Jerry Brito & Peter Van Valkenburgh: Coin Center – The US Regulatory Landscape for Crypto #417

Transcript

welcome to epicenter the podcast will bring you your crypto founders builders and thought leaders i'm sebastian gutier and i'm here with frederick ernst today we're speaking with jerry britto and peter van valkenberg who respectfully are executive director and director of research at coin center um we've had jerry and peter on the show before and today we're going to be talking all about uh the regulatory landscape in the u.s and um how that might affect the creepy crypto ecosystem going forward but before we do that we'd like to tell you about our sponsors for this week periswap just came out with a huge update that's even faster and more liquid it's cheaper than uniswap and it comes with a new gas token that can cut your fees by fifty percent empire strap is now multi-chain has has expanded to polygon finance smart chain and is now

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participate in d5 at the same time head over now to chorus.one and start your staking journey jerry peter thanks for joining us today thanks for having us yeah happy to be here again well it's great to have you again you guys are great voices of reason and the uh you know everything that relates to uh questions regarding the regulatory status of crypto uh in the us but also uh broadly around the world um you know for our listeners not familiar with coin center and your work could you please just introduce yourselves and uh talk a little bit about coin center and the work that you're doing sure so um coin center uh is an independent nonprofit uh we're based in

washington dc and we're focused on the public policy issues that affect cryptocurrencies and open permissionless blockchain networks so things like bitcoin ethereum and the like um we exist because these networks as we all know are open and permissionless like the open internet and as a result they are public goods and public goods typically nobody has an interest in a self-interest in looking out after the interest of the public good right everybody's got their own self-interest for their own company or their own project or whatever and so we exist to be um sort of self-appointed champions um before governments for these networks um and at root we are a civil liberties organization our main concern are free speech and privacy um

since we're us focused these are constitutional rights and they apply to people who are building with code and so that's what we exist to champion it protect you know the last time we had uh we've had you guys on separately this is the first time you've been on i think uh together uh but you know we had jerry on in in 2019 and and back then you had just written the paper uh called the case for electronic cash in an open free society which you know very good very much goes with the mandate that you described and at that time you know lots of people were focusing and were kind of talking about libra uh which had just been announced um and certainly regulators were very much you know focused and concerned about that you

know how has the political and regulatory landscape uh change in the last two years like you know there's been a lot of water under the bridge and like what's what's in that water so libra really was a turning point um for crypto in the united states which is funny because libra is neither crypto nor does it exist right um but the fact that it was announced um by facebook and that you know and facebook was is this sort of monolithic um presence for uh policymakers especially politicians in the united states um it is a boogeyman um it really just sort of focused their

attention for the first time i think on the potential here oh you mean billions of people could use this stuff outside of a traditional regulated system that we're used to and so that really brought more scrutiny to the space than we'd ever seen and i think it also sort of began a process uh of making crypto a little bit more partisan um than it had been um traditionally crypto had always been an issue that was bipartisan nonpartisan um and now that's that's beginning to change i think also as a result of uh of libra

um and so we've just gotten um a lot more scrutiny um since then and but really um there really hasn't been it's largely been rhetorical right the couple of times where we've had um uh actual different policy um we've come close so for example um in late 2020 early 2021 there was an attempt by the outgoing treasury secretary uh mnuchin um to basically regulate uh uh self-hosted wallets um but that you know we were able the community was able to

to avert that and avoid that um but short of that peter i'm not sure tell me if i'm wrong but i'm not sure there has been beyond a rhetoric which has gone through the roof i'm not sure there's been real policy change since 2019 let's say since libra was announced no and even the policy change in 2019 here in the u.s was not particularly fundamental fincen elaborated on its guidance that it first issued in 2013 that you know if your custodial um exchange you have anti-money laundering obligations and you know the sec continued enforcing its somewhat broad but i think actually quite reasonable interpretation of the hawaii test as far as securities

regulation i think just to to put up another point on the facebook thing to to jump on the blame facebook for everything bandwagon um you know before facebook announced libra now diem uh policymakers had sort of three reasons to ignore bitcoin um the first was oh well it's very volatile um and so it probably won't work very well because the price is all over the place the second is well there's no company behind it which if you you know if you're a regular listener to this podcast or someone in our space you're like well that's what's cool about it but to somebody who's you know used to thinking that their their um target for regulation or their

potential adversary is a big corporation uh you know bitcoin there's no big corporation there so you know what's to regulate and then the third thing is bitcoin wasn't really used for for small payments and so to the extent you're interested in surveilling uh and controlling people's payments um you know people make some big transactions with bitcoin but they don't use it for day-to-day payments they don't use it for a lot of like person-to-person payments even because it's it's difficult and so facebook's announcing uh libra was an attack on all three of those reasons to ignore bitcoin uh if you're a policy maker it's like oh well now it's a big corporation doing it uh now it is um you know maybe something people will actually use for payments i we always question that because you know

they had facebook pay before why is a crypto version going to be any better and and so just made it a lot harder for you know people to ignore this stuff and it it was also unhelpful i think that originally when libra was announced there was a lot of branding at least here in washington dc that it was going to be facebook's cryptocurrency and the same rules that you've developed which are very good for cryptocurrency regulation should apply to this thing even though it's um centralized and sort of issued by by the libra association and so there was this sort of like well now we're really interested in stable coins um and now we're really interested in big companies getting involved in this space and that that kind of

trickled later into now we're also really interested in bitcoin and in cryptocurrencies because apparently those are the same things even though they're not and so we had a lot of like re-education uh not to use a maoist phrase but re-education to do to say look you know i'm glad you're interested in this stuff um in a way that you maybe were disregarding it before but we got to know what's different between what facebook's talking about and crypto because both have benefits and risks and we we should just be reasonable and not apply a one-shot deal to it all and then there's also china which i think you know their cbdc the dsep program was a direct response to facebook's libra as well and then that started a whole

nother cycle of oh china's launching a cbdc what are we doing in the u.s all we've got is this crazy bitcoin thing and there are open ones and uh yeah so it was this beginning of a strange avalanche uh but it was to deal with but it's been all again rhetorical and to the extent there's been actual policy change um it's been a mixed bag um uh the irs in the united states uh um the tax authority issued guidance um on uh the tax treatment of crypto and it was a total mixed bag some of it was just completely wrong some of it was somewhat helpful um really didn't move the needle much on the positive side the office of the comptroller comptroller of the currency which is a

banking regulator basically issued guidance saying that um federally chartered banks could custody crypto and do other crypto related things so that was kind of positive although that is now being kind of clawed back by the new administration so the bottom line i mean we we like to say um the u.s um kind of status quo uh policy stance towards crypto is very good very friendly despite the rhetoric right and so there's a lot of rhetoric and so as a result of that rhetoric and there's a result of uh you know political activity that might change but at the moment it's very difficult to do anything

um legislatively in the in the us and so i i foresee it kind of staying generally the same way no it's just like people keep waiting and just just last week or um just recently the president working group on stable coins released its report which everyone was waiting was going to be this apocalyptic thing on stable coins turned out it's actually quite reasonable and even has a great paragraph saying permissionless networks are kind of cool for certain reasons and yeah they might carry risks but you know there's no there's no ominous sense of that report that they're going to come for node operators and minors or things like that which was you know one of our fears so we keep waiting and maybe nothing actually bad's going to happen there's this um sense in here that this epic crackdown is imminent

do you guys feel the same way or is this something that uh that basically so long nothing's really happened that basically everyone's kind of waiting for it but what do you think do you think it's tangible no i i think there is definitely a crackdown uh in the works and i think it it kind of um it's going to come in two ways so one is and again sorry we're very parochial so i'm gonna be talking about the united states um but i i'd love to hear uh if it matches what's happening in europe but in the us you have um gary gensler who is the new i guess at this point not so new it's been like nine months um uh gosh 11 months uh

chairman of the securities and exchange commission and since he took office he has been again really engaged in strong rhetoric around cryptocurrency and in particular around d5 around decentralized exchange around interest rate protocols um so he's been engaged in this in this rhetoric saying there's a lot of illegal activity happening he would say most um cryptocurrency tokens are securities even though he he previously said at an mit conference that um uh they were not a very minority would be

uh so he's been there's been a lot of rhetoric and so there's an expectation that he can't just that at some point he's got to put up or shut up right um there's going to have to be some activity from from some enforcement from the sec or some regulatory activity because you can't go on with this rhetoric for months and months and months and years and never do anything so i suspect and we've heard uh that there have been that there aren't current investigations reported in the press um into decentralized exchange protocol developers into stable coin operators uh et cetera et cetera so at some point i foresee that there'll be some enforcement actions from the sec some of those i think are going to be uh completely expected um and so really

not that surprising or consequential i i mean it's easy for me to say consequential for sure for the people who are going to be on the other end of that um but here i'm talking about things like issuing securities um without complying right so if you've issued tokens or if you issue a stable coin in such a fashion that what you're doing is issuing under registered security you know that in a centralized fashion that that's you know going to be a securities violation where i think it's going to be more interesting is um if there are enforcement actions against the developers of decentralized exchange protocols or interest rate protocols it'll be very interesting to see

under what theory that enforcement happens because if it if it's you know saying well you you know as part of your protocol there's a token that was issued in non-compliant fashion well you know that might be pretty clearly against uh the rules um but if they go further and they say um publishing this code is illegal well you know we would have a problem with that and indeed i don't think they would say that because that would be a clear that would be in clear attention with the first amendment but they might say that in some way some of the uh some of the activities that developers are engaging in facilitates um

a violation of the law and so depending on how like what what actual activity they point to and say this is the violation that that's um what's going to be interesting so i'll stop there because i want to monologue but i'll say that the other piece that i worry about is related to ransomware that's interesting i mean so so what you're saying is that if i understand correctly so the the publishing of code in the u.s context in the u.s constitutional context would not be considered uh what could could not be considered illegal because of course it would be in in contradiction with the first amendment but but that this activity facilitates uh illegal activity or activity that is uh um that goes against you know securities

law or something like that for instance what what do we have any is there any precedent for this and like other areas of there's a little yeah and so so jerry's jerry's point here is important the the difficulty in deciding you know what the sec goes after is they don't like losing cases and the fact of the matter is that to my knowledge most folks who've created a decentralized exchange tool for example have also issued a token and so if you're the sec thinking about targets why wouldn't you just go after those folks for token issuance which is more clearly something that is not speech you know you're actually selling

maybe to accredited investors but maybe a couple of unaccredited investors get in there or maybe to just foreign investors but maybe a couple of american investors get in there and the fact of the matter is since 2016 it's been abundantly clear that the laws for securities issuance have always applied to selling tokens in a centralized manner like i'm promising a future platform or i'm promising a platform that will be useful that i'm going to build those laws have always applied to those token sales so that's an open and shut case in most cases now the hard case is an exchange where code has been published that facilitates like atomic swaps or something of tokens on ethereum or or

anywhere else maybe it has an order book maybe it has some sort of auction principle behind it and there hasn't been a token sale or there's there's there's such clear evidence the token sale never violated any u.s securities laws because there weren't pre-sales to american retail investors in any in any extent in that case you've got this hard question of all right well there's this thing out there that seems to meet our very flexible definition for national securities exchange or alternative trading system and those things national securities exchanges are alternative trading systems places where people can you know find markets for securities they have to be registered with the u.s securities exchange commission in order to have u.s retail participants using

them and none of them are now this thing that we think is a ats or a national security exchange is just code running on the ethereum blockchain so who can we find who's culpable for that and that's a really hard question the precedent here sebastian is if you look back at the 90s when the internet first blossomed there were message boards where people would actually say like look we're setting up this message board you can join and you can say i've got some you know maybe i want to resell some equity securities maybe i'm in part of an old tech startup and i got some i got some you know stock options or something like that and i will help you this this message board will help me find a buyer for my

security so i can post messages and i can answer bids and offers and things like that and the sec had this interesting you know question well wait a minute is this a message board like craigslist is it just like a classified ad page in which case it looks much more like a newspaper and much more like free speech protected activity or is this actually some kind of new securities exchange in which case it's unregistered and violating the law and we've got to go after them and the sec looked at a few of these offered a no action letter actually to at least one of them because i've read this no action letter that said a couple of different things we don't have to get into the minutia but interesting things like a flat fee for membership in the message board is okay but a per transaction fee is not

okay then it would be a national securities exchange you know and a no action letter is not binding legal precedent but it was it was their opinion of the time and those questions are now you know a hundred times more complicated because these things are much more easy to use much more available and they all trade these you know digital tokens several which are definitely securities like say synthetic tesla stock or whatever you know so so in the last couple of years this doctrine kind of took hold of sufficient decentralization right ever since the hindman speech i don't i don't recall which year 2017 or something right um so the notion that something if something is sufficiently decentralized um more or less anything goes

um is this do you do you think this will carry through do you think this will this it will stay like this so we hope it does um i uh so so here's the thing right um i think it's pretty clear that the sec and uh the chairman would say that bitcoin is not a security right and so if you ask them what's the basis uh for that um i think there's several things i think number one there are no promises ever made uh related to bitcoin but i think another thing is that there is you know nobody who on whom you depend for its operation right so it is

sufficiently decentralized if you want to label that right um and so and so we think that's a useful way to think about it and i get it that sufficiently decentralizes is very amorphous so you can't it's not a black you know line that you can identify but in cases where you do have the developers have made promises when they've done that that's clearly a security but at some point what they've created uh it makes no sense to treat it as a security because you can imagine at some point a developer made a promise thus uh the issue to security um but then they built a thing and then they die right they literally are wiped

off from the face of the earth it makes no sense to then say that the thing that people continue to use that they created by virtue of having been associated with them if that thing depends on nobody if it looks exactly like bitcoin to say that it's a security but but i think and so that's why we think the human test makes sense and i think if we're rational it will continue that said you know i can imagine that at the sec especially under this new chairman there might be a um an instinct to pull back from that yeah right and to say if you know if promises were made that's kind of the original sin and that's kind of the more important uh thing yeah i also just want to point out in case

you've got like lawyers listening especially u.s lawyers there's never actually been a sufficiently decentralized test there is no hinman test there is just the howie test which is a flexible standard for what is a security and you know some of the prongs in the howie test all this stuff meets easily like even bitcoin there's definitely expectation of profits just go look at crypto twitter about like rainbow charts and you're like oh crap you know everyone is here expecting their bitcoin is going to be more valuable but you need to meet all four prongs of the howie test and the sufficient decentralization test is just an interpretation of the expectation is just a an interpretation of the

efforts of others or more specifically substantially from the managerial or entrepreneurial efforts of a promoter or issuer um so you know jerry's right when a project is just in its nascent phase and you're still waiting for someone to write a bunch of code and you're holding an iou for some tokens of course strong efforts of others you might conversely or by analogy say not decentralized but we're really just looking at the efforts of others problem howie test but once that guy or girl publishes that code and then gets hit by a bus and the thing is still working how can you still meet that test you know it's not a decentralization test it's an

efforts of others test and and here's the thing is peter's right uh that there's no such thing as a hindman test because that was just a speech given by uh a time scc uh official you can imagine that in the future there will be another speech by say chairman gensler or an enforcement action that kind of repudiates that but ultimately what is the test is something that only courts decide right it's not something that speeches do or even enforcement actions do and um i think what would happen will happen is that the sec will only pick cases to enforce and probably more likely to settle with that you know are open and shut

right where the thing is clearly not decentralized clearly you're relying on the efforts of others and they'll pretend that that is some kind of precedent right if we're lucky they will enforce against a good hard case where the thing truly is decentralized and then a court is going to have to decide and at that point i think what we will get if we have it if our court system works and i think it does we will get something that looks a lot like the hinman test and we'll call it something else we'll call it jowy uh you know versus sec or something can i can i how are we [Laughter] um so if you look at um the tone that this administration is setting for crypto

at least the rhetoric um is pretty adversarial um let's talk about the reasons behind that so why do you think this administration is so against this i mean basically there's a couple of of different alternatives one could think up right so one is basically they they they see their um their their monetary power as the issuer of the dollar they they see this threatened i mean the alternative explanation you could you could actually draw up is saying okay look i mean janet yellen she's a boomer maybe she

doesn't get this maybe this is a generational thing right where do you think where do you think the the the reasons for this lie do you think it's a tactical um no no no no i i think i think the reason for the hostility is totally uh reasonable and understandable even if you know we wish that they would see the bigger picture so number one um i think you have to understand this is a uh democratic somewhat progressive administration and so um they take very seriously investor protection and the fact is and in the cryptocurrency space there is a rampant violation of investor protection laws

right and uh and so i think that concerns them i think they are also concerned about um uh you know main street investors um getting hurt uh and so you know that um sort of fuels a lot of the angst so it's kind of like a lot of the same reasons why um they might be concerned about gamestop uh type stuff they're concerned about this too so it's that that general thing and i think that's what drives a lot of um gary gensler's um concern is just he's looking at this market he is seeing a lot of activity that as he says goes right up to the edge or goes over right honestly i think if it's going

right up to the edge well then you're still um you know complying with the law so you shouldn't be worried about that but he might want to tighten the law and by the way something i didn't mention earlier when we talked about potential enforcement actions that we expect look there's never been and we've always been very surprised by this there's never been an enforcement action against a uh cryptocurrency exchange the centralized cryptocurrency exchange for listing unregistered securities and at this point you know some of the biggest cryptocurrency exchanges in the us list hundreds of tokens and so i don't know i think there's a good chance that the sec might be able to find one that could be a security the other reason okay which i wanted to

get to before and i'm glad we're getting to now is what they might call national security concerns and this is not concerned about the dollar and we can talk about the dollar in a minute um but it is ransomware is a big piece of it right so a few months ago there was a ransomware attack that really crippled a pipeline company called colonial pipeline here in the united states and as a result a lot of the eastern seaboard gas stations along the eastern seaboard were left without gasoline i actually very nearly got stuck with my little minivan on the side of a dc street not not near where i lived because i almost couldn't make it to a gas station i had i went to five and

there was no gas and then i went the sixth one thank god had some so it was like it touched people in a real way and it's ransomware that caused it right and so as a result of that um i think there's been this hostility from this administration um to crypto but that's very generalized right and i think that we can and i think luckily there are a lot of so the the political folks starting from the president on down hear about this and they're like we have to do something about this this crypto stuff is bad right luckily within the um uh bureaucracy there are people who are experts whose you know once it gets down from the very general political folks down to the experts who are

actually trying to fight to ransomware actors these guys understand that crypto is not the problem right and that indeed if you quote unquote banned it or put all kinds of other tighter restrictions on it you're actually going to make it harder on them to fight the bad guys who are the ransomware operators right and that at root here the real problem is poor cyber security on the part of the victims quite frankly not to blame the victims but that's a fact um and so um that explains some of the hostility and then lastly yeah there's this um concern about a challenge to the dollar maybe i think maybe more to the point uh systemic risk but i think that is not about crypto i

think that there's nobody at the fed or um a treasury who really sees a challenge to the dollar or really systemic risk coming from bitcoin or ethereum i think they see it coming from stable coins and not just stable coins libra okay which doesn't exist but they see that right and so i would say those are the reasons that there's this hostility um and so it's totally these are each reasonable and you can and luckily you can address each of those and try to uh you know talk to folks about them yeah so let's just unpack this just to summarize so there's three uh aspects here uh one is investor protection the other is the you know

threat of ransomware and and then the other is what i would call the ghost of libra that shows up and you know every discussion i mean like you know in our conversations with with uh eu lawmakers i mean we when we're talking about mika uh of course the the uh the regulatory framework proposed here in europe for for for crypto assets you know libra showed up everywhere and i mean not in the document itself but in conversations we realized that this this thing had been written specifically to block libra whereas like libra no longer existed in in the form of which it had been presented so um but yeah but regarding the the ransomware i i i think that you pointed to this as i you know experts experts recognize the problem is not ransomware the problem is poor cyber security and like

for me that just you know even further reduces my confidence in her elected officials that you know they are pointing at ransomware and not like trying to harden cyber security of like national you know things that are of national interest to the security of a nation whether it's the us or france or anywhere else and regarding investor protection i think this point i think is the one that can be argued that you do do you think that you know investor protection laws as they exist today are sort of aligned with you know the the sort of current information landscape where like investor protection laws as as i understand them i mean i'm not an expert on like u.s investor protection laws but as i understand it these things were were written and

passed into law decades ago when people didn't have access to the abundance of information they have now financial literacy was perhaps much lower and so you know the the idea that investor investors need all this protection is actually what needs to be put into question and that um investor protection laws should be reviewed uh to to sort of conform with this new reality that people have access to information and people make decisions based upon that i think with both ransomware and the way we do investor protection you've got you can you should be forgiving of policymakers who especially more at the high level rather than like down in the weeds

because they look at these things with an older paradigm and they genuinely would like to just slow down the clock or reverse it even and that's actually kind of fair so let's be clear cryptocurrency payments do make it easier for people to use ransomware to to release it and to get paid when it infects a computer now we know as folks who are really excited about web 3 and building a better internet that isn't vulnerable and building better cyber security practices that aren't vulnerable by using blockchains that blockchains are the answer to a lot of these cybersecurity problems individual self-sovereign identity is much better than having equifax hold everybody's credentials or have target hold everyone's credentials

and inevitably get hacked and so to us hostility towards crypto misses the point in the ransomware context because we would say no these things are the answer and unless we adopt these technologies and learn about them and prosper from them our problems are only going to get worse because you can't put ransomware back in the bottle it's out there it's always going to be out there so we need to harden our infrastructure using the very technologies that maybe our adversaries are using in order to monetize these things right now but that's a really hard conversation to have with someone because folks of a certain age or disposition just don't realize how bad the internet infrastructure is how sort of ramshackle it was from the beginning how arbitrary

a lot of its constructions were just to make things work kind of well for a time and they don't realize that we really need to rebuild it from the ground up or else we're screwed right so that's an education battle but it's a hard one yeah and and to answer the uh investor protection piece sebastian uh yeah i think if we could from scratch right to securities laws over again we might write them differently for the current information landscape but i feel then you'd be rewriting the rules every 10 years and that's not you know a lot of success that we have in our financial markets comes from the stability of the rules so you don't want to do that and that's where i think um the beauty of a flexible test like

howie comes and people hate the howie test and hate how flexible an amorphous it is because they can't look at their project and know with certainty whether they're inside or outside but the beauty of it is is that as you say this was written in the 1950s i mean the the the securities act was written in the 30s the howie test came up in the 50s right and people look at this and say oh it's a decade test it's unfit for well no it's a it's a flexible test it's a principle that can be applied at any moment and it can be applied by a judge with knowledge of what the current landscape is and so in that way i mean i tell people look the constitution of the

united states is centuries old and we don't say ah old law we should just rewrite it no we think it's great because it's got these principles that we can apply no matter uh the time period yeah well i i would argue that i would argue that the u.s constitution you know as an outsider could could also be in part rewritten uh you know it's as far as like we have software that governs that gov governs you know 300 you know if you if you think of like democracy as technology as a technology to as a governance technology i would argue that that software you know badly needs it patches yeah we got into this last time i was on the show right and you definitely had a more european perspective and i had more

of an american that's right we did have this conversation inevitably it's funny though at the end at the end of the day if you compare the two regimes and you took a hypothetical of somebody is writing core code for an open blockchain network a satoshi type of vitalik type they'd be much safer in the us much safer in the us with our ancient first amendment doctrine which has no equivalent in europe no equivalent in germany no equivalent in france the protections for speech are extraordinarily weak when it comes to state censorship so you know so there sebastian no i i i think no i mean i i i agree and i think like free speech in in france and germany is you

know uh like you know the protections for speech in france and germany are are abysmal i mean like but the heart the hard part is you're right like it's sometimes frustratingly bizarre how difficult it is to amend the us constitution you know two-thirds majority um in the states and and and in the house and senate and and a process that just doesn't happen very often patches are really hard you know america is more like bitcoin as far as updates that it is like ethereum um and that's bad in some ways like we have some silly things on the books maybe although if you take a certain philosophical point of view there's wisdom to things that have lasted forever or lasted for a long time there's a sort

of berkey in conservativism and it also doesn't upset expectations for people who are trying to just live freely in a society where the rules don't constantly change and so i think the reason why we've got great first amendment is because we've got a really bad system for updating the constitution it would have been gone in the 60s and 70s when the red scare happened and you know people wanted to lock up communists would have been gone if it was easy to amend the constitution it would have been gone with the aliens edition act right in the right after revolutionary war that's right yeah um can we maybe maybe i want to prod you some more on the consumer protection um so because from

fr from someone in the crypto trenches um it actually feels different than just the government wanting to protect consumers to me it actually feels panicky almost and i i i totally concede um that this ecosystem is fraught with scams i mean i cause constantly get added to super scammy telegram groups to the extent that telegram is basically unusable um so i mean yeah i i mean yes there's tons of scams going on um but then um it seems like the government is going

after projects that are useful and not super scammy and um to to me the entire investor argument it feels outdated to to to to a certain extent in a time where one of the main um issues we're facing is inequality and basically if you look at um what returns people can get on vast fortunes namely around 10 and what basically uh the average joe who's not an accredited investor can get uh i mean they did they can kind of be happy if they get two percent um i mean this this this kind of to me um it it seems almost

unlikely unplausible that this is just coincidental and not um driven by the people whose interests it protects yeah um so i i'll say this um it has been a source of frustration for me to see the sec um begin to you know start investigations against for example decentralized protocol developers um who are kind of in a gray area as opposed to going to the 100 obvious scams that i can point them to and that clearly they're aware of right or the major centralized exchanges that are

non-compliant with u.s laws and offering securities completely unregistered like obviously securities like synthetic tesla or something like that and so you know that's that kind of thing i think we may yet see um an enforcement action against interest exchange but here's the thing i i think what the essies i think regulators they um are used to a paradigm where the way that they regulate right the way that they have any leverage because their budgets are limited right and they can't go they literally cannot have they don't have enough manpower to have thousands of lawsuits against um scams uh

and so the way that they regulate is that they go after choke points right and so these choke points are being decentralized and so this i think is what you're detecting this panics them right when they begin to see that the choke points that they are used to being able to go to and control and regulate in order to deal with the long tail of scams when that's going away that panic summon i think that's why you're feeling what you're feeling does it make does that is that compatible with them also um being you know if you're a regular at the sec you probably came from a centralized competitor to these protocols or will go to in future

employment to one sure i'm sure that buttresses it but but i think it really is hey here's a law in the books here's how it's typically enforced this is no longer going to be an option this makes them uh panic and i don't think there's a there's a good answer for that um i think um uh the thing to tell regulators and i think we've we have finally i think over the last 12 to 18 months we have finally reached a point where this is not just a theory they're beginning to see that the the the choke point that they're used to regulating will be certainly decentralized i think the thing to tell them is you're going to have to come up with new um

two things either you're going to come up with new strategies for enforcement including maybe prioritizing your enforcement right going after the clearly bad stuff first and uh number two maybe you need to start maybe not the sec but maybe congress sebastian to your point is going to have to start considering um maybe these laws don't make sense anymore right and frederica you make a really interesting point that got me thinking about so the equality issue see i think i was you know a baby 20 years ago or 30 years ago now oh i'm getting old cool um but 30 years ago if someone was promising your average joe retail investor or just like a or even worse

like a grandmother or or like an older more vulnerable person if someone is promising them 10 that is a scam we have no question like that there just were not investment opportunities for those people at the amount that they would be willing to invest in the sophistication level that they had that weren't scams so when when folks today see people promising or suggesting that they're able to get five to ten percent or more even much more in some cases to somebody who's just investing 500 or 5 000 instead of 50 000 or 500 000 it immediately looks like the same scams from 30 years ago and half the time they

are the exact same same scams from from from 30 50 years ago but what's interesting maybe is i i don't know when you when you talked about this you talked about it in a in a halfway benign way because sometimes i think small investors now can get better returns legitimately from crypto because crypto allows them to pool their assets together in a trustless environment which removes the cost of dealing with several small investors as a pool and now a bunch of small investors can act like a big investor and get the kind of preferential treatment in markets that a big investor was previously the only person who could ever get that kind of treatment and so maybe these things actually can be a really powerful force for equality and we just have to

recalibrate oh actually some of these things are are not scams at all and are in fact an inversion of the traditional paradigm of big returns for big investors small returns for small investors but you got to understand that like a regulator at the sec is coming to this with a perspective that's that's a decade older and that's not that's not an indictment that's just like these things were always scams if if you were only going to invest 500 and someone was promising you you know 10 returns it was a scam but i mean peter if if you look at the talks that gary gensler gave when he was at the cryptocurrency initiative at mit i mean clearly he understands this clearly he understands the value proposition of blockchain technology no

yes but when you're in the when you're in the chair you have to be different you have to be careful no one wants to i mean it's not just selfish but there's an element here that is you don't want to be the person that was asleep at the switch when a bunch of elderly folks got taken and lost their family fortunes i mean that it's your job to be much more risk-averse when you have that responsibility than when you're an academic just sort of thinking about big ideas for the future and and i just want to make sure people don't confuse what we're saying we're not saying that the status quo is fine what we're saying is the status quo is understandable and

uh we're much more sanguine and optimistic that it's only a matter of time uh before the world catches up to to us right to us all and uh things change for the for the better so i'd like to talk about the the infrastructure bill and you know some of the more concrete things that are happening have been happening in the u.s but i want to ask you first do you see because it certainly appears that way in europe that there's sort of a double standard uh you know when comparing what that's applied to crypto like they're comparing things that are applied to crypto and rules that are applied to crypto companies uh you know compared to other companies and sort of service providers in the more uh legacy financial world do

you see this double standard uh being applied as well and you know what do you make of the attempts by retail banks to prevent uh users from you know sending money to an exchange or receiving funds from an exchange or you know like here in in europe we have like high band discrimination you know happening like with multiple service providers do you see this sort of thing also happening uh in the states yeah so um we definitely see a double standard and a lot of times it's just sort of in black and white so in the um infrastructure bill uh the crypto tax reporting provision that's part of it um it includes reporting requirements

uh for crypto exchanges that don't apply to other kinds of uh securities exchanges okay so it's just that's just clear discrimination um i you know if you look at the fincen rule from last year that was proposed same thing there would have been certain requirements that only would apply to crypto would not apply to other financial institutions would not apply to cash so yeah i mean that happens all the time and in each case we just have to um uh you know make the argument that look good policy is going to be technology neutral um you don't want to pick winners and losers etc etc and that so i think the instinct is again because

of this hostility for the reasons that we discussed is to uh address the acute problem that they perceive so that's crypto rather than you know taking a more uh sort of pragmatic technology neutral approach and as far as the de-risking debanking yeah you know we continue um to see that um you know i think to some degree i'm sure that's motivated by competitive pressure you know from banks but largely i think it's really driven by uh risk aversion and conservatism on the part of anti-money laundering compliance departments at these things right because it's not just crypto it's also going to be pornography and sex work

it's going to be firearms it's going to be you know all kinds of other legal things you know marijuana uh legal things in the u.s are also facing the exact same kind of de-risking and debanking and the the other aspect here is that everybody uses crypto and technology as branding for what they want to do and so if you want to really hammer investor protection or anti-money laundering you can get more headlines for the work that you're doing stopping anti-money laundering or investor fraud by talking about how you're doing it in the context of crypto because crypto immediately adds this sort of sex appeal to the headline like oh money laundering through crypto that sounds much more interesting than deutsche bank launders

20 billion dollars of russian oligarch funds which they did you know but you know the bigger problem is deutsche bank and yet you're going to get more attention from the press by by being tough on this weird new exotic technology that's ultimately setting up a battle between cypherpunks and government this is all garbage uh you know when you look at the actual numbers involved money laundering in crypto's much is minuscule compared to the legacy financial system but you can get headlines and i just want to be fair to the policymakers by flipping this as well because if what you want to attack is the age-old investor protection regime in the u.s the securities laws instead of attacking it head-on and saying the way we do securities regulation here is wrong a lot of technologists want to say you know what

crypto's a whole new world and therefore we need whole new investor protection rules that's ridiculous you just want new investor protection rules you just want to be able to issue a security without doing the old school disclosures and you're using crypto as branding for your new policy when your new policy really could have been introduced in the 1940s as a direct criticism of the policies introduced in the 1930s as far as securities laws i see that argument um i mean i also i mean the prospective requirements and so on i mean i totally understand where people are coming from because it is super frustrating and any argument to kind of make it go away right but let me kind of come back to the other point you made namely that um

big banks it's almost their business model um to kind of bypass um see a counter terrorist financing rules and basically i mean sure they get they get they get fines but i mean it's their slaps on the wrist it's still insanely profitable so why do bank you know harmless in comparison fairly small crypto car companies um and not go after you know iran money or oligarch money to say something controversial i would say that we should probably get back to enforcing our criminal laws and arresting people who do bad things and stop trying to stop people from doing

bad things by creating barriers in the financial system like that's a losing game and it's a game that just hurts a lot of innocent people along with the few guilty people that you trip up when you block their financial transactions the money system should be just public infrastructure that works reliably without without you know trying to judge you first as to whether you're criminal or not because that's something the courts are supposed to do not the banks and so should we should get rid of anti-money laundering as a policy if we want to actually be smart about how we like have a just society in the future but that's a very controversial thing no no it's a controversial opinion i can get 100 behind uh it just feels like it's it's basically the people who have no real interest in in enforcing the rules have to enforce words that

basically it would be beneficial to them and everyone else if they didn't enforce so yeah it seems like this is just possible what's terrifying this is what's terrifying about china's central bank uh central bank digital currency dsep is is the tool you would build if you wanted to give um all of the decisions about who can do what and what in society to the people who control the channels of commerce to the people who control the actual payment system dsep gives that power directly to the communist party of china they can block people they can censor people they can spy on people they can create credit scores for people this is not a way that you have a society with the rule of law this is that is the that's what jeremy bentham would have called dog law you

just watch what your dog does all the time and when they do something you don't like you hit them over the head with a rolled up newspaper and then they they never know what they did wrong they just realized that they suddenly can't do that anymore they're going to get punished like you can't have the rule of law and a system of order that's based on just arbitrarily censoring or surveilling people yeah and so like we should be better in europe and in america and and we everyone should be better but our governments as governments that sort of have been known as open societies for centuries now should do better and we should embrace these technologies i mean as you guys can clearly hear i'm not an american um so um i mean let's let's bring up the topic of the infrastructure bill again that

sebastian tried to raise just a moment ago so basically um no no no oh good oh good uh super interesting conversation so basically i mean just to to recap that and so basically there was a um pretty good bipartisan infrastructure bill that basically almost everyone could get behind because it funded um very s i mean very common sense operations um and then basically the department of treasury i think tacked on this addendum saying that um some of the money to fund this just a minuscule portion like less than a percent should come from taxing crypto and basically the entire crypto ecosystem went haywire because it felt like a bipartisan attack on

crypto without without being founded in anything concrete um can you can you maybe address that sure so um into a couple things uh number one um number one is the you're right there was a provision added at the last minute to this bill um that was a what's called a pay for meaning that this bill is going to cost money because the bill spends money on bridges and railroads and things like that and so how do we pay for it um there are different ways that you would do that right you would raise taxes maybe

tariffs maybe you'd stop spending somewhere else um and so this was a provision that would pay help pay for the spending and the way that it would pay for it is not by raising taxes on crypto i think this is a misconception this does not impose any new taxes or raise taxes on crypto whatsoever what it does is that it gives treasury authority to require reporting from certain actors in the crypto space about their customers saying this is how much my customer used my services this is the capital gains that they had and presumably with this information the irs would be in a better position to know

uh how much money it's owed and collect more taxes okay that's kind of convoluted but that's what the provision uh would do um and i think people uh got up in arms about it number one because it there are many reasons right but one reason is that this was added at the very last minute nobody was consulted about it um we weren't really consulted about it and so as a result the provision has a lot of unintended consequences right among them the authority that would be given to treasury is so broad the treasury could use it to say that minors for example

would have to do reporting on their quote unquote customers but of course you and i understand that miners don't have customers in any normal sense of the word and couldn't possibly report and so if treasury were to require that miners couldn't do that is mining banned right so it's just it's just nonsensical um and and purely a uh result of them not having consulted anybody and trying to just ram this through the other piece which peter can probably there are many things wrong with it but we're just going to focus on two so one is is what i just said the other is in the u.s there is a requirement that applies to everybody engaged in any

transaction any trade business transaction any kind of business transaction right so not a gift to your child but uh any kind of business transaction if the transaction happens in cash and is over ten thousand dollars you have an obligation as an individual to collect information about your counterparty and submit it to the tax authority so social security number physical address a lot of information name obviously so let's say that i am uh i sell antiques and i'm at a flea market uh uh on saturday morning and i have this beautiful antique desk peter comes by and he says oh i loved his desk i said yeah it was once owned by george washington he says oh fantastic i'll

i'll buy it how much i say eleven thousand dollars peter takes out cash gives me cash i now have to collect his name address right something that i would never ask him for at a flea market you give me cash i give you the table we're good right well at least he can pay you 11 000 in cash because i think uh europe cash transactions are limited to a thousand but yeah let's continue yeah um so so that regime which exists for cash is now going to be would be applied if this law just became law would be applied to crypto and so the problem so you can see the obvious problems here um one is that because so many crypto transactions are for high amounts and number two because

the transactions are oftentimes crypto for crypto both parties would have to report on each other to the government and the problem here is that this is completely unconstitutional peter i don't know if you want to explain well you know why we would say that yeah i mean briefly so the fourth amendment says that the government needs to get a search warrant from a judge you know to make sure that the investigation is legit and not just harassment before they can collect very personal information about american citizens uh or american residents um and you might think well then why are things like this constitutional why is the bank secrecy a constitutional where the government can get all this information from your bank about your transaction history and the

courts in the 1970s said well the government can get that information from banks because of something called the third party doctrine which says once you hand your information over to a third party you lose your reasonable expectation to privacy over that information which means there's no warrant required for the government to come and get it from the third party and now when you hand it over to a third party that collects it in their normal course of business and holds it for a legitimate business purpose and you voluntarily provide it to them this is why for example we don't really have good constitutional protections for your emails when you use google and gmail to store your emails is because it's a third party you willingly handed your private emails over to google when you chose to use their service a lot of people don't like the

third party doctrine anymore in large part because of technology because that google standard where because i choose to use gmail instead of protonmail or something i host myself i no longer have unconstitutional rights to the privacy of my own correspondence that seems insane but this is actually even simpler the 6050i cash and currency reporting regime because there's no third party here when i buy the table from jerry i'm not voluntarily handing over my information to a third party for a legitimate business purpose jerry isn't a third party he's a second party in my transaction and even if you were to treat him as a third party he has no legitimate business purpose to know my social security number in order to sell me a table or a desk that was owned by george washington and i didn't

voluntarily provide it to him if the law says i had to provide it to him in order to buy a table that's crazy so i think it's just inherently unconstitutional as is coin center's not going to challenge it because we're not cash center there should probably be cash center in the u.s it'd be a good civil liberties organization but if the infrastructure bill passes as it's currently drafted this would be something we'd potentially challenge on constitutional grounds okay that's really that's really fascinating um you know i i am conscious we're running uh running low on time here and you've been very generous with your time i i'd like to maybe you know as we move towards like longer term vision here maybe just kind of talk about you

know europe versus the us and um you know your views on how the us is faring in terms of like it's competitive in this in the crypto space so you know for for a while now it's it's been at least my feeling that um and you know this is what we try to communicate with you know lawmakers here in france and in europe um when educating them about crypto that you know if europe doesn't get its act together and europe doesn't start encouraging innovation in crypto that in you know 15 to 20 years europe will find itself basically in the same position that it is now uh with regards to big tech companies

and that is that there you know there are no big tech companies in europe and so therefore like europe just is constantly just defending itself and regulating but the best job we have sap what are you talking about [Laughter] um yes we do have sap but you know uh sap i i don't think you know falls into the uh category in which i'm just i'm talking i don't even know what you guys are talking about um no so so my point is that you know europe is constantly defending itself against you know the the fangs uh of the world and and implementing regulation that protects its its citizens um primarily in the in the area of data protection

and you know it's it's been our position at end that if if europe doesn't start encouraging innovation it will find itself in the same position in the next 15 to 20 years only the fangs of the future are basically like the banks of the future you know the the crypto banks of the future and the the financial infrastructure that uh underpins our all or all of our lives and and you know we we felt that the us was you know um encouraging innovation and encouraging cryptos you know earlier this year um there was this this opinion by the you know the office of the comptroller that allowed banks to i think receive payments and stable cores and

this sort of thing and we saw that as like as signs that the us was moving in that in in that direction and now it feels a little bit different it feels like maybe it's that swift that's that's uh being inversed a little bit where um like the mika regulation is now you know it's it's it's subsequent drafts uh much uh much more friendly towards crypto and like there's this um there's this uh um maybe more uh critical approach to like how to regulate crypto going forward in the u.s like where do you see where do you see this balance kind of playing how do you see this balance sort of playing out and like the um yeah the balance between sort of like

the us approach in the in the in the eu approach and who do you think will turn out to be the winner here yeah that's a fantastic that's a long question but yeah no but it's a good question so um i think so number one i'll say that the u.s in my view uh is rhetorically hostile to crypto these days especially but it otherwise is probably the best regulatory environment for crypto um if you just look for don't look at what they do what the us says look at what the us does um i think it's it's a the place you want to be building uh something and if you don't want to build

it here you probably have a problem with the existence of securities laws right not their application to crypto necessarily uh i think you're correct you're detecting a shift in policy and i think we'll see that more with the crackdown that we discussed but i think that is uh more to do with the fact that we have a new administration right so that we now have um democrats in control of the house and senate and the presidency and like i said earlier sadly crypto is becoming a slightly more partisan issue than it's ever been um but i think you know uh there it's largely expected that the republicans

will take congress back um next next year next congress and you know it would not be surprising looking at um opinion polls today that they would retake the white house again in uh three years right and so you might see uh that shift back and forth on you know on the margin um more broadly though to get to what you were saying about us versus europe i think you're absolutely right i think and this is a message that we have for both democrats and republicans for anybody who will listen to us uh the u.s succeeded in the information age because it

embraced the internet while france was embracing minitel okay and you tell yep i'm a big fan but you know uh and we have an opportunity at least from the u.s side to play that that playbook again i hope that europe and the rest of the world does not play the minitel playbook that they play the open um you know and you know in a way most optimistically that won't happen and what will happen is that china will play the minitel playbook as they seem to be doing and the open societies uh the rest of the world will play the internet playbook um

so you know but if europe doesn't and it goes with a chinese model uh that's yeah i think you're gonna find yourself back in the same in the same spot i don't think it will even play the chinese model i think it's just going to i think it's it's just going to drag its feet for so long that it no real innovation will uh or of significant value will come out of europe and you know we sort of see the the hints of this with you know the cbdc talking not that uh sorry the the ecb talking about cbdc's not the cbdc's have any you know future in my opinion but you know they're they're saying like oh we're

going to like look into cbdc's for the next two years and then decide whether or not whether or not we're going to do something you know in this field and it's like guys like you need to start experimenting now it's not like you know a two-year research uh endeavor into like researching crypto in two years from now your your the results of your research will be completely irrelevant and i feel like this is sort of the um the overall approach in europe and you know also in france i mean there's been there's been uh you know recently there was uh uh sort of like the i guess it's like a new finance law that was being passed in france and and all the amendments

you know as reasonable as they were were were uh were shot down uh simply because like you know people are not ready to accept that like crypto is a thing yet and so i'm not i'm not hopeful yeah but so here's i have sort of a civil civil liberties theory of innovation uh i don't think governments can do very much to promote innovation short of protecting aggressively protecting individual liberties why was america the home of the internet it's because and why was specifically the west coast of america the home of the internet it was the sort of rough and ready communities of frontiersmen and immigrants

who found a home and a place where they could start a business and have dignity doing something that is so weird and crazy that in any other part of the world they'd be laughed at or even thrown in jail you know that's why the internet flourished i mean the clinton administration did good things by creating a framework that said we also like what we're seeing purpling up from the bottom of our innovative communities and we're going to take a light touch approach to that but the main driver is that people had you know property rights and speech rights and freedom to do these crazy things that that literally would have gotten them thrown in jail in other places in brazil i don't mean to pick on brazil but brazil there's no truth defense to defamation if you defame a public

official by saying something that's actually true in the u.s they'd say that's not defamation that's truth you do not go to jail you do not have to pay a fine in in civil in civil court in brazil they'd say no truth is not a defense you defamed a public official so like these base rules of society are much more important than we think they are and this is how america could potentially fail is and betray itself is by is by removing these protections that have actually sheltered immigrant populations weird people populations on the frontier and and their ability to build things if we stop protecting our privacy rights by giving up on the fourth amendment warrant requirement for a search if we stop protecting speech

rights by giving up on if you publish code you can't be arrested for that um you you simply can't you're always allowed to publish research then we lose but i think america is the most likely to not give up on those things at the moment uh but everything is in question now i there's a lot of things happening in america that scare the crap out of me right now so i don't i don't mean to sound rah-rah america i'm scared about the whole world but i still think that this civil libertarian theory of innovation is is most likely to succeed here and and hopefully also in in countries like germany and france who have a fundamental respect for basic human rights but you could you don't have the constitutional tradition so it's easier

to sort of like wiggle around on the edge cases and be like that's not speech that's something else yeah you know so basically if you take this into the present and basically the pitch that you give to regulators and lawmakers right now when you talk about how the future will look and how the future will look with and without web3 what are the key metrics that you point to and say look these are metrics that where we can clearly see that people's lives are going to be better with web3 it's so hard it's like it's like if you were trying to convince someone that the automobile was good if you're trying to convince the police that the automobile

was good in the early 20th century they'd be like no they just outrun us when they're robbing the bank and they just outrun us when they're moving liquor across state lines and that's what that's how that's how stock car racing started nascar in the u.s was from rum runners sweeping up their cars and then when they weren't out running the car it totally makes sense in my head yeah you know when they didn't have a bunch of hooch when they didn't have a bunch of hooch in the trunk they were just like showing off to their friends by going around in circles you know and so like how do you convince the authorities that be that this technology that right now the early adopters are weirdos and criminals is actually going to be the thing that in 10 20 years is is the automotive revolution in the us

it's really hard to you don't have numbers to point to the thing you have to point to is oh look at ransomware crypto's a really good payment tool it works it's working for criminals [Laughter] and well with ransomware it's also a potential solution to it but um i also think it's interesting you ask about what metrics we stay away from that and i think that it's a mistake sometimes to kind of point to metrics or over promise and we see this a lot in washington where you'll have especially companies and trade associations in the crypto space who will go to policymakers and say this

will help the unbanked and this will help diverse populations without access to banking and this will increase blah blah blah right um totally over promising where yeah in theory it could and maybe at some point in the future but you know within a year they'll be coming back to you and saying okay so where's the data right and we get asked where's the data we would never make that kind of uh claim especially because the key metrics that you could probably see uh movement on these days it's not going to be in the developed world where we've got so many facilities already our disposal it's going to be in the developing world right and honestly policymakers don't in the u.s won't care about that

when i say metrics you have to bear in mind i'm a physicist right so basically um so basically when i say metrics i think about things that are measurable and i mean as much as i sympathize with the civil liberties argument um it's not something where i can that can be clearly measured right so basically things things that can be measured to me are things like um how well off are people how how much choice do they have and you know these kinds of freedoms um so you don't you don't actually like talking about these at all

no so we like to sell a vision rather than sell specific um you know specific improvements that might happen because we can't predict what the improvements will be right so if i was trying to sell the freedom to use and build on the internet in the 80s or 90s i would i would want to say facebook netflix google you know delivery stuff hbo max i would love to say all these things that we use google docs all the stuff that incredibly improves people's podcast software podcasting video yeah we're talking in like france germany dc right now

that's the stuff that i would point to that would have huge economic value um huge uh uh improvement of people's lives but you know what happens in 80 1990 i don't know that yeah i can kind of imagine what it might be but i don't know it and if you postulated it and someone said wait seriously you're gonna you're gonna send high resolution video over the 56k modem or the the 20 modem that's ridiculous and you said you'd have to convince them but you wouldn't have any metrics to point to right and they would they would ask you you know year after year well where's your fancy video podcasting where's your fancy video posca right and it would take 20 30 years for it to come but you're sure that it's going to come and so for us i think it's

probably much more effective to explain the vision and explain that the uh the technological primitives are here and we just need to foster them and and let that let the fire um not go out and explain the vision you did thank you thank you guys so much for coming on if people are interested in coin center where should they go to find out more coincenter.org uh for sure cool fantastic it's been a pleasure as always thank you so much thanks for having us thanks for having us