Crypto Funding Claims, FinCEN vs Mixers, and IRS Tax | Rebecca Rettig and Jake Chervinsky

Transcript

this episode is brought to you by chainalysis the leading blockchain data platform that powers investigation compliance and risk management tools used by both businesses and government agencies around the globe you'll hear more about chainalysis later in the show welcome back everyone we have two recurring and very special guests again Jake and Rebecca welcome back it's been a while since we did a regulatory catchup so it's great to have you both on thank you for coming thanks for having us it feels like many years have been in between each episode I know we're like now on a bull market it seems the sentiment is totally different but there's a lot going on on the regulatory side I know you both um Jake first of all congratulations you have a new role now so maybe you can tell us a little

bit about that and then we can transition into all things regulatory yeah sure and thank you very much so I um recently announced I'm going to be joining variant as Chief legal officer uh for those who don't know variant is an early stage Venture Capital firm uh focused on the ownership economy and investing in in the future of web 3 and um I have actually been advising them for the last two and a half years working with Jesse Walden and lein the general Partners I'm just an unbelievably huge fan of them and the thesis uh and I'm very excited to get back to practicing law and helping Founders figure out how to navigate some of these Regulatory and um and policy and legal issues that we talk about on this podcast I am also not going very far from the policy world so looking

forward to to continue doing this with you and Jason and Rebecca for as long as it matter matters that's great I think it ties into a lot of your effort Rebecca polygon which is really showcasing the use cases and variant as a fund really you guys invest in a lot of consumer and I think this that's so important to really showcasing The Regulators and general public of why crypto is so useful um uh I think as a starting point obviously there's uh the war that has recently broken up and unfortunate unfortunately in Israel um and Palestine and this uh Senator Warren has come out just really uh saying you know crypto is bad Hamas you know it's being used cryptocurrencies are being used to finance terrorism and that I think is really negative and we see this

time and time again so maybe uh Rebecca or Jake whoever wants to start kick us off there and then um what's going on in DC yeah um so I'll kick us off I think anti the anti-money laundering uh question when it comes to both crypto uh and then extending it out uh particularly to defi is one of the existential questions that the industry needs to band together on and come up with some really good answers to and they're hard and they may be the answers may be imperfect right I know a many of us want to preserve the systems as they are today or as they're intended to be um especially on the defi side of things and we should do we should keep things permissionless at all costs but I think there needs to be an answer um and and a

response now what I do think is a lot of the talk of crypto being used for elicit Finance has been um really made into sensation ized headlines uh you know there is still plenty of of elicit finance that goes through Fiat even the defi treasury report um talked about that um many months ago so I think that needs to be put in context but you know there is there's the um framework of the bank secrecy act what everyone calls the BSA that sets out this idea of this like detection and deterrence regime for money laundering for financial institutions at least in the United States and then the financial action TX task force is this like Global anti-money laundering group that does

try to come up with ideas for how to combat these issues and they have a virtual asset something vacg so their virtual currency working group um that has been trying to work on both CI and defi issues for money laundering for a long time on the CI side of things we uh you know I think in the US all of the major exchanges and other uh centralized actors are licensed for the most part in some way uh and so as a Money Services business you know or a virtual currency exchanger um you do have these types of AML kyc obligations but if you actually look at what FFF is saying Global compliance on the CI side is I think 20% or below and we know from having been able to through

the transparency of the blockchain track how a lot of this um terrorist financing elicit activity through crypto works is they go to Offshore exchanges right because nobody's taking speaking your favorite I don't know what I don't even know what the non-wearing word is to call it but like these low liquidity coins um somebody needs to come up with a better word um coins but yes okay um you can say it I won't um but uh and I was on like a trafi type panel this morning and I was like what word do I use but but yes though highly speculative internet uh coins sure um those are usually are the ones probably most uh sort of least secure and frequently what get hacked and then

they're turned into stable coins and then to get them into Fiat right because no one's taking their shitcoins and actually like you know using them to finance weapons of mass destruction or something like that they're taking them either out to stable coins or really much more so to Fiat and they're doing that through these offsh offshore exchanges so there really needs to be work there um and I know fatf is trying to figure out how to bring these non-compliant exchanges up to snuff but they're also I mean look you have to obviously have the um you also have to have the evidence to back this up but lots of times ofac or the office of foreign asset control will put sanctions out on centralized actors in other countries that they know are facilitating money laundering in ways that it affects the United States and so

I'm curious as to whether we will see some of those types of actions when it comes to CI defi is much more complex um and maybe I'll put a pause on that because I do think we just saw this notice of propos rule making come out of finsen last week about mixer and I think that's sort of meant to address this question of terrorist financing um because I talk a lot about overseas actors using crypto um for elicit activity but Jake I don't want to keep I mean I could keep talking about this for a long time but I'll I'll stop yeah well I mean as always I I totally agree with all of that and I think it will be good for us to get into some of the details of the specific regulatory proposals that we're seeing and also legislative

proposals that we're seeing to try to address this issue but maybe just to give a bit more of High Lev perspective I think first of all we have to start from a position of acknowledging that nobody wants bad guys like terrorists or moneya launderers to abuse this technology right that is not why we are here we are not Building Technology because we want to make it easier for terrorists to carry out attacks on innocent civilians that said we are building technology and technology is a tool that can be used for good or for ill and it's not surprising that just like every other technology that has reached uh Escape veloc like crypto has like the internet or anything else we are seeing it abused by Bad actors and so the challenge for us is to engage with that reality and figure out how do

we maximize the benefits of this technology while mitigating the risks and reducing the downside and that's the conversation that we're having right now now for a very long time the way that the industry has addressed this challenge has been to say we already have regulation on the onramps and the off-ramps into the crypto ecosystem right we already have the full application of the bank secrecy act we have surveillance we have monitoring we have reporting and we have the ability to freeze and seize assets on exchanges where people are getting money into the system and taking money out of the system and within the crypto ecosystem itself there's not a lot of conversion of digital assets into useful goods and services for bad guys right exactly like

we're saying they don't really use shitcoins to buy machine parts to power rockets or or weapons of of mass destruction or things of that nature the problem is especially with the increase in use of stable coins we are starting to see that shift and also as we are seeing more use of crypto uh you know as a as a percentage of total volume a vanishingly small amount but still just more use of crypto for elicit activity globally uh we're starting to get tougher questions about how are we going to address this problem not just at the on and offer amps but also within the crypto ecosystem itself and there's sort of two ways broadly speaking to address that challenge one way and the way that that we are trying I think Rebecca and I are

spending a lot of time trying to address this is to say there are better ways to address illicit Financial activity than simply excluding the vast majority of human beings from the financial system and that is what we do right now we keep you know seven billion people or so out of the financial system simply because they do not have an appropriate government issued ID that allows them to pass a kyc check to get access to basic Financial Services which I view as a a human rights something that everyone should be entitled to and instead we should use Crypton native mechanisms to try to root out elicit activity while still expanding access to financial services for all people that's one way of looking at this the other way and unfortunately the one we're seeing more and and we'll get into how exactly we

are seeing this uh being implemented is to Simply expand the drag net that we already have in the traditional Financial system which says the financial system must be dominated by intermediaries the intermediaries will be deputized to perform essentially a law enforcement function of surveilling what types of transactions people are conducting and then stopping people from getting access to the system there's an inherent mismatch between decentralized technology and that type of centralized regulatory solution but that's the battle that we're fighting right now we've seen this coming from a lot of international Regulators too which is they they they want to find and this is a like a defined term through iosco

which is this International Organization of securities Regulators a responsible person because that is what we are used to seeing in most financial and economic activity and they want somebody to be responsible and so if we are going to get into some of these legislative proposals um I think we'll talk about this but they're all seeking to figure out who's the responsible person here um and they're all pitting it on different actors in the space some of whom may make more sense than pitting it on than others um but ultimately it's probably not even the the best result I'd say um so I think I think this is but I think one as Jake said like nobody wants uh Bad actors to use crypto um for bad

purposes and the industry needs to be pretty um vocal about that being a fact um I think because there is this idea that it's permissionless and um ungovernable and in many ways that's partly why I think Jake or certainly I'll speak for myself but I do think why Jake and I are here that this does upend many of the um Concepts that have held back access to people throughout the world um that's really really um obviously important um but people are just trying to impose sort of this old system on this new system and trying to keep it as permissionless as possible so you have the benefits is really important too um but we need to be I think speaking with one voice to say

like we don't want this uh and we're going to work and collaborate to find a solution that keeps the benefits and the beauty of the technology um intact as well I mean I'll go as far as saying even the bad guys don't want to get crypto I mean Hamas uh U issued a kind of a statement uh even before the war started like I think it was a year ago it said guys please don't send any more Bitcoin because you're putting a Target on your back like you're all of a sudden becoming very identifiable person um and so it's just important to understand that right I mean like so go talk to um you know the folks at Silk Road like the reason why we're able to trace this down is because it's transparent in nature so it's important to just kind of understand that but but I agree with so

is this sentiment um properly understood in political circles how much of it is just um because we've seen time and time again certain figure heads want to get ahead in terms of get political Goodwill and make all this noise but maybe the working groups within these agencies kind of really understand and have a more balanced Pro crypto opinion I'm I'm kind of curious like because this is very sens when you start talking about terrorism you start talking about you know uh Access of Evil and and crypto gets involved in that like people really are very binary um have we made any progress we we've definitely made some progress I

I'm I'm curious what Rebecca's take is uh because I know she's been working on a lot no I'm so interested to hear what Jake has to say because I actually think we made progress in a way that people can't see so this is a good question so we can talk about it a little bit yeah I mean I think um maybe there's sort of four categories of responses that we get from policy makers when we talk about this um so I'll go sort of from best to worst from our perspective the best one and I think that we are hearing this increasingly as we educate people in DC is an understanding of our perspective which is there are better ways there's a win-win here right there is a way to both increase access to financial services and mitigate Risk by removing intermediaries from the financial system

while also addressing elicit Financial activity in a really effective way and that we shouldn't throw the baby out with the bathwater so to speak instead we should support Innovation and we should let this technology grow into a place where we have this sort of win-win of of the best of all worlds that's that's one perspective and and um the best one and I will say we hear this not just from Republicans a lot of people think crypto is this partisan issue Republicans in favor Democrats against that is not the case right we are hearing this on on both sides of the aisle the second category I would say are the folks who just don't understand yet what's going on here right so they think the entire crypto industry is simply non-compliant they are used to a financial system that necessarily

requires some middleman in order for people to transact at a distance and when we say this is new this is decentralized this is dis intermediated you can't find a responsible person in the way that you might think this is peer-to-peer they just don't really get that yet because they haven't understood it and often and this is something Rebecca is better at than I think anyone doing this kind of work is to literally explain what the technology does and then show them right to pull up a decentralized exchange front end and connect a web3 wallet to it and do a transaction and say there was no intermediary in that transaction that blows people's minds and it's really fun to have those moments the the third category are the people who don't care and I would put unfortunately Senator

Warren in this category I think she genuinely does not care about the tradeoffs of of what's good or what's bad here I think that she's is looking to score political points I'll I'll due respect and she's doing that effectively and I I think it's it is quite sad that a lot of our politics in the United States is dominated not by making good policy decisions but by saying something that will'll get headlines and we'll get votes and then we'll get donations for you know for campaign funding and I think that there's a sort of growing and large category of people at least since FTX exploded who feel like attacking crypto is just an advantageous thing to do and they will take advantage of any crisis in the world including a terrorist attack by Hamas on Israel to acre their own political power sort of

the third category the fourth category and this is maybe the one that we need to be most concerned about are the people who do understand they know what decentralization is they just do not like it they think it is a worse Financial system they believe that intermediaries are necessary in order for us to address illicit Financial activity and any other you know type of concern that they have about how the financial system works and they do not care about all of those billions of people who don't have access this is often a very entric view right A View that you have when you are in a privileged developed nation that has a well-functioning financial system and you have the luxury of just not caring about anybody else but those are some of the folks who are putting forward some

of the regulatory proposals that we might talk about it's not that they don't get it it's not that they are you know are just trying to score political points they get it they just don't agree with us yeah I mean so Richie Torres uh has said a number of times that this isn't a partisan issue this is a generational issue um and frequently you can see it breaking down that way from the policymaker side and so when we talk about whether we've made progress and I will put this across uh definitely yeah I'll put it across all branches of government in the United States that when you hit the staff level usually who's a bit younger maybe a bit more in the weeds and I'd say this is true at agencies that we think and have very public antic crypto stances in the

United States too the staff of many of the agen Regulatory Agencies and the staffers on the hill and i' venture to say the clerks who are supporting a number of the judges who've put out really interesting really te forward what we think of as spot-on legal decisions all do seem to get it on some level um they can't be making the progress that we'd all like to see right um but I what I keep saying and keep telling myself is that we're sort of living through the worst part of the part of the storm and so whereas like you look at your face and you don't see it aging every day because you're looking at yourself in the mirror on Zoom or whatever um H and then one day you wake up you're like oh wow I look so

much older it's um or you see or somebody else right you haven't seen them for a long time and then you see them you think oh they look much older um I think five years from now things will look different maybe 10 you know things will look really different but we can't see the incremental change um one because I do think that there is a lot of very loud leadership um in all levels of government um who may generationally not be aligned with us as Jake is saying um and then also uh at the same time once there's an opportunity and I spoke to somebody yesterday who's at a regulatory agency who was saying like we're just waiting for a break in leadership to be able to try to make some progress because people at the

staff level are working on it so I do think we've um there is the possibility for change I do think we're in a better place than we used to be I think it's very hard to see right now for a number of different reasons chain analysis is the Premier blockchain data platform crypto businesses financial institutions government agencies regulators and policy makers all utilize chain analysis's data and services to make sense of what's happening on the blockchain Chain analysis demystifies crypto by providing industry-leading compliance Market intelligence and investigation support for all crypto assets for organizations like square and Barclays and bny melon as regulators and policy makers work together to pass

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people see these news of course it gets blasted all over how much of that is just like in what stage are these kind of builds like because I think a lot of people see them they're like oh my God this could be implemented and and be live and tomorrow and if I don't comply you know it's but it of course that's not the case I think and so uh maybe if you could just give some context on the bill and then kind of talk about kind of what the different scenarios uh and possibilities are for it yeah okay so let's back it up a little bit so the financial crimes enforcement Network which is overseen by the department of the treasury put out a proposal of special measure regarding what they call convertible virtual

currencies um and first of all it's not a bill it is a rules which are put out by a regulatory agency right the treasury is under the admin side of things um so they wouldn't necessarily put out a bill so that's one they are looking for feedback so people should read it and actually provide feedback and they ask really specific detailed questions um about certain things so we can get into the substance in a second um and the notice of the proposed rulle making um have comments have to be submitted by a certain date and then what happens after that is not like somebody turns around tomorrow you put your comments out and a day later things come out it's that they will take in all the comments

they will have to read them under the administrative procedures act they'll have to take them into account they have certain balancing factors right benefits versus risks and we should talk about one thing everybody really needs to do uh because there's a very specific request in here um and I think people really we should be working as an to come forward to meet that request but um to make the responses to understand what they say to do all the balancing they're required to do Under the administrative procedures act and then they will put out a potential rule so that's the first thing so it's not a bill it's not it doesn't need to get passed um it's just a notice of proposed rule making what it actually does Subs Jake is there anything you want to add on the procedure side of things no n it

okay what this notice of proposed rule making does subst is is that it asks for domestic financial institutions and domestic Financial agencies so domestic meaning based in the US to implement recordkeeping and Rec reporting requirements which are things that FIS already have to do Under the bank secrecy act relating to transactions involving uh mixing basically for crypto um and on its face I think that's not crazy right one you have to be a financial in institution right it's not saying we're going to regulate defi on its own or something like that they're saying you're already a regulated entity we'd like you to do additional enhanced

reporting and recordkeeping which is what the BSA requires so that's the first part of it um the real Pro and and recordkeeping and Reporting are are part of their normal course the real problem is the breadth of what mixing is under this proposed rule would capture I'd say all smart contract based based um applications spe definitely defi apps but probably even ones that expand out from defi that just somehow you know you're still using crypto and other types of smart contract based applications that's really problematic and one of the things that I was sort of shocked seeing is that they said well instead of actually taking on these

additional reporting and recordkeeping requirements we understand that financial institutions probably may just decide not to touch mixers at all and so fine if your only mixer is tornado cash and it's already been sanctioned let's put aside what you think about that uh I have many strong feelings and I don't I don't even think we did it maybe we did like a portion of an episode on it but now the thing is oh no and by the way coinbase is an fi because they're a Money Services business so they already have a lot of these requirements um it would say they wouldn't touch any of defi so that's really really problematic and the portion of the industry that

this really benefits and when you're reading the proposed Ru making I mean it's just screaming out to you like this benefits the blockchain analytics companies how much of this is just chain out like okay let's intermission intermission how much damage has coin analysis or chain analysis and what's the other one uh like Cipher Trace have done for the industry cuz I mean I've heard some crazy stories of just they're just really doing fearmongering and pushing stuff that is really just going to stimulate their business I mean they raised around and they got to support it which you know anyways if you fre to comment or not comment but continue if not not commenting but um page 55 of the notice and proposed rulle making like

you're reading the whole thing and you're like all this is going to do is have the analytics companies be more involved because what it re on the recordkeeping um what you re and and uh um and these requirements you'd really have to do onchain monitoring really deeply for all of your customers like for every transaction to know if it touched a mixer and they were bringing it back into the exchange but the funny part was on page I kept thinking this the whole time I was reading it on page 55 it says in particular finsen expects the proposed requirements may affect the demand for services by Third Party blockchain Analytics companies and I was just like well at least we're calling it that re like an IPO

perspective I just thought that was very interesting that they at least they at least were look finsen has historically been I'd say one of the most um aware Regulators on crypto um for many many years I think people thought the 2019 fin finsen guidance was some of the best in the space and probably stays um you know pretty good and pretty out out there in front to today um so so they understood a lot of what they were writing here and they ask really good questions but I've been talking for a long time now so Jake oh you um I mean again as always excellent explanation of the details let me um as I often do step us back just a little bit and then and

then zoom in on on a different piece of this so stepping back what is actually going on here to me this is again Parton paral of this this macro challenge that we have which is Regulators want to identify the parties who are transacting right they want full insight and surveillance over the financial system and this particular area within crypto mixers are a tool that people can use to get privacy so that the government cannot surveil their transactions and what we are seeing is sort of a full frontal assault from Regulators specifically anti-money laundering Regulators to try to figure out who are the people who are transacting and how do we circumvent this type of Technology now they know that they cannot stop stop

software developers from building these tools they can't stop them from being launched onto blockchains they can't stop people from using them once they're already in the crypto ecosystem so then the question is how do they stop people from using them to make them as uh you know low liquidity and as difficult for people to use to protect their privacy as possible one answer is sanctions and that's what we saw with tornado cach where the government said tornado cash is simply illegal for us persons to use and that is sort of the the strongest form of an attack that we can imagine where where the government simply criminalizes a particular type of Technology that's why that designation is subject to litigation right now in two different lawsuits that Rebecca and

I through the defi education fund are both involved in because we oppose oax designation of tornado cach as you know a sanctioned party whatever that means this action is sort of like sanctions light the designation of a class of transactions as a primary money laundering concern and it's very noteworthy because the Patriot Act has been in effect for over 20 years the treasury Department has had this ability to designate primary money laundering concerns for that long they can designate an institution a jurisdiction a type of account or a class of transactions they have never designated a class of transactions before so this is a novel action that the treasury

Department is taking one step further going after crypto than they've ever done in any other type of context and say sanctions light because as Rebecca was just explaining quite well the the designation doesn't say it is illegal to use a mixer what it says is hey you regulated financial institutions do you really want to touch these things because you know if you don't paint within the lines you might get in trouble with us and that is really a signal to them to Simply cut these things out and that's often how the government works they don't tell you exactly what to do but they sort of hint are you really sure you want to take on that risk understanding that an in-house compliance department is going to say it's better for us to just drisk this entirely and not have to suffer the you know the consequences of getting it

wrong and the high compliance cost of of going forward with it so I think that's sort of where we are now drilling into um two pieces of this that I think are are worth talking they literally say it in the nprm they say it is reasonable to expect that the relative attractiveness of engaging with CVC mixers or the number of those who Avail themselves of CVC mixing Services might be affected they they totally call it like they see it sorry keep going um exactly right and and I think just as Rebecca was doing it is very important with with uh rule making like this to read very carefully what they are saying now the way they are framing this is we think that mixers are a particularly high risk because bad guys are using

them to launder funds but if you read the definition that they provide for CVC mixing it is way more broad than something like tornado cache or another privacy preserving protocol it includes basically anything in defi it as an example gives something that pools user funds period end of conversation so what this really looks like is not just treasury saying we're uncomfortable with privacy tools it's them saying we're uncomfortable with defi very because they are very consistent with what they've been saying for many many months they put out a risk assessment of defi in I want to say it was in March or April or February earlier this year and their their take on defi basically was like we don't think decentralization is

a thing but if it is a thing we don't like it and we want it to stop so that's sort of what what the message is that's that's coming here now let me give you just one more piece of this from the politics perspective because there's an interesting conversation happening in DC around this right now which is is this actually good for us because if we get to talk about the legislation the bills that Elizabeth Warren and Senator Warner and others are are putting forward those things just ban crypto outright and there's at least an argument to make that says this is the treasury Department kind of trying to help us they're basically saying look we don't need new legislation you don't have to ban all of crypto we already have the tools that we need to address these problems and there's an argument to be

made this is a little bit more behind the scenes than I probably should be saying on a public podcast but like there's an argument that really our public messaging should be like we support this rul making the treasury Department has all the tools that it needs to address elicit Finance we do not need Congress to do anything because that might be better than the alternative which is Elizabeth Warren right now saying treasury does not have the tools they need we need to pass my bill because my bill is the only way that we're going to solve this problem yeah that's quite fascinating uh where do we go from here so like there's a commenting like people can read it they can comment I'm sure you guys are going to be commenting and doing a lot Rebecca so here's what they are begging for and this the industry

needs to come together and do I have to find the actual wording they say we have to do what I said before under the APA they do have these different types of balancing um exercises that they need to do some of which is like what we'd call a traditional cost benefit analysis and they literally are asking for examples of legitimate business purposes for mixing they specifically asked for it they need it to balance against what harm they would be doing by implementing this rule against the legitimate business purposes for mixers uh for mixers um so honestly I I would love for

somebody to do work collecting those for the purposes of putting them all into a response um if it's not ba or the defi education fund um I personally will do it and figure out a way to get them you know into somebody's uh response um but like we really need the industry to to come together and give an anecdotes and it's probably fine if it's you know Anonymous too about legitimate business purposes for mixers and we heard a lot about them when after the tornado cash um designation a sanctions designation where people said like well I pay all my employees in crypto and people don't want to have like the amounts of money they're getting paid traced and like it's like Jake was talking about like we're allowed to have you know privacy

particularly over our financial transactions we have a lot of that today in certain aspects although the B say does allow for centralized intermediary surveillance on some level um but I do think we need to talk very publicly and also then submit to finsen all the legitimate ways that mixers are important to preserving privacy right like what would T tweeted out too like you know I don't want everyone tracking my wallets when I donate to Ukraine and things like that right I mean I I guess like would you would you start by like redefining or narrowing the scope of a mixer I mean like that to me feels like it's just like everything under the sun like you're swapping from an L2 to an L1 okay that's a some sort of that I I mean

in my understanding was correct me here I'm wrong but the definition is just so broad I think intentionally so yeah should we go through it I have to find yeah I love to just dissect it because to me it feels like if you I wouldn't even want to start giving examples I would rather just try to get it like focusing on narrowing down the oh sure so I think you probably need to if you're going to respond you need to do it in two steps you need to say what are what are you talking about when you're talking about a mixer so I'm talking about a mixer the way we would all talk about mixers right yeah like tornado cash like you know um and then you need to say what are the legitimate uses for that because if we're going to go with legitimate uses for defi people

should get Toms um okay the term CVC mixing means the facilitation of CVC transactions or crypto transactions in a manner that obfuscates The Source destination or amount involved in one or more transactions regardless of the type of protocol or service used such as pooling or aggregating CVC from multiple person's wallets addresses or accounts so like liquidity pools def two using programmatic or algorithmic code to coordinate manage or manipulate the structure of a transaction also defi um right splitting CVC for tra and like on when I was reading it I wrote

like defi defi on that second one is not just defi that's just like any smart contract it's not just well so first of all not even just smart contracts like it's like probably like Robo advisors and like anything high frequency tra yeah if programmatic or algorithmic code to coordinate manage or manipulate the structure of a transaction like that's almost all of fintech today on some level if you think about about it yeah so it's it's quite broad except it does have the modify well in theory it does have the modifier that it has to be crypto but still um splitting CVC for transmitt or transmitting the CVC through a series of independent

transactions also defi creating and using single wallet single use wallets addresses or accounts and sending CVC through such wallets addresses or accounts um exchanging between types of CVC or other digital assets that's also defi that's just exchanging um or facilitating user initiated delays in transactional activity now quite frankly what is that like that to me felt like intense it's very intense but I do think like the other thing that's so strange about this is like the a user initiated delay in defi sometimes is a really good thing right like I just I think there are also like benefits to many of the things that they're including in here

that really do get lost and so doing the benefit analysis is extremely important how would you modify this definition Jake or or I guess if you assuming you have to work within the boundaries here well yeah and that's the thing and that's you know we're still figuring out for the blockchain association I think we all are figuring out what is the response to this and I think there's there's in the short term sort of two ways to respond to this one is to just say this is wrong don't do this and I'm sort of inclined to start there because what I don't want to do is allow the government to take advantage of this sort of Crisis moment to take away civil liberties and often that's what we see right that's sort of

how we got the Patriot Act in the first place and so I don't really want to say this horrible thing happened therefore we'll give up on privacy I still believe very strongly in privacy I don't think that it is right to designate a class of transactions the class being ways that people can maintain their own privacy and dignity over their financial transactions to designate that as a prim AR money laundering concern right not all private transactions are criminal so I I I sort of like hesitate to say let's work with them to figure out what a better definition is but I think if there is going to be a better definition it needs to be narrowly tailored and it actually needs to be something specifically related to obfuscating the source of funds for the purpose of uh

hiding or you know making use of ill gotten games or something of that nature like the sole purpose of the of the front end is to allow for obfuscation of transactions without the ability to unblind unshield a transaction that's it because every like even there are some mixers where you can if requested if you send if you send money from tornado to coinbase I think coinbase would say hey wait a minute where's this coming from and tornado would issue you a proof where you can trace it all the way back you like you can generate these proofs I don't understand what the problem is if there's a mixer that doesn't allow that then that's the problem that's literally the only problem for the designation to coinbase won't touch tornado does uh no not anymore but what I'm saying is

tornado would allow would generate this proof yeah yeah yeah right to to B to whoever party needs to know it's like when your bank com says show me you know source of wealth oh yeah like the Privacy pools paper and that that came exactly yeah right and and look I don't know that I have an opinion about the Privacy pools paper specifically but I think this gets exactly to the point that we always make which is there are better ways to do anti moneya laundering without doing know your customer right there are ways we can use this technology to improve compliance I think zero knowledge proofs will have a big part of this and we need to maintain the opportunity for this industry to develop those innovative solutions if we just do

this if we just say look we're so uncomfortable with all this technology in its current state in 2023 that we don't even want to let you get to 2026 or 2030 or some future version of it which is drisk and way better than the current Financial system system we're so afraid of this that we're just going to get rid of it today that is a huge loss for the United States of America cuz guess what this is going to get built somewhere and we should want it to be built here has there been a response uh in the European Union in other jurisdictions uh similar to this given the with the war you know I mean like terrorist financing and all this stuff or is it really just kind of contain of the US no but what gets missed a lot is the EU is equally if not

more obsessed with anti-money laundering as they we are in the US and already have operative regulations in place um some of which uh have really unfortunate monetary thresholds um and where they are really looking to crack down on self-hosted wallets uh and so there is there's something called the amlr uh there's something called the transfer funds regulation but while everybody's sort of celebrating M just as a step forward and a positive step obviously there are problems with it but still they got some legislation through um the anti-money launder like the attendant anti-money laundering regulation is going to make it hard for crypto too um

I actually think the plac is where as Jake said it's being built and being built in a really responsible way is Singapore some in Japan like we're seeing a lot South Korea um there's a lot and very vibrant crypto community over there so um it is I agree with Jake it's going to keep getting built um I actually think for a while it'll keep getting built in the US until until it just becomes truly untenable and we're getting I mean maybe we're getting close to that I don't know yeah we do have one advantage in the US which I always come back to which is we have the courts I knew it so you know that we can talk about sort of what's the short term how do we respond how do we respond to the rule always for me and this is I think

the position that both the blockchain association and the defi education fund have in writing these comment letters there's two things we're trying to do one is we're trying to explain from a policy perspective why we think that this proposal is not right or could be better or shouldn't go forward at all the second thing that we're doing is we're setting ourselves up for litigation understanding that there may be a bad outcome and that we will bring the case to court where a judge may see things differently than an elected official or a regulator who is just a hammer of seeing nails and Rebecca and I have have the extraordinary privilege of working with Amanda tuminelli who's the chief legal officer at DF she's a litigator she and we will be looking at this to figure out if worst comes to worst and this gets adopted in this way

how do we raise the right issues in the comment process so that we can take those issues to court and I think that's something that at least in my experience in other jurisdictions is a lot harder we do get to challenge the government here and we often win right we are developing a track record of winning these types of cases so in the long term I think that's where a lot of this stuff ends up we have privacy rights that are guaranteed to us under the US Constitution the fourth amendment is one of my favorite amendments if not my favorite and I think that's where we're going to vindicate our interests long term yeah look I mean the the courts uh since we did our last update I mean with ripple they of course they threw out certain parts of it the against like the

executives but they did that for a specific reason but with you know with other stuff with the the ETF approval with uh coinbase and I mean the the courts have really stood up and I think if you don't have faith in the courts then we have a bigger problem on our hands um and I think what makes a us so special which is there is a very strong judicial system and as long as that continues to be the case and I think you can make really strong arguments and the right to privacy and other components that this bill and others um are are stepping on uh very clearly and um anything else on this particular bill and I want to transition the last kind of 10 minutes uh talking about other regulatory stuff using the Horizon and just other topics but as it relates to this particular bill is anything else

that is noteworthy to talk about I mean as Jake said like we need to come up with and sort of I tried to allude to it when we started we need to come up with really viable solutions that are compelling um we've talked a lot about hey just regulate the on andof Rams not comp yeah but that doesn't really carry the day um people want options so reach out to ba reach out to the defi education fund um you know policy is not limited to those people who have it in their title or who are associated with a doing it um I think we want to see this be a larger industry push so if you have legitimate business use cases for mixing please reach out to somebody do who does policy to share it um and if you have

really strong ideas for AML um and look zero knowledge proofs digital ID all lots of things are swirling around but share your ideas so that those people who do interface with policy makers regularly can really work on those too yeah and and anyone that has experience I mean I think the internet went through this too with encryp ention like Bill Gates and others were really pushing the encryption battle back in the day and that was not too long ago I mean it's just so funny how these things come up uh with new pieces of Technology um and now you know encryption is so essential for the internet um but lo and behold we're at it again all right well moving on on this topic um what else should we talk about guys what what else is on

your mind uh what are you most focused on or paying attention to yeah so um I'll throw in one um one other item that we're all working on right now which is uh another piece of rulle making also from the treasury Department but a different part of the Treasury Department this one from the IRS uh which is the implementing regulation for the tax Provisions that were added in the bipartisan infrastructure bill so going back in time about two years um folks may remember that there was uh a huge argument in DC over the infrastructure bill because the infrastructure bill of course cost a large amount of money uh and to pay for all of what the infrastructure Bill provided Congress had to find ways to

raise more money and one way they did that was by saying there is a lot of non-compliance in terms of tax payment in crypto so we need to tighten up the tax rules to make sure that people aren't evading taxes using crypto and the way that they did that as a as a quick refresher is at least in part by expanding the definition of a broker in the tax code and and this all back to the sort of same issue we've been talking about which is the government wants to know who is transacting and in this case they want to know what people owe in terms of their taxes and the way they do that is by deputizing intermediaries who they call brokers who are usually the the typical Vanguard or Fidelity or Schwab right these types of

brokers who have a relationship with a customer and so they know when the customer is buying or selling securities and knows what capital gains they may owe and those Brokers then have to file reports with the IRS and also with their customers saying what that tax obligation is and that way the IRS knows whether people are paying their taxes or not and of course that does not happen in a disintermediated environment like defi so what Congress did is they expanded the definition of broker in what felt at the time to us as an attempt to capture defi uh and to again find a responsible person to make an intermediary out of a disintermediated environment so what they did was they

changed the definition of broker to the following quote any person who for consideration is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person end quote and if that doesn't mean anything to you then you and I have the same problem because I have absolutely no idea what the hell that means so 2 years later the IRS finally put out a rulemaking giving a further definition of who they actually think is a broker and unfortunately as with so many of these other cases the rulemaking basically says anyone who looks sideways at a dii protocol is now a broker and has an

obligation to collect information about everybody else who's using that protocol and file it with the government and to be to be more precise what they do in the rulle making is they create a new legal term of art which is a facilitative service and then what they say is any person who provides a facilitative service is someone who with respect to a sale of digital assets is a person who ordinarily would know or would be in a position to know the identity of the party who is making the transaction and what they really mean by this is for example The decentralized Exchange front

end that is in a position to know who the users of that front end are because they could just add kyc to the front end or maybe the governance token holders who can vote on changes to the protocol who are in a position to know the identity of the users of the protocol because they could just like vote on a change to the protocol that adds some type of AML kyc compliance layer to the protocol so the um rulemaking is out for comment right now again the the wonderful thing about our process here in the US is that the government has to ask for public comment and give notice of these things before they can put them into effect the deadline for comments was just extended I believe it is now November 13th 2023 so if you're

listening to this before then we would love for you to submit comments saying things well saying whatever you feel about this but specifically that um you understand that this is going to infringe your privacy rights that this is not consistent with the technology and that treasury should not move forward with this rle making in the way that they are and we've got some resources if you go to uh the defi education fund website we also have another website uh I believe it's protect diy.org where we've got some tools to help people submit those comments so this is a big challenge for us I think an existential one for defi so would love everyone to to get involved in this one yeah and what Jake is talking about the tools is things that will help you generate letters uh easily um using technology and sort of

make the arguments that we need as I was saying when we were talking about canuse chat GPT for this stuff or not yet um I think people might be but um yeah go to go to protect d.org and you will find an interesting AI tool to help you right one lovely we'll Link in the notes for sure um but what I will say is under the administrative procedures act you the agency is required to take into account all the responses um and the the timeline was supposed to close I think October 30th so in like six days and when Jake says it was extended to November 13th it happened to today because I think as of this morning they had almost 9,000 responses um which is a lot so I

extended it so they have more but let's make sure they have a lot uh and have a lot to account for and that's true of the the nprm from finsen too like you have to really it's really incumbent on us to Advocate um and I don't think that only is the policy works either I think it's the whole industry if you're building um figure out a way to get involved it doesn't mean you have to necessarily spend money and resources we know you know a lot of people are just focused on building right now but I do think there are lots of ways to be involved and so people should should definitely be figuring that out yeah well in close I mean I think it's really important because in times of Crisis as you said Jake and this is the first my first thinking is that's when the most

overreaching pieces of legislation have been passed when the public is distracted and I think as an industry you guys are doing really God's work here and just keeping everyone informed and uh and making sure that that you know you really are reaching out I mean election years are coming up uh in closing Jake I think you you said something really interesting um I think it was a while ago I think it was over a little over a year ago when we were recording a podcast over the summer and you said hey um the fall tends to be a period where these agencies ratchet up their efforts and make more noise because they have to justify their budget um election year is coming up I don't know how how often these budgets are negotiated if it's on an annual

basis or in some what for of cadence but I'm curious just in closing get both of your opinion on um what can we expect um for the remainder of the year over the next kind of three six months um and um you know of course everyone right now is really you know in in Bull mode you know bitcoin's aaton and so is e but from the regulatory side of things uh what should listeners not lose sight of other than paying attention and commenting and reaching out to their you know officials but what are you most like looking forward to over the next 3 six months on the regulatory side of things uh I mean I don't know about looking forward to but I expect I want to keep the tone positive here oh I mean

positive honestly my positive ending before I get into what I think we're gonna see is like we're gonna make it like I it may not look exactly like we thought but um I mean the amount of attention this industry get all over the world and if you would have told me back around so 11 months ago um and we saw FTX collapse that we'd have a viable Bill uh come out of two house committees in a bipartisan manner one of which just was with a Voice vote I'm not sure I ever would have believed it so I think the industry is like very strong and very robust uh and that's why I really want us to continue and want

everyone to make efforts to really pushing this policy point forward Ward through various different Vehicles even if you're just a builder like we need you we're here to working for you so you can keep building so people should definitely be involved in that I think we'll see more coming out of the Treasury Department um on Defi and on elicit finance and crypto um this week next week um I don't think they're going to let this Kamas used crypto narrative die just with the mprm um I think there is going to be more and I think it's going to be tough uh and we need all the tools that uh we can get to make sure we're moving everything forward uh we may see more bills coming through I think with some of the aid packages uh there may be something tacked on from all the different AML bills that have

been going through the Senate um so I mean my focus is on what's going to happen on the AML side with crypto and defi for sure right I agree with all that I um I think it's also just it's amazing to note that one year ago today FTX was a going concern this it feels to us like a DE decade ago but it was so recent that this thing collapsed and how far we've gone as Rebecca was saying how far we've come since then I think is extraordinary so I think it's worth recognizing as hard as some of this stuff feels and although you know this discussion today was so much focused on an attack on the industry that we're playing defense for there there's a lot that that we can be excited about and a lot to look forward to um in terms of

your question Santi the end of the fiscal year for the agencies is at the end of September they usually try to ram in a bunch of enforcement actions right before then so we're thankfully past that sort of moment of heightened risk for big enforcement actions I uh think I said a few months ago after the coinbase and binance enforcement actions came out and then we got that amazing order in the Ripple case that we were so back and that we were sort of past the worst of what we were going to see at least from from the SEC and the cftc I I'm sticking with that I think that we are sort of past the worst of it and now we're just sort of fighting this out I agree entirely with Rebecca that now the um the main issue is with the treasury Department and with some of these bills

that we're seeing move into Senate addressing this anti-money laundering issue I do think in the next three to six months the biggest opportunity that we have is a window to get legislation done that we like before all of DC is consumed with the election because not too far into next year work sort of stops in Congress and I think that the stablecoin bill at minimum maybe also the market structure bill but especially the stable coin legislation that we've been working on for for so long is baked and ready to go and even if we just get regulatory Clarity for that segment of this industry it would be such a massive win and it would set us up um for great things going forward so I think that's what we're going to be focused on at this moment it's hard to say what the

likelihood of of getting that done is because there is no speaker of the house at at the time that we were recording this and it's unclear when there will be one and that is sort of you said they were working still well they they are definitely working they just can't actually do anything so that's sort of the DC version of of working unfortunately love that where do I sign up yeah but um hopefully uh hopefully we'll get that Log Jam freed up soon and we'll be able to to make some progress there so that's my that's my Outlook that's awesome guys well I know you both are lawyers so keeping it positive is is encouraging and and you saying that we're so back Rebecca I don't know if you would agree with that uh are we are we back I'm just like we're gonna make

like we're gonna make it we're gonna make it we're gonna make it and we're so back I'm really I'm really sure of it like it might not look exactly like what we thought um there were definitely some interesting twists and turns that I'm not sure any of us could have anticipated especially when Jake and I started working together like in what feels like a million years ago um was FTX even like a thing like was it even established back when we started working together yeah 2018 like no um but uh I do think we're gonna make it it just may look different than we thought um but this industry is it's it's strong and um yeah awesome well thank you both for the fantastic work that you both do we'll link to all these initiatives and ways where people can get involved in the

show notes and I guess for next episode we'll have to have you on let's talk about like recent wins and and make sure people are reminded of because you guys have made a ton of progress and I do want to go deeper there I think we're so conditioned to think about the negatives but there's been some huge wins uh and it's important that we remain focused on the offensive so both thanks for coming on I really appreciate rebec I know we gota go um and so anyways uh thanks everyone for listening we'll be back in a few weeks awesome [Music] thanks