, they also often are more pro-law enforcement. And so it's often very difficult to find judges who are both going to understand and want to support innovation in the industry and also want to support

• 1:17:10Speaker 00

  civil liberty in the contest between a freedom and national security. So I think this is an extraordinarily high-risk situation. The Department of Justice does not lose these types of cases. I mean, occasionally they will, but very rarely. And so I think the fact that, you know, this case has these sort of difficult facts underneath them, which are very serious, we shouldn't dismiss the importance of this issue. And as an industry, we have to come up with some other way to address it. But I think that it is, you know, very worrisome about how this case will come out and what precedent it will set for the rest of us.

• 1:17:42David Hoffman?

  Wow. Okay. All right. Well, we'll have to sit and wait and see on that one. As we kind of draw this podcast to a close, we have to turn back to the world of Congress and US elections. We've already kind of touched on it a little bit, so I don't think we need to dwell too long on this. But what about the incoming November United States 2024 elections really stands out to you the most? Like, what are you guys particularly focusing on as like the big focal points of like the before and after of the 2024 elections? Jake, we'll start with you.

• 1:18:11Speaker 00

  Yeah, sure. So I think this is, it is pretty quick because before is basically nothing. Congress is pretty much done for the year. It's an election year. They're going to start campaigning. If anyone has been watching what's going on in the House of Representatives, it seems like they can't sort of get their act together to do anything, like pass a budget, let alone move legislation related to crypto. And we have the divided Congress, Republicans in the House and Democrats in the Senate. So structurally, it would be difficult for them to do anything anyways. Basically, we're done with Congress for 2024. The focus is really on the election. And there's maybe two important things to watch. One is the crypto industry has become much more active in the election. There've been a lot of investments being made, a lot of contributions and donations to candidates

• 1:18:54Speaker 00

  that are either pro-industry or frankly, those who are simply not anti-crypto, right? Just to make sure that we don't end up with a Congress that's full of folks who think like Elizabeth Warren does, that the entire industry should simply be destroyed. So that's really one important piece that's never been seen before in an election like this, is how much of a player the crypto industry is going to be. The second thing to watch is a handful of congressional races where there's a competition between, sometimes in the primaries, moderate and progressive Democrats. You know, we all sort of talk about how the Republican Party tends to be a little bit more pro-crypto, but there are so many Democrats, especially moderate pro-business Democrats, like Jake Auchincloss, for example, in Massachusetts,

• 1:19:36Speaker 00

  and many others who have very difficult or competitive races, like Alyssa Slotkin, for example. We need to be supporting those moderate Democrats to win their primaries and then to take seats where we can turn the Democratic Party a little bit more toward the industry. This is not, you know, a one-party type of issue now. So I think that's going to be really important to watch.

• 1:19:57David Hoffman?

  Amanda, same question to you. What are you looking at when you see the 2024 election?

• 1:20:01Speaker 02

  Yeah, I agree with everything that Jake said. I think this is going to be an issue in a bigger way than it ever has been before in an election, right? I think the industry has really rallied and come together in a lot of ways, like the proactive litigation we're talking about, even in the face of rule makings, like the massive amount of great comments we got from the industry in response to proposed rule makings this past year. And I'd love to see that groundswell be brought to this next election. I think I'll just use this as a call to action. I think that people who are not aware of who their representatives are, figure that out, tell them you care about it. They care about their constituents. They care about voters in their districts. So I think if you want your voice to be heard

• 1:20:43Speaker 02

  in favor of crypto, this is the time to do that. And I think, like Jake said, Congress is probably done for the year, but next year is a new year. And I do think there will be a huge focus on passing legislation next year. So there's no reason to, you know, wait on educating lawmakers about the issues that you care about. It will matter. I really do think that individuals in the industry can make a difference. There are, there are younger members of Congress in particular who are crypto curious and can, we can educate them and explain to them why it's important and it's a great issue to get in front of somebody to talk about.

• 1:21:23David Hoffman?

  Well, thank you, Amanda. Jake, for getting in front of the Bankless Nation and educating all of us so much about just the insane amount of activity that is happening. This is like one of our longest legal episodes that we've done in a really long time. So from behalf of the entire industry, just thank you for being on the trenches. Thank you for being on the front lines. And also thank you for coming on Bankless today and keeping us informed. I really appreciate it.

• 1:21:45Speaker 02

  Thanks, James.

• 1:21:46David Hoffman?

  Bankless Nation, you guys know the deal. Crypto is risky. Taking people to court also risky, but sometimes you just got to do it. You can lose what you put in, but we're headed west. This is a frontier. It's not for everyone, but we are glad you are with us on the Bankless journey. Thanks a lot.