Policy Corner: Grayscale ETF, Uniswap Ruling, Tornado Cash Charges | Rebecca Rettig, Jake Chervinsky

Transcript

this is in many ways an attack on the constitutional right to free speech and financial privacy this is the Collision of the fundamental concept of a decentralized financial system that the government cannot surveil and cannot control with the government's desire and frankly they're having gotten used to being able to do both of those things in the financial system for at least the last 50 years nonetheless the reason doj brings this type of case in in with this fact pattern is because it is the best way for them to curtail fundamental constitutional rights while having people say we're not going to defend this because it feels bad to do that I think it is Our obligation to show up

and say this indictment is not justified as a matter of policy and as a matter of principle this episode is brought to you by Chain analysis the leading blockchain data platform that powers investigation compliance and risk management tools used by both businesses and government agencies is around the globe you'll hear more about chain analysis later in the show all right everyone welcome back to another episode of Empire this is uh part of the Regulatory and policy series we've got Rebecca and Jake joining us again Rebecca Jake welcome guys thanks for having us back yeah of course of course um all right so we've had tornado a couple weeks ago tornado cash a couple weeks ago we had uh grayscale in the Bitcoin ETF last week um big ruling and then we had uh uh actually what I might think is like

almost as big which is uniswap which I feel like kind of got swept onto the The Narrative table because of grayscale was so important so I think maybe we could start with the Bitcoin ETF actually and uh Jake I'd throw this first one to you which is it feels like this was the moment we've been waiting for for I mean even I I don't know when the Winklevoss filed their first that Bitcoin ETF several years ago maybe I don't seven eight nine ten years ago yeah right is this kind is this as big of a deal as crypto Twitter was making it out to be in your mind yes I think so and I think there's two reasons for that so that's true the the first ETF application was filed I want to say in 2013. so literally the industry has spent 10

years trying to overcome this specific hurdle that the court just said the industry is right and the SEC is wrong so waiting 10 years for that I think is a huge deal I mean we can talk more about sort of what that issue was if that's interesting but I think the second and maybe more important element of this is this is a unanimous decision of three judges on the D.C Circuit Court of Appeals right this is not just one district judge with one order that isn't binding precedence in any way this is the most important Circuit Court in the entire country for administrative law issues coming down three to zero saying the SEC has acted in an arbitrary and capricious Manner and that does a couple of things one it sends a signal to the

SEC that they are going to lose cases in court if they keep acting as unreasonably as they have been acting and it also sends an message that the administrative procedures act which is one of the laws that we often talk about when we think about the need to sue agencies for acting in an unfair or unreasonable way has teeth behind it and the industry can win these cases if you hire the right lawyers and if you have the right fact pattern and you make the right legal arguments so I think even more than just finally making progress on getting a spot Bitcoin ETF listed which is a big deal in and of itself I think this is a significant curtailment of the sec's ability to assert its own authority in the absence of

congressional authorization who were the three judges and I guess really what I'm asking here is like were they placed by Biden were they placed by Trump like kind of what side of the aisle do these judges fall on yeah so it was a mix so uh one judge was appointed by President Trump won by President Obama and one by President Carter going all the way back to the 1970s and so this was not a partisan issue and in fact a lot lot of people going into the oral argument were somewhat concerned because as we know uh you know folks on the Democratic side tend to be a bit more permissive of the assertion of regulatory Authority by administrative agencies and since two of the three judges on this panel were

appointed by democratic presidents there was some fear that if this was going to be partisan the SEC would have maybe a better shot with this particular panel and not only did grayscale end up winning the case they won three nothing and the opinion was written by the judge Who was appointed by President Trump and it is not you know very friendly or polite opinion it's written in a way that really shows the SEC was way out over at skis in this case and I think that you know if I'm at the SEC I'm definitely feeling some egg face and some embarrassment for this so why did grayscale win when so many others have not won or have others not sued like like counter sued or what like what why why was this different than all the other

Bitcoin ETF filings of the last 10 years there are a couple Fetchers ET exchange traded product now and to have that out on the market without a spot um ETF out there too is a very different set of circumstances that didn't necessarily exist a decade that did not exist a decade ago um and so also having the reasoning behind allowing um uh Bitcoin Futures ETP out there and then comparing it against what the reasoning was um as it related to an ETF I think was a very helpful set of circumstances so that's one two uh I think uh this was really important for grayscale in terms

of like existential for its business to be able to move it forward and so even outside of crypto when you have an existential question for your business and you have the capital to go forward frequently you do take that on because you say like well I'll either be in the status quo where I won't be able to move forward in my business or something positive will happen like I'll get a you know a favorable ruling from a circuit court and be able to move my business forward potentially I mean I don't think this means that we're definitely getting an ETF but I think it's going to be very very hard for the SEC not to at least it put something forward and I think even if the SEC puts out a different set of reasoning for denying another ETF it will probably face another challenge for

that because if you've said one thing for 10 years and nothing else right all they've said all over and over is that this Market is manipulable and you can't what's the exact language I have to pull it out from the um from the opinion but basically it's about this Market is easily manipulated and so we can't have an ETF around it um and if they now say oh well we went back and looked it and they're like there's another reason it's going to be sort of hard to be believable I think the other thing that's interesting is that BlackRock and a few others are very much in line for their Bitcoin ETF too and so it may make the SEC feel better to just approve them all at once across the board so they have you know already

SEC regulated entities who are going to be doing this too yeah and we should we should talk about sort of what we think might happen next but just to drive this point home the reason that no one got a ruling like this before in the 10 years of applications and denials from the SEC is because nobody filed a lawsuit before right this was the first time anyone ever decided to take the SEC to court over this issue and over the course of those 10 years you know not to speak for any of the the ETF sponsors who were trying to get these these proposals through but I think the overwhelming feeling internally for them was this is our regulator right maybe we're already regulated in some way we're offering other SEC registered products or you know our goal is to become SEC registered by offering this product we

don't want to upset our regulator by taking them to court right that is like not the nice thing to do and often companies are just afraid of taking the battle to their own regulator in that way and I think it was only because we finally got to the point where it was clear that number one the SEC was indeed acting in an arbitrary and capricious Way by allowing Futures ETFs to list but not allowing spot ETFs to list but also secondly it was clear that politically the SEC was never going to allow grayscale to move forward with this conversion and the only thing left for them was to go to court and the fact that they won this suit I think should be very encouraging for other folks out there who have other issues either with the SEC or with other regulatory

agencies that they should also consider going to court maybe you're going to upset your regulator but also maybe you're going to win and in the course that's really where these issues get resolved Rebecca can you take me inside the mind of a of a company that maybe is thinking about not that I don't think you've done that before but like maybe Inside the Mind of a company that's thinking about suing their regulator like it's basically a cost-benefit analysis right like if you lose you're down in two ways you're down in well now this governing agency really doesn't like you but you're also down I mean how much does one of these suits cost is it 2 million 20 million 10 million I have no concept of that but would be interested to hear that too I think there are a couple things and it's what

I was saying where it was existential before which is like was great grayscale even going to be able to move forward with anything without this conversion no so it's sort of like a zero-sum game for them um as Jake was alluding to before if you're a a registered investment advisor and you have a fund and you're overseen by the SEC but you also want to launch this ETF you're probably not going to go sue your regulator say like okay thanks for the ruling and so you had a sort of a standalone entity who was well capitalized who was able to go to court and they probably were able to justify the expense because they have fiduciary duties and things like that um and probably duties to their holders and whatever so I think that's some of

it um it's it's rare that you that you as a company will sue a regulator um Jake and I just had a a talk last week about impact litigation and usually that happens in the civil liberties context right like the loving versus the Virginia Brown versus the Board of Education right that's like impact litigation where you're really gonna like change the way everything works and we were talking about impact litigation in the context of crypto and whether this grayscale case is impact litigation and I sort of took that contrary point when we were talking about it last week but if you really think about how Jake positioned it uh at the beginning of our conversation today which is that this is

not just about grayscale it is just about grayscale um but it is also in a much broader sense about how the SEC has been uh employing reasoning as it comes to crypto and the statements in the grayscale case are thing like the SEC acted unreasonably and we they did say they acted arbitrarily and capriciously but there's like a lot of language throughout this entire opinion that is uh very uh critical of how the SEC has been moving forward really polite way of telling the SEC that they're completely incoherent that like that's what it I don't read many legal things but it was like very it was about as that kind of messaging as I think you're

gonna get okay analysis is the Premier blockchain data platform crypto businesses financial institutions government agencies regulators and policy makers all utilize chain analysis data and services to make sense of what's happening on the blockchain to analysis demystifies crypto by providing industry-leading compliance Market intelligence and investigation support for all crypto assets for organizations like square and Barclays and bny melon as regulators and policy makers work together to pass legislation that provides Clarity for crypto businesses and protects consumers they have the chance to do so with unparalleled data and Research into the entire crypto

ecosystem gain greater visibility and insight with the leading blockchain data platform by visiting chain analysis.com forward slash Empire if you are looking into compliance and you need blockchain compliance there is no better place it is chain analysis.com forward slash Empire what do you guys think happens from here Jake you're mentioning I think it's you know it's important to talk about what's next I think there's what seven or eight Bitcoin ETFs that have been filed one of them comes due in I think it's January the other six or seven or eight come due in March um what's the likelihood that we get I think of Bitcoin ETF in 2023 and then what's the likelihood we kind of get

them in that March time frame of 2024. yeah so it's it's hard to put a probability to this um although maybe I'll Venture I guess uh if you push me hard enough on it but I think macro level right yeah I and this is going to be sort of obvious but either the SEC will decide to approve basically all of them or will decide to continue rejecting all of them and I think that is in many ways more a political decision than it is a legal decision right so you know chair Gensler has sort of staked his reputation as the anti-crypto chair of the SEC and they did just lose a very embarrassing case in grayscale but the judge did not order the SEC to approve grayscale's conversion or to approve any other spot

Bitcoin ETF what the court said was it was arbitrary and capricious for the SEC to conclude that grayscale's proposal was not designed adequately to prevent fraudulent and manipulative acts and practices which is the section of the exchange act section 6b5 that the SEC has invoked to say a because of Market manipulation concerns none of these products can list and the court said it's reasoning in this case was faulty but that doesn't mean the SEC has to approve these ETFs it could either go back and come up with some other reason to deny these ETFs and you know I think most commentators believe that the most likely other reason they would pick is

concerns about custody custody of spot digital assets is sort of an untested issue in the SEC World we're fighting about this now when it comes to qualified custodians in the context of registered investment advisors the SEC did not have to deal with custodianship in the Futures ETFs so no one could show up and say well you allowed custody in these other cases but you're not allowing custody in this case so I mean maybe the SEC could sort of spin a story about that personally I think that would be ridiculous because they have never rejected any ETF proposal on the basis of custody so they would be sort of raising this issue after 10 years for the very first time I hope that they or not crazy enough to do that but they could they also could decide they're

just going to do a better job of explaining why a spot Bitcoin ETF is too susceptible to Market manipulation right they could come up with other reasons that they didn't have in the order of denying gray skills conversion they also in theory could just decide to pull all the Futures ETFs which would be kind of like the nuclear option if genzel really decided that he wanted to go after the industry I'm not saying that's likely but I'm saying these are options that are available on the other side the SEC could decide you know what we just lost this this uh you know bad beat in the DC circuit we're gonna give up on this one we're going to make ourselves look reasonable we're going to take a semi-graceful exit from this position of opposing Bitcoin ETFs particularly in

consideration that BlackRock and so many other very large traditional financial institutions are ready for this type of product and they're going to back off of this issue and decide to approve all those ETFs I guess if I was going to give a probability I would say 51 they decide to approve them all because I think that's the right decision that's what I would do if I was there but it's it's hard to uh to sort of bet on that from where we're sitting right now so why do you think that they will why do you think it's an all or nothing thing so so like when you look at the goal when you look at gold and gold ETFs there are uh I I only think of basically two gold ETFs there's GLD and iau but really there are 30 I think it's 30 or 35 or

40. somewhere in the range of 30 to 40 I think gold ETFs but there are those two right GLD and iau that make up the a large amount of the market um if I were the if I were the SEC and I was kind of like I don't know trying to pull strings in the back to make sure this didn't get kind of out of hand right because they obviously don't want it to get out of hand I would probably pick the two that I could control the most I might be like laguardian with BlackRock grayscale sure we can kind of like they'll you know we'll regulate them to death like the and then and then all these other ones like we won't approve them why do you think it's an all or nothing game so look that's a that's a very reasonable take and I I guess I'll um

I'll temper my view that I think it's All or Nothing um with the fact that legally it doesn't have to be and I've not gone deeply through all the proposals and it may be that there's one out there that actually should be rejected right so like this custody question is an important one if there was a proposal that was like we're gonna print out the private key and stick it under a mattress and that's the entire you know cyber security method for securing custody but that should be rejected similarly the reason that that the DC circuit ruled in grayscale's favor is because grayscale had the same surveillance sharing agreements as the Futures ETFs so they ruled it was not fair for the SEC to treat those same systems differently but maybe there's

another proposal that doesn't have those surveillance sharing agreements maybe it should be rejected for that reason so it's not really fair to say all of them definitely will be approved at the same time I just feel like if the political calculation is the SEC is going to show that it's reasonable and it's going to allow listing of spot Bitcoin ETFs so that chair Gensler can push back on what I think has been a very accurate Narrative of Regulation by enforcement and unfair discrimination against the crypto industry the best way for him to send that political signal is to say hey we will approve the right products pursuant to a court order even if we disagree with the underlying logic of that court order and we're not going to pick winners and losers with respect to

that product but we're going to keep going after all the bad guys who just aren't complying with the obvious clear rules that they think we should comply with which is sort of his message for literally everything else in the industry that isn't related to bitcoin so if I'm thinking just with my political hat on not my legal or policy hat that's what I would do if I was in their shoes although I mean so I feel a couple things so GLD was I think the first gold ETF approved I don't know if I a you was around the same time or at the same time but I think that the whoever's out of the gate first is going to have a competitive advantage and so I it's there's a possibility that he would let somebody like BlackRock over who the SEC has a ongoing relationship

um out first or something like that the complicated part which we're not talking about is that most of the new applications are using coinbase for their surveillance program and so the SEC does have this ongoing case against coinbase um but having nothing to do with surveillance although they do say that you know they are combining all the different functions of clearing and broker and exchange so they're gonna have to reconcile that as slash if they approve these we'll see do you ever remember when coinbase acquired neutrino like four four years ago so that was um I actually just put this together in my head they um I think it was 2019 they

acquired this surveillance company called neutrino and they got a lot of crap on Twitter because it was a surveillance company and I just put together that together in my head that they probably made this acquisition yeah for these surveillance deals um does it feel like to you Rebecca that so I was reading acts there's an axios article SEC chair Gary gensler's Court losses are piling up in crypto then actually the Wall Street Journal editorial board wrote this opinion piece the SEC strikes out again on crypto with grayscale Gensler bids to match the losing legal record of Lena Khan's FTC um does it feel like the tide is turning on Gary Gensler or is this just what I want to think well I also a very Vending Vindicated because for a

long um press and public sentiment including from some of the Publications you just mentioned basically said things like that you know um reinforce the bad Narrative of crypto right and gensler's Narrative of like they're all criminals everybody's just trying to you know make a buck there's nothing good or nothing useful about this and um stop especially you hear a lot of this on the policy side like stop crying about what the SEC is doing they're doing their job that's all that right and then you read the grayscale opinion you're like we're not we're not crazy like this is the reality we're living in and we and so um that was very gratifying from that point in time is the tide turning I was really thinking about this in

preparation for today's discussion which is you know it's hard to say because things shift almost weekly here uh and who knows um I will say I think from a long-term perspective I feel um including dealing with all sorts of regulatory agencies just on how they're building like in positive ways how they're building out for crypto and things like that um I see this this industry staying for the long term how that's going to look and what that's going to look like I think remains to be seen but I think especially with a lot of these court cases it may expedite the process more than anything

um but look I think other things that have have happened have been negative too so I think we're just going to keep getting a smattering of both but I do think the SEC losses and especially the rhetoric and grayscale around how the SEC was making decisions is really important just for as Jake was saying like the political uh view of all of it including in Washington DC because if a if the ninth circuit had said this about the APA it may have had less force in DC with policy makers but the DC circuit with a mixed um panel of Republicans and Democrats is a very powerful statement in DC yeah yeah I I feel like I'm always the bullish one in these conversations

which I'm I'm happy to be I'll look yes I think the tide is turning and I think we're allowed to be happy about this and I I think the reason why I feel positively about recent developments is because we are winning in the courts and this is one of these issues that Rebecca and I have to deal with a lot in the policy world where there's just a lack of connection between the facts and then what is being said in Washington DC right like the tether to reality is extraordinarily tenuous in a lot of cases where because of usually political um desires more so than logical or rational analysis people come down as being crypto Skeptics and being anti-crypto right we deal with this all

the time with folks like Senator Warren for example where it feels like the Nuance is just totally ignored because the message the facts the truth are just not interesting to the audience that we're trying to get those you know facts and reality over to and that is distinctly not how the federal courts work right the job of the courts is to engage with the nuance and to actually consider the facts and apply the law and then come up with the right decision it doesn't mean the courts will get it right every single time but it is just like Rebecca said really nice to see that you know we've been arguing that the sec's denial of ETFs has been unreasonable for at least since I got into crypto right like the first Twitter thread I ever rode in 2018 was about the

sec's denial of a Bitcoin ETF proposal and I do think we could be led to believe we're just crazy and it's so great to see that once people are actually cast with analyzing these issues the right way actually we're right and I think this is just the beginning as I've said before of us we're winning a lot of cases and moving the needle on the courts yeah and look this is how our system of government is supposed to work anyway right of the administrative um Branch the legislative branch and the courts and the courts are meant to be a check on the other two and so this is one how it's all supposed to work um maybe I won't be saying that as clearly if we lost but I'm just kidding but um it is how it's supposed to work where you everybody gets a chance fair

chance the other thing I'll say is you know everybody's talked about people leaving the U.S and there are really vibrant crypto hubs all over the world both from a policy legal perspective but also from just like Builders being everywhere um and that's really important but you do not get this same kind of Court check against administrative power in other countries and so everybody can be fleeing and I totally see that and understand that and it has been a rough rough road in the U.S but there is something to be said for being able to vindicate your rights and on a fairly I mean look I'm sure Gracie I would say this court this took a long time but like this is fairly quick right like

um in terms of being able to bring it and um get heard and get an opinion like yeah you know you don't have that in the same way in other places so there is a benefit to being here too in terms of you know being able to vindicate your rights yeah um I think one last thing on grayscale and then we can move to uniswap is um so when companies mess up their people are hold like accountable held accountable right and if I kept screwing up decision after decision after decision at block works like I don't know maybe I'd get I don't know Mike would Mike would give me the boot or something like that it doesn't feel like the same with government and specifically with the SEC right now it feels like the court basically told the SEC it had no basis for this decision

that they kind of just made this made up this kind of incoherent thing and that they lost and it seems like that is starting to happen more and more here what is the consequence for overreach or just bad government behavior in general from Gary Gensler or is it just that you don't get you don't get you like read I don't know if the term is reelected or something is yeah I mean basically it's that right I mean this is a core a political issue and right we live in a representative democracy the idea is that if our elected or you know unelected officials are doing a bad job they will be punished at The Ballot Box or they'll you know the idea is if we really think that Gary gunzler is doing a terrible job we're going to put pressure on the

president or you know whoever gets elected in the next um the next presidential election to pick somebody else to do that job it's also possible in Congress and the Appropriations process there's been some discussion about how much funding is the SEC entitled to but ultimately the SEC is created by an act of Congress and is responsible to Congress Congress has oversight of the SEC and the more the courts are saying the SEC is doing a bad job generally speaking maybe the less Congress wants to fund the SEC or maybe the more Congress wants to pass other legislation that would change the way that the SEC operates but yet the sort of problem with that is our uh democratic system is very slow to respond to things like this and also

although this is a really interesting conversation for us on this podcast the vast majority of people in America do not care about this at all so it's pretty hard to exert political pressure just because yes although what I was going to say is on the the custody rule traditional Financial actors just brought a case against the SEC for the custody rule as well um a whole group of more traditional Financial actors and so I I will say that if we see this span out and losses I was going to say the same thing is about Jake like this feels big to us and it feels like a series of losses for the SEC I haven't done the math but this is a small percentage of what the SEC is working on and what cases they're dealing with

um uh but I do think if it fans out much more broadly there may be all sorts of political pressure some of which just like oh he resigns and gets to go to some fancy new job and there was like political imaginations behind the scenes so who knows I will add though the headlines matter a lot so the comparison of Gary Gensler to Lena Khan that that's like oh yeah do you think that isn't devastating for him right yeah this is this is someone who lives in the headlines so that kind of thing that can seriously move the needle all right we're doing what we can to have bad headlines about Gary G over at block Works Jake we got you yeah um let's move on to uniswap Rebecca can you kind of just tee up this conversation and uh give us some background on like what this case was

about so this is not an SEC case although it feels I think good and we can sort of talk about any corollaries uh to the SEC world after we've gone through the opinion but this was a private class action brought by a number of private persons who supposedly had bought what they called scam tokens um on uniswap pools uh and they brought a case not against the issuers of these scan tokens but instead against uh uniswap Labs Hayden uh Paradigm a16z Union Square mentors and the uniswap foundation alleging that because all of these different entities were involved in running owning and operating

the uniswap protocol and creating a technological mechanism through which these scam tokens could be the pools could be opened up and sold they had violated a number of Securities laws so that links into sort of what we were talking about before um and uh the case only got to the a motion to dismiss stage so this means all the plaintiffs did was file a complaint and then the defendants went ahead and filed different what are called motions to dismiss so there was no Discovery no depositions no documents that changed hands and um the defendants basically argued on its face these allegations even if you

accept them as true judge do not amount to violations of the Securities laws we don't control the protocol the interface that was part of the allegations um we may control the interface but the interface isn't the protocol and isn't enough to show that we were facilitating these types of sales and for that reason you need to basically dismiss the entire case and that is exactly what the judge did so a couple of points on that before we get into a few more of the details this case is pending in or was pending in the southern district of New York which is um obviously one of the most important jurisdictions from a district court perspective in the United States

obviously there are a number but all big Financial cases really go through the sdny the other thing that's really important to note in terms of the judge who it's pending in front of is it's judge faila who the coinbase SEC case is also pending in front of and I think what is important about this opinion is not just that um well first of all the understanding of the technology and the way that the uniswap protocol works is really really spot on in this um there is a whole the whole first section and I will say the whole first maybe 20 pages is about how the protocol Works how the interface Works how somebody could independently

create a pool on uniswap um it even has like a footnote about how V1 was like East to erc20 and that V2 was erc20 to erc20 yeah so it was very very impressive um the other important thing for any crypto lawyers listening to this is your terms of use and your privacy policies are really really important the court really went through and looked at what uniswap had said about itself publicly and even on a motion to dismiss a judge can take what's called judicial notice of public materials that may impact the analysis so she went through those but I do think there are a few points to note which basically the takeaway from this is the judge said there the way the law

works today does not allow for these types of claims and a number of times throughout the the decision she says this the courts and Congress have not weighed in on this issue and this is some of this is not for me to decide but we need Congress to update our laws to be able to address these kinds of issues she said she says due to the protocol's decentralized nature the identities of the scam token issuers are basically unknown and unknowable leaving plaintiffs with an identifiable injury but no Iden identifiable defendant undaunted they now sue the uniswap defendants and the VC defendants hoping that this court might Overlook the fact that the current state of cryptocurrency

Regulation leaves them without recourse at least to the specific claims alleged in this suit I mean it's and she says it a few times it's very powerful and Rebecca the she here is Judge faila and this is the same judge that will be overseeing the coinbase case she is and there's that I was just gonna go to that she says when she's talking about the technology um she says well these scam token issuers they say something like she says something like they could have registered or even any token issuer could register but Congress hasn't weighed in on what these are and so we don't know and I think for the purposes of a coinbase case and whether these tokens are securities or

investment contracts unless Securities or not I mean you can't say that's gonna be determinative of the entire case but I thought that was a very big signal for her to say we don't know what these tokens are and when she didn't really need to say that in this opinion so I I thought that was an interesting point too Jake what did I miss no you nailed it I the only thing you missed was specifically calling out the major questions Doctrine which is why I'm so excited about this about this this um decision or at least one of many reasons so maybe I can just give a a minute or two on that um and and this is sort of close to my heart in part because I think that the major questions Doctrine is the reason why the SEC is wrong when it tries to

extend its own jurisdiction over crypto without Congress having done so explicitly during a time when Congress is considering legislation for how digital asset spot markets should be regulated with the major questions Doctrine says when an agency claims to have some Authority granted by Statute if its claim relates to an issue a vast economic and political significance Congress must have clearly authorized that uh you know assertion of jurisdiction or else the assertion of jurisdiction should be rejected by the courts and the blockchain association filed an amicus brief in the coinbase case making exactly this argument that when the SEC says it has jurisdiction

over digital assets because of its interpretation that digital assets embody investment contracts which are a type of security that the SEC should not be given deference to that view because Congress did not clearly authorize the SEC to regulate digital asset markets and my favorite line from the uniswap opinion when judge Fela is rejecting the plaintiff's request to apply the federal Securities laws to these transactions in a secondary Market she says the court declines to stretch the federal Securities laws to cover the conduct alleged and concludes that plaintiff's concerns are better addressed to Congress than to this court better

addressed to Congress than to this court I could not have written that better myself in fact I'm not sure we did in our Amicus brief 20 pages of making this argument but it makes me feel really good not only about the impact of this ruling but also if judge Fela continues to hold this view in the coinbase case I just cannot imagine how coinbase does not win the core question of whether the SEC regulates it as a as a trading platform providing secondary markets and digital assets yeah sorry just to that point she says I found the right language she says issuers who create erc20 tokens are known as developers each of them theoretically could register their tokens with the SEC but such registrations are few as Congress and the courts have yet to make a definitive determination as to

whether such tokens constitute Securities Commodities or something else oh very interesting how much does the how much do recent legal cases tie into decisions that are made now and what I'm thinking about specifically is Ripple right like admit I think it was mid-july um the kind of like years-long battle between Ripple labs and the SEC to decide if Ripple's xrp token was the security or not got determined right I think it was sdny Judge uh Torres I think it was ruled that xrp is not a security one sold to the general public but it could be treated as one with regard to past sales to institutional clients does that decision just you know a month and a half ago

have any implications for the rulings today or it's too recent she doesn't really reference Ripple in here um I think she wants this to stand on its own she interestingly unless I'm remembering another case does actually I know she does she does drop a footnote about the tornado cash decision in a totally different District because she is so focused on the tech and what smart contracts are and are not that she sort of has to give a nod because there's a totally different case that talks directly to this issue but district courts don't have to follow each other for one and even District judges within the same court may look to other other judges or other decisions

um but you can see even within the southern district of New York uh shortly after the Ripple case judge rakoff made a decision on the Tara motion to dismiss and said I think that's wrong and I'm gonna let this case go forward you know pass the motion to dismiss stage now there are a million ways to distinguish all of that and we can but we have limited time on this podcast um so it like it depends but I don't think Ripple had a big impact on this case because this was so focused on the tech I I agree with everything Rebecca said I I guess um my take though is I do think these things matter and I think it's a small enough world that it would be surprising if judges aren't keeping up to date on what the latest opinions are in the big cases

um there's no way to know that unless there is a citation like Rebecca said in the terraform Labs uh opinion from Judge rakoff he directly cites judge Torres and explains why he disagreed and we don't see that in this opinion at the same time it would just surprise me if uh if judge Fela wasn't thinking about what her colleagues down the hall in the same Courthouse are doing the other thing is the parties in in a case like this can and often do file a notice of supplemental Authority telling the court about some new opinion that might be relevant I'm not sure if that happened in the uniswap case but that is sort of common practice in in any case like this that whenever there's some new important decision the parties are going to notify the judge about that so that the judge

can at least consider what that is before they issue their own order or opinion thank you does it feel so you mentioned that uh you know eth is couldn't or it couldn't be uh was it couldn't be categorized as uh security or commodity that obviously is a leading a leading thing that says maybe there's this other class of things that you could bucket into but at this point in time with it doesn't feel likely that Gary's sec would create a new bucket is it is it the SEC who even creates that bucket is it who who creates the bucket here and is that even a is that on the is that on the bingo card for 2024 Congress would create the bucket if there's going to be a new bucket most likely because um the SEC regulates Securities or the

pockets are in right um and the SEC regulates derivatives and Futures and things like that um so it would have to be Congress who creates a new bucket not on my bingo card for 2023 for sure um and we've you know we have a piece of pending legislation right now that just made it out of two house committees at the beginning of the summer um it feels like a lifetime ago that it happened but you know that bill which um classifies digital assets at different times in different ways as both Securities and commodities um but based on certain circumstances mostly relating to decentralization um and sometimes they can be both the

security and a commodity at the same time depending and depending on who holds it and how it was sold and the like um so I don't foresee that happening with Congress in 2023 and quite frankly I don't know if I see um the US creating a new bucket at all we have a very very old school entrenched Financial regulatory system so I think people will want to find pigeon holes in the buckets we have now got it cool last thing I want to talk about is just tornado cash we both tweeted about this and it seemed like basically the I I read this paper and it seemed like it was basically just saying that the doj's tornado tornado cash indictment got the law wrong and it did I think a pretty good job of explaining how the doj ignored fincen's guidance on

the definition of money transmitter um and that a fin sentence guidance was right the doj can't win on this charge I get that right can you explain this can you explain can you explain this paper to me and can you explain just how you're feeling about tornado cash in general August ofac which is the office of foreign asset control uh sanctioned a piece of software for the first time ever it sanctioned the tornado cash protocol uh also the interface but a num it added smart contract addresses for um tornado cash the piece of software and uh the the lawsuit that I referenced uh in the uniswap order uh challenges

that designation as does another case pending in Florida right now um and what has happened subsequent to that is uh this past August and just a few weeks ago uh in the southern district of New York um the U.S attorney's office or the doj filed a criminal indictment against Roman storm and Roman seminov both of whom are software Developers who coded and developed the tornado cash protocol the there are three conspiracy claims that are alleged one is for creating an illegal money transmitter one is for violating sanctions laws in the United States and the last one is for conspiracy to commit money

laundering the crevath article and a lot of this is quite novel um and uh it isn't an allegation of you engaged in criminal conduct just for writing code but take into its logical extension I think the indictment is meant to say that if you develop this code and it is used in a way that compromises National Security and even if it's permissionless and you have no control because um they did not have control over the protocol itself and other aspects of it as well but if you knew that there is a potential for having conspiracy claims brought against you even if you couldn't stop it

um we can argue over what exactly there are alleging but just to get to your question about the crevath article and why it's important is there's no statutory definition of money transmission if there was you would have seen it in the indictment we all would know we'd all be able to say that's the money transmitter that's the money transmitter that's a money transmitter um but the reason fincen's guidance is so important it's what everybody has been focused on is because it really was meant to explain what money transmission looked like in the context of all of this brand new crypto related technology so there's a section on our wallets there's a section on dapps there's a section on mixers and all that stuff um and a lot of the commentary up until the point of the Wrath article on the 2019 guidance was really focused on

other sections of the fincen guidance the mixer section um software provider section software Services section but what crevasse's article does and it's just an academic article to say well if you're really looking at what tornado cash did is this whole system that was put together right because the indictment doesn't only look at the protocol it looks at the protocol the front end the relayers and the fact that governance and the governance tokens were such an important part of incentivizing the relayers and choosing which relayers would actually submit transactions to tornado cash and through the front end so it was a very complex system but it said if you really look at this system and you look at the guidance

on wallets in the 2019 guidance um this this indictment doesn't stand up to that and for conspiracy for creating an illegal money transmitter does not the crevath article does not touch the sanctions or the money laundering section I totally agree with all of that um let me zoom out for a second and then and then Zoom back into the details I think zooming out there there were sort of two ends of the Spectrum in the reaction of the crypto law Community to this indictment on one end of the spectrum were the folks who wanted to say um doj's indictment is Justified these are bad guys they're not just software developers they are knowingly and intentionally supporting North Korea in

laundering funds to fund its missile program and no one wants that so we shouldn't stand by these guys we should just say as we often do in doj those after genuinely bad people who are abusing this technology we're not standing by these guys and this this prosecution is Justified on the other end of the spectrum were the folks including me who were saying this is in many ways an attack back on the constitutional right to free speech and financial privacy this is the Collision of the fundamental concept of a decentralized financial system that the government cannot surveil and cannot control with the government's desire and frankly they're having gotten used to

being able to do both of those things in the financial system for at least the last 50 years and of course they are bringing a case like this in the context of facts that sound and feel bad right North Korea funding its missile program not the kind of thing we want to defend nobody wants Kim Jong-un to have nuclear weapons and no one supports his brutal dictatorship who's working on this technology in the United States nonetheless the reason doj brings this type of case in in with this fact pattern is because it is the best way for them to curtail fundamental constitutional rights while having people say we're not going to defend this because it feels bad to do that I think it is Our obligation to show up in say this indictment is not justified as

a matter of policy and as a matter of principle so that's sort of zoomed out let's let's zoom in for a second though then the question is what actually does the indictment allege because we're lawyers we've got to actually look at the facts and and you know deal with the nuances I was saying before and I think when you look at this indictment it is clearly deficient in many ways and the crevath paper does a phenomenal job of explaining why the indictment is deficient with respect to one of the three charges which is the conspiracy to operate an unlicensed money transmitter to me it is a trivial conclusion that if a software developer does not take custody of someone else's funds in other words if they do not have the unilateral ability to control those funds they are

not a money transmitter that I think is obvious I also think it is Trivial to say doj is obligated to follow both the rulemaking and the guidance that fincen does otherwise the term money transmitter has no meaning whatsoever and is a matter of criminal law they cannot prosecute under a claim that doesn't mean anything to anyone because that term will be void for vagueness that's a sort of a standard Theory under under criminal law maybe one that we will see defense counsel raise in this case the other two charges are the difficult ones sounds like there's more to go deeper on next time but Rebecca Jake thank you guys good uh good regulation policy up as always thanks Jason thank you both [Music]