Bankless - SBF vs. Erik Voorhees: How Do We Regulate Crypto?

Episode Date: October 31, 2022

A debate between two crypto titans on how to regulate crypto. Whether to regulate crypto? Where do we draw the line? Study and remember this one anon. ------ Push | Try the Communication Protocol of Web3 https://bankless.cc/Push  ------ SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/  ️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/  ------ BANKLESS SPONSOR TOOLS: ️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  DESO | DECENTRALIZED SOCIAL BLOCKCHAIN https://bankless.cc/Deso  BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave  TRUEFI | CRYPTO FINANCIAL HUB https://bankless.cc/TrueFi  SEQUENCE | ALL-IN-ONE PLATFORM https://bankless.cc/Sequence  ️FUEL | THE MODULAR EXECUTION LAYER https://bankless.cc/Fuelpod  ------ Timestamps: 0:00 Intro 7:36 Should Crypto Be Regulated? 23:50 Transparency 25:55 Showing Up & BitLicense 36:50 Erik's Issues with Sam's Post 52:12 The DeFi Regulation Debate 1:24:27 Why Regulation Now? 1:40:10 DCCPA 1:53:04 Stealmanning Eachother's Points 2:01:55 Closing Arguments 2:06:17 Closing & Disclaimers ------ Resources: SBF https://twitter.com/SBF_FTX  Erik Voorhees https://twitter.com/ErikVoorhees  SBF Proposal https://twitter.com/SBF_FTX/status/1582835426116575235  Erik Voorhees's Rebuttal https://www.moneyandstate.com/blog/response-to-sbf  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures 

Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Guys, on today's episode, we're going to give you a fantastic live stream that we just did this Friday. Very important listening. Hope you enjoy. Guys, we're super excited to host this live stream and conversation. Maybe we'll call it a debate. I'm not sure. I think it'll be very conversational between Sam Bankman-Feed, that's SBF, and Eric Voorhees. The topic today is crypto regulation. David, I found myself playing a somewhat

minor role in a conversation that happened on crypto over the last week, I guess, all of this happened. SBF was the originator of a post, just his thoughts, his solutions on how crypto should be regulated. And the crypto community had a great deal of response to this post. I think leading one corner of the internet was Eric Voorhees and kind of giving an ethos back. crypto-O-G-type take to what Sam Bankman-Fried has said. And I know, David, that the best place to have a long-form discourse about this is not on Twitter, not in, you know, the character limitations, but in a podcast form. So that is what we are in for today. We're having this conversation about Sam's thoughts on crypto regulation, particularly areas like Defi, versus contrasting

with Eric Forhey's thoughts. And we might find that we land somewhere in the middle. Any other thoughts going to this episode. I think the two guests here, Sam and Eric, are great two ends of different spectrums, I think, to bring to the table here. Sam, of course, is the founder, CEO of this gargantuan exchange, FTX, which has rose out of 2021 and into 2022, and is really just a huge, just innovator and leader in this space. And also, Eric Forhees, this crypto also builder, been around since the get-go, this kind of crypto-philosopher builder person who also has very strong principles around how crypto should be approached and regulated both internally as an industry, as a community, but also from external regulation as well. So two different perspectives, I think, going to come to the table and we're

going to find what do we want as a community, as an industry, how do we want to approach regulation, how much do we want to go out and seek regulation versus how much do we want to do some self-regulation? And so I think these are the various perspectives that we're going to bring to the table here today. That's exactly the conversation I was hoping for. You guys are in for a treat. We'll be right back with Sandbank-Bid-Feed and Eric Forheas. But before we do, We want to thank the sponsors that made this episode possible. Arbitrum 1 is pioneering the world of secure Ethereum scalability and is continuing to accelerate the Web 3 landscape.

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Bankless Nation, we are super excited to introduce you to our next guest. Both of them have been on the Bankless podcast before. I want to introduce you to SBF. He is the founder and CEO of FTX. Of course, this is a behemoth crypto financial institution and exchange. rose to prominence in the last bull market but has been here for a while. And he has thoughts on crypto regulation that we're going to discuss today. SBF, Sam, welcome to bankless. How you doing? Doing well. How are you? I'm doing fantastic. I've been waiting all week for this conversation.

I brought my glasses to the conversation. I hope you'll forgive me for the elitist of vibes I'm dropping. I'm going to wait to see what Eric says, and then I'll figure out my, my view of glasses. I'm going to make sure to balance it out. We're going to need some context here. That's fair. That's fair. That's fair. That's fair. Also, Eric Forhees, of course, you've heard him on the bankless podcast before. He's a crypto-o-G. He's a, what I'd call a crypto-libertarian philosopher. He's a builder and a thinker. He's built in exchange himself as well via ShapeShift and brings a ton of perspective to this conversation. The reason we're having both of you on is because SBF wrote a fantastic, open starter to the conversation, what he thinks, what he thinks crypto regulation should look like. And Eric, you had a fantastic response.

Eric, thank you for coming on Bankless. How you doing? Glad to be here. Don't mind the glasses, but what I really hate about you is that bookshelf in the background. Why do you hate the bookshelf? Do you not like books? Is this part of the Neanderthal coming out, Eric? No, it just reeks of elitism. Okay, gotcha. Okay, can we pause for a moment since we did our way way into these references for the people that are understanding these glasses and elitist references? What's going on? Oh, you want me to do this? Okay. I don't want to talk about it anymore. Okay, so a YouTuber was going off against Ryan, the YouTuber's Bitboy, and Ryan called him out and saying, BitBoy doesn't represent us, which triggered BitBoy, and BitBoy made a very large rant about Ryan and his glasses and his overall elitist vibes. And so that was the joke leading into the intro of the show. That's kind of funny. I actually think everyone watching has probably already seen that video.

You might be on the internet half. No, I got relatives like texting. Like, who is this guy? What? This dude with Alex Jones vibes. What is he talking? about and I'm like, just another week in crypto. That's how it goes. Moving on. Hopefully we never have to invoke BitBoy yet again on this live stream, but now that that's past us. All right. So great to have you both on bank lists. We're going to get into it. Long-form discussion on this topic. I think the crypto community really wants it. We have some sections of this conversation. But before we kind of get into the sections and the high level here, I think the big meta question is this, that we have to answer for folks. The question of, should crypto be should it be regulated? I think this is an important topic to start with an important question

that will set the context for everything else. Sam, what do you think? Yeah, so I think I have two answers to that question. And the first is parts of it should and parts of it shouldn't. And really, you know, there's sort of my core take is roughly speaking that one axis you can talk about is how regulated crypto should be. And a second axis you can talk about is basically how thoughtful are we a out which parts of it are more regulated, which parts are less. And that it's that second axis that I think I care about the most. And maybe to drill into that a little bit more, you know, if you're looking at a stable coin, right, and you're thinking should it be regulated, I kind of think, well, it's important that there's like oversight of these holdings.

If it's a one-to-one USB-backed stable coin, or so it claims, there should be something proving that it is one-to-one back. And I'm sort of in favor of, like, really thorough, regulation confirming that the number of dollars in the bank account is at least as many of the number of tokens there. Like, you know, maybe you have multiple auditors who have to audit it. It's not a hard thing to audit. It's not that expensive. Like to do. And so like going kind of deep into like ensuring that from regulatory point of view, I think makes a ton of sense. It's like very regulated for like that piece of it. But then you can say like you're going to 7-11 to buy a bagel and like, you know, you want to pay with a stable coin, like, is there a broker dealer that has to be

involved? I think, like, absolutely not. And it's, like, very important that we not require a broker dealer to buy a bagel that would just completely kill commerce. And so, you know, I guess my core thought roughly is like we should be really thoughtful about where the regulation comes in and what it does. The second thing I'll say is that independent of what you think of this, at least in some ways it will be regulated, at least in. the United States. And so it's not a question, I think, like, practically of whether there will be any regulation or there will be. It's a question of what should that look like and which parts should and shouldn't have which types of regulation. So, Sam, your general position is that

regulation's coming, no matter what. We should get ahead of it. And if we get ahead of it, we can kind of define and steer it in ways where the ball's in our court, where we have more say if we kind of get ahead of it and we can kind of like focus that regulation in. to areas that are easy wins, easy things that we are willing to compromise as an industry, perhaps like on crypto dollars and the level of degree of audits in the bank. And that can redirect some regulation away from other parts of the industry where we want full control over like our defy apps and our nodes. Is that a fair summary? I think that that's mostly a fair summary. I think I would frame it very slightly differently because I think some of this regulation

is definitively good. Personally, I think that. And I think that it's not just a compromise, but some pieces of this, I think, are just healthy. But I think that even if you didn't think that, then I would say the thing that you said. And would you say that if we want to, you know, put the listeners and ourselves into the shoes of SBF as he was writing this blog post, which was the start of this whole conversation, is that the motivation behind this blog post or is there other motivations as well? Oh, I think that's basically right. And I think that, like, you know, maybe just a little bit more context on that is that, you know, there's been a lot of discussion about a possible upcoming bill coming out of the. the Senate Ag Committee, you know, Stapeno, Bozeman, Bill, DCCPA. And I think that, like, you know, I want to give some context behind my thoughts on it,

which is cautiously optimistic, basically. And it depends on the exact language, but, like, I'm optimistic that it will end up striking a balance where it will do a good job of, like, providing, like, a large ratio of customer protection to restriction of commerce, basically. So, guys, one thing I will say about this conversation, I think the scope of this conversation is probably mostly relating to Sam, your initial post. And then Eric's reply and the conversation that ensued. I would like to talk about this new piece of legislation a little bit towards the end, the DCCPA, but it's important for listeners to know we don't

actually have a finalized draft version of this in the public. And so, you know, your post is maybe tangentially tied to that, Sam, but that does not represent the position that we're going to find in a draft of the DCCPA. Is that correct? Well, right. A, I'm not writing the bell, and so who will be in it? And it's, you know, it's not mine. But also, it doesn't necessarily represent my view of the DCCPA. It might, it might not, because we don't know exactly what it will end up saying. And, you know, we're going to have to wait to see, you know, what finalized text if it looks like before, I will have a confident position on it. So we'll have to treat that as kind of a separate conversation that we'll maybe weave in at

the end. But Eric, let's go back to this high level meta question. Same to you. You've heard Sam's response to this. Should crypto be regulated? What a question. So I guess first let's consider that, like Sam's proposal, that a stable coin itself should be regulated at least such that a provider has to prove that it has reserves for the tokens would be a higher bar than the Federal Reserve itself already applies, right? The Federal Reserve does not prove anything inside it with any degree of audibility or attestability, banks do not need to approve anything about what they do in any way that is cryptographically verifiable. Us in the crypto industry already have a higher standard of what constitutes knowledge,

what constitutes proof. And so it is a little ironic for people from the traditional financial world imposing on us the need to be proving anything, right? We're the ones that prove it cryptographically. So on the point of whether crypto should be regulated, it's also important to consider that it already is. Crypto is heavily regulated. I know Sam would agree with that. It's been regulated ever since the very beginning. It falls under all sorts of laws and all sorts of jurisdictions. And we dispense with this myth that it's like some void of regulation. I wish that were true. That would be my panacea, but it's not. It is encumbered already. Third, I guess I'll say that we have a highly regulated financial system and we've seen where

that status quo has gone. I think we in the industry should step back and ask ourselves, do we want the crypto financial ecosystem to move closer to the traditional financial world? Are we here because we love how that world looks and we want to make crypto resemble that world more? Or are we here because we're trying to build something better? And if it's the latter, I think we need to consider that the regulations are a huge part of why traditional finance has gone where it is now. So I'll leave it there for now. So, Eric, just, you know, I guess maybe a point of clarification.

Do you agree with Sam's position that, you know, we don't live in a panacea? And so whether we'd like it or not, it's going to be regulated. Indeed, you've said it already is. And so what we want is the least worst possible outcome, and that's essentially what we would be fighting for. And then I guess maybe a kind of a second question. Well, actually, just take that. So what about we don't live in a panacea? And so we should actually be fighting for the least worst.

regulation possible. What do you think of that? Let's not set our standard to be the least worst option. This is how the entire current political system works where everyone's basically just voting on who's the least bad. Let's have a higher standard than that. Let's practice some ideals, such as open finance, freedom, liberty, equality, immutability, and actually seek to achieve those things, speak positively to those principles rather than simply playing defense and trying to get the least worst bad outcome onto the industry. So I think that perspective is important. It's difficult to know to what degree to engage with these regulators. They will engage with us for sure, right? That's what they do. All they see is things to be regulated. And then we have this immutable

system which does not respond to human tick tot. And then there is us in the middle who are the people that use these systems which do respond to these things. And we can all make decisions on to what degree we want to, you know, bring the clause of regulation onto the crypto world or not. But I think first and foremost, we need to be remembering the principles of why this stuff exists in the first place. How about this concept I want to run by you? If to the extent what you're saying is true, is like, you know, cryptographically verified and does not require trust, maybe people could accept regulators themselves could accept that there's less degree of regulation necessary because we have cryptographic guarantees. But to the extent that we have a

centralizing actor in the middle. Take the example, Sam was mentioning earlier, where we have a stable coin, and that stable coin is not cryptographically verifying that the amount of assets that back that stable coin is inside of a bank account. You actually have to do like atomic meat space level audits in order to get that. Where there is centralization, there should be regulation. Where there is decentralization, there is less need for regulation. Is that an access that this conversation turns on for you as well?

Yeah, I think that's a fair perspective. If you want to argue for regulation, I think it's more reasonable that the regulation should apply on people and centralized intermediaries which do not execute programmatically. Like much of the fundamental rationale for regulation is to try to ensure that humans behave in certain ways. When it comes to defy, when it comes to code, when it comes to these blockchains, we don't need to ensure anything. They just operate according to the code. And I would love to hear any regulator even acknowledge like what's been built here. It's hard to take them seriously when they can't even look at these machines of immutable finance and like applaud what has been built. I think they're completely missing the virtues that we've already built,

the consumer protections that have already been created just through the market. And I would be able to take them a lot more seriously if they could at least acknowledge those things. So I agree with some things that you said. And I totally agree with that last point. I mean, I think it's really valuable to have discourse where each side tried to argue the other side's point in general. I think, like, if you can't successfully or at least plausibly argue for the other side, then you don't understand the other side's arguments. And there's a worry that you're discounting them. And so I would love to see a lot of crypto libertarians argue for regulation against regulators who are arguing for the value of decentralized finance.

I think that would be, like, really fascinating to watch and a cool exercise. one thing that I will say, which I do honestly believe, is that, and I want to make sure I don't overstate this comment, but that some, there do exist some regulators who I do think appreciate what crypto has bought and what crypto can provide. I don't want to overstate that. I don't want to claim that there are a very large number of them. I don't want to claim that this is like most, but there are some. And frankly, I think some of them maybe could talk more publicly about this as well. I've had conversations with regulators where they talk about what they're excited about crypto bringing to the world. Again, I don't want to overstate this. I would be happy if

there's a lot more of that and if a lot more of them did. But I do think it's not none of them that do. But to your point, like, I think it would be really valuable if we were in a world where there are more pushing for these advantages. And frankly, in other countries, you see this more frequently. Right. I think we're sort of both implicitly talking about the United States when we talk about regulators or maybe the United States in Western Europe or something. And I definitely fall into that trap up sometimes just like just sort of like implying that. And I've been like remembering to say that that is true. But that is often going to be true here that like I will default to talking about Western regulators and definitely call me out on that if, you know,

when there are situations where that's not relevant or where there's like really important distinctions that that should be made. But I do things worth noting that in other countries, you know, we have seen I'm in the Bahamas right now. I'm saying in NASA. And we've heard a lot from the regulators and the politicians in the Bahamas about the potential values of crypto. So, you know, that does happen in some places. I wish it happened a lot more in the United States. Another thing I want to say is I completely agree with you, as you suspected, that crypto is not unregulated. We actually looked recently.

We tried to figure out how regulated we are compared to other companies. And I'm sure we missed a lot. So I want to caveat this with like, don't take this as literal. We missed a ton. as far as we could tell, we could find one other company in the world that was more regulated than us that had like more regulated. You're not talking about just finance, Sam. We're talking about like across all industries.

Well, yeah, although like I'm sure we missed non-financial ones because I'm sure implicitly, we did a good job of thinking of the financial ones and a really bad job. Like healthcare, I'm going to be honest, I like don't know that much about international healthcare regulation. So we just missed a lot of this. And big trees business, mostly finance. But not crypto specific. Like, you know, we looked at like, like, I don't know, we're regulated.

It's not just that we're regulated by like 50 state regulators and also like five federal regulators in the United States. We're also regulated by like 200 countries and each basically independently. So it's definitely not an unregulated industry. It's maybe an industry where the regulation has a really high ratio of like sort of inhibiting commerce to protecting customers relative to other industries. Like I think just because it hasn't gotten to a lot of the point. And I agree.

it is just a dumb narrative that we hear sometimes. And it's just wrong and it's frustrating to hear. And as a similar one, I don't know, we sometimes hear narratives around like, you know, like the easy regulators. They're just, there's wrong. I don't know. Like, it's CFTC is like one of the most thorough regulars I've ever seen. And like you can look the enforcement actions they bring.

You can look like the diligence done on applications. It's sort of like an outlier in the strong direction. To your point, Eric, about the Fed and about banks and about like, hey, like, is this actually commensurate oversight or are we actually going in the opposite direction here? First of all, I think it's a good point. And I think that there are ways in which there is more transparency required here than of some other things. I think part of my answer is, well, it might be cool to see that transparency in other things, right? Like, it might, like one thing you'd imagine is if you tokenize the dollar, fully tokenized it, right?

And then when you looked at like you had a bank, right? And it was borrowing lending effectively. If there's all going on on chain, it would be transparent to everything. everyone, like how it would be transparent to everyone, like what the actual net borrowing was, what the net lending was, right? You could see transparently what the Fed's balance sheet was. I think that actually be kind of cool. And I think that like, you know, bringing some of that to other industries, I'd kind of be in favor of that. I do think that like they are though heavily regulated in some ways, although there isn't necessarily public transparency around that.

So can I jump in for a second? Yeah, totally. So that last point you made is important. The traditional financial world is heavily regulated, as everyone knows. And how transparent do we feel they are, right? Do we feel that the banking system is a bastion of transparency? No. No one would ever say that with a straight face and from time to time that has actually caused like horrible financial calamities. So why is it that we as the crypto industry are being burdened with additional requirements for transparency when we're already more transparent and when the entire stack of Tradfai financial regulations hasn't itself created. anything that is transparent? Well, I think we're more transparent in some ways and not in others.

And I think that that points to where I would like to see more and less regulation. Now, obviously there's a worry that that won't map onto where it is. But as an example, right, defy our lending protocols are in some meaningful ways already more transparent and trustworthy than non-crypto-related borough lending is because it's all on chain. You can transparently see exactly what's going on. And, you know, you didn't get that in traditional finance anyway. And so that, I think, like, I totally agree. I think that, you know, you look at like, at, you know, comparing, for instance, Celsius to a broker dealer that has some borough lending activity. And there I think you actually see Celsius being less regulated today, or at least less effectively regulated. There are many regulations

that are sort of ensnaring it to some extent, but not as much sort of effective oversight of what it's doing. So I think there's like some in each direction. And I guess part of my sense is just like the details matter. Like I don't know. I kind of feel differently in different areas here depending on like exactly what is happening, exactly what is regulating, exactly what isn't and you know, what the impacts of each would be. Eric, I've got a comment for you. I'd like to get your brain to spin some wheels on, which is I totally as like a crypto believer

understand the value of regulation by the EVM. The EVM is what regulates us. That's the point. That's why we're here. That's the cool thing about that. I'll take Sam's point that regulators don't get that and getting them to understand that is going to be an uphill battle that's going to feel like pushing a boulder uphill over and over and over again. And then there's this other line that I've heard before that is like a common trope that like in the world of politics, if you're not at the table, you're on the menu. And so yes, philosophically, 100% agree. Like the EVM is what regulates us. Smart contracts are cool. That's why we're all here. But I think. think Sam's point is that like regulators aren't just going to care and they're just going to eat us alive if we don't show up. What would you say to this response? Yeah, I don't think there's anything wrong with showing up. I think it's good that people in the industry are engaging at different levels with various government regulators. How effective that has been historically,

I think is a matter of debate. So we can highlight, for example, the bit license in New York, which was, you know, a couple of crypto generations ago. That was the fight that everyone was having. and these same arguments of, to what degree should we engage with the regulators were coming up. Back then, all the major exchanges, the big companies, engaged fully with the New York Department of Financial Services, provided all sorts of useful feedback. And what came out of that was this hideous monstrosity, a 60-page application for anyone trying to do crypto business in New York. And it effectively made New York like a barren wasteland per capita. relative to many other cities in the world.

And I believe also the author of the bit license, his job became consultant for helping companies get around the bit license. Yeah, let's reflect a little bit on Ben Lossky. So after he spent a year or two crafting this monstrous bill in New York for the protection of New Yorkers, after it was done and launched, he left that department, went into his own private practice as a lawyer to help companies navigate the walls that he himself had put up.

How that is ethical or legal is an interesting question. But then, like, as if that wasn't embarrassing enough as something that a human would do, maybe because he didn't have enough people paying him in that role, he then ended up on the board of Ripple, getting paid monstrous sums to help govern, you know, Ripple itself. So his career has been great since the Bit licensed. certainly was a good catalyst for him to get everything he wanted, and I'm sure he's made a ton of money from it. How has the average New Yorker benefited from all those important consumer

protection laws that he put out? I don't think they have. What you can see here is there's a tremendous amount of distrust, I think, between kind of the crypto community and some regulators, based on past experience. We burnt in the past. And I do think this thing that Eric is echoing, which is probably something that you felt some of the pushback on, Sam, when you kind of put out some of your thoughts is, hey, we understand that regulation is coming, but bad regulation is worse than no regulation, you know, and we don't even have no regulation. We actually have regulation, right? And so we can't afford to get this thing wrong. We can't afford for an encompassing bit license type thing to sweep the entire country, and I'm sure you'd agree with that. I'm wondering maybe,

Sam, if you could respond to that. And then also maybe your call for getting into the details. Let's start to get into the details of what your original proposition was, and so we can talk about them maybe piece by piece. But yeah, go ahead, Sam. Yeah, so I guess I feel a little confused, I guess, by the argument. So I think part of this is just like coming at it from a philosophically, not opposite direction, but just like sort of like some slightly different direction, which is, again, I sort of like approach all this from sort of like, I don't know, let's evaluate that specific case or something. And I agree that the bit license has been a mess and has been bad. I completely agree with that and has been worse than they're not being a bit license. Absolutely true.

And obviously, like, I wasn't active in the industry at the time. So I can't say honestly that like, you know, I can tell you 100% what I would have thought at the time. But I think at the time, I would have reacted very differently to that than I am to the, you know, for instance, that now has been legislation. I think the biggest problem with the bit license is to say, state-level license that only works in that state. But I think as an enormous involved process, you have to go through just to unlock a single state, it is not reasonable. That sort of is a fundamental design fly with the bit license. But for me, I guess I hear that and I'm like,

that's why it's important for us to be engaging on the details of these because, you know, it's important for us, you know, to see something like that and say, hey, guys, like we should I either do this at the federal level or have a passport from state to state. And, you know, instead of like making it just a one state thing. So that's simply like one thought there. And, you know, I think that like in the end, like the details just matter a lot. And the problems were, we're in some of the details. I think I don't know actually the details of exactly how the crypto industry lobby on the bit license.

It'd be interesting to me to hear. I think that like there's also, you know, some extent to which, you know, you could say, look, like, I don't know, exactly what was happening then, but like to the extent there was going to be a bit license one way or another, it could have been appropriate to try and work to make it better rather than worse. And that's sort of like a, you know, somewhat independent or separate thing from, you know, thinking about like whether you should be lobbying for or against its existence. Can I jump in real quick, Sam? Yeah, totally. So I think importantly, the lesson from the bit license wasn't that we need to engage more. That was an example of heavy engagement. There

are videos of industry leaders testifying in front of the New York Department of Financial Services. And there was huge amounts of discussion, discourse, comments submitted through all the official channels. That was not an example of the industry abstaining from comment. It was an example of the industry's best comments and the suggestions from the entire crypto community, basically falling into the gears of New York politics. And I doubt that federal politics are much cleaner than a single state. So I hear you, I'm going to be honest. I'm more optimistic about this time than I would have been about that time.

Mostly, I think frankly, the industry's lobbying was not very sophisticated. And the industry's engagement, even if it was heavy, it was not sophisticated at the time. And so it actually, frankly, wouldn't shock me if it was the case that, like, you know, we were going to be able to do it much better this time. And I will say that, like, I strongly suspect that, you know, some feedback the industry has had has already had significant impact on what I expect this bill to look like. Like, I think it just straightforwardly is having impact this time. I don't know the details at that time.

I agree that on priors, it doesn't seem like federal would be easier than state. Maybe it's just like it's being done in a more sophisticated and sort of like impergey, but I don't know any details. Yeah, I'm sure that's true. Like, it's definitely more sophisticated now. But the consequences are also much bigger now. This is a federal matter and it will govern and influence how policy is set around the entire world. Whereas New York never would.

Oh, I totally cure you. Although it's not clear the lobbying was bad last time. Like, it may have been ineffective. Sorry, I don't know the details of it, but are you think the industry is lobbying in favor of the BitLicense happening or that they are lobbying to have edits put into it. They were lobbying to influence how it was written and what good or bad things would be included in it.

Yep. And so the other thing I would say, though, and this is, I think, really the core thing that I think, is that like when you look at like DCCPA, like, again, we don't know the details, of what it will say, but there is going to be oversight of centralized exchanges. Like, that's going to happen one way or another. So at least that piece of it, and I totally curious that there are other parts of it that you may be objected to, at least that piece of it, like, that's going to

happen one way or another. And it's a matter of how it happens. Whereas having a separate New York state framework for crypto that is separate from all the other states and the federal government was not an inevitability. And I think that that's a pretty big asymmetry. these situations. And so, like, you know, killing DCCPA doesn't mean that, like, centralized exchanges with spot commodity markets will forever be unregulated. Like, that's not going to happen. And all this stuff is already regulated, right? We have to, yeah, we have to acknowledge that. So let's do this. Let's get into the details and why there was this kerfuffle. Because so, you know, Sam is talking about, you know, kind of getting into the details. And he actually, he does think that

there is a chance for the DCCPA to actually pass and, you know, some version of some of the thoughts from the crypto industry to be embedded, certainly on centralized exchanges. Now, Eric, I'm going to throw it to you. Okay, so Sam, I put forward a proposal called, and I'll share my screen here, possible digital asset industry standards. And this is not the DCCPA. Let's be clear on that. These are Sam's personal thoughts. I think this is written by Sam Bagman-Fried, but neither FTCS. This has all of those qualifiers, all right, disclaimers. But he goes through and he talks about hacks and accountability. He goes through and he talks about asset listing, token equities. He talks about consumer protections, sanctions allow lists and blocklists

as well. As I went through this and I read this, I was like, oh, this is what regulators really want to hear about, right? Like, they want to, these are the subjects that they're most concerned with. And Eric, you took issue with some of the positions that SBF had in his original article, and you wrote a very thoughtful response, which I think was definitely the best response I read, and much better than kind of a two-minute rant on crypto YouTube. Won't name any names here. But what were some of the issues that you had with some of SBF's suggestions? Because again, if there is a shot at getting some regulation in, we sure is how I want to get it right, don't we? And it seemed like you are very concerned that this is not the right

path to go down. What most concerned you in Sam's Post? So, yeah, again, importantly, we don't know the text of this DCCPA bill yet. So we're all kind of talking about it blindly in that regard. I'd say there are mainly two big issues that I had with the post. And I want to give Sam credit for how open he's been to feedback and how engaged he's been subsequent to that post. I appreciate that very much. The first one was when Sam said that we should, that everyone else, they must respect and follow OFAC. But to use that word respect, I think, was a little bit revealing. And I wanted to counter that because OFAC should not be respected and it perhaps bears discussion on why. So OFAC stands for the Office of Foreign Assets Control.

It's a part of the Department of the Treasury. And they maintain sanctions lists. And any people, companies, organizations, and entire countries are on this list. It is illegal under current law for any American person or any American business to do business with anyone on these sanctions lists. So why is it unethical? Well, it includes entire countries. So in my post, I talked about Iran.

It is illegal for any American to do business with an Iranian. This is patently unethical and is the kind of thing which we in the industry should be highlighting as emblematic of the status quo financial system and something that we vehemently oppose. It is not okay that an American cannot send money to a brave, Iranian woman who is standing out for her freedom in that country just because she was born in that country. We should be reflecting on this as a people. And like what kind of financial system do we want to be designing in the future? I don't think we want to be designing one where 80 million innocent people are excluded from the financial system. So yes, as Americans, do we have to follow

OFAC as law? Yes. Should we respect it? Absolutely not. And my request here is for someone as preeminent as Sam to make that distinction and say, even if it must be followed right now, it is not an ethical body of law. The reason this is important is because the moral premises under which these regulations get imposed on us are important. They're always cast down as if we have these morally prescient individuals in the government that know what's right and wrong, and they keep us the Wild West crypto industry from acting badly. That needs to be challenged. We are building actually more virtuous financial systems than what exists today. And OFAC was a good example of that.

So I'll pause there for a second. Yeah. So first of all, I did mean respect as in follow. And I hear your point of that being at least a lazy choice of wording. Maybe a frigging slip. Perhaps what I had intended to say was follow. And of course, I was lazy about a few other things there too, some of which you called me out on various points.

But like, you know, I said everyone is pretty lazy about whatever and what. Obviously, if you're an Iranian, trying to buy a bagel, but it's an Iranian selling it to because you're an Iran. Like, that's not, a ophra doesn't make sense in that context. So I acknowledge on that. I will say that I think that your Freudian slip point, I think in general, showing respect, even if you strongly disagree, has a lot of merit. And I don't think everyone agrees with me on this. And I don't think it's 100% clear that I'm right about it. But it is what I believe.

that in general, even if you want to strongly disagree with something, with some exceptions, doing it while showing respect is the right way to do it, and that just creates better discourse and it creates better engagement on both sides, and that if you come in openly and sort of like preemptively acknowledging the strengths of the other person's point, that will make them more open to engage as well, it'll make them feel more heard and feel like when you did, agree with other parts of it, you're doing to having understood why they did what they did,

rather than like, well, this person doesn't even know why it's here in the first place. That's sort of like one thing I would say, you know, on O fact, like, first of all, I have a lot of sympathy for the concern about disenfranchising and deplatforming and innocent civilians. That sucks. Like, it sucks. It's not fair to them. They didn't choose that. They have been increased of, you know, or even suspected of any, you know, wrongdoing. And whether or not the policy, is right, that sucks. And I also think I would be like excited to see bilateral engagement around, you know, what are ways that, you know, we can sort of minimize the amount of collateral damage dealt while making sure to, you know, sanction terrorist activity. And I'm going to be

awesome. I haven't done a deep enough to hide in some cases here to feel confident that I I know the right answer from policy perspective in terms of what the right tradeoffs are here. And I totally respect that, like, I least have a lot of sympathy, if nothing else, for, you know, your perspective on OFAC. I think that, like, I think the Iran case is the one where there are the most innocent people who are caught up in it by far. I think you can look at sort of like on the other side, North Korea, as an example where I think there's a lot to be said for being really careful to make. sure that we're not at all facilitating financing, you know, of terrorism there and that that is just like a large fraction of what's going on in North Korea. And so like, any various case by case. And you know, I know exactly what the right answer is in all of them.

But yeah, I hear you on that. And really my core point is just like, and it's a lot. And whatever you think about it is the law and we should follow it. And I also think strategically that just like to think that it was the right fight to choose, you would have to think that it was the one you cared the most about by far. I think that's how the game is set up here, so to speak, that like, this is the one. the policy makers generally care about the most, which is not something keep in mind. And I do think I will say that it is very important to enforce sanctions as a general matter. I think that, like, there are a lot of cases where these are, like, important for the world

remaining safe. That doesn't mean they're all perfect. And that doesn't mean I don't have a concern about something. And I also don't know enough to be confident in why I think about something. Like, there are a lot of cases where, I don't know, maybe if I knew everything that the United States knew, I would feel differently. It seems totally plausible. you know, I will say that like, you know, when it comes to Russia, for instance, I think that

there is a lot to be said for the core sanctions. It's not entirely clear to be why every person who got sanctioned did get sanctioned. And that might just because I don't know things. And, you know, that absolutely could be. But I definitely would say that I'm concerned, you know, if it is the case that there are some, you know, people who got sanctioned there who didn't really deserve it for whom there wasn't much cause. Because I think that that starts to undermine a lot of the world's confidence in their safety with the U.S. dollar. But again, I don't know enough to feel confident that there was a mistake there. There are just things that, like, don't necessarily seem clear to me.

And I would find it very concerning if there weren't any further reasons they didn't know that for it. Yeah. And to be clear, I'm not advocating that in this discussion over DCCPA that we try to take the fight of abolish OFAC, right? Like, that's going to be a non-starter. that's a battle for a different time and different day. What I am saying is that when discussing something like OFAC, pointing out its moral deficiencies, at least in a blog post, is worth doing.

I also think, like, just as a matter of principle, if the U.S. government wants to block payments or de-platform or censor someone from global finance, let them bring an allegation of wrongdoing. Like, how is that a radical position today? right like if it's a if the government believes someone has acted wrongly or done something illegal let them show the allegation before forcing people to block payments to them right you know even an allegation let alone a conviction but in terms of o fact there is no allegation there's no allegation against 80 million Iranians that they've done something bad obviously the vast majority have not

and i don't think it's any different for for north korea i mean talk about any group of people that could use an open money system and break free of tyranny, it would be the North Korean people. Like, we should advocate more crypto usage in North Korea because we understand the danger and tyranny of the North Korean government, right? And so to associate or to try to draw some comparison between the North Korean government and all the millions of innocent people that are literally suffering and dying there, I think is a big mistake. Eric, you're articulating a point that I really like, and I really want to double down on this. As a libertarian, I remember hearing some content from you on some other podcasts and talking about just the catch 22 that it

comes with being a libertarian while like no libertarian goes into politics to fight for libertarian ideals. It's almost antithetical, right? So you almost never really get what you want out of politics because if you're a libertarian-minded person, you don't really like going to Congress and fighting for your ideals doesn't really seem interesting to you. And I think kind of what you're saying with this whole approach to regulation where I'll paraphrase, let's not go to capital. Hill and like work with regulators when we finally have this crypto platform to stand on and support us and actually embody some of our ideals for one of the first times like the more libertarian free market minded people have this infrastructure smart contracts decentralized protocols

defy dows to actually like stand up and prop up and support some of our deals with actual true like social coordination infrastructure and i think what you're saying is let's not go and shoot our in the foot by giving up what we have to stand on. And what we have to stand on is a permissionless finance system that can integrate the Iranians and integrate the North Koreans. And I think what you're saying is like, let's not give that up and let's make the regulators come take that from us with court battles and fights rather than going to them and, you know, doing some deals and handshakes where we actually end up throwing the baby out with the bathwater. Is this a fair articulation? Not quite. Again, I'm not, my ask of Sam and my plea here is not that we don't engage. I think

there's nothing wrong with what Sam's doing in terms of engaging with the government. And I support various people and groups that do this. I'm sympathetic to those who have the view that any engagement is bad. I'm sympathetic to that, but I think the Hydra approach of everything from the most radical crypto-anarchy to people in suits going to meet with those in Mordor, or I mean in D.C., that they would all be effective in some ways, right? So yeah, I want to be super clear that that's not my ask here. What my ask is, is that people like Sam who are engaging, be very careful about what they ask for and where they draw the lines. And those specifics are critical. And I think Sam agrees with that point. Sequence is the all-in-one developer platform you need to build

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TrueFi.io. So, Eric, what other specifics did you take issue with in Sam's original post? I mean, there's a lot of places we could take this. We could talk about defy. We could talk about kind of code. I know there are some points that you do agree with, but let's focus on maybe the deltas here and the disagreements. Aside from the overarching kind of concept of respect for OFACT, for instance,

there are some other, like, practical things that Sam proposed. what would you point out? What are things that you don't agree with? Yeah. And I'll start this by also saying something that I did agree with and like, you know, Sam had a very creative suggestion for how exchanges should handle hacks and like trying to create a standard or a protocol for that. The specifics aren't super important, but vet he was trying to do that, I think was great. And that being done as a set of industry standards is laudable. So well done there. Certainly the biggest area of contention, both with my own response to Sam's post and with the crypto community at large,

is what Sam was saying about Defi. And I'll try to characterize Sam's position correctly here. He was clear that at a protocol level, things need to remain open and immutable. So that's good. Where he made the big mistake is in suggesting that interfaces for decentralized protocols, such as the front-end website of something like AVE or UNISWAB, should perhaps be regulated as a financial institution. That line cannot be crossed.

That line should not be crossed. And if we spend the rest of this discussion on this point alone, I think that would be valuable. My main ask of Sam in these discussions is that however important it is to regulate centralized custodians or intermediaries correctly, the current bill, the DCCPA, trying to do that and doing that well is understandable. If regulations in this same bill get attached to how decentralized products, i.e. non-financial intermediaries, are handled, that is going to be a big mistake. It's going to be

done incorrectly. It's going to be done poorly. And it's going to harm America more than it harms the actual protocols themselves. So if I can make any request, it's simply to not include any concept of decentralized finance into a bill, which is centrally trying to, you know, which is centrally trying to govern well central controlling intermediaries. Sam, what would you say? And Eric, are we talking just about the protocol or are we talking about the user interface? I know Sam had some propositions around that. The user interface that connects to defy applications, is that sort of one in the same to you? Yeah. So Sam was clear that the protocols shouldn't be regulated, so that's good. But he was suggesting that interfaces to these protocols should be and should be regulated similarly to how a centralized

intermediary under the Bank Secrecy Act would be regulated. That is the big line that we need to say no on. So Sam, did I characterize that correctly? And what are your thoughts currently? I think that's basically characterized, right? And I think I like, one thing I did take a little bit and by the way, I'm not sure you're wrong to be clear on this. Like, I think he's a complicated right. I don't fucking know what the right answer is. I think you did characterize. I think basically right. And I really appreciate that you sort of have put the thought in to make sure that you do that. I don't think everyone does that on either side. One thing that they do just want to note is like,

and I think you're not your first or your third, but in your second description of what I think. You sort of said that you think is important that decentralized applications, not be rightly, and I think that they should be, or something roughly like that. And I think that your first and third versions did clarify roughly correctly what I think.

But I think the second version sort of blurred a little bit, the lines between like a decentralized protocol and, well, at the very least, and for instance, centrally, who's did doy? And so you just want to clear it, like, make it clear that, like, I do draw a distinction there. And then I think a lot of the discussion on Twitter failed to remember that distinction,

even if it was pointed out periodically. And so I want to make sure that we keep that pretty clear and that we not sort of, like, drift back and forth about, you know, whatever it's due. So I don't know for sure what the right thing to do with zero. One thing I will say is, well, first of all, again, we don't know what DCCPA will say. don't have the final text yet. I do not think that we should be trying to hash out a lot of

defy regulation in DCCPA. I think for, you know, most of the reasons you said, this is like, first of all, a lot of this is just permission of this code. And second of all, it's just a tricky area in general. And those are two recipes for Zastron trying to quickly cobble together a comprehensive regime for DFI. And I don't think, although we'll see, that the DCCPA is going to be aimed at trying to put together a regulatory framework for DFI. I think and hopes that it will be quite light touch on that side. And that to the extent that it does reference defy, at least in prior drafts that that had been released,

most of that was actually centered around something else, which was if there is a broker dealer, if you have like Schwab or something, and it wants to access Defi for its customers, what should the principles around that be? I will say that that thing, I actually feel like pretty good about, I mean, sorry,

there are mixed parts of this. But I think, like, overall, like, you know, trying to create ways for highly regulated, centralized financial intermediaries to interface with permissionless defy is, like, probably good and healthy and, like, will open up a lot to defy. And that, like, to that part, like, the devil's in the details there. And I don't know exactly what's going to say. But I think it's potentially exciting and healthy. But putting DCCPA aside for a second because it's like, I think in particular on the defy part, it's not clear exactly. what it will say, and so it's going to be hard to hash out thoughts on it exactly. Maybe just drilling into the place where I think we probably at least somewhat disagree,

which is on the goos. Maybe I'll make it a few points here. The first is that there are some blurred lines here. And I'll acknowledge that some of things I've said, but I think it's sort of like forgotten about those blurred lines and treated as if there was like crystal clear differentiation between different parts of this, which doesn't exist. But I think that the most important thing by far, and I'm interested if you disagree at this, but my instinct is that by far the most important thing is, or set of

things as a following, that protocols can be permissions, that on-chain code can be permissionless. Sorry, the only reason I'm saying can be here is that is permissionless to write it and obviously could write on-chain code and put permissions in it. We shouldn't make that illegal. But, you know, that should be permissionless to write coding and, you know, that could be permissionless. And that, like, pure to pure transfers and payments can be permissionless. Like, those are things that I think are, like, incredibly important and fundamental here.

And I think that, like, if those are violated, I think those are sort of the sacred things. Because if those get violated, I think it just breaks the whole thing. And by the way, I think it's true. or tried to buy too. If you tried to say everything is permissioned, no one could go to a shopping mall anymore. Like, you could not buy food. Like, the world would just starve the next day.

And I think that, like, the result of that would be to, like, effectively ban digital commerce and say that, like, the only unregulated commerce can be physical unregulated commerce. But anyway, I want to check if you agree, not with my statement that I think that they should be permissionist, but with my claim that that's the most important thing by far. Yes, I think I agree with that. Cool.

I take a little issue with your point about the current payment system not being permissionless or being permissioned. Like today, it is absolutely permissioned. Then you can go with your credit card and buy something at the store is only because several intermediaries have your box ticked as approved, right? That is permissioned and that can be taken away from people for wrong think or for anything that, you know, some Orwellian government wants to do to them. Oh, sorry. I think why it says parts of it are permission and parts of aren't. And I think it's totally arbitrary, which parts are and armed. And I think that I agree with you on the price of art.

Like, sorry, you can go to a store and you can pay it to a credit card or it's a dollar bill. And one of those is intermediated. Cash. Yeah. Cash is permissionless, right? That's the last bastion there. I think you're making a good point here, which is like, when you go to a store and you buy a baby, it costs 2% to a payment processor.

And that's if you're allowed to buy the baby, right? That's if you have connectivity, the financial system. Now, you can buy it with cash either way, I guess. But cash is a pain. And why does it cost 2%? I think a lot of that is because, like, you're trying to, get like gigantic companies to zoom in and say like Alice wants to buy an everything bagel with cucumber. What do we think about that? And it's like that's fucked. And like that's where

that 2% is going. That 2% is going because you're trying to mediate like that transaction. And as you said, like not everyone has a credit card and credit cards don't always work. And so that 2% fee is the good case. That's the case where the payment. it does work. So I agree that, like, a lot of the fact that payments are disrupted is because of this. And so anyway, so it seems like we agree on what the most important things are and agree on what to do about those most important things. For worry, discreet, here's my argument. And my argument might be wrong. Like, I don't feel 100% sold by my argument here. I on balance currently think it's correct. But basically what it is, is that like given, she's taken as a given, that that is the most important thing. That's more contracts, that code that. Oh, validator is another thing. I should have thrown.

which I assume you agree with that it's very important that validators can be permissionless or else again you have like 10,000 random people running code to validate mathematical transactions and also think about everything bagels with onions at 7-11 and Alice which is insane and maybe I'll say just to clarify I make explicit a website I'm used on a centralized service by an American that targets financial products at American retail back ending on to Defi, but is non-custodian. And so it's not, it's not custody, which I'm guessing is maybe where you would be drawing this line here. No, non-custodial. So let's use a specific example, like a U.S. hosted, U.S. owned, front-end for Avey. Yep, which is, to be clear, in this case, U.S. hosted U.S. owned and offered to Americans. And sorry, offered to Americans is a vague word, but like I sort of want to say, like, isn't IP blocking the U.S. or something like that? And like, I don't know, we, there's lots of interesting details about that.

The question is, should an American need a license to offer a front end for a back-end D-Fi protocol like Avey? Yeah. Your blog said yes. And sorry, just want to clarify, offer two Americans. Correct. Yeah, two Americans. Yeah. So I want to sides up for a second, so we can get back to it.

The question of whether I think, if I were dictator, that should be. required and rather answer a question of what policy should we be proposing and arguing for. And my core thought here is the following, which is that I claim that the most important things here at the end of the day, the most important thing is that smart contracts validators payments remain open and free. and that the most important thing is that that gets protected at all costs. And that because of that, like, I am relatively willing to accept compromises if they preserve the things that I believe have the vast majority of the value for defy. And that plays a non-trivial part in my thinking here, which is that, first of all, like, if my best, my projection is let's just expand out 10 years from now.

and say, you know, what will, empirically, in expected value terms, regulation look like for Defi in the United States, for, with all these caveats, again, Americans offering to Americans, blah, blah, blah. If I had to guess, I would guess inexpected value terms that looks worse than it does in a world in which it's like, Gallaudetia, small contracts, payment's totally free, but in which the centralized American-hosted targeting Americans of a GUI, requires a burger dealer license or something like that. My projection is that that world is better than the expected value of what the world will be. Maybe I'll just pause for a second there and ask you, do you agree with that statement about the relative expected values? I think the tendency of the regulators is to make the world a darker place no matter what. Now, it's up to non-regulators.

It's up to you, Sam. It's up to people in the industry to highlight the reasons, whether ethical, moral, legal, why those people should not be imposing the controls that they want to impose. And I agree that the protocol being immutable is the most important thing, but I kind of feel like you're starting to compromise far too early. Just as in the same way that like if we agree that the heart or the brain is the most important part of the body, we would not so readily surrender our arms and our legs to be chopped off just because the heart may be arguably more important. right, like let's keep the whole being here. Let's not invite in this kind of restriction. And if they force the restriction, then they'll force it in. And history will be the judge of that. But let's not be the ones who invite that in upon ourselves. So I totally hear you. I want to make an empirical claim, which it might be wrong. And if this claim is wrong, then I change my position on some of this. But my empirical claim is the following. Maybe I'll sort of like lay out my logic here. Step one, most important thing validators at the

step two, I predict that in expected value terms, that compromise is better than what we will get. Maybe it'll be better, maybe it'll be worse, but like it's better than what we're expected to get because it preserves the most important thing, and I'm not 100% sure that that will be preserved. I really hope it will be. Step three, I think we have to fight to make sure it gets preserved. I think that's the most important fight. And then step four, and I think this is an important and non-trivial stuff that I might be wrong about, which is very relevant for my thinking on this, is my sense.

is that it is much more effective at getting what you want the most. If you come to the table with a stance which is immediately recognized as willing to compromise and reasonable. And I'm not yet making a statement about what matters with the right thing to do is, but that like my belief is that like if you come to the table in D.C. and ask for exactly everything that you want, as you're first asking in a very forceful way, you will not get what you want and that you will not be taken as seriously. And that the way to maximize the odds of getting what you want the most is to express a willingness to compromise on the things that are less important.

That is my belief in principle. That's that's absolutely right. You're not wrong on that principle, but you're sacrificing far too much. much from our position here. Let's be pragmatic for a second. Forget all principles and everything. If defy front ends catering to Americans need to be licensed, defy in America dies. It dies. People will not use defy through licensed front ends because it will simply look like CFI. There will be no meaningful distinction. That can't be sacrificed. Well, I think I disagree with that, but I more strongly disagree with at least one of the things you said, even if I don't know which one.

Like, in other words, I don't know that you can simultaneously think what you just said and also think that by far the most important thing is that validators, et cetera, remain permissionless. Because what you're saying right now is you lose the whole thing if you give up permissionless front ends. But then you also said that you get most of the value if you have like permissionless backends. And so I think I'm now confused about which of those you think. If you gate the way that people use defy, 99% of people use defy, which is through a GUI, if you gate that as a licensed financial institution, you have turned defy into tradfy. And so just to clarify it then, like, the sense I'm getting now is basically that you think that like the front end is just about as important as a back end. That like, you know,

if you got like 70, 30 odds on like which was permission to which was permission list, you'd be kind of like, I'll just take whichever gives me the 70%. Like I kind of think about equally important. Is that kind of how you're thinking about this? I'm thinking of this from the perspective of actually wanting the entire world to be able to use an open, immutable financial system. And 99% of those people use GUIs. So if you gate the access to permissionless blockchains with GUIs that need financial regulation on them, we've failed. We end up with TradFi.

I feel confused about whether you agree with my statement. Okay. What am I missing? Sorry. I know what you think the best case is here. I know what you think the worst case is here. I'm trying to say is like, is an intermediate case closer to the worst case or the best case. This is the intermediate case.

My best case is that governments leave free sovereign individuals alone to interact economically as they will like the country was supposed to be founded on. But that is a radical notion that no one in Washington accepts anymore. Sure. So sorry. So if you take, sorry, of the following three cases, granted that there are many cases beyond these three. But over the following cases, case one, all of Defi and things related to Defi are unregulated. Case two, back end unregulated, centralized front-unregulated. Case three, back-end regulated, centralized front-unregulated.

Do you think case two is closer to case one or case three? I think it's closer to case three. Got it. So you think that basically like, if anything here requires oversight, that you've lost most of the value? I think we need to move the conversation up a level and acknowledge that the oversight in Defi already exists and it's done by immutable code that operates perfectly as written. It has oversight. Sorry, I agree.

Oversight from a human-based financial regulator in the government. Why do we want to invite that? I'm not making an argument about whether I think it's good or bad. What I'm saying is, and maybe you dispute that we have to choose because maybe you think that it is fairly likely that we end up in a world in which there is no human regulatory oversight of anything related to defy. And if you think that that's an interesting belief, which is not my belief, but which would be very interesting if you thought it was true.

There's already human oversight over these things. Fraud is already illegal. Fept is already illegal. It doesn't matter if I do it through a defy smart contract. If I steal from someone, that's regulated already. Sorry. I hear you. Okay.

I feel like we're being a bit bit bad. anticure, but I will go with the flow, and I will, like, add a lot of words to this sentence, but I think you know what I'm trying to ask. And I'd appreciate it if you ask the question, you know I'm trying to ask. So is your belief that if any part of the flow by which many people currently access defy in which you go to a American human hosted website aimed at Americans hosted on AWS paid for a with a credit card that then backends onto AVE in a non-custodial way, that if any part of that requires an explicit license for a government financial regulator, that that already means we're close to the worst case in absolute value.

And that it's not worth that much to talk about which parts of it do and don't require a license. Because if any of them do, it's already like you've already lost basically the whole war. Is that roughly what you think? Yes. I think if that is the outcome, then none of us should be proud of anything that we've been doing to build this whole industry. The entire point of this is open permissionless finance. And when we say that, it is not just a slogan. It is the entire point.

And if you exclude 99% of people from open permissionless finance, then all you've done is make a more complicated, more expensive trad-fi system. Right. That's not acceptable to me and I think to most of the people that care about, why we're doing this in the first place. I think I disagree with your last statement about exactly how it's acceptable to and not. Although I also think I, maybe it would be if it was phrased the way you phrased it. But, okay, I think I now understand your view here.

And your view here, tell me if this is right or wrong. But my understanding now of your view here, roughly speaking, is that, and I think I understand why my previous question didn't get at this. And I'm sorry for that. I now think your view is roughly speaking that if anything in this process requires a financial license, then that means that the people, so to speak, won't be able to access it as that means we've already lost. Yes, just as if we were having this discussion 25 years ago when the web was being created

and we were taking these same positions and you were asking me, if any part of the web stack that lets someone log onto a web browser and access something as powerful as the entire tome of human knowledge like Wikipedia. If any part of that required a license, would we have lost the battle? Yes. Yes, the web would not be the beautiful thing that it is today. The reason that it is so special, the reason that it is so innovative, the reason it's so dynamic, is because people do not need permission to access the web, to read to it, to write to it. And it's amazing that that has lasted. And anyone who reads, researches the history of the web knows that these very same battles and discussions and debates

happened back in the 90s. It would be the height of irony if crypto entrepreneurs then gave up that very same argument 25 years later and allowed finance itself, which is no more dangerous than information to become a permission system. Okay, I hear you. I hear your point here. And I have a lot of empathy for it. I think it's like, I think that there is a totally plausible argument to be made here, which you're making. That, yeah, that like any amount of, if anywhere in this process we're requiring a license, then in practice, the worry is basically in practice, no one's going to be able to access it. In practice, it's no longer an open financial system.

You've lost that. So if you're okay with losing that, if you're okay with having a closed permission financial system, then we see things very differently. So I guess I don't see things in binary. Like I guess what I would felt like a very binary statement. It's a statement of a line. It's a statement that if we cross this line, we've lost permissionlessness, which is the entire point. But I don't think permissionlessness is binary.

Like I think that there are shades of gray here and that you're sort of sweeping that a little bit under the rug. And that like the real answer is. is that like, I think there are costs to losing this line. But I also think that like that doesn't mean that you've lost everything. Like I think that like in particular, sorry, maybe more explicit here, I think that if you end up in a position where it's licensed to deploy a smart contract or to interact with a smart contract with code, that puts a gear in the works that is very difficult to overcome.

Like I think then you just get like on-chain stuff just like. work. Like it's just like you can know. Yeah. So we agree on that statement. So on that side, I think I feel maybe somewhat similarly to your sort of sense of like it's very difficult to find ways to mess with that that don't break the whole thing. I think I don't feel nearly as strongly about the thing I said. So what you're saying is that an American hosted GUI, even an American retail hosted a centralized way on a centralized cloud server requires some sort of financial the licensure. I don't think that that basically breaks D5. And I think there are a lot of reasons that I don't think it does, you know, thinking through like what impact does that actually have,

like, well, you know, I mean, I can make this very practical. If a company needs to be licensed and do KYC to operate its American front end for Avey, that company now has a compliance program. That company has registered in a certain jurisdiction. That company is now taking personally identifiable information from millions of users and storing it. There is nothing decentralized about that model. That is a centralized model that is endangering people with custodianship. That is tradfi. That is not defy. So I think, sorry, that model, meaning that company, but some other parts of this stack are still definitely decentralized. Not everyone's going to be accessing it through that protocol. So if nothing else, I think, like other smart contracts aren't going to be accessing

it through that portal, for instance. Like, that's a big deal. I think that, like, you can still have things just building on each other in every direction, which is super cool. I think other countries can have different regimes, which is super important. I think that, like, American can still freely contribute IP and products. And on top of all of that, I don't even agree that that company is definitely taking PII. Like, I think that many of them will be. But, like, I think I could describe a system view that I think would probably get there on a regular corporate context without that company taking any BII, which I think is a little of a side point except to say that like I think there's a lot more

nuance of this than what you're saying, right? Like let's say that you had on chain, you know, you had some people KYC for other purposes with some company. That company wrote out on chain. This person's address is KYC, not saying anything else about them other than that I have KYC them and give them a checkmark. And then this front end only let addresses in that list interact with it. Then this GUI is not taking any BII while doing so, right?

And again, that's like a little bit of it in the weeds point. But like, I think that's just like true of a lot of the things relevant to this gooey thing. And so I guess I just like think this in practice has a lot fewer of the downsides than you do, although I think it's all downsides. Like I'm still concerned about it. Like I'm not. So Sam, just to take a higher level point because you do think it still has downsides

and you would prefer a system that didn't make this compromise. One question I think I'd have for you and maybe like Eric or the cryptic community also asking the same thing, is like, so why are we being forced into this choice now? Like, so to use Eric's example from the 1990s, why not come back when our regulators understand defy a little bit better, when our market share in education around the U.S. populace or different jurisdictions around the world as a little bit stronger? People have seen the practical use cases. Why can't we sort of strive for the best and have regulation that goes soon to effect remain silent. Why isn't it enough to just do the C-Fi regulation? Why are we forced into this

position of terrible compromise if what we want is the outcome where we don't have to make this user interface compromise? So I don't think I'm arguing for us to try to make that happen. Like, I think that's misrepresenting pretty grossly what my position is. And I feel like I've never said that. And I feel like that, I don't know, like what I've said is that, in people, it might turn out to be the case that this is true. And I have implied that that might be a compromise that we could live with. But I'm not saying that we should make that happen. And I think that I'm not saying that that's something I think DCCPA does. I'm not saying that we go and make it our priority to make that happen. Like those, I think would be probably not the right tactics. I think what I am saying is that, you know, when asked by a regulator, would I think that that was appropriate? I think what I would say is that the most important thing was to keep smart contracts, validators, payments decentralized. And that like, if that did mean that like, you know, essentially assumed front funds by Americans targeting American retail had to be licensed. I think that could be reasonable.

I think that that's like a little bit of a different statement. Sorry, I don't mean to cut you off here. But if the question was, let's acknowledge that the email, protocol will be permissionless as a protocol. But every email front end requires licensure in KYC so that we can make sure no one's sending communications with terrorists. Where would your position on that question be? So, okay, so first of all, I think that's not quite the right, comparable. I think that sounds more like payments to me than, like, far landing. We're just talking about emails here, right? Like the sending of messages across the web, if the protocol,

was going to be immutable and no one would have to put any sort of censorship in the protocol of email. Yep. But it was the law of the land in America that every email front-end provider required K.YC from its users. Yeah. Because under the justification that we do not want people sending information back and forth with terrorists.

Yep. Where would you stand on that position? Oh, I'd be strongly against that position. Why? Why would I be against it? Because I think that it, I think it'd be like against freedom of speech. I think it would be disenfranchising a lot of people. I think I would not trust in practice that it would do a good job of sorting people.

I think that just the gains from it are relatively small and the risks of it are massive. And I think it would also just introduce a ton of friction everywhere. So I agree with you on all that. I think that like, sorry, this is. Why is I don't know how compelling you're going to find this. One thing I will say is that like I'm making a distinction here between, for instance, payments versus is derivatives contracts. And that, like, its email feels to me more like payments.

Well, it's weird, because I'm not sure exactly what the equivalent of derivatives contracts is in the email paradigm. Or there's the, like, you know, messaging paradigm or something. But, like, I think that, like, that is one of the reasons that I do think that I'd be very worried about a world in which we ended up with, like, you know, every payment ever being permissioned. I think that would be crazy and untenable. And that feels to me like the closest comparable to the email thing. Why is Avey somehow different than email? So why is it different than email?

You argued so well and so passionately to not block email with licensing in KYC. I loved hearing that. That filled my soul with joy. Such good arguments. Why does that not apply to financial transactions? So why does it not apply to financial transactions? I think there are a few things here. So first of all, okay, to some extent it does, right?

Obviously, some of the answers here is that I think there are a lot of ways in which it doesn't and which I have similar appeals. So I'm not going to say that there is no similarities there. All I'm going to try and argue is that I think that I very least feel significantly more strongly about payments than I do about Aube for instance. So here's why. Just looking at the trade-off of benefits income, right, just looking at like, what is that trade-off in practice?

When you look at, you know, payments, or at least let's say when you look at like email, that's something where it's used constantly by everyone in lots of personal ways day-to-day. and it's sort of like a really central part of how we communicate. Today it is. In 1994, it was not. And I wonder what it would look like if all of that was licensed. It's an interesting question. And so, okay, I think that from a payments perspective,

that feels similar to me in some respect. That, like, that's a really fundamental ever-insuing day-to-day. And, like, gumming up the gears on that is real bad and, like, really disenfranchises people. So why do you see that for payments? But if I'm trying to pay AVE, the logic changes. Why? So first of all, I think that like borrow lending protocols, I think they're awesome. I think they have a lot of utility.

And I really, sorry, I really want to make this clear. Like, on an absolute scale, I'm a huge fan of them. And I think they're super cool. I don't think that there is as important to the world as the ability to pay for things. Like, I think that's just like on a relative scale, like, you know, if I had to choose, like, which one of those is, like, more central to, like, important things to around the world is clearly payments. And I think it's by, like, an enormous factor.

Like, I think it's not like a factor of, like, 1.2 or something. I think it's more like one of them grinds commerce to a halt. The other one is sad is how I feel about it, roughly speaking. And to, like, you know, I just like quantitatively think that, like, yeah, that one of them is more important. second thing is that when you look at like, so in terms of like the costs, you know, of gumming up the gears on them, I think just like massively high in one case and the other. Second of all is that like, especially when you look at more complex products, like there's a range of things here.

And I understand that like one could be worried about lots of things being swapped up into this. But especially when you look at more complex products, I think that first of all, to the extent that they're going to be used by many fewer people, the costs of, for instance, KYC in aggregate goes down, you know, and that like those people are using it much more each means that, that again, the cost of a one-time friction cost goes down. Now, to be clear, I feel very differently about a one-time friction cost and then every-time friction cost. If what you were saying was that, like, in order to use Avey, every single time anyone used it, they had to be a very time, to go initiate a new, annoying, permission process, that would be very bad. Like, that would kill it.

And I'd be very sad about that. Now, most of these things, ideally, optimally, and query whether you think this would actually be true in practice, but ideally would be one off per user things, a type of thing where, like, you know, the first time that you registered for AVE, you know, you would spend 10 minutes going through this process and then never again. And I think that that while sad is just like a much lower cost than if you had to do this every time that. How about when the Iranian woman tries to do that the first time and it's not 10 minutes, it's never. Yep. Oh, I totally hear you on that. Why are you okay with that? What is by okay? Humanitarian perspective. What do you mean okay with that? There are lots of bad things that happen in the world every day and I don't grind to a halt because of that.

I try to do the best I can. I try and move things on the margin and constructive direction without sort of like giving up because some bad thing happens. And like, I'm not saying I'm happy about that. I'm not happy about that. But also like it's not infinitely bad. I mean, it's somewhat quantifiable, right? You know, it's about one percent. That's about how bad it is.

And that sucks. And like, but also, you know, I don't want to throw the baby out with bathwater here. And, you know, I think that like, you know, also there's still be, you know, Iranian commerce in Iran with Iranians. But I, you know, I understand that that is not the same thing as real global financial access is a very different thing. But just to say that like, I think that the like, you know, the scope here does matter to me because we are in a world where like we are always making tradeoffs. And like we are always trying to decide given all the factors before us, really. realistically speaking, what we can do and what we should do. And so, like, you know, I think that

these things, while bad are not, not infinitely so, so that's another piece of this. You know, when you look at like the reasons to permission them, I think at the very least having like a knowledge-based test on complex financial products is not an insane thing to do, especially. When you look at, you know, websites that are marketing and targeting these at retail users, I think that that is a kind of thing that could help reduce fraud, reduce scams, while still making it the case that anyone who did actually understand these products could use them. And by the way, I won't make it clear, I will fight against monetary threshold tests to access financial product. I think those are bad. I think they're discriminatory, discriminatory. I think they're

fascist. I think they're racist. I think they're just like real bad. I think that like being in a world where you say that only the rich can access financial products is fucked up. And so like I'm not saying that like I will support every type of regulation one could imagine for them either. So I think that some types are just bad. And I think that we as a society have messed up on that in a lot of cases and had unduan stakes. And but I think that if you're saying that like, you know, you have to demonstrate that you understand the products that you're using, that at least feels more reasonable to me, especially again, you don't see that as paternalistic? Oh, I do say it's a little bit paternalistic. And I'm not saying that I feel unreservedly good

about it. But on the other hand, if you say, like, should people be able to market really scammy things pretty aggressively with no barriers to anyone using it? Like, that's a stronger statement. Scams are illegal. We don't need new regulations to make scams illegal. So scams are illegal. but if you only do that in a retrospective sense, if you never look proactively at them, then for what it's worth, and this isn't the worst possible thing, but it does mean that, like, you know,

you only catch scams, you know, like after they've already scam people. And like, there's at least an argument to having a proactive check on is this a scam before allowing it to go forward. Now, there are costs to doing that as well. So I don't want to say that, like, it is clearly pure, good to have that check, but there are some advantages to doing so. So I think that's like, you know, a factor here as well. And I think it's not crazy to want to have that check in place. And I think that like, you know, when you have a site that might be like really deceptive

in how it describes what the decentralized on-chain protocol that it was marketing to its users does, right, very heavily implying. that it does something very different than what it actually does. You know, maybe you say, okay, well, that's a scam. They should go after it. Maybe they're popping up all over the place. Maybe it's complicated to figure out. I think it's complicated.

And that like I feel like at least more on a relative scale, I feel like the costs are lower and the advantages are higher. I think the costs are way lower. And the advantages are moderately higher to putting permissions on centralized frontends for derivatives trading protocols than they are for, payments or centralized front ends for pure, pure payments. So to bring this back a little bit, we're debating right now, like, how should DFI be regulated, right? And this is a big open conversation and you and I have two views among many.

Yep. In terms of the DCCPA, as you've acknowledged, it's very hard to get defy regulation right. You're not even sure where you stand on it. Yep. And you're one of the smartest people in the industry. industry. Can we acknowledge at least that the political class, the regulators themselves, are nowhere near ready to be regulating defy? And whatever the appropriate regulations are for defy, this bill is not where they should be contemplated. We are not ready. And thus, the DCCPA should not include any

conception of defy. Because if it does, it's going off the track. Do you agree with that? Um, sorry, sort of. There's no part I strongly disagree with. There are a lot of parts that I would put differently and feel conflicted about. So first of all, I'll say briefly, I think the smartest, most knowledgeable people tend to be the least certain in general. I think the fact that I'm uncertain doesn't mean, I don't think anyone should be certain. I think it's fucked that some people are. But I think it will always be uncertain. And that doesn't mean that like, you know, we have to give up on ever acting. So I, I, I will always be uncertain. I'm not advocating to give up on ever acting. No, I, I hear you. I hear you. I hear you. Do you want to exclude defy from DCCPA?

First of all, most, right. In general, I would argue that it would be ideal to basically exclude defy from DCCPA. I think that would be the ideal approach to say, look, we're going to figure out defy later. This is not a defy file. This is a C5 bill. That is what I think, roughly speaking, would make sense here. And I think that would be appropriate for all the reasons you said.

I want to give one caveat to this. which is, I'm interested in take on this. One thing that has been in some drafts, at least I think of DCCPA, I'm interested in your thought on is what if there was do some studies to have some discussions about eventually developing a framework for how an already regulated centralized custodial broker-dealer could access liquidity from a on-chain smart contract. That feels good to me because the status quo is that it's effectively illegal to do so. So that's an example of a DFI provision that I think is good.

That's reasonable under the condition that the scope is narrowed to precisely that kind of party. Right. If the scope is how does a business, for example, interact with DFI? That means that any person's LLC now has to fall under the licensure, right? That's a very different question. I totally hear you. So anyway, some of what the DCCPA is. is about Defi. In fact, most of what it is is about the thing I said. I think that thing's at least

reasonable and probably good, but I acknowledge your concerns here. Outside of that, I basically think that like hunting on Defi is the right thing to do because I think it's complicated and anything that like, you know, it's not going to be easy to get right. I will give a few reasons that I would make a weaker statement than the one you made in addition to the thing I've already said. First of all, I think it's, well, I believe that the people working on DCCPA are unusually thoughtful and knowledgeable. And I share your prior about what happens when, you know, a bunch of bureaucrats get together and try and like write down how people should use a product they don't know. Like that generally produces nonsense. I will say that

like in this particular case, like maybe just dumb luck. I think part it is. But I do think it happens to be the case that like there are just like unusually good thoughtful public servants who are working out this who are unusually knowledgeable about crypto and about defy and in part because i believe they viewed it as their duty before even writing a bill before even figuring out how like whether any version of a bill would be scoping defy in or out that they had to understand the subject matter And I don't think that's always the case. I think often people act without understanding it. I've seen that happen countless times.

Yeah, I will grant, let's assume for the sake of the discussion, that everyone working on it is very knowledgeable. Yeah. I'm not arguing that one. And maybe they're not, but like that's what, at least my belief is premised on that. So, okay, it shifts me a little bit in the direction of being. And again, I don't see these as binary things. I see it all as a spectrum.

And it shifts a little bit, what I'm comfortable with. I'm not all the way, but a little bit. So that's one thing that I would say in this particular case. Another thing that I would say is, you know, what are the provisions, well, we don't know it's going to be in the bill, but what are in various drafts that have been circulated? What are provisions that exist here? First of all, I think that like one thing that I've seen is like commissioning a study to determine what might be a productive direction to go in with respect to, well, really, it's with respect to regulated entities accessing DFI. So not only is it in the end, I think targeting a healthy thing, which is how do regulate entities

access permissionless smart contracts, but it is in fact taking the approach of let's not try to write the answer down right now. Let's like acknowledge that we should think about this and talk about this. Now, I acknowledge that like you may have concerns about how this study will go and I hear those. But I do think that that shifts me a little bit more. I think like in general, I don't mind the study. Yep. So the study is, you know, that's a fine and appropriate thing. And I think it's a study again about a pretty healthy direction here. Now, I think that one could totally reasonably have concerns that this will bleed over that like this will bleed over and

not just like how does it currently regulated broker dealer interface with Defi and into like, you know, why should we ever allow commerce to happen? And that sounds facetious. But that is. But that is, worry of me. Like, I am seriously worried about like extreme anti-commerce and anti-freedom things happening. So, can we comment on that really quickly? Yep. If that kind of nightmare gets proposed, let them propose it and then let us talk about it and show the world what they're proposing. And even if we lose, let history judge it. Oh, I agree. We should not be proposing something that we really don't like. And I claim, I think, well, sorry, again, we don't know what DCCPA says. As of the last draft at least, I claim that at least my reading of the intention of it was that it was not trying to regulate

defy. It was trying to have studies about how CFI should be able to interact with DFI. I've heard some very worrying things that in more recent language, the target is shifting from just regulated institutions. to defy and defy users. If that's not true in the language that we see, then great. But I do not feel like it's going in a comfortable direction. Sorry, when you say that, just to clarify, are you saying that that is true as of after the most recently leaked version? I don't know what's the most recently leaked version,

but the people that I know that are dealing with this are not happy with the recent movement of it. I'm going to be a bit of dick here and say, Can you read the most recently read, read, read, read version and then we continue this. I don't actually want to say that, but I actually am a little shock that you happen. Like, that's what started this whole thing. Like, this whole dispute on Twitter started with a leak of a version of DCCPA. Like, the whole text was there posted.

Like, I'm a little surprised that you would have written this blog post and, like, done all this without having read it. Am I wrong? My concern isn't with how drafts are written. My concern is with how the bill is written. and I wanted to comment on your thoughts about it because you're influencing how that bill is written. Right. So I totally cure you. I'm not even saying with respect to like this podcast, but like I haven't heard the things that you are alerting. Sorry, I haven't not heard from a source I trust that the things you are alluding to are happening. I've heard vague rumors of some people being worried that maybe they would happen. I see how it turns out. All I want to establish here, all I want to establish here, and I think you agree with this. is that the target of whatever rules are proposed are intermediaries,

that those are the affected targets, whether or not that means how those targets interact with defy or not, that's understandable. But if the target moves from intermediaries to normal, unregulated non-financial businesses, operators of websites, people who are interacting with defi, that that is a line that should not be crossed at this juncture. Do you agree with that statement?

I certainly agree with most of it. I certainly agree with users. I certainly agree with developers. I certainly agree with validators. I agree with operators of websites. I do agree with that. I'm going to be honest. I'm sorry, I might be off on this read.

But I'm not feeling super optimistic about, like, my read here, which again, might be wrong. But my reach here is that, like, at the end of the day, that might be the tradeoff that we have. have to make. And I think that would be, I think, and it could be wrong, that some versions of that, if very carefully scoped, would be the right one. And so I think I would have to see the details of it to know on some things there exactly what I would think in how bad I think it would be and how much it would change my view of the net thing here. I don't feel confident that I'm thinking about that part, right?

Like, that's just like, that is my current like on net, I guess, sort of thinking about how to sort of mesh these things together. I think that like, some of the, versions of that would be more free than the status quo. Like, I think some versions of that would be frankly deregulating relative to how things are realistically speaking today. Because I think realistically speaking today, there is effectively some amount of regulation on some of these front ends. Like, I think that is how some regulators are treating it today. And so I think that's like worth acknowledging. And I think that changes my mind a little bit about like exactly where I think the lines to draw are here. But anyway, all of that being said, like, I would certainly be really cautious and nervous about language around that and, like, would be very nervous about it unless it was, like, really carefully done.

But I don't think for what it's worth that I would be comfortable giving a sort of blanket statement of like anything that touches any front end in any way, unless it's an already licensed institution is a deal breaker. I don't think I would go that far. I understood. Guys, this has been exactly the conversation I think that crypto community wanted. And I just want to thank both of you for participating so openly. This has been hugely productive, I think. I just have like two quick questions and keep these as brief as you'd like to be. But I want to go back to the challenge SBF you made at the beginning of this conversation

to steal man the other's case. Can you just give a steel man for Eric's case here? And then, Eric, I'm going to ask you to do the same for Sam's. Yeah, totally. I think I'll also give two different types of steel mans of it. Caviating did just to be absolutely explicit to anyone listening to this. This does not represent my all things considered Fyoldo, I do agree with some parts of it. This is me attempting to steal men and argue for a different person's case here. Put that caveats on this. Do not believe.

We won't create a gotcha clip here, Sam. Don't worry. This is not for you. This is for a sort of malintention. Our friend who doesn't like glasses? Okay. He might be in the chat right now, by the way. Who knows. It's possible. Anything could happen. But, you know, first of all, what I would say is that in general, like, deciding what someone is and isn't allowed to do with their own money,

you should have a presumptive concern of paternalism. And it should have a presumptive concern that, you know, are you going to end up doing something that is, A, hurting the people you are claiming to protect, B, not what those people would ask you to do. In fact, they would tell you to stop trying to protect them. C, heavily discriminatory in exactly the ways that you would be concerned, it would be discriminatory against the underbanked, against minorities, against rural populations, against the poor, against people in really difficult situations. Would it persist class disparities? That's one concern. that I would have. And again, this is different if there's regulation claiming that something is going

to harm an unconsenting third party. But if this is just someone acting on their own behalf, then I think there should be a presumptive, deep concern about whether it is really helping the person you are claiming to be helping if it is paternalistic. And then second of all, what I would say, there's something magic that happens when you have permissionlessness. There's something magic that happens when you have pure on-chain actions. And in particular, what you see, which I do think is just incredibly powerful, is you can end up in this situation where you can just build, where you can build on what's been built, where you get exponential growth in innovation. And as soon as one step here, is permissioned. Instead of the whole system being able to innovate at the level of computer code

and human innovation and action and cooperation, it goes at exactly how slow and bureaucratic the single most slow and bureaucratic permissioning agent is. And the more permissioning agents you have, the worst that gets, but even one, even one of them, right, with a weak turnaround time, might take you from 10 seconds to a week in innovation time scale. And when you, that is a serious, serious risk for throwing permissioning into an otherwise permissionless system. Similarly, when you do something like what we see with charge facts on current transfers, the ACH, you know, and credit card transfers, where there is a system whereby it might,

rarely is, but might be the case. In some cases, that if a payment happens, it might be reversed two months later and that you can't compute whether or not that will be the case. That is a sort of bespoke human action deciding what would happen there. When you have a system like that, you end up in a world where if you get paid something, there's nothing you can do to become absolutely confident that you actually got paid. There's nothing you can do to know for sure that that money will ever be yours. It might all be fake. And because of that, you end up in a world where any money that you have, you kind of can't spend for two months. Because if you turned out to not get it, maybe everything breaks.

And if you have a malicious actor here, then maybe you have to keep it in custody and have to freeze every transaction for two months so that they can't gain this by maliciously doing a transaction and charging back. And as soon as you even let this in a little bit to a financial system, there's a serious worry that you end up in a world in which literally every commercial transaction takes two months. Even though it's only a 10th or percent of payments that you're saying might be charged back two months later, that is actually enough to make it commercially the case that you might not be able to sustain a business model where you don't hold up everything for two months on that because of abuse, because of uncertainty. And so there's a real worry that small amounts of friction and non-determinism in a system, especially exploitable non-determinism, can ruin the fundamental behavior of an entire system. And we see that today. We see today that two years ago, tens of millions of retail traders got frozen or liquidated all at once, trading stocks on retail platforms because they made so. much money that those platforms worried that maybe one of the ten intermediaries might two days from now turn out to not settle, a transaction that they already claim to settle.

And because of that worry, they all had to shut off all trading for all retail. And that's a terrifying place to end up in. We don't want our lives to end up like that. I think both of those factors create a really strong presumption of worry. that paternalistic regulation can cause massive unfair harm to people for unfair upside. All of that, sorry, all of that I actually believe, that wasn't steel man. I believe all of that. The steel man of Eric's side, which I don't think I believe, is that set of things is so strong that I think it just outweighs all benefits of regulatory oversight.

Eric, a few layers to the steel man that Sam gave you. can you steal them in Sam's argument? Yeah. Sam is in the trenches with regulators on a new bill, and he has some principles on how these protocols should work. He believes that the protocols should be immutable and that nothing should be gated or permissioned at the protocol layer. He's very worried that if that isn't defended at all costs,

that will be lost. and he is willing to sacrifice things which he believes aren't too important, like a U.S. front end being licensed to allow people to interact with DFI smart contracts. He doesn't want that to occur, but he would be willing to offer that up as a compromise to make sure that the protocols themselves are not permissioned. And I think he sees this as a pragmatic stand of where that compromise should or could get to. Sam, last question. for you then. Could you just wrap this up, closing arguments for your case and your position. We'll

throw to Eric to close out. Yeah. So I think it all comes down to the details. I think nuance is always in the details here. And I think that today, we are potentially in a massively better place than we were a year ago. I think that a year ago, we're in a place where there's nothing good acrimony between crypto and regulators. And many products were incurably not being offered in the United States because of regulatory problems. So I think it was a really big problem and huge acrimony. Over the last year, I think constructive engagement, give and take, push and pull, being willing to have nuanced positions and being willing to entertain compromise

and being really open about acknowledging the benefits of other people's positions. Over the last year, has led us to a world where, as of today, things are mostly the same. in terms of what is actually doable in crypto, but where a large swath of DC is much more open to moving in a positive rather than the negative direction on the regulatory front. I think we're very close to seeing changes that I hope will be very positive. And I don't know for sure that they will be. And I don't know for sure that they will happen. But I believe that we are better off today than we were a year ago.

I believe that is by a significant amount. And I believe empirically that that has come through nuanced engagement. And I think that like, you know, if that doesn't mean always compromise on everything, that doesn't mean always take the most extreme standing. It depends case by case on the details, on the benefits, on the costs. But that's at its core. That is my belief that I think is evidence that we're making progress. And I think you can see this reflected in the attitudes and beliefs of regulators and policymakers in D.C. I think that they have become substantially more constructive.

Close us out, Eric. What's your closing position here? Argument. We, those of us in this ecosystem, this industry, have created essentially a new financial

foundation for the whole world. This is a huge responsibility. And the entire purpose of this financial foundation is that all of humanity can use an open, immutable financial layer. We are set, separating money from politics. We're separating money from the state. And in the same way that the

church was separated from the state and everyone now hails that as one of the greatest things that humanity ever did, we now too, it comes to us to do the same for money. Money is as or more important to people than religion is. We interact with it every day in all sorts of manners. And just as mathematics or language are immutable and open to the entire human race, so too should the exchange and management of money. That is the principle that makes this entire ecosystem important. That is the principle that justifies everything that we do. And if we lose that, it will be something that we regret for the rest of our lives because we had that opportunity. We can't protect that principle when it comes to centralized custodians, granted. But we can

protect that principle when it comes to decentralized immutable finance. which we call defy. That line exists to the degree that we all defend it. So that's what I'm trying to do. My request to Sam and anyone else working on this bill is to exclude Defi from its conception, not because Defi shouldn't ever be regulated, but because it is too important to screw that up, and it should not be included in a bill that contemplates how normal custodians should operate. So it's a very pragmatic request. And hopefully we can have more of these discussions. Indeed, I hope we can.

Sam, Eric, I want to thank you guys again. This is exactly what we needed in order to have this discussion, bringing to the light. And much better back and forth than on Twitter. They can't contain these types of conversations. So we appreciate being willing to come on very much. Thank you. Thank you guys. Thank you so much for engaging.

I know that I should on you a little bit here. And that's probably too negative and a little bit unwarranted. and, you know, he's without sin past the stone here. But what I really do appreciate you engaging here, I appreciate you doing so constructively and that you have done that the whole time. I hear you, I really respect, you know, your arguments, and I'm going to push for a number of them.

Okay. Thank you, Sam. I appreciate that I am not the man in the, shall we say, FTX arena here. It's always easy to criticize what other people are trying to do. I think you're a good actor, and I hope you hear these points and help express them in a productive way.

Thank you for the discussion. This sounds way too friendly for a crypto, contentious crypto conversation. This is not what I'm used to on crypto Twitter, damn it. Action items for you, Bankless Nation. Hope you enjoyed this extra long episode. We didn't mean to go that long, but I think it was important that we did. Some action items. Why don't you go and read the tweet thread that started it all off?

We'll include a link to that tweet thread from Sam and the show notes. It's pretty entertaining. I got to say. So make sure you go check that out and some of the discourse that has fallen out from it. Also, read Sam's original thoughts that is posted at FtXPolicy.com. We'll include a link and read Eric's response. As always, got to let you know, none of this has been financial advice, risk and disclaimers. It never is.

Eth is risky. So is crypto. So is defy. You could definitely lose what you put in. But we are headed west on the frontier, fighting for a better future. This journey is not for everyone, but we're glad you're with us on bankless. Thanks a lot. Thank you.