Bankless - Why ConsenSys is Suing the SEC | Joseph Lubin & Matt Corva

Episode Date: May 1, 2024

“The U.S. is trying to disconnect from Ethereum," that’s what Joe Lubin the CEO of Consensys said in today’s conversation. He was talking about those in power trying to unplug Ethereum from the citizens. The SEC is going after Kraken, Coinbase, Uniswap and Metamask. They’re trying to turn every non-custodial wallet into a broker-dealer. We brought on Joe Lubin, a crypto OG and CEO of Consensys the company behind a number of massive crypto projects including the popular Metamask wallet, and Matt Corva, the General Counsel at Consensys, leading the charge against the SEC  Joe and Matt are producing evidence that the SEC is coming after Ethereum itself. Sending discovery requests to Ethereum core developers, threatening their employers - pushing a coordinated effort to claim Ether is a security so they can control it. So Consensys is taking them to court to settle the issue. If they’re successful it’ll be the first time we get a clear court ruling that Ether is a commodity and not a security. ------ 📣 TRANSPORTER - SECURED BY CHAINLINK CCIP | TRY IT OUT transporter.io ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2     ⁠   🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle   🌐 CARTESI | APPLY FOR A GRANT https://bankless.cc/CartesiGovernance  🔗CELO | CEL2 COMING SOON https://bankless.cc/Celo   🏠 CASA | SECURE YOUR GENERATIONAL WEALTH https://bankless.cc/Casa   🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/toku   🏙️ CONSENSUS | SAVE 20% WITH CODE BANKLESS https://bankless.cc/4aykesD   ------ TIMESTAMPS 0:00 Intro 6:35 SEC vs. Ethereum  9:45 The Uniqueness of This Case 11:15 88,000 Pages to the SEC 12:11 SEC Going After Devs?  14:47 The Wells Notice 16:27 ETH ETF 17:58 Outcome of Consensys Winning   21:29 U.S. Law Process & Timeline 25:55 Ether Isn’t a Security 34:50 Gary’s Confidence Conspiracy   41:17 MetaMask Isn’t a Broker Dealer 47:10 What is Prometheum?  51:10 How Can the SEC Win? What Happens to Crypto?  55:49 What the Crypto Community Can Do 59:50 What Happens Next? 1:03:15 Closing & Disclaimers ------ RESOURCES Consensys Complaint  https://consensys.io/crypto-regulations/defend-ethereum  https://assets.ctfassets.net/gjyjx7gst9lo/Bu1bK7DF3tSig9Atde0lM/2fcaadea2b111a8c3f3ebce4a6a2386c/Consensys_sues_the_SEC_in_defense_of_the_Ethereum_ecosystem.pdf   Joe Lubin https://twitter.com/ethereumjoseph   Matt Corva https://twitter.com/MattCorva   ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures 

This regulatory scrutiny is great because it gives us an opportunity to share how powerful and wonderful the technology is and can be. And it gives us a platform effectively to speak with politicians and regulators, help them understand that it's not just this action. We need many, many actions to reform the laws in the United States and on the planet so that the world can embrace this technology. And so if we want it, we're all going to have to fight for it. The U.S. is trying to disconnect from Ethereum. That's what Joe Lubin, the CEO of Consensus said in our conversation today. And he was talking about those in power, trying to unplug Ethereum from the citizens, from we the people. And I got to say, the evidence for that increasingly seems to back up that statement.

The SEC is going after Cracken, Coinbase, Uniswap, Metamask, we've done episodes on many of these. They're essentially trying to turn every non-custodial wallet into a broker-dealer. You already know some of that story, but here's what's new. Joe and Matt are producing evidence that the SEC is coming after Ethereum itself. The SEC is sending discovery requests to Ethereum core developers, threatening their employers. They're pushing a coordinated effort to claim Ether is a security so that they can control it. But this time we're going on the offensive. Consensus is taking them to court to settle this issue once and for all. And if they're successful, it'll be the first time in a U.S. court we get a clear ruling that Ether, is not a security, it's a commodity. Before we get into the conversation with Joe and Matt, a message from our friends and sponsors over at Transporter. Transporter is a bridging app powered by ChainLink's CCIP in the background with some of the most intuitive UX in crypto.

So if you want to try out the new bridging app Transporter, try it out at transporter.io. You can bridge eth, link, USC, and other assets. There's a link in the show notes to getting started with Transporter today. Both Matt and Joe are interesting characters that we had on the episode today. for bankless listeners that aren't as familiar with Joe Lubin, he is the founder and CEO of Consensus. He has been building critical software that Ethereum has really needed in order to actually be a usable system. Many of the products that have been built out of consensus have made Ethereum usable,

Metamass being the big one, infura, but many other projects as well, like Gitcoin was incubated out of consensus. And Joe, I think for people who aren't familiar with him, I appreciate Joe because he thinks in like cosmic scales. He thinks he's a very big thinker. Yeah. He's like he understands the way of the universe, the way of the world, very like Ray Dalio-esque in the way that like things, uh, move forward across time. And then we also have Matt, the legal counsel of consensus who is a lawyer, right? Very grounded, very pragmatic. But each of these, uh, two guests take turns putting on the conspiracy hat a little bit, which I thoroughly enjoyed. So these are the two guests on the show today. And they each bring their perspectives to the show, which I thought, we've done these shows before, like SEC suing

company, company suing the SEC, but it's different when it's Joe, and it's different when it's consensus. Yeah. And what I appreciate about them, both of them, is they came here on this episode, and they're here to fight. They're here to push back. They're here for the resistance. So guys, we're going to get right to that conversation. But before we do, we want to thank the sponsors that made this episode possible, including our number one recommended crypto exchange, a place to join the resistance. That is Cracken. Go create an account. If you want a crypto trading experience backed by world-class security and award-winning support teams, then head over to Cracken, one of the longest standing and most secure crypto platforms in the world. Cracken is on a journey to build

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started securing your generational wealth. Bankless Nation, we have Joe Lubin. He is a crypto-O-G. He's the CEO of Consensus. He's been on the podcast a number of times. Consensus is the company behind a massive number of crypto projects, including many we know and love, such as the popular metamask wallet. Joe, welcome to bankless. Thanks, Ryan. Thanks, David. And Matt Corva is here for the first time. He's the general counsel at consensus. He is leading the charge in this case against the SEC. Matt, welcome to bankless.

Thanks, David, Brian. All right, guys, give us a rundown. What is going on at this point in time? The high level, it sounds like the SEC is maybe coming after metamass, coming after Ethereum in general, and you guys are taking them to court instead. I know, that's my high-level TLDR. Can you tell us what's really going on? First, you, Joe. So at a high level, we feel that the Ethereum ecosystem is under threat, that the United

States effectively is trying to disconnect America from Ethereum. We've been tracking this issue for quite a while, and we believe that the stakes are now clear and much higher and more existential than we previously believed. And it seems that the SEC is intent on using surgical enforcement actions, granular enforcement actions, to try to try to. to cast ether, recast ether as a security, even though it's been very clear for quite a while based on statements made by SECC officials and CFTC officials in the way our whole ecosystem in the world has been operating, that ether's been classified as commodity for a long time. And worse than that, we're seeing, and Matt can flesh this out a little bit, we're seeing scrutiny of the technology. We're seeing scrutiny of actions that software developers are taken,

taking in building out the protocol. And that's either a merit-based evaluation that the SEC is engaged in. And I think Chair Gensler was on video a short while ago saying something like The technology is too volatile, too volatile or unstable or something like that. And essentially by classifying Metamask as a broker-dealer, which they've indicated that they're moving towards, it makes the entire industry without even making it clear that Ether is security, it makes the whole platform unusable because, again, by gaslighting, by refusing to utter that if there's a security, they're effectively treating it behind the scenes as a security, and they're going after us and many others. And if Medamask is a broker dealer in the eyes

of regulators, then pretty much all software on the Ethereum platform, which engages with the ether token swapping, doing other things with it, might have to go in and register with the SEC. And that's obviously going to chill all software development in the U.S. and usage. Matt, this isn't the first case that we've seen either with the SEC versus crypto or crypto versus the SEC. But I think there's also just some new elements here. What about consensus's case versus the SEC really stands out? What's the unique properties about this particular case? Yeah, so our case is really about three things.

So the headline thing is MetaMask, right? That's sort of what Joe had talked about as well. It's the subject of our Wells notice, MetaMass wallet, the swapping feature and the staking feature. The real differentiator, we think in our case, is to some other actions, which have been about challenging agency rules or about specific company operations,

is Ethereum itself. Ethereum itself is under attack. as Joe said, the narrative we sort of like to talk about internally is we think they're seeking to unplug Ethereum and we think that's just wrong. They have sort of deputize themselves, sort of the police of open source technology in a way that we think is outside of their agency authority. And so we've gone in front of a court in the Fifth Circuit of Texas to say, look, Judge, they are wrong here. Ethereum's a commodity. Everybody knows it's a commodity. The SEC has said it's a commodity.

The CFTC has said it's a commodity. The facts show it's a commodity. They are outside the scope of their authority. On Ethereum, our complaint details that they have sought testimony from our developers and our professionals and document production over 88,000 pages that we've produced to them over the past few years. Wait, wait, wait. Can we catch that? So you have produced 88,000 pages to the SEC.

What is that? Is that sort of like discovery? Have they asked for? Yeah, exactly. It's document production. And I think perhaps most alarmingly, like a lot of that document production is contributions to GitHub, right? Like, show me your work on GitHub and contributions to Ethereum or protocols or clients or things like that. And it's not just us.

And that's sort of what led us to take action in a lot of ways. We think, believe this action against us is imminent. But we've heard this throughout the ecosystem. It's been reported on that they've sent similar letters to the Ethereum. foundation, and individual open source developers. And for me, that was a bridge too far in what we'd be willing to passively tolerate while they went through their process. That's why I thought we had to stand up as a leader in the space, protected developers who contribute to open source code. So Matt, so Matt, I really want people to hear that because this was actually, I skim the

complaint. It's 36 pages. We'll include a link in the show notes. This is the complaint for injunctive relief. I might be getting the legal term. wrong Matt, but like it's your case against the SEC basically and what was most startling to me as I skimmed through this is of those 88,000 pages the SEC is asking for a list of contributors from consensus from other organizations that have contributed to EIP that is Ethereum Improvement proposals that went into the ETH2-0 merch right you can see them trying to make a case that this isn't decentralized open source software with a permissionless

and group of contributors, but it's somehow, like, I don't know, some cabal, some centralized group that's actually running the show. And the level of detail that they're going to here, it does seem like it's, like they're going after directly open source developers in a way. And that to me was incredibly startling and shows the breadth of this. It's far beyond just the MetaMask wallet. It's actually looking at Ethereum from an open source developer perspective and who's contributing and what codes go into EIPs. That was incredibly alarming to me. It's almost like the SEC believes they have a mandate to regulate technology.

It's almost like they have a mandate to assess technology on its merits. This action is related to what they've told us they're going to sue us for. But it goes further. It focuses on getting clarity. from the courts regarding how the U.S. should classify ether. That's something that we would not get if we sat on our heels and let the SEC sue us. Chair Gensler has been really careful not to contradict what has been said before, because that would be kind of ridiculous.

But instead, to sort of gaslight our industry and actually, as though a reclassification has been done without actually doing that. There is a theory that that we can get into that this is related to the shift to proof of stake, but it's a foolish theory. Zooming out and kind of like identifying the pattern that I'm seeing here, first part of the details of this case, we've mentioned in passing, but just to make it explicit, is that the SEC sent consensus a Wells notice saying, hey, we intend to sue. And consensus is just replying to that with like, well, we're going to sue you guys first because we think we have a stronger case. That's kind of like how I'm reading this. And Matt, do you want to clarify

something? Yeah, I wouldn't say that's actually accurate. So this is an action we've thought about taking for a long time. And so we've been thinking about this for a while. They just so happen to send the Wells notice in the process. The Wells notice was was informative of the fact that we don't think we're dealing with a reasonable party who has allegiance to the law. You guys all saw the CoinBious Wallet decision regarding their swapping feature. So to get a Wells notice alleging that Metamass swaps, which was the leader in the space and was doing that thing first, so the Quinn-based wallet facts are very similar, is violating the same laws. A judge just said did not apply to the wallet. That was perhaps another

triggering factor in our decision to file but you know we've we've thought their action was imminent for a while against us prior to the wells notice so this is something we've been preparing for and has been well thought out you know what one thing we didn't want to do is harm the prospects of the approval of the ether spot etif and so while we we could have started this action a while ago we wanted to to sit back and read the tea leaves and make sure that uh that if the s SEC was going to open that floodgate because it would probably change everything that that we did not get in the way of that. So are you saying by filing this complaint, you're thinking that the ETF approval, like the

SEC is just not going to approve a TherMETF and that kind of like factored into it? We thought it was over based on various communications that we have with people in the industry that they weren't going to approve in 2024. before. Yeah, the inverse is probably true, Ryan. So like we thought that we wouldn't need to bring the Ethereum action if the SEC was going to approve the Ethereum ETF because that's sort of your best evidence to say, look, Ethereum's obviously not a security.

This is just another instance of the SEC saying it's not in approving the ETFs, which be a commodity based ETF product. And so that was really what we were thinking about in relation to the ETF. You're kind of just waiting for them to do the right thing and hoping that they would. And they didn't. That is a very good description. Yeah. And if they did the right thing, as I said, it would open the floodgates, similar to how the Bitcoin

Spot ETF affected our industry quite positively. We would see the rush of lots of capital into an attention on our space. And that would be a game changer, I think, for the Ethereum ecosystem. It would be something that would be likely to. grow the ecosystem bigger and faster than it's grown before. And effectively, there'd be no gaslighting at that point. Right. And it's been pretty clear from the actions that we're observing of the SEC that they just don't want that to happen.

And so there's like two elements to this case that I'm seeing. There's like the narrow things that the SEC is accusing consensus of. Like your guys, like MetaMask is a broker dealer, is something that they are accusing or believing that that is the case. And of course, Mena mask disagrees. Most people disagree. There's evidence to say that that disagrees.

But that's like the narrow case between consensus versus the SEC. But I think you guys are also kind of just like zooming out and seeing the pattern of the SEC as a whole, including the information that they are not disclosing, the cards that they are keeping close to their chest, which is the pattern, which is that, like Joe, I think you said it very well, the SEC is trying to unplug the United States from. Ethereum. That is not something that they have said that they are doing. It's not something that they are articulating that they're doing. But with all of the evidence of the other court cases and the behavior of the SEC, I think this is something that you guys have believed

that you guys have enough evidence for to present in a court case. And so this is actually kind of like the bigger battle. It seems to be like consensus believes, and Matt, check me if I'm wrong, that there's enough evidence out there to show that the SEC has some unspoken mandate to unplug the United States from Ethereum, and that we can actually push this as an issue into court and get a judge to actually agree with your guys' position. And if that is the case that you guys do prove this, what's the outcome of that, Matt?

Like, how does that improve things? Yeah, so our case doesn't really rely on the overall narrative because we can just look at the isolated facts regarding their involvement in Ethereum. We can look at their multi-year investigation following the Hidman speech about Ether, following the CFTC position about Ether, following the fact that it's been around for so long, why don't you just say, you know, this is sort of the point some congressmen have said in the past few days after learning about this. If you've changed your position on Ether, why don't you just communicate that to the market?

Why are you doing this in secret? This is a $400 billion asset class. You know, this is no way to conduct business in the United States. But our case doesn't rely on sort of the overall narrative. So we'll take the position, and we believe the court will agree with us, that it's appropriate for the court to declare that ether is a commodity, and therefore all SEC investigations into the asset ether. And as a result, things like their investigation into who contributes to the open source code would be outside agency authority because they don't have authority to regulate assets that are not securities. And so we think that will be very impactful. And similar to the Judge Fela opinion regarding Coinbase wallet, explaining that broker-dealer's laws do not apply to software interfaces that do the types of things that Meta-does and most popular Defi apps do, getting another judge on the record looking at that issue and saying, yes, I agree with what Judge Fala said. This is correct.

We'll be another line of defense for the industry to the extent the SEC continues to try and file these cases that are outside the scope of law. So we think it will obviously be helpful for us, but will help set precedent for a lot of other companies in our industry. But Matt, the outcome of winning the case is you would get a judge to say, get a court to say ether is not a security. It's instead a commodity. And non-custodial wallets like Mattamask aren't broker dealers. That's the outcome you're trying to argue for. Yeah, that's correct. Okay.

And if that is achieved in a court case, it's like, how does U.S. law work? Is it done then? Like, are we kind of finished or does this get escalated? Can the SEC somehow appeal? And how long does this process typically take? Parties can always appeal and we can always hope that it will be finished in the sense of, you know, just like we said when we saw the Fela opinion about Coinbase Wallet feature, we said, hey, they've been investigating us about the very.

same thing that they just lost on, it's done. Obviously, they didn't think it was done. So, you know, judicial interpretation and precedent relative to agency action, I think if you are an agency and you have adherence to due process and are you acting in good faith, you're going to look at those decisions and say, hang on, let us take a step back from our regulation by enforcement approach. Maybe this isn't working. We're not getting the results we want. We need to either do rulemaking, notice and comment rulemaking, good agency practice, or what probably needs to happen, and it's discussed in our complaint, we need to go to Congress and say, Congress, we don't have the authority to sort this out. The courts have said we don't have the

authority. We think there needs to be some regulation. And let me be very clear, consensus is not anti-regulation. We think there's lots of room for good regulation to help improve the crypto space. But that's for Congress to sort out at this point, not for one agency to declare itself police of the open source internet and regulate the entire stack. So how does the process unfold? hopefully win in Texas, that will be a win in the sort of win column for the crypto industry. To get to the higher courts in the U.S., you need something most often what's called a split circuit on issues. So the court in Texas resides in what's called the Fifth Circuit.

The courts in New York reside in something that's called the Second Circuit. And so to the extent the Second Circuit and Fifth Circuit disagree on issues of law, that is how you get to higher courts in the United States most quickly, most often. And so you can deal with the court of appeals and potentially ultimately get an issue up to the Supreme Court if it's big enough. So, for example, you know, Howie's application to crypto is how he the right, right test is how he even the right law should it exist. People have sort of been theorizing how does that happen with crypto? How does get to the Supreme Court? It's a many-year process and we're hopeful that people will see reason before dragging it out all the way that far.

What that means? So you went like, like a many-year process to get all. all the way to the Supreme Court if the SEC sort of digs its heels in. But like, what's a happier scenario? You win this case and maybe the SEC just backs off. It could that happen? That could happen. It could certainly change their approach.

Like, look, I think everybody has been pretty sober about the fact that this has been the approach from this SEC and this sort of chair's agenda regarding the crypto industry. As Joe said, he said lots of negative things about the crypto industry after being a professor teaching about it for a while, I guess perhaps somewhat ironically. That's in the complaint, by the way. There are clips. If you haven't seen this bankless sister, there are clips from Gary Gensler, MIT professor, Gary Gensler acknowledging, like, you can go watch the video,

acknowledging that ether is not a security, Ethereum is not a security, as well as like light coin, I think you list Bitcoin cash. He said, go watch the clips. This is from recent history as well. Matt, was it like 2018 or something like this? It was sometime around that era, when he was a professor at MIT. And these things just sort of point out, like, why we had to take this action.

For a while, we felt like we were living in a bit of, you know, like a Looney Tunes type scenario. Like, wait, you mean you're going to change your, you're going to flip flop? You're going to flip flop this way. What's going on? Court says this. Now you're going to say the opposite thing. We've seen alarming things like the debt box case where some SEC professionals were

sanctioned. You know, it was all too much for us. And that was sort of that paired with the imminent of their attack on us, which led us here to try and get the clarity. I used the phrase to borrow a phrase from Chair Gensler, cop on the beat. You know, Chair Gensler, that's one of his phrases regarding crypto, that it needs a cop on the beat and he's there to be the cop on the beat. We view ourselves as the cop on the beat now in this scenario, the cop on the beat, to regulate agency overreach and to help clean this up and try and bring a resolution. All right. So, Matt, let's do a scenario here.

Like, imagine you're making the case in a courtroom, and you've got, like, two arguments to make. And again, I'm sure your case would be much longer. So we're looking for, like, a faster bullet point abbreviated version. But you're making the case that ether is not a security, okay? And then you're also trying to make the case that non-custodial wallets like Metamask aren't broked dealers. Let's start with the first.

Ether is not a security. What are the bullet points of that case? for a courtroom to hear. The Ethereum protocol on the ether asset, which is needed to use the protocol, is just an open-source piece of technology. It is decentralized, sufficiently decentralized, as Bill Hidman said. No party exerts control over the protocol. Development is done in public to the extent you think that development could impact asset prices.

That's no different than other large commodity industries, gold, diamonds, etc. And so we think there are great similarities between oil is probably the best example. as a consumptive, you know, commodity that people invest in, but also use in daily life. Ethereum is just another version of that and a very important sort of iteration of open source internet protocols. And so that's the core legal argument, but I think it's even easier than that. It's not a security because the CFTC has already done the homework to say it's a commodity. The SEC has already done the homework to say it's a commodity. one chair's sort of post hoc review of that process and his attempt to rewrite history will fail

because for the factual reasons it's not a security but also because lots of people have done their homework and reached the same conclusion. Matt, here's what I don't understand. We have ETF futures for ether, the asset, that have been CFTC blessed and the CFTC governs over commodities, right? Like, is that evidence that just says basically this is our? recognized, like Ether, Ethereum is already recognized as a commodity? That's certainly evidence, but there's even better evidence than that, Ryan, that's talked about

in our complaint. In October of 2023, so just last fall, the SEC accelerated the effectiveness of a future, Ethereum futures ETF product. And so that was a big thing. That was the sort of, again, it didn't just go effective. The SEC accelerated the effectiveness. So that's them taking an affirmative step to, again, list a futures base. Ethereum futures based ETF product. They can't do that if they don't view it as not as a security,

if they view it as a commodity. And they have a standard and hopefully I'll get it right in this sort of brief. But to do that accelerated approval, they have to take in the public interest and investor protection. That's the legal standard they're held to. And so in October in doing that, they're saying, hey, we're going to approve this and we're taking in public interest and investor protection in doing this. And now a few months later, they're going to say the asset that they just said was fit for approval as a commodity-based futures ETF product is actually an unregistered security, please make it make sense. And that's why we're taking this action, right? You have the history of CFTC and even the SEC all along the way telling you it's a commodity.

And so, you know, it is very confusing. It feels like a reasonable judge would just look at this and just be like, this is so odd. Well, like, what are the, like, why are they about facing here? Why are they hitting the handbrakes here? Joe, do you have anything to add to that first case? Let me get Matt to comment on the non-custodial wallet, like part of the argument, but on the just ether is not a security case. So the broader context is that our ecosystem is likely perceived as a threat by factions within the U.S. and other parts of the world

to how they have been doing business for millennia. Certainly big banks in the U.S. don't love the idea of disintermediation and decentralization. We've had millennia of authorities governing the world, and the U.S. is top dog right now through intermediaries. And the decentralized protocol industry comes along and says disintermediate all the things. We can build better systems and reduce the need for trust. at third parties and there is a concerted effort. It appears in the United States to make sure that they can conduct business as usual. There are certainly factions that believe that decentralization is consistent with free market capitalism and Western liberal democratic philosophies.

And perhaps that's why we're in this sort of quantum state where certain entities are seeing things clearly. The court's judicial system, the CFTC has been seeing things clearly, the previous SECC administration saw things reasonably clearly. But the current ruling party seems to want. want to preserve their ability to run the world through different kinds of intermediaries, financial intermediaries in particular. And it does appear that the major banks in our industry, who've worked really hard to get their hands on levers of control, would prefer to continue winning in that context rather than playing a little more fairly in a more decentralized context.

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Sellow is the mobile-first EVM-compatible carbon-negative blockchain built for the real world. Driving real-world use cases like mobile payments in mobile defy, and with Opera Minipay as one of the fastest growing web-free wallets, cello is seeing a meteoric rise with over 300 million transactions and 1.5 million monthly active addresses. And now, SELO is looking to come home to Ethereum as a layer two. Optimism, Polygon, Matter Labs, and Arbitrum have all thrown their hats for the cello layer two to build upon their stacks. Why the competition? The cello layer two will bring huge advantages like a decentralized sequencer, off-chain data availability, secured by Ethereum validators, and one block finality. What does that all mean for you? With

cello layer two, gas fees will stay low and you can even pay for gas natively using ERC20 tokens. crypto to phone numbers across wallace using social connect but cello is a community governed protocol this means that cello needs you to weigh in and make your voice heard join the conversation in the cello forums follow cello on twitter and visit cello dot org to shape the future welcome to consensus twenty twenty four consensus is one of the biggest hubs for all things crypto blockchain and web three this may consensus is celebrating ten years of decentralizing the future going to consensus means being in good company with over 15,000 attendees from over a hundred countries you have the operative opportunity to learn directly from the architects and advocates representing Bitcoin, Ethereum Solana, along with the teams from popular layer twos like Mantle, Arbitrum, optimism, base, and others. But consensus is more than just discussions and presentations. Badgeholders get access to witness 10 professional karate combat fights and one unprofessional one between myself and Nick Carter. For the visionaries, pitch fest is your spotlight, presenting a stage for the

most promising early stage web three companies. And for the devs, the hackathon offers a unique chance to build your next project or take your existing project to the next level. Immerse yourself in hundreds of side events and hacker houses scattered around Austin. Register for consensus 2024 today and save 20% with code bankless. Joe, one of the big mysteries I've always had about Gary Gensler and the SEC is where does he get his confidence from? It's so true. And go toe to toe is some of the biggest. I say that all the time.

Who's, why does he feel like he has covered to do this? who's giving him the authority or the mandate. And like between me and Ryan, I'm the one who's very willing to put on the tinfoil hat and go out there. And so I'll do that here is like the big banks, the incumbents, rather than just like looking at the narrow details, you can kind of zoom out and see just incentive structures in the old world that doesn't want things to change.

This is a pattern throughout him in history is that the people that are in power don't like change because that's that's disruptive to their status quo. And like there could be some sort of pipeline between the incentives of those power structures into the current political party that put Gary Gensler in power in the first place. And that is like the perceived blank check that Gary Gensler has to do some of the things, the harassment that he's done of this new power disrupting industry. And so like is that kind of where you're saying like the way he gets, He has this like blank check from incumbent power structures.

Yeah, with with conspiracy caps on. One, one has to wonder, first of all, he's a very smart individual. His brother Robert, we understand is very, very smart and possibly libertarian. Possibly own some crypto. I mean, who knows? Possibly and possibly own some crypto. And so Thanksgiving at. I thought that family's dinner table should be just fascinating.

Little brother, why are you funding my bags? I would love to be invited to that. So very smart politically been engaged at the top tiers of the financial industry at Goldman at the CFTC for a very long time. Was he smart enough to position himself to be a an MIT professor, an expert of blockchain by himself, or was that coordinated in some way to give him legitimacy to take the role? He's also done some research on AI, and I think he's written some things. So either way, we find ourselves in this position. And as you're aware, Elizabeth Warren has been placing people in positions of power in the current administration.

John Deaton, who is now going up against Elizabeth Warren, he referenced on, I think it was Fox Business a few days ago, that there's an entity called the Bank Policy Institute that I don't really know much about, But apparently they're a banking industry think tank. So all he did was reference that. And so I started paying a little attention to them on the internet. And there is a coordinated effort involving Elizabeth Warren and those banks that she used to attack quite strongly to make sure, again, the banks can continue to operate business as usual. And the U.S. government can continue to operate business as usual. I, you know, I'm not usually like on the tinfoil hat side at bankless, you know, David has that territory covered for us.

But I got to say, just like observing sort of what's been happening with crypto, it's hard to not see this as part of a coordinated effort against crypto. It's almost as if Gary comes to chairman of the SEC and he's sort of tapped by somebody, some group, basically says, hey, what can you do to just like slow this down? Right? I'll work with these other agencies and we'll do other things to slow it down. But the SEC, like, how can you gum up the works, right? You throw it in the court system, like, what can you do here just to buy us more time to figure out how we fully stop crypto? I mean, if that conversation happened either explicitly or implicitly, we would see the actions essentially that Gary Gensler is taking now. And it would be a rational explanation because apart from something like that, it is hard to find a rational explanation for not only the actions

he's taking, but the degree of confidence that he is like taking these actions with, as you and David were just saying, Joe. Yeah. So slowing it down is one thing, and maybe it's not even a terrible thing. So slow it down for the benefit of big financial institutions so that they can get involved or maybe slow it down because the discontinuity that we could face if Estherium, the platform, and ether the token just rocket from here as a result of the floodgate of the Etherspot ETF being opened.

That could be pretty jarring to a society. And so maybe these kind wise souls who are running the government are just. thinking about smoothing the transition to a rigorously decentralized future. I don't think that's true. I think more likely they're trying to maintain the structure of control in the U.S. and across the planet and try to figure out how to co-opt the technology and dumb down the technology and make it a sort of either an American style decentralization where you got a register and there's significant regulation and back doors and things like that. And so we, it's basically a clash of civilizations

at this point between those who want to maintain top-down command and control and those who believe in rigorous decentralization. 2020 and 2024 has certainly felt like that. I want to get back to Matt in the court case. He was making. So we got to take that off because these are things that may be going on and like are likely are likely going on. But we can't prove them necessarily. We don't have the evidence of kind of the backroom conversations necessarily. So Matt's role is to bring evidence to the courts to prove that ether is not a security. And also the second aspect that I want to get to that, non-custodial wallets aren't a broker-dealer. So, Matt, what would you say to a judge as evidence for why, or what's your case for why Meta-Mask is not a broker-dealer? So I think it's very plain and clear.

Non-custodial wallets themselves can never be broker-dealers. If you think about what they just do, their self-hosted software that lets you manage your private keys and author transactions can't be a broker-dealer under any sort of conception of the law or history of broker-refer. dealer laws. More specifically, even better for the industry, services that have developed around utilities like swaps or metamask staking, which allows you to connect to the LIDO and Rocket Pool protocols. So if you want to participate in those protocols as an individual user of Metamask,

you can use the metamask staking feature and connect with those protocols. The SEC says that near connection to Lido and Rocket Pool, two services they allege are offering unregistered staking products, is broker-dealer activity. And so why is this all wrong? For the reasons that you all touched on it in the conspiracy segment, which is that the world has evolved around intermediaries, and the government and our history of laws regulate intermediaries, and for good reason, right?

Intermediaries are historically where things have gone wrong. If you think about the number of transactions that happened through Metamask and then imagine that happening through a human, what would the propensity for fraud be, be very high, right? Because it's not autonomous, it's not software enforced, it's not transparent, it's not auditable, it's not verifiable, you would think that you'd get screwed in those transactions, probably a high number of times. But software is different. It's disintermediated, and all it's allowing is a technology service for a user to transmit instructions to their own

instructions to where they want. I want my instructions to go to Uniswap, and I want to tell Uniswap, I want, you know, five USD for, you know, a corresponding amount of tokens I'm willing to sell. And verify that logic is actually happening and being enforced exactly how the user said on the blockchain. And so why can these things not be broker-dealer? Because the broker-dealer laws regulate human intermediaries that perform human discretionary acts. They negotiate on behalf of customers. They seek prices on behalf of customers.

They custody customer assets. And of course, our services and similar services offered around the industry don't do that, right? They're software-based. They're non-custodial. They rely on code. They are not exerting the authority that the broker-dealer rules for good reason seeks to regulate because it is not needed in this context. And I think that's what Judge Fela and the coin-based wallet really sorted out.

You know, she said like, hey, look, this thing doesn't, a very preliminary stage in the case. This is software. This isn't regulated broker-dealer activity, aka, he. human activity in some way. They're not doing broker-dealer things. They're doing technology things. And that's not what these laws are meant to regulate. Matt, it's just software. And also what I can't get my head wrapped around. This is just like the layman's conclusion. So I have, let's say, a hardware wallet ledger wallet, and I use that with metamask. I have custody of my property the entire time. I'm not giving that custody to any third-party intermediary. There's no kind of like

broker in that entire transaction any more than like a vault I might have somewhere in my house is like a broker dealer that's just a place where I stole I store my assets and so like that part just doesn't pass the the common sense person on the street test in any way and back to Joe's comment I want to get people give people the sense of what it would mean if all unhosted wallets if all non-custodial wallets were labeled as as broker dealers because it would be pretty severe Joe earlier in the conversation said, if Metamask is a broker-dealer, then all software on Ethereum has to come into the SEC and register. What's the alternative?

So let's say the SEC wins in their world. All non-custodial wallets are broker-dealers. Like, what would that actually mean for all of the stuff that we have on top of Ethereum today? I think from a legal perspective, I'll just answer and say, like, it doesn't have to mean anything bad per se, but it does because we haven't done the rulemaking and we haven't done the homework. If the SEC wanted to create a framework, such as those previously sort of developed by Commissioner Perce, you know, a former guest of the podcast and I think crypto industry favorite,

people have had ideas of how do you regulate these things in ways that don't block the technology? The problem with the SEC's approach is to say, hey, I want to classify this thing as a security or a broker dealer and then not promulgate any rules for that technology. technology to work. Because again, those rules, historical rules, require intermediaries. They require transfer agents and all these humans and they require things that the SEC has not provided guidance or rulemaking on, including that the guidance or rulemaking to even register. You couldn't register Ethereum today even if you wanted to. You couldn't register a token. It's very confusing, despite what the administration has said, you can't just come in. It's not a form on the website.

You can't just come in and talk to us and register. Many legal hours have been poured over trying to figure that out. So it's not catastrophic to the extent we develop a framework, but there's been a refusal to develop that framework. And I think that's a huge problem. Yeah. So if the SEC wins, apparently we could purchase ether or at least custody, maybe our ether at an organization called Prometheum. So speaking of this is a simulation. Interesting name Prometheum, Ryan, Ryan, Swith. Joe, can we just... One of my favorite protocols.

Can we just tee that up for a second? Because I don't know if you have any takes on this on what Prometheum is. So it came on our radar. I was actually talking to David about like, should we do a podcast on this weird Prometheum thing to try to explore and find out what it is? But it felt like a digestive exercise in journalism. But Prometheum, and the guy who runs it, it seems like it's this exchange that has been given SEC regulatory approval to list ether, but listed as a security. And the CEO is making the rounds basically saying, I have the only registered crypto exchange, like, only in America. And on my exchange, I'm calling

Ethereum a security, and therefore it's a security. And look, everybody, I can get a registered exchange in the U.S. where everyone else in crypto says it's impossible. Aren't I a good boy? All of these things. Meanwhile, he has no liquidity. Like, no one's using it. No one's there. It's a really bizarre story. I don't know if you have any takes on, like, what this thing actually is. Bankless folks can go, you know, like, find their own

information about it. But, like, do you have a take on this? I think it might be an attempt to create an American style decentralization. A limited version of using these protocols enable tokenization.

Larry Fink likes the idea of tokenization. I hope Larry Fink and BlackRock really like the idea of radical decentralization. Matt, can you make any sense of how they could possibly have approved Prometheum? So maybe it's my turn for the tinfoil hat. Yes, yes, we get the lawyers. Yes. So Chair Gensler. Shadow super lawyer.

Chair Gensler is actually brilliant in a lot of ways. In many ways, he's very successful. smart guy, people who know him, nobody will dispute that he's extremely smart and well thought out. The Prometheum approval, which is just approval of a narrow sort of purpose broker dealer, the only one who's received such approval to deal in crypto, I think is factually correct. So many have applied, but only Prometheum has received this approval. Drop just a few days before Gary Gensler testified before Congress on the need for crypto regulation as a convenient way to say, hey, we don't need regulation. We've approved these things.

They just have to come in and register, just like my friends here at Promethean. And he gave testimony. The CEO Prometheum gave testimony in front of Congress about this. Exactly. And tracing it back to our complaint, this is something Congress has picked up in the past few days. Chair Gensler went before Congress to testify about the need for crypto asset regulation again in 2022. If you look at the timeline in our complaint as we talk about the Ethereum order, sort of this order, deputizing the staff to go after sales and trades in Ethereum as a securities transaction,

mere days before he appeared before the Congress and had that infamous exchange with McHenry, where he refused to answer whether Ether was a security. I will leave it to you to interpret whether that all of these timing things are coincidences, notably right before Paul Greywall was set to testify, Coinbase gets hit with a lawsuit, right? So, you know, there's one instance. Incidence, Coincidence, several instances,

maybe part of a trend, part of a plan. And so Prometheum could just be a pawn in this sort of, let's just try and slow things down. Let's try and convince people. Here's the bizarre thing about all of this and why, like, I'm convinced it'll never,

it'll never work like they can't win. It's because no one wants to use that product. No one wants to use Prometheum. We already have a centralized financial, structure in the U.S. And it's like, it's working great. People want to use metamass. They want to use uniswap.

They want to use the Coinbase Exchange because it's like a 5 to 10x improvement. So like, how can they win when no one's going to use their products? They can win by chilling activity. Two decades ago, the BitTorrent protocol looked very promising. the Record Industry Association of America, the Motion Picture Association of America, began sending, I guess, cease and desist letters or taking children and their mothers to court. And that really put a chill on that technology. It continued at a low level for quite a while.

But that was a decentralized protocol technology. and it effectively was rendered relatively harmless in the American context. For people don't remember this time, I remember stories of, you know, like, somebody's grandmother who would receive a notice from, like, their ISP, that their grandson was, like, downloading illegal music and, like, a scary letter comes in the mail, like, with, like, fines and all of these. Someone you know, Ryan? Yeah. we'll cut that from the episode. We've all had our limewire days. I mean, so that's kind of the chilling effect that they could have.

But back to, I guess, the broader conversation here, Joe, where you feel like this is maybe in the context, these cases are part of a coordinated effort to unplug the U.S. from Ethereum. That doesn't mean Ethereum gets unplugged. It just means the U.S. is less tapped into Ethereum. Our developers have to be shadowy super coders and go underground. Our entrepreneurs have to move offshore to different jurisdictions. But other jurisdictions will probably promote.

We'll fill in the gap. We'll fill in the vacuum. Do you have any take on, let's say, things go bad, they get worse. Maybe we lose these cases. Maybe something bad happens. What happens to Ethereum and to the crypto movement? So currently, let's say the U.S. is anti-etherium, and in relation, other nation states are a little more pro-ethereum because Ethereum decentralization levels the playing field for those nation states against the U.S. Yet the U.S. has a very long arm and can influence other nation states quite significantly, and it's a long game.

This isn't about the next few years. This is about perpetuating the system for as long as possible in certain people's minds. And so one could imagine, again, I said it's a clash of civilizations. This is about whether decentralization, disintermediated systems are allowed to persist, allowed to continue to make life better, or whether they're stamped out in favor. of the current system. We're in a world of so many threats, existential technological threats

that are relatively inexpensive to acquire for small groups. And from that perspective, you could see that it might make sense to people who like top-down command and control because they can use very rigorous versions, very controlling versions, to stamp out existential threats to humanity.

The problem with that is, even if they're well-intentioned, we end up moving into something that feels a little bit like a prison planet or a planet of effectively slaves to the system, rather than building a world in which we all have much greater economic and political agency and where we we can all benefit from permissionless innovation and access to to financial innovation. So, Joe, I know no one listening wants to live in that dystopia. No, no prison planet.

Okay. So, like, we are definitely not team prison planet on bankless. You are team bankless. We are. But here's the insidious thing is even I was scrolling the bankless discord this morning. And someone said, I'm really excited to hear about kind of the consensus versus the SEC thing. But like, I got to be honest, like you guys are having one show about regulatory issues per week. And it's hard for me to tune into like more than one.

And I feel like this is a almost like a DDoS attack against our industry. Okay. So like look at who the SEC is coming after right now. Just just look at it. What's happened in the last few months? It's Crackin. It's Coinbase. It's Uniswap.

It's Metamask. Right? Are these the bad guys that they should be pursuing? Are these the true crypto villains? It's absolutely bizarre, but because they attack on all angles, it feels like a DDoS attack. And what people are feeling is almost powerless to kind of respond. So people are frustrated because, you know, they get geo-blocked. It's like Iran, North Korea, and America can access a particular air drop token.

How bizarre is that? But they feel powerless. They don't exactly know what to do. So you could be like, I guess, You know, you could say something like call your congressman. But like everyone know, I mean, you call your congressman. What was supposed to do that weekly? Where does that message go?

That's why we get behind cases like this where it's so good to see consensus actually going on the offensive here rather than being defensive. And we can rally around that. But I think a lot of listeners want to know like, what can we do? How do we support this? How do we keep our attention? Is there something we can do in this case? Do you have any advice for just like the crypto native who's listening and feels very powerless,

concerned, but also powerless? So as one of our close colleagues, Pat Beriducci, likes to say, this is a special moment in time. When Ethereum started, I and other people realized that we were going to be causing a clash of civilizations. I'm sure Satoshi felt similarly. And we knew that we had to have heads down and build as much and as fast as we could because when the people who run the planet realize what's going on, that they would not be able to run the planet through the levers that are currently in place and that it would likely be a much better system for the 99%. They are certain to balk. And this is great what's happening right now. All this regulatory scrutiny is great because it gives us an opportunity to share how powerful and wonderful the technology is and can be.

And it gives us a platform effectively to speak with politicians and regulators, help them understand that it's not just this action. we need many, many actions to reform the laws in the United States and on the planet so that the world can embrace this technology. And so if we want it, we're all going to have to fight for it. This is the case that David makes to me when I'm feeling pessimistic about all of these things. He's always like, on the flip side, look at who they're suing. I'm like, look at who they're suing, Dave. And he's like, yeah, exactly. Look at who they're suing. It's some of our best companies. It's the Avengers of Crypto. They just do cracking, coinbase, uniswap, and metamask, right?

And now you guys are taking them to the offensive. And I guess that's the optimistic take. Maybe this goes to the Supreme Court. Well, that will cause a national discussion on what it means to own your own property, your own digital property. And I guess that's the positive way of looking at all of this. Matt, as we progress into the future with this court case, maybe you can simulate what this might look like in terms of like timeframes,

milestones, is there like a default scenario that you can kind of articulate? It's going to be a multi-year process, most likely, and frankly, it's largely up to the SEC as to where it goes from here at this point. We are happy to be the plaintiff in the case, and we've stated our case, and now it's up to them to respond. So in Texas, they've got a couple of options. It'll unfold. It'll be clear probably over the next 60 days or so, which approach they're going to take. They may try and dismiss the case. They may say, let's just argue the case here. We want to argue it about the merits and we'll get into what you usually see and you've seen in the ripple cases and the Coinbase cases in exchange of briefs.

Here's why they're wrong. Here's where we're right. Here's why they're right. And then the judge hears the arguments and it progresses. And so we think if Texas case could play out over the next, let's call it one to two years, depending on timeline and how it goes. The SEC may also continue to file their own cases around the country. They seemingly have limited resources. Somebody joked to me the only people they go after a crypto and Elon Musk these days. So they have lots of trial lawyers sitting around, it seems like, to deploy on these things, and they can continue to bring their actions that they want. We'll see what Congress does. Does Congress get more active? We've heard a lot from Congress, hey, we're going to clean this up. We're going to sort this out for you. They haven't

done that yet. Congress is the quickest path to resolution. The courts are path to like a final, you know, clear picture, but they're slower. And so hopefully Congress front runs this and we don't have to be so inefficient. We can focus on building. People can build confidently in this country. Joke talks about it all the time. It's a matter of national economic security, you know, U.S. involvement in Ethereum, as you guys pointed out, these are all U.S. companies that are leaders in the space and they're trying to throw them out of the country and put them out of business. Doesn't make a lot of sense when you think about the big picture. And so hopefully people come around to that sooner. But if not, the court case will play out.

Yeah, so I think the best we can expect is probabilistic finality as some of these cases make their way up towards the Supreme Court and with gridlock in D.C. As Congress fumbles and tries to understand the technology and hopefully weighs in, in the meantime, these two civilizations are proceeding in parallel. Our civilization, the decentralized civilization, is growing quite dramatically in value and in number of participants. And so if we can keep things going in the U.S. and other places, then our world can grow and hopefully grow really fast. Hopefully in 2025, the SEC is forced to approve the Ether Spot ETS. That will be a game changer.

and frankly, the legacy world needs to continue to operate and service the cohorts that are most comfortable in that world as more and more people spend their work and leisure time in the decentralized protocol ecosystem. So we can just grow our way into real finality. The grand irony of this whole relationship with the SEC is that, Matt, you talked about like the SEC's seemingly infinite resources. Well, those come from our tax dollars, ironically. And also the thing that the SEC is preventing is GDP growth inside of the United States. So it's really a double whammy bullet to the foot that we're kind of causing ourselves here. Another consideration is that there's so much debt in the system that the U.S. and other nation states need to engage in. financial repression, which means they need to pay off the debt via inflated currency,

devalued dollars. And they don't want a whole bunch of us escaping to a sounder, an ultrousounder currency, that they want us all to shoulder the same pain that has been caused over decades. Yeah, yeah. Well, Joe, Matt, thank you guys for coming on and illuminating some of the paths for us and also going toe to toe to toe with the SEC on, I think some of the biggest issues that we all know are bubbling behind the scenes. Now you guys are kind of bringing them to the forefront and making them explicit.

So thank you for doing what you guys are doing. Let's do this. Let's win. We're going to win. We're definitely going to win. We wouldn't have done it if we didn't think we were. There we go. We're right on track.

Awesome. Well, thank you guys. This has been great. Thanks, guys. I've got to remind you, Bankless Nation. Of course, none of this has been financial advice. I guess Matt would probably want me to say it's not legally. advice either. Crypto is risky. You could lose what you put in, but we are headed west. This is

the frontier. Not for everybody, but we're glad you're with us on the bankless journey. Thanks a lot.