Jito Chief Legal Officer: Why CLARITY Is Very Likely To Pass (Insider Take)

Transcript

Rebecca, we've got you on stage now. Welcome to the show. >> Thanks for having me. Good to see you. >> Absolutely. Good to see you, too. Thanks for waiting. We uh we've been on a we've been on a roll today. So, it's been it's been uh a good Monday. I'm curious. It is your first time on the show. Maybe you could just tell us a little bit about your day-to-day these days. I mean, Clarity Act ramping up as someone who's, you know, COO, CLO of a Protocol Labs company. How much are you, you know, planning for Clarity Act to go through? you're reading through some of this language and you're thinking to yourself, okay, if this goes through, we're going to need to do this, get this license, do that. Or is it like, hey, we're not really going to do much until this thing goes through and just kind of

continue operating business as usual. What is uh what are you seeing on the ground there at Geto Labs? Yeah, that's actually a great question because I circulated a copy of the updated combined 600page draft of the clarity act and actually got a lot of questions from people about what are we going to do about this, what are we going to do about that and some of it is you have to plan but some of it is wait and see. I think the other interesting part about clarity is there are an unprecedented number of rulemakings. So what clarity does is it lays out the framework for how things should work or how things will be treated and then it gives a lot of authority to the SEC and the CFTC to create specific rules for compliance. So yes, you'll have to do a lot of

disclosures for tokens. Um there's a big section on that. All the section numbers have changed since they merged the banking and a pieces. Um, but so the first part of the bill talks about disclosures around tokens and we're going to have to wait for the SEC to do a rulemaking on that. So there's not a ton to do daytoday yet, but you know, you called out my a days um early on and when I was there, there were maybe two people doing policy on the DeFi side and everybody else was from centralized exchanges and so I got to do it then with uh Uniswap CLLO. Uh, so you know that having been through six, seven rounds of market structure that you can't plan until the bill actually

passes. So obviously keeping in touch on calls every day about it. Um, but otherwise, you know, not changing our business strategy yet. >> Got it. That that's actually a very um very insightful uh given that you guys are a big labs company here and you know, I think others are watching the show and they're, you know, they're they're looking at this and trying to figure out, you know, how quickly should they move. So, very helpful to hear how you guys are thinking about things. Um, I've got questions about where, you know, where things are headed, where where we're at now. But first, could you just give us a quick status update because you mentioned uh Senate and and the A committee. Um, some of these things have just evolved and I I know the ethics langu language came out last week.

prediction markets are still putting this at like 38% to go through and I found it surprising that even after some of that ethics language came out they didn't really move it seemed like you know there was some people that have been optimistic they stayed optimistic others have just stayed pessimistic feelings didn't really change even after that ethics language came out can you give us a bit of a status update where are we what are some of the progre progress moves that have happened ad committee ethics language how important are those and and how much further forward does it put us closer to ultimately getting this thing through?

>> Yeah, so I actually think 38% is pretty high when it comes to thinking about passing a bill. Um the other interesting note is that maybe a month or two months ago sta congressional staffers were banned from using prediction markets. So you don't have people who really know what their bosses are thinking um participating. Also, you know, depending on the prediction market, maybe US persons are not supposed to be on there. uh but you don't you don't sort of have the um specific information that's necessarily flowing in from a day-to-day perspective. I also think that there's a there's a line in DC that a bill dies I don't know seven times nine times before it ever gets passed and I and I actually think that 38% is say I've been at

around 35% for the last six to nine months honestly because there are a ton of hurdles to jump through. It's not that if we get a vote on the Senate floor next week, uh it will even be a substantive vote. It may just be a procedural vote to move the bill forward to a substantive vote. And so there are a lot genius. I I um spoke to Senator Hagerty a couple weeks ago and said, you know, you made it really easy uh you made it look really easy to pass the Genius Act and he said, you can't imagine the work we did behind the scenes. But I think there was this critical mass of belief around stable coins and so it was an easier bill to pass. That's a 60page bill as compared to this 600page bill for clarity. So there's that. As you noted last week,

the combined text from banking and a came out. It included very specialized language on ethics. No matter what people say about it, it is actually unprecedented to have this types of ethics language around a very specific asset class come out. There are continuing discussions behind the scenes uh with a number of Democratic senators about getting to an even better place on the ethics language. And I think if we can get there, it will be a real shame and an enormous miss and actually a miss on a win for Democrats to make clarity get across the line. I think one of the things that is missed a lot is that this is actually a really hard bill to comply with. It actually goes to your first

question like what are you doing to comply? It's not going to be easy. Um and you know I think there is some meta around Democrats in DC that says well if we put a bill forward we're legitimizing the industry. It's a relic, but it still exists. Uh, sort of that thought process around it. And I think the real answer is it actually makes it much harder for industry to progress quickly and to outpace traditional finance if we have a bill like this in place. When you do not have regulation in place, uh, I think we've seen that crypto is more risk than Tradfi is. So, we're going to keep seeing that. And this, I think, puts crypto in a sort of even playing field with Tradfi in many ways.

>> Yeah. Yeah. And there, like you said, there there are people out there that want this to continue to be a wild west, but typically those are the people that are out there for sort of questionable reasons. You know, those who are out there that want this to go through are intending to comply with it and like you said, legitimize a business and run legitimate businesses, which I think ultimately does put us in a much more mature industry and uh a much more reputable one as well. And I I think it would clear the way. But I I'm I'm actually curious about your thoughts on this. I my you know speculation here my inclination is that this would clear the way for institutional adoption and I realize that's a broad sort of handwavy term but when it comes to banks coming in you know doing tokenized deposits or

you know New York Stock Exchange other stock platforms have talked about 247 settlement they're running research and development programs for blockchain you know tokenized equities and tokenized assets. Are we in a position where the bottleneck to those programs is fundamentally the Clarity Act and getting this thing through does sort of open the floodgates if you will or is there something else that's holding those things up or there's nothing holding them up? It's just a matter of it's just a matter of time. >> Yeah, I actually think those types of programs are just a matter of time and getting regulators um comfortable with seeing certain types of instruments on a blockchain or digitized in a way that's totally new. This bill deals with

tokens, selling tokens, launching tokens, disclosures around tokens. It actually has DeFi provisions, um, how we deal with sanctions on the front end, um, and sanctioned screening, how trady can plug into DeFi, and then it has a whole section on how digital commodities intermediaries need to register with the CFTC. for what the banks are doing and what a lot of traditional financial institutions are doing. It just is a new way to do old um old types of instruments and old types of uh you know generalized financial transactions or actions and so that's just going to take time working with regulators which all these traditional financial institutions are doing now. I think your question

though goes to the heart of how fast will traditional financial institutions want to move and how much capital are these institutions putting behind these pushes. You can see Morgan Stanley has a head of digital assets. Bank of America just hired somebody but other banks are waiting to see what happens with clarity before they put the full weight of their resources behind it. So I think that's where the difference is but I don't think this is going to stop the you know treadfi era that crypto is in right now. Okay. But there are banks and there are financial institutions that haven't put full resources behind it because we don't have this legislation in place.

That >> That's right. But I don't think it's going to change what they actually could do on the ground dayto-day if they worked with the regulators. >> Got it. Okay. And so so that that was actually my next question is you know when you sort of gave us that status update you mentioned that you know this clarity act would extend additional powers to the regulators in in terms of compliance if I heard you correctly. My understanding is that this this law would essentially codify a lot of the market structure and and you know irregardless of the administration that we have in the office this would remain the law. The regulators right now are issuing guidance, but maybe you could te talk to us about, you know, what additional powers are given to the regulators through the clarity. What

yeah, where do they navigate? What are they not able to do now that they could do with clarity in place? >> Great question. So, I think there are a few different pieces to it. One, this the clarity act is legislation. It is written laws. it to your point can never be changed unless it is challenged in you know the Supreme Court or in the courts for from a constitutionality perspective. So that will be the law of the land and it won't change and you're right doesn't change you know from administration to administration. There are there's guidance as you noted that is not binding. Hard to know can you really rely on it? You would if you went to a court of law and sure a court would probably say you were right to rely on it but um but rules are also uh the agencies all have the ability to

promulgate rules. Now we've seen the CFTC put out what's called a notice of proposed rulemaking on prediction markets. We've seen that from the SEC in the past on um on things like communications protocols and exchanges and the like. So they can do that now. Those can be overturned from administration to administration, but it is extremely hard. It's not the law of the land in the same way, but it is rules that people must comply with in order to be in compliance with the laws. And there's a whole long process. There's an economic analysis. Those can be challenged in court, too. But it this the clarity act would really lay out what the SEC and the CFTC and the Treasury Department would have to put

out notice of proposed rulemaking on agent um the industry and anybody else would be able to give feedback on the proposed rules and then the agencies have to put them in place. So it's a normal process that happens all the time. We don't pay attention to it as much as normal but this has something like 40 to 50 independent rulemakings and it's a lot. And when you think about the last major piece of financial legislation in the DoddFrank Act, which was a long time ago, they're not even finished with their rulemakings. And as we heard last week, uh the genius rulemakings I think were supposed to be done on the one-y year anniversary and those are not finished either. So it is very hard to do rulemaking.

>> Okay. Okay. Well, that that is helpful as well. So it extends when ultimately a lot of the provisions of the Clarity Act would go into place because getting this thing through, you know, is going to instantiate into law. But we actually have to make and execute all of those rulemakings and and as you mentioned from the Genius Act, we're still not done with those. And so even, you know, if clarity does go through, those rulemakings could take years to roll out. >> That's right. There may be some interim guidance on like how to comply before you get the rules uh put in place. And there are of course timelines and clarity for when the agencies have to roll out the rulemakings and have to be finished with them. But it is a it's a difficult process. It's definitely not

easy and especially when you get tons of industry feedback and I would say AI probably makes feedback even more vast these days and you really have to show that you've taken everybody's uh responses into account from the agency side. >> Yeah, makes sense. Um just a a bit of a more general question here. What what do you think are some of the biggest wins in the clarity text? you know, as someone who's representing a protocol and you've represented several across multiple different blockchains, you know, both the DeFi side primarily, uh, but essentially, you know, the blockchain side as well, kind of all across the docket. So, you've seen the way that these protocols operate. A lot of them have had this, you know, split DAO equity structure as well.

>> What is it in the Clarity Act that you think is going to be the biggest help to the onchain industry? >> Well, I think we can, you know, that's a great question. Um, it codifies a lot of what we're doing today, uh, in terms of how do you sell tokens and giving us information about how to sell tokens. As I said, the SEC will have to do rulemaking on that, but it'll make it a very legitimate way to move forward. We've seen it with VCs, but I actually think it will make at least certain tokens more investable um, and concrete and move them maybe more out of the retail side and into the traditional side for people to think about what to do with tokens. Um, I also think it's a huge win for the exchanges and uh the OTC desks and things like that to have a

real registration path forward and not have to be under this strange patchwork of money services businesses laws which you know go from state to state. Um, but I think it's really just you know I think it's I was thinking about when you said who's it a win for? I was thinking who's it a win for, right? Like it is a win in some ways for the industry and we all clearly see it that way but when you think about who is it a win for like and not to be super cheesy about it is a win for like the US economy and US consumers because you actually know what you're engaging in and in my view I certainly think um people in Congress should be viewing it that way like as I said it's not easy to comply with not just from a token disclosure perspective but this is

the only set of laws in the world that touches DeFi period. Okay. And so this is going to be tough. It's going to have lots of new compliance obligations. Treasury is going to I mean the other thing that is a big win is you know we've talked a lot for many years in the industry. Oh it's decentralized in name only and we've been calling things DeFi that have control mechanisms. Treasury has a rulemaking authority under the Clarity Act to define when there's control and when there's not. And so really to cut a line for what's what we consider DeFi and where people may have regulatory obligations for onchain finance. So this is a very difficult bill and we've seen this happen in Europe with MA where you put laws in

place and it actually makes it harder for industry to move forward quickly. >> Right. And that's something that I think the industry ought to be aware of. That's and and I think that's what you're indicating as well is that our industry I mean especially early in its days we were breaking things moving fast. It was a industry made up of cipher punks that were used to sort of this >> anarchist libertarian, you know, code is law type of framework and they could move as quickly as the law or excuse me, as quickly as the code would allow them to. Um, and especially with AI now that means extremely quickly. And it sounds like this would really put on some some ankle weights and slow the industry down a little bit and maybe for good reason because, you know, it would in enforce some compliance, but it would slow down

the industry in terms of some of that innovation. Um, and so maybe that would be the part of the industry that would continue to operate offshore and that would be sort of the experimentation grounds. But then we would also hopefully get this very uh robust, very legitimate um accessible industry part of the industry as well that would allow us to understand what we're operating in. And and I do like the the line in the sand that Treasury would have uh the ability to say this is decentralized. This is where control lies because I mean frankly, you know, I can understand how how, you know, people that are offchain not really accustomed to these things. They just want to trust that this thing is legit. For someone who's on chain, like we sort of know that legitimacy is a blurry line and

decentralization is one one line where we can draw and and sort of say, all right, if it is sufficiently decentralized, it can't really be gamed. It's not able to just, you know, someone can't just take control and arbitrarily decide what to do with it. if it if it is sufficiently decentralized. So that that makes a lot of sense and I think there are some rules that even us technologically inclined innovators we like to see innovation but there there are some of these things that we would like to see enforced. Yeah. >> Um >> and to your point on the wins there is a preservation for self-custody and recognizing that as an inherent right. I think that's obviously very important.

The other thing that is um good for the industry, I don't know if we call it a win, but it is a codification of law, is something called the Blockchain Regulatory Certainty Act or the BRCA, which it goes to what we were just talking about. It says if you are a non-controlling software developer, so you don't have control over user assets, you do not need to register as a money transmitter. That is the line that Fininsen has been drawing for many, many years. I'd say a decade, but people may, you know, tag it back to the 2019 guidance. But I think that's very good because there has been at least some use in the past by prosecutors of of trying to put that in touch to shut down DeFi.

And so I think that would be a very helpful point as well. >> I remember I remember that you know uh people were a little bit concerned whether that meant uh wallets. It could mean aggre uh aggregators, exchanges, venues that were just potentially just AMMs, just decentralized exchanges. But there was some question on whe whether or not they were included in this money transmitter license regulation. But you're saying if clarity goes through that wouldn't be the case. If you're not custodying funds and most smart contract protocols do not custody funds. Most of this is self-custody. They would not get wrapped up in that.

>> Well, the line is not custody. The line is control. So even if you self-custody, if there is control over the protocol, you're not going to get the um coverage from the BRCA. And so it goes to this uh part of the bill that I was talking about where Treasury could define what is a controlling versus a non-controlling developer. So if you fall within the non-controlling part, you do get coverage from BRCA. But even if it is onchain finance where you're using self-custodial wallets, but there is control over the protocol, which means you can take user funds at any time, whatever the whatever Treasury decides is the line in the sand, you don't get coverage from the BRCA.

>> Got it. I I could also see how that could mean like some of these actively managed vaults as well. You know, the that that would certainly indicate that they have control. you might be, you know, self-custody, you can withdraw from the vault, but while you're deposited in, uh, they can manage maybe amongst some whitelisted assets. >> Yeah, it's that's so tricky to figure out. And this is what I've been grappling with for so long having been in DeFi, which is, you know, if you do have control, what are you from a regulatory perspective, right? Are you a trustee? Are you a fiduciary? Probably neither of those things. So this is actually something we need to be able to progress DeFi vaults, you know, moving DeFi or onchain finance into institutional use cases. I think it'll

be really important for that. >> Yeah. Yeah. And that is where I think there is, you know, this industry is poised for a lot of growth, but I I could understand why institutions might be on the sidelines kind of looking from the outside in because they don't have that guidance quite yet. So, this is an important part that is, you know, uh, kind of shortcircuiting some growth at this point. As as we're talking about some of the nuts and bolts here, I also wanted to to follow up on the token disclosures that you mentioned and how you particularly mentioned how this >> seems like it could be a win for Democrats and >> at at least from my point of view, and I'm not in DC, but it seems like Democrats are the ones that are, you know, holding this up. Um, is that true?

Is it the Democrats that are holding this up? I I I think it is. and and and if so, why do you think token disclosures is particularly a win for Democrats that they could be leaving on the table? >> Oh, I think clarity in general is a win for Democrats from a customer protection standpoint and from a you know US economic standpoint of view. I think and this is a political uh tactic, not a Republican or a Democrat tactic, but everybody is trying to get the most they can for what they believe their constituents care about. And I think you can't fault either side for doing that.

And there are a few red lines that Democrats have, a few red lines for that Republicans have. But I think ultimately people want to get to the right result, which is one putting together a bill that hangs together and makes sense and two that moves it for moves the industry forward in a way that gives you know good guard rails. >> Yeah. um in in this 600page, you know, uh bill here, do would you say are there things that just don't belong? Like I I understand it's intricate. There's a lot of nuances when we're talking about who has control, who doesn't, where the rulem comes from, but I I've also heard just stories, you know, when these bills come through. It's like, you know, politicians maybe slip in, you know,

we've got maybe a military package, but they slip in a health care thing or vice versa, right? Healthcare and you slip in a military. So are would you say there are things in this in this in this gigantic bill that just maybe it's a little questionable. Why are those things in there? Is that is that holding things up when we don't really need it in there in the first place? >> No, not in the same way that you're talking about. I think what you're talking about is something like the NDAA, which is the National Defense Authorization Act. That goes through every year. It has military spending attached to it. People know it's going to move because it's pretty necessary. Although it didn't move this last time because there's been so much politicization in DC right now. and um a lot of hyperbole and people going to

both sides, but you know, people will tack on bills that they want to have moved with these certain bills like the NDAA. There may be one or two little things peppered in there that we'll see get cut out in the House potentially, but uh one people aren't really super focused on those. the staffers in the House are focused on things they might want to have excised when it comes to the House, but this is really a very cryptofocused bill and you don't see things like, you know, animal rights provisions being tacked on into the end. >> Okay, that that makes sense. I think that's going to be helpful to get this thing through. And, you know, it seems that we've got 10 days, right? That's effectively what we've got before the August recess. How how real is that deadline?

>> Um, it's pretty real from a procedural standpoint. I don't think anybody expects there to be what's called a closure vote this week. That's the procedural type of vote that I was talking about where people say, "Okay, we think there are enough votes to move this bill to the floor." People don't like to move bills for substantive votes to the floor. Leader Thun certainly does not want to move a bill to the floor. That does not look like it is going to get a full amount of votes. And look, it didn't the first time on genius. And then um Senator Hicker has been very public. He went he said to the leader then, "Give me a week. I'm going to get this across the line." And he did. And then they came back. They had another closure vote. They had the procedural votes and then it got across the line

substantively. So I think all we really want before the August recess is a procedural vote to say it should move forward and that's really important. There are actually a few procedural votes that we'd have to get through with I don't want to bore everybody with those details. So I think that's really important to have by next week and then we when we come back from recess we'd go through and have some of the substantive votes. And what I hear you saying is that if we get the procedural vote sometime in the next week or so before this deadline there, the expectation would be we would come back from the recess and this substantiative vote would go through as long as we get the procedural vote in the next 10 days.

>> Hopefully. Um, you know, as I said, a bill dies a number of times before it ever becomes law. But I think everybody is hoping that we see us a a procedural vote before the August recess. >> Okay. And what would you say are the things what's holding us up from getting a procedural vote? >> Ethics for sure. Okay. Uh and then uh I think there are still some concerns around the blockchain regulatory certainty act and whether we need to make any amendments there. That's been a big piece of it. The other interesting piece that people haven't talked as much about is that the tribes have been pushing for potential provisions relating to prediction markets. And this bill does not touch traditional derivatives. So it doesn't touch per it

doesn't touch prediction markets. It doesn't touch the CFTC's current authority. All it does is give the CFTC new authority over crypto spot markets. Um but the tribes are seeing this, as I was saying before, everybody is using this as a an opportunity to exert leverage. So, there's been some of that in the background as well. Um, but I don't think that ultimately the prediction market question is going to hold things up. >> And when you say tribes, you you're talking Native American tribes that are currently running casinos across the country and they're >> sort of looking at the prediction market space as a potential infringement on the gaming industry.

>> That's right. That's exactly right. >> Okay. Okay. And so are they trying to include some regul like regulation in the Clarity Act to keep the prediction markets and the per markets at bay? >> Yeah, a little bit. They So definitely the prediction markets. I don't think the tribes are as concerned about per um but they want to have some language in there because there are these developer protections for things like writing code running validators and nodes like very heavy technical work that is scoped out of the regulatory perimeter that's captured in clarity and there's been discussion around whether decentralized prediction markets and really I think they're looking at poly market but probably other ones that are online on chain um and saying we don't want those

to be captured by these developer protections that are in the bill either on the spot side or on the equity side. Hm. >> I know. >> Yeah. >> DC is a funny place. The things that you don't expect to have happen. But look, I do think that there we forget that just as we have interests and can, you know, we're a constituency of a number of people, there are all sorts of industries out there who see this touching them. Yes, we saw the banks and we're like, "Oh, yeah, of course the banks are coming because we they know we're coming for them." But people have seen the expansion of, you know, the digitization of finance, onchain finance, whatever you want to call it, and seen the threat that it poses to existing businesses.

>> And would you say that kind of the approach that, you know, the incumbents are taking, whether those are the tribes or the banks, you know, they're sort of trying to save off the the, you know, DeFi industry as long as possible. That do they do they maybe see that it's inevitable? They're just trying to buy themselves time so that they can roll out their prediction market offering or they the banks can incorporate some of their blockchain finance aspects as well or are they just trying to permanently ban these things? >> Uh we just saw right before this it was announced that the CME rolled out single equity futures in a 247 uh way. So and we saw the CME sue the CFDC overs you know about a month ago or so. So, I'd argue that uh everybody's trying to buy

themselves some time or exert maximum amount of leverage to get things that they think will protect their business or keep their moes in place. And I, you know, I would say you can't really blame people for doing that because people are used to their businesses operating in a certain way for decades and so they see the threat that the changing world is bringing to them. >> Yeah. Wow. Rebecca, I think that's I think that's about it. I'm sure we could, you know, continue to talk, but in a couple hours there's going to be more news that comes out of DC and then we're going to have to, you know, do this all over again. I I I'd love to have you back on before that that deadline and just, you know, make sure that we get a chance to catch up before this ultimately hopefully, fingers

crossed, goes to the procedural vote. >> I know. Well, happy to be here anytime. Thanks so much for having me. >> Awesome. We'll see you next time. Thanks so much, Rebecca.