Policy and regulatory considerations for web3 builders with Michele Korver and Brian Quintenz

Transcript

[Music] we are going to be talking about both policy and Regulatory issues that you will encounter as as startup Builders and we hope that you will find the information useful my background is that I was uh a prosecutor for many years um at the Department of Justice and then was working on regulatory matters over at the Department of Treasury um and I'm happy to be here with our Global head of policy who equally has um an interesting background working both inside and outside of the government uh thank you uh everyone it's so exciting to be with you um I'm Brian

quintens I'm the global head of policy for the crypto team we're both very excited to be with you uh and spend some time getting to know you um today and tomorrow uh for some exciting discussions and some exciting events uh before I came to a16z crypto I was a commissioner of the commodity Futures Trading commission that is the derivatives regulator in the United States we have kind of two different Market Regulators in the US the Securities and Exchange Commission regulates the stock market and the bond market and the cftc regulates uh the derivatives markets and while I was there um the agency was really just getting into um uh crypto uh and uh decentralized Concepts and uh it led very well uh into this role where we are

trying to develop policy Frameworks um that fit the technology and that appropriately address risks uh and so with that will give a little bit of a distinction between policy and Regulatory so a lot of people like to put together policy and Regulatory in one box and that makes a lot of sense because we do particularly at a16z work together um in parallel um on policy and Regulatory ma matters they go hand inand but just to be clear um the differences between our roles um with policy this is where we're looking to affect what the laws and the regulations are going to be going forward that's a really important role both in the United States and internationally because as you all know

the laws are still in development and we actually can affect what they are um with regulatory um this is about what are the laws on the books right now that if I'm running a business I need to be aware of and I need to be complying with um and so so those are the differences um and so our presentations will reflect that and I I think that's it yeah and I I think the other important thing is that we work incredibly closely uh together there's often a lot of overlap between our teams and with our legal team and with our government Affairs team uh so while you know we are kind of an Inseparable group we do try to Define some boundaries and have leads on different issues uh or different workstreams and so since we're you know kind of we're we're developing broad

Frameworks um first for policy outcomes right so it's important to have a set of first principles you know from from which everything else can flow um the first that we've established is that you know regulations and legislation should reflect Democratic Values you know obviously you know we think this technology is important and it shouldn't be used to impose things like censorship or control or surve surveillance obligations or create new powers uh that don't exist and and that match the values of democratic governments uh such as you know individual Freedom um the right to transact uh respecting individuals legal privacy and

competition promoting competition as opposed to regulatory capture um secondly you know new rules new laws uh should be appropriate and clear and so when we think about kind of appropriate appropriately framed constructs we're talking about you know how what is the scope what's the scope of the audience that a regulation or law is intended to address is it targeting the right risks and are the rules something with which those targets and that risk the targets can comply with and that manages that risk appropriately um you know one example to kind of think about there is let's say the government wanted to regulate um self-driving cars autonomous vehicles but it created a definition

that was really broad that then scoped in things like functionality around cruise control right so appropriately calibrating the scope of a rule addressing the actual risk and then ensuring that the outcomes of those rules um are are are calibrated so that the entities can comply with them and they target the right activities thirdly uh legal businesses deserve access to Legal Services um that is a main principle for us uh and we see some challenges with that um there are currently a lot of uh discussions and issues uh certainly around access to banking services and around some other um access to services and we think it's very important that if businesses are

legal that they can't be censored out of other legitimate uh services that the rest of the economy has access to uh and finally kind of a construct that we talk a lot about with policy makers is um don't regulate software regulate businesses in our Parliament that's you know regulate applications don't regulate protocols um and those are clear distinctions that we try to make with policy makers so that they understand again again back to kind of that second bucket how to appropriately Target scope um uh potential potential rules I'm going to go into more of the policy overview and then we'll turn it over to Michelle what are the policy issues that we're trying to solve right again coming coming down from those Frameworks that we that we've established I think most policy makers

try to think about or end up scoping in all the activity in blockchains uh into Financial Services rules and laws but Legacy financial services and rules do not fit this technology they were designed a long time ago they were designed for centralized entities that created centralized risk so they don't match what we are trying to accomplish here and they don't address any of the remaining risks or new risks of the technology so what are a couple buckets there that we're that we're focused on well how to launch a token right um there's there is a lot of discussion I know a number of you number of your teams are thinking about this process and uh launching a token has a lot of

legal and Regulatory uh concerns around it and we want governments to recognize that the true benefit of this technology is decentralization um from the benefits that that itself provides but also the benefits that that provides to Consumer Protection that you have a lack of a centralized management team a lack of asymmetric information between you know uh a consumer and the purchase of a product um so how do we create rules that recognize decentralization as a benefit and that then give Founders a clear path in a government you know recognized way to building and launching a token that users can purchase and uh and and

ultimately use or consume second is how do we think about defi defi it's important to note that a lot of conversations we have with policy makers around decentralization when we say decentralization they think of Defi and that's and and and that's if they have some familiarity with defi at all and so the first thing is that we try to broaden the aperture there to focus decentralization on something much much more General than just defi but then if they do want to talk about Defi and we need to address defi uh how do we think about that and I think that gets back to kind of one of those first principles standpoints about you know if you you regulate a business for the risk that it poses you don't regulate software that anyone can access uh and so Miles

Jennings has published extens ly on this we have I think five parts to a series called regulate apps and not protocols I was uh pleased to join him in publishing two of those that give a lot of thinking about how to how to potentially create regulatory obligations for businesses and apps that are facilitating access um to di5 services that can provide Integrity To those marketplaces and to Consumers that are transacting there and then the third is kind of uh you know stable coins and staking those are very prominent discussions right now in the the UK uh hm treasury has announced that they are Expediting work on creating stable coin and staking policy and trying to finalize that by the end of this quarter Q2 um and so it's important that we distinguish what the risks are

between different models there you can and and again this comes back to centralized versus decentralized when you have centralized Services you have issues of trust you have custody um you have transmission of funds you have um the investment of those funds into products and collateral uh that can create risks whereas if things are decentralized they solve a lot they they solve a lot of those problems they obviate the need for a lot of the regulations designed to address those concerns but then how do we think about what the appropriate mechanism is um to address any any remaining risks like um the Integrity of the software you know the the the capabilities of the protocol the ability for the protocol or the

software to be changed so I also wanted to talk a little bit about some of the things that we hear from policy makers and I think it's important kind of separate these discussions or or potential audiences into two different buckets you the first bucket are conversations had in good faith with people that are um uh you know H honestly and legitimately um skeptical of the technology possibly ignorant of the technology uh but that want to have a good faith discussion about about what it is what the Innovation what you know how how much Innovation exists in this ecosystem how they can embrace the benefits and try to you know cabin the risks um versus you know some policy makers just have a political hostile

view towards the technology and uh that either requires a different kind of Engagement um or you know um it it it may not be a fruitful discussion um and so I think you know the first part is recognizing what your who your audience is um and even you know with with policy makers that are legitimately skeptical um and have some self-aware ignorance uh a lot of times we hear you know a number of different kind of refrains that I think reflect you know a couple of you know the the either the underlying beliefs or the things to which they're the most exposed I think everyone has to remember policy makers are extraordinarily busy um in their roles they are responsible to have um thoughts

and positions on every single major policy issue every single front page news item they are often booked in 30 30 minute increments throughout the entire day every week of the year um and so it's about trying to cut through and meet them where they are right if they're giving us feedback about what they know or what they have heard we try to answer those concerns and oftentimes this boils down to you know them thinking about um blockchains and crypto assets as being Bitcoin um as being FTX or as being you know defi if they've done you know any amount of of research and they can get that far and so some of the things that we've heard for instance are you know I like blockchain but I don't like crypto you

know when I hear that what I translate that into is I really like Innovation but I really don't like speculation and that's something we can work with right um so the first step we take there is we say you can't have decentralized blockchains without crypto assets right they're they're integral they are linked and so let's let's let's push down on on right let's target The Innovation that we are seeing in this space and then let's also address you know the speculative aspects of of the ecosystem and oftentimes we go through the web one Web Two web 3 model with them so they understand what the true benefits are and potential is of the technology and

then we also use Chris Dixon's you know incredible framing from read write own about the world computer versus The World Casino um and when you have kind of the World Casino aspect that's um based in centralized entities uh it's legitimate for policy makers to be concerned about that but what we don't want them to think is that that's the only thing that exists so we focus on use cases right what are the use cases that are the most tangible for them that solve the problems that they are concerned about um secondly crypto is the wild west there are no rules people do whatever they want and it's all legal um the reality is there are a lot of rules that are already apply to crypto Michelle's going to talk a lot about some of those uh in her presentation so we try to address some of those concerns

and let them know that all these laws that you work that you've worked on or that have existed for a long time already applied to activities in this space and so you don't necessarily have to be as concerned about those aspects as you think you are the third is the same activity means the same risks means the same rules this is a little bit of a of of a political tagline and we've heard this Mantra in the United States to some degree and a lot out of the EU and and it it in my view it it deserves kind of um you know some unique focus and some special attention because I'm not sure um people really mean it when they say it because um as I look at that I I'm asking myself you know th those

are those are two questions followed by a statement right is it the same activity and does it pose the same risks therefore there sure there should be the same rules you know or said differently if it is the same activity and it is the same and there are the same risks we should have the same regulatory outcomes maybe not the same rules if this if the rules don't fit the technology but a lot of policy makers think well if you're doing x and x is regulated in the financial markets it doesn't matter how you do it we need to bucket you into this bucket of legacy of a legacy rule set so often times we're trying to walk through you know what is the activity how is it done again how how does the benefits of the technology um um obviate

the need for prior regulations and what are some of the new risks that need to be addressed and lastly I'm worried about crypto and illicit finance and uh this is something that Michelle's going to speak a lot about and she has a lot of expertise on um and a lot of this comes down to data right we try to be data driven um in in everything we do uh The Firm published the fund published a state of crypto policy report about a year ago where we go through a lot of different data around some of these conceptions like energy usage also around elicit Finance talking about the amount of crypto transactions that are actually used in elicit Finance which is a tiny percentage compared to the amount of cash that is used in transactions which is a much larger percentage and a much much larger nominal amount um and

so while this is definitely a concern for everybody uh we also need to scale the problem appropriately and make sure that we're not addressing it through a means that destroys the benefits of the technology uh lastly I just wanted to quick go through um where we are in an international policy perspective here's a little geography quiz hopefully everyone knows the first flag uh since we're in the UK I've been spending a lot of time in the UK I think one of the reasons we decided to open our first ever International office in the UK was to embrace the current government's approach to crypto asset regulation um hm treasury released a consultation at the beginning of last year and then issued a response to its own consultation at the end of last year

where they had what I thought was some of the most nuanced thinking and appropriately calibrated um uh thinking around crypto asset regulation uh they said things like um air drops are an important part of uh the crypto ecosystem and import and important to achieving decentralization um they had a Nuance discussion around staking they they declared that it was not their intention to ban defi um nfts are out of scope for now um so so some very actually nuanced thinking that we haven't seen from other regulatory jurisdictions uh that they are in the process of trying to put some meat on the bones now and bring into the regulatory perimeter in the near term there will be more work to do over the

next uh months and years there's likely to be an election here in the UK uh sometime between now and the end of the year and we are preparing for all potential outcomes there uh and there will likely be more work to do to try to finalize that regime in a way that respects the technology and appropriately uh provides customers protection the EU uh has brought on the M regime or the Micah regime um that is a a pretty comprehensive approach to regulating crypto assets and centralized intermediaries uh but it's up to now The Regulators to interpret uh that text and uh some of the signs that we've seen from The Regulators are a little bit concerning uh there's also an interesting interplay between the state you know the state country regulatory

system and the um the national uh um eu-wide regulator Asma so we're following that closely to see how that uh see how that evolves um but there are some concerning signs and we've provided a lot of comments and feedback to esma Japan Singapore and Korea um are also very advanced in thinking about how to regulate activities through centralized intermediaries uh as we are engaging with them we are again focusing on ideas that don't enshrine centralized Concepts in the regulatory obligations that would preclude projects from from decentralizing when you think about an A A disclosure framework for instance for crypto assets is it an issuer based

disclosure framework where you're talking about the financial condition of a management team or a company or is it an asset-based disclosure framework where you're talking about you know the risks and the attributes of the the crypto asset itself of the token itself you know we are trying to push and suggest that countries in in a disclosure regime for instance embrace the latter because I think we' all agree you know an issuer based disclosure framework for something like ether or the ethereum blockchain doesn't make any sense right what's the financial statement and the financial condition and the balance sheet of the ethereum blockchain and what kind of information if you even decided that that you could you know um conceptualize that why would that be

important to people as opposed to a generalized disclosure that can be that can be satisfied with publicly available information that provides people with the benefit of understanding what the true risks are of purchasing an individual token and France is on there too France is kind of a um a standout within the EU they've been much more um positive in in regards to their approach to crypto assets although it's kind of TBD on whether or not their approach is going to be subsumed by you know the eu-wide approach uh through esma so those are dynamics we're following closely uh and now I'll turn it over to Michelle for her presentation and then I'll come back up to answer questions okay although we have the disclosure slide because I am barred in two states

I have to tell you this isn't legal advice that I'm giving you um but I hope you'll find it useful interestingly we've got a lot of different jurisdictions that we have to think about I'm going to generally go over the alphabet soup of the US but um as you know and as Brian uh talked about in the last slide we have comparable Regulators for various types of activities and businesses in those International jurisdictions that are going to be the equivalents as well so the question is often who has jurisdiction for what and often it's going to be overlapping jurisdiction for these various different types of agencies depending on really the activity that you're engaged in um

the other thing is that a lot of people think that where you incorporate or where your offices are is going to dictate who regulates or supervises you and in fact um what H what's really going to be the most important uh factor in who is your supervisor and what laws you have to follow is where you're offering Services um and so you know we see that in the United States where we have the federal Regulators but if you're also offering Services depending on the type of services to State individual State residents then you may have to have licensing requirements in those individual states and the same is going to be true internationally so if

you're offering say you're a money transmitter in Japan then you're going to have to uh uh follow those laws and perhaps license or register um with the jfsa in Japan um but just to kind of put them in buckets we have the banking agencies um that probably touch um the types of businesses that you guys are building not as much as say some of the large like exchanges and um custodian uh offerings um but the markets and investing those agencies the SEC Securities and Exchange Commission which I'm sure everyone is familiar with um the cftc where Brian was a commissioner

um and also the FTC um those are the agencies that are really looking at the markets consumer protection um and when you're thinking about token design um whether or not it's a security how is it classified what types of disclosures you have to to give do you have to register or license depending on the jurisdiction those are things that you're going to need to think about very very early because obviously token design if that is a part of your um um business is going to be affected by those agencies in their laws um then the National Security and um kind of financial services types of businesses so this is going to be money

transmission um and then thinking about tax issues those are all going to fall into the bucket of the treasury um agency so that's the financial um crimes enforcement Network that's where I worked prior to coming to a16z two years ago um if you are a bank or a money transmitter uh then you will have to um comply with certain laws um this is what you commonly hear about the AML programs where you have to kyc and there's um a lot of give and take there because it's a facts and circumstances um evaluation as to whether you actually have those obligations and we used to say that one

of the most important factors was whether or not you were custodial or held private keys if any of you have been following some of the both enforcement actions and criminal cases that have been brought in the United States um that may not be the case going forward um that there could be um certain activities or business models that even if you're not holding private Keys you could be considered a money transmitter these are important things to think about but obviously um we've seen that there are Bad actors out there that are looking for ways to use the technology to um make money to hack to launder and so these are things that we

need to be aware of and then finally as we discussed there are State Regulators that do have laws on the books that you may have to comply with this mostly Falls in like Insurance lending um Financial type of activity um and so that's something to be aware of as well so what I want to give you today is like kind of a quick highlevel operating instructions and talk to you about the top regulatory issues that actually come up with web 3 businesses so the first thing that I tend to um to advise on and that all of you need to be thinking about regardless of whether you would be classified as a financial institution or a money transmitter whatever if you are moving any type of value um on your platform on

your technology your business your app um you need to know that you have to follow the sanctions laws and that is whether or not um you are running the business in the United States or not um there it's a very broad capture as far as their jurisdiction um you really only need a little bit of touch um to the United States in order for um you to have liability under the sanctions laws and so um these are things to think about and the way you want to think about it if you're not offering some kind of financial services that would have um you know the AML or kyc obligations you need to think if I were a North Korean cyber criminal how would

I come and use this technology for my purposes whether it's coming in and um hacking whether it's coming in and laundering uh crypto through the website or through an app or through the protocol um and what can I do to mitigate that risk that they're going to come and use um my technology and the reason why you need to think about this is that the Civil enforcement of sanctions law does not require what we call a scienter element which means you

didn't have to intend to do it you didn't even have to know that it happened but if it does happen you can be liable and when I say liable findes and penalties that can wipe out your business it is a stain on your reputation that could cause you to lose banking relationships so I'm not here to scare you and be the boogie woman here but this is something that you all really want to think about and there are excellent ways to address this with screening blockchain analytics um and other things and we can talk um individually um about those things uh if you like um then the next question I get is am I a money transmitter do I have to

have an AML program do I have to kyc customers hey I don't have account relationships with my you know users we don't hold the private Keys um am I a money transmitter what am I what activity am I engaged in and that's a question that comes up a lot with crypto um and so it's something that you want to think about because there are um you know licenses in some countries that you would have to obtain uh registrations um in the United States and it requires um actually a lot of money and investment in compliance programs um and so these are things that you want to think about very early because it may be that as you're building that there are pivots that you

can make with how your technology works if you don't want to be in financial institution land to take the business um in a different direction that would prevent you from um having to um to have those registrations and licenses and and and those regulatory obligations the third question that comes up is tax um so we have a lot of pending um regulations that are um are happening in the United States with the IRS um how they're going to determine how nfts um are taxed um how they think that staking should be addressed from a tax uh perspective um those are all things that you just need to be watching um I will

say that as you're setting up your businesses and the questions that I get a lot it's not just about where do I need to pay and decisions that might be good for you as far as where you incorporate um around the globe for tax um benefits but also do you have reporting obligations so depending on the users that are using your businesses or Technologies um and what jurisdictions they're from what are do I have tax reporting obligations on those users in their activities and then finally the thing that we love the most with Securities laws and how do we design and launch um and build um our tokens and our token ecosystems um and so those are questions

that as I mentioned before you're going to want to think about and start Consulting with either you know the resources available um at our team or with outside um attorneys that have expertise in in this area um so those are really the top kind of regulatory questions that come up in the context of web 3 businesses and then lastly the other question that we often get is how do I interact with regulators and you have as you can see on the screen reactive and proactive the reactive are unfortunately often unpleasant you know you've heard about the wells notices in the United States that's when the SEC delivers a letter that says we're investigating you and we're considering

suing you or bringing charges it's this is your chance to come in and talk to us and convince us why we shouldn't do this um you don't want one of those um you don't want um a notice of Investigation um because it is unpleasant and you don't know how it's going to end but also because it takes away resources that you want to use running your businesses um so these are things that could occur and why you want to proceed carefully um talk to advisers talk to layers um about uh how you're building your business in order to avoid um regulatory scrutiny sometimes people get subpoenas um I get calls from people who are panick that the FBI emailed them or

sent them a subpoena and most of the time actually 98% of the time they're just looking for information um in a case that has nothing to do with your business or your technology um they just seem to believe that there may be some information that you may have access to um and obviously um cooperating with them is helpful but sometimes you may want to also uh talk to legal counsel um but that is something that's not out of the ordinary and you you shouldn't Panic if you have law enforcement contacting you uh looking for information and often they are confused about where they need to go and where the information is held

and often it's just a email or phone call to explain hey like we're a protocol we don't store any data you know you're looking in the wrong place but maybe over here they may have some information about the customer or the transaction or the activity that you're interested in and then the proactive interaction with Regulators which um can be really great opportunities for them to learn about what you're building and how the technology is progressing and as Brian mentioned helps them to to learn and um understand um what it is that we're doing so that they can craft the regulations in a way that's going to allow the businesses to thrive um and I

would encourage interaction at conferences where they're asking um demos of products that they may be interested in um and uh there are opportunities to actually um interact in a positive way with uh Regulators even though what we often read in the news is all of the bad interactions so just a couple of examples of how we've seen the context of some of these regulatory issues come up one was an nft company that basically operates like a layaway or a mortgage and you know we were able to determine with some consultation um that they needed to get lending licenses um and so their Boutique law firms that actually can do that for you in all 50

states or in other countries um if you're servicing customers in those um jurisdictions um wallets in the UK recently we had a financial promotions regime that was enacted last summer um and we had a number of wallet companies that needed to figure out hey is the function ality that that we have with our technology um is that going to be captured by this law and trying to figure that out um and you know sometimes the answer isn't clear and you just have to make a risk-based assessment um as to whether you think that you might be captured under that regulatory regime and if so um what are the consequences if you don't get

licensed or or follow whatever the laws are that they're proposing that you have to follow in that in the particular example um here there were some wallet companies that said you know what we don't have that much um we don't have that much visibility or those that many users in the UK we're going to just turn off the lights until we feel more sure about what the market um you know how this is going to to to pan out um but others said hey like we think the risk is small that they'll determine that the way we function that we're covered so we're going to keep keep going um and we don't believe that uh we fall under the law so these are all discussions that are very fact specific to your business um and then finally um with the IRS

rulemaking that I had mentioned you know they're looking for information about um nfts about staking about your Technologies um and so interacting in uh responses to comment letters we had a number of companies that actually filed responses themselves in addition to responses that we filed um and one of the reasons why you want to be aware of these kind of circumstances if they might affect you is that if the law comes comes into effect any law comes into effect um that could affect your business um in a negative way or a way that you don't want if you have participated in the rulle making process

in most instances that's going to give you legal standing to be able to bring a lawsuit to challenge it um so these are all things to think about why some proactive policy work sometimes is really beneficial to your business because it may give you legal protection um if the laws don't turn out um to your to your best uh advantage to close we all need regulations they're you know they're important for these policy objectives making sure that we're protecting consumers from the casinos right and that there's a fair playing field and that we're doing things that aren't going to allow North Korea and other Bad actors to use our technology for bad purposes there are a lot of moving Parts the landscape is changing

um I want you all to think about all of these things you know as you're building the business it's easier right to make design design and business decisions that are going to affect these regulatory outcomes in the beginning rather than having to change or fix or deal with um a regulatory um agency later once the business this is fully baked and launched um and finally attorneys um are doing really well in this space because you need them and they need you and one in doubt um you really should consult with outside Council and that and and I would say do

your research or talk to um to us about uh about lawyers that have the expertise in the area that you need the advice in and with that I think we're at time for questions uh thank you for your presentation I have a question about a Wells notice received by uniso it seems that they've did all the right things but they still got that and um my understanding is that this will be like a multi-year process so just curious if you have any thoughts on that particular event there there are there are certain things that um Builders and companies can do to try to have you know the best fact pth pattern if an agency decides to

investigate and bring a case against you but um some of the things that we have seen specifically by the SEC haven't necessarily abided by standard practice uh that's the nicest way I can say it I think there there's no question that we're in a fight in the United States um and a lot of that is being driven by a regulator that is taking a very broad view um that that that may have some um significant legal challenges uh in in in their interpretations um that that anything and everything in the space other than Bitcoin um is part of their regulatory remit and jurisdiction regardless of

what the fact patterns say um and that's a process that we're dealing with um I think you know the Innovation isn't going away it's going to survive it's going to be here longer than the current chairman of the SEC um and uh as as those if those cases are brought uh and as they are um adjudicated in court you know the I think the law will have an opportunity to be made much more clear and I think to the benefit of the industry and good actors yeah I would agree that right now I think we're in a very good position and that there are a lot of affected parties in the private

sector that are fighting and they their lawsuits pending and um I have a fa have faith in the courts um you don't always you don't always get what you want but I have faith that the that the courts um are going to um maybe not in all instances but in some instances give us more clarity and information that perhaps will cause the agencies to um either go in a different direction or scratch their heads about whether or not um this aggressive stance is appropriate and and just there's one more point there I mean I think that you know the legal team can really I think dig in to you know the facts of the case

uh but I think it's it it's it's really relevant that in the SEC case against coinbase coinbase W on the motion to dismiss that its wallet you know was a broker uh broker dealer and that fact pattern and that that complaint is most similar to what the SEC May charge you know Unis swap with um so they've already lost on kind of that major question issue but it doesn't seem to be diminishing their interest in retiga would love to get a sense of you know you guys are in the uh in the thick of it so I'm building a D5 protocol for context and uh would love to see what

what you see you know coming down the pipe um on on your calendar that you look forward to finding out on rulings you know and stuff over the next call it six months um what the most critical things coming down the pipe are I think from a regulatory perspective uh you know Michelle and I work very close in kind of the regulatory perspective especially of defi involving derivatives because of you know my my background at the cftc um and unfortunately there's not a great story to tell there from the agency's um uh approach to the space they they've been as intransigent and issuing new rules or and thinking about new Frameworks as as the SEC has you know in its purview um so I mean I think the first question is what's the area you know of that of activity you know that that that that system is going to

address um and then trying to think through okay well what what jurisdictions would would pose the most you know risk most legal risk to you um in terms of broader Frameworks um the UK for instance has announced that it is punting on on uh considering defi rules and we are working um you know very hard to ensure that is meant to focus on centralized intermediaries and token listings Etc does not inadvertently scope defi in and that you know that that they hold that promise and then again once they get to that step I think we're going to have a very positive conversation with them about appropriate you know scoping of of

those kinds of Frameworks along along that regulate apps not protocols um discussion that we had earlier um others like uh the EU through M have also decided to punt um but then you know you have um you know the FSB the financial stability board uh writing a report that starts to get um a little bit more direct about its recommendations uh for different jurisdictions to be addressing defi risks um and then you have you know uh some jurisdictions like the United States and others where they refuse to update the rules or consider you know the benefits of the technology that that pose some more direct risk so I think it's jurisdiction by jurisdiction there has been good news that some jurisdictions are deliberately punting

you know to be patient and thoughtful we expect to be um very active in those conversations and I have I have some level of optimism that you know at least one jurisdiction is going to get this right um and uh that's going to I think it's it's hard to underestimate the benefit that that a jurisdiction getting this right will have in translating ultimately to good rules in other jurisdictions the other thing that you will want to watch um from the um money transmitting sanctions that type of exposure for dii Protocols are the court the criminal cases that are currently um being decided so the tornado cash litigation um there's a pending motion to dismiss um and also

the samurai case that was just charged um those cases are interesting because we've all been living in the world that the 2019 treasury guidance like is the Bible and you know if you don't have keys then you don't have control Etc and I think that in the contexts of those two cases um that they're looking this is the first time we've really seen on paper that they're looking at it from a different perspective and so I think watching to see both in the the um the Motions practice that happens before the cases go to trial as well as um what is the evidence that's that's presented in

the trial and and what did juries think about this I think those are going to be really important to focus on awesome thank you I have a follow-up question on the election you know when we hear talks on um legal stuff in crypto there seems to be often a number of parties that got brought up right there's the administration legislators the agencies and then also the courts is that because all of them will have to come together in agreement for crypto to be um accepted in in the United States for example in general or are the legislators more important because once

they buy into it they're going to create laws that will then be enacted or have to be enacted and then the agencies will have to comply with that how how does that all Mash together and if the legislators are the more important part I wonder I mean there's a probably a16z but there's other others like I think the blockchain association uh lobbies I suppose right um and I was wondering if there's if the legislators have had enough opportunity to to meet people building like serious people building in in in the industry because it seems that

that is where uh um there's potential for them to understand this a Sy is good for the economy Etc uh great questions and um the the first thing I would do is is is point you to the presentation that our head of government Affairs Colin mun made at um our crypto startup school um last year uh in Santa Monaco which I think is recorded and on YouTube where he goes through a lot of the Dynamics of Congress the presidency agencies and how that process works I think to your point around election risk or election outcomes it's really a big scenario analysis um who controls the house who controls the Senate who controls the presidency the presidency would then

appoint Regulators um or replace if if it's Biden winning he would replace existing Regulators that are term limited um uh but those would have to go through a senate confirmation like I did when I was nominated so then it depends on who's controlling the Senate and would they agree to you know approve the nomination of someone that you know may be hostile to either the technology or to their view of markets in general or to their view of the regulatory remit of that agency so you know there a lot of moving pieces there um for instance if the Senate's Republican and Biden wins the White House there would be you know a lot of kind of um interaction around uh you know potential new nominees for

agencies as some existing Regulators you know are termin liit have to move on um uh you know if if Trump wins the White House then the entire regulatory heads turn over and then it becomes a question of well who is the nominated head you know is are they likely to be confirmed through the Senate given the Senate makeup um and what would be their you know priority uh and strategy um you know uh and agenda uh in implementing you know new potential rules in this technology and if you're kind of stuck in kind of the current you know you know scenario with agency heads frankly under either you know either potential outcome with the White House that aren't moving on this technology or that are um

embracing hostility towards it then depending on the makeup of the house and the Senate they could always pass a new law um and we've seen the house take action through two committees on a very important bill fit 21 that creates a new market structure regime that has thresholds of decentralization in it that may be coming up to a vote on the house floor soon if that isn't successful this year it could likely you know be on the floor again next year and it could ultimately pass into law that then tells these agencies you have to do this and this is your framework for doing it so it's a way of Congress then you know passing that obligation to create new rules within a framework to those agencies regardless of who the heads are in those agencies um but lawmaking is a very complicated process there are a lot of checks and balances

that were designed intentionally to you know prevent bad ideas from becoming law as opposed to allowing any idea to become law um and so that you know there will be a process process but as I said I think this is a long-term game um the technology is here to stay and ultimately the United States will get this right but is it you know this year next year three five years we'll see and to to address your question about whether or not the legislators and the policy makers are actually interacting and having an opportunity to be exposed to the technology um the answer is yes they have been for years I think that it needs to continue um because it's really helpful particularly those who are kind

of in the middle the Skeptics that just want to know more again as he described because you've got all of these different um different policy decision makers that potentially have different ideas about how this should be dealt with I think that there's always an opportunity to be talking to them and educating them on all the beneficial aspects of the Innovation and and here here's kind of something that's a little bit more direct to that I mean except for that group of policy makers that just fundamentally or politically oppose the technology the entire rest of that audience the more that they know about blockchains crypto assets and Innovation

the more they support it so it is an educational um uh necessity to go in and have those conversations we are doing that very actively I have seen in real time you know people's eyes light up the light bulb go off and them kind of saying well no one ever came in to talked to me about this stuff before you're the first one that's done that and I think part of that's just the um you know the the the the the relative Youth of the industry from a lobbying perspective an educational perspective you know some level of inexperience um focusing on just Who The Advocates already are as opposed to trying to broaden the appeal but that is a process that we are significantly involved with and I think have had a lot of success with thank you guys so much for your

presentation I'm Julie from Tweed for contacts we're in the wall and imp payment space so super relevant for us my question is it's pretty General but considering the fact that young companies like we have obviously limited time and and capital we can't go out and get a legal opinion um on what's considered custody or what's considered money Transmission in every country in the world but we do it's a global industry so what advice can you give in terms of like balancing these two things do we just think about like the key markets like are the most advanced markets like Europe and a couple of others or do we think about okay where are the most users we think we're going to have like how do you balance those

two things so certainly there are are plenty of companies technologies that are squarely in the gray area and you know need to have expert legal consultation but surprisingly there are number of meetings um that we take where talking through the technology and how the business works we can give you a pretty clear answer in many cases about what your obligations are and then I think that particularly when it comes to because you mentioned payments say money transmission um even though you may have different regulatory requirements across

different jurisdictions you may be serving I think generally they're going to look at um who Falls into what bucket in a very very similar way and so usually if you can determine okay we are a money transmitter or we're not in the United States under the bank secrecy act that's going to tell us whether we would also be classified as that in these other jurisdictions um so I think that there is a lot of certainty and it's in some aspects and although you there may be slightly differing obligations um as far as licensing or registration or what they're going to require in different jurisdictions that takes some work even in the United

States if you're a money transmitter getting MTL licenses in all um 50 States but um what we have done here um is in addition to kind of trying to give you um some guidance we have a very thick black book of uh legal help and people who actually perform these functions and I will tell you sometimes it's a it's a really hard legal issue isue that I'm going to say you need to go talk to this like international law firm who is the expert in this and it's going to be expensive but in other cases we've identified like Boutique firms that are very costeffective that are happy to work with startups that often are not

that expensive or they're happy to take on your business as you're getting started at a sliding scale fee hoping that you will be happy with the services that that they've the they've given to you and that you're going to come back as a repeat client so don't get freaked out about like all the different jurisdictions and all the laws I think you know you've got a lot of help we're all in this together we've been working on a lot of the same issues over and over again and so um I think you're going to be successful in getting direction and then there are resources out there that you can be referred to that aren't astronomically expensive of a question on I think uh the

presentation you mentioned um considering regulatory risk and obligations early um so my question is um when what you're building um straddles across you could say multiple Industries and their respective regulatory regimes how do you kind of uh consider these um I guess what I'm trying to say is we're building a Marketplace that straddles across AI regulations data and privacy and you could say the tokenization regulations and um operating in regulatory uncertainty is almost a default state so are there any sort of guiding principles of Frameworks you recommend when it's almost as if there's multiple kind of um regulator sort of regimes that you kind of have to think about well well I I was

going to just preface kind of maybe an answer to that um by saying you're you're right there there are a lot of uh policy conversations that are going on around those different areas and I think you know we can help try to preview with you where the most immediate action may be in which jurisdiction so you have some level of an ability to focus but to the extent that there are laws on the books already depending on you know what other activities or markets that touches um that would be something that you know the Regulatory and legal team can can help legal team as well yeah and it goes to what I was mentioning to was it Julie um again assessing that maybe

prioritizing your focus based on who um we know is most active from a regulatory agency perspective in certain jurisdictions um and then um you know making an assessment about what are the actions that you need to proactively take where you are certain about what your regulatory obligations are I mean you know obviously we want um you know Investments of ours to be following the law it it doesn't doesn't make any sense um to spend all the time building these wonderful businesses um if they're going if you're going to have to spend all of your time fighting um regulatory action and so I think just

doing those assessments and consultations um early on is really you know the best advice that that we can give you and it's probably not the type of thing that you that you thought that you needed to focus on as you're building a startup um but that's why we have these these presentations during the accelerator because you know we want everybody to to to think about um pacing themselves and even thinking about budgeting um for perhaps having to to Li license with particular Regulators for whatever activity that you're engaged in in various jurisdictions we usually hear about companies blockchain startups very

actively trying to avoid being classified as a security have you you encounter cases where they want to do the opposite and like own that they are security and and maybe trying to get benefits from from uh being open about this so I think I think there's an interesting opportunity in the UK in that regard because the FCA through hmts uh work has launched a digital security sandbox and they are currently Consulting on the framework of that it's cost fees scope Etc and um Aiden's done a lot of work researching that and we're happy to provide some of that information to anyone that might be interested to

understand whether or not we should submit a response you know as a as a comment letter to that to help frame it more appropriately to anyone's interest um I think in the United States it's it's been a little bit of the opposite you have seen um entities go into uh the SEC to try to attain you know a special um registration designation to launch a token and they have died there they they have not been able to escape they haven't been able to follow the rules imposed upon them um and again I think that's because there's a refusal to provide any kind of new framework that fits the technology so I

think it's a jurisdiction to jurisdiction question um but obviously it depends on what you know the Innovation is that anyone is building if it's designed to be you know efficiencies in Securities transactions through blockchains then there are sandboxes and there are programs and other jurisdictions that are actively considering that because they a lot of these jurisdictions want to have um uh a better you want to compete more on you know the status of their financial markets you know and their and certainly their equities marketplaces so they're actively exploring those things and trying to take advantage of uh the fact that the United States is not I'm wondering uh if you guys have seen a

major shift in the way policy is being uh directed towards a technology and the way regulation is enforcing that over your careers more explicitly is the last four years like an aberration um in the aggressive regulation by enforcement that we've seen and that's something that's like an outlier that we should view in our mental models as hey things are very different or is this sort of a par for the course as they say um just looking back over your careers and what you've experienced in them I yeah that's a that's a complicated question I think partly because um you know I think you know

when I when I first joined the cftc it was late 2017 and I had a very long nomination and Confirmation process that lasted I know four years and during all of that time I didn't do any research on crypto assets blockchains Etc I was focused on dodf Frank implementation but then three months into my 10e we had the CME Group self-certify Bitcoin Futures contracts and it launched the agency you know directly into the you know um the crypto ecosystem uh discussions around um around the viability of the technology and in the intergovernmental and international debate around you know regulatory approaches to crypto so it hasn't been that long I think from my

perspective um to have a good snapshot you know or data set there um I think to me the the I think you are seeing a much stronger and wider spread reaction to the negative and aggressive enforcement approach to think that it's going to be sustainable or that it's going to be something that continues to repeat however once something becomes you know in the you know kind of the political it gets politicized and becomes part of the like political Zeitgeist then you do can have scenarios where you pingpong back and forth between different you know

administrations or parties and control Etc I'm not convinced that that's happening um I think it's it's it's much the approach that we've seen is much more isolationist uh and the breadth of the enforcement um is is um somewhat unique uh to this given how outside of the traditional bounds of the law and tradition and traditional approaches to regulation it is I don't think it's sustainable and I think it takes a unique individual to be able to try to stomach that um you know that that approach so um I guess you know you know my answer to that is that I don't think we've had enough time but I think that as I said before the

more policy makers know about this technology the more supportive they get I expect that Trend to continue that I think helps to diminish the potential that this becomes kind of a pingpong back and forth between different administrations over time thank you very much it's a pleasure to be here and we're um we're excited to interact with you today tomorrow and through the rest of the week [Music]