On The Brink with Castle Island - Dana Syracuse and Josh Boehm (Paul Hastings LLP) on the 2025 Digital Asset Legal Landscape (EP.588)

Episode Date: January 9, 2025

Dana Syracuse and Josh Boehm of Paul Hastings LLP join the show. In this episode we discuss: The common legal and regulatory considerations that are encountered by companies in the digital asset industry. Common pitfalls that entrepreneurs in this ecosystem should avoid. The state of the stablecoin industry and the regulatory considerations in this category. Potential changes ahead in 2025 on how digital assets are regulated in the United States. To learn more about Paul Hastings and their fintech and digital asset practices visit www.paulhastings.com  

Today on the podcast, I sat down with Dana Syracuse and Josh Bohm, both partners at Paul Hastings. In this episode, we discussed some of the legal considerations facing entrepreneurs in the digital asset ecosystem, and we talked about the outlook for 2025 with the incoming administration. I think you'll enjoy this one. So without further ado, here's my conversation with Dana and Josh. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guests and host may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only.

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac. The two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden people start to worry.

So out of this worry, we have something called the Bitcoin. Bitcoin. Well, Dana and Josh, thanks so much for hopping on and recording today. I think we were originally going to record this before the election. And it's a good thing we didn't because a lot has changed in the industry. So welcome to the podcast. Great to be here. Absolutely great to be here.

Why don't we start out with some quick backgrounds and orient people around who's actually talking? So maybe Dana, why don't we start first with you and what your origin story was in this industry? Absolutely. So Dana Syracuse, I'm a partner of Paul Hastings. I've been a crypto lawyer. We've been active in the space since about 2011, so very early. First got interested in crypto when I was in government and started hearing about it in podcasts and reading about online and this concept of borderless metacurrency for the internet. It was just really fascinating. The idea that before then, there had never been a native payment layer for the internet

was really interesting. And this was at a time when there wasn't very much activity in the space. It was barely mentioned in the media. First year of Times articles in 2011. And in my time at DFS was able to meet a lot of different crypto entities, was was able to help work on the Bit license and left there in 2015, went into industry, and really pivoted the entire practice into just working with digital asset companies. We've worked with many of the major players since then from development of licensing strategies,

obtaining complex bank level charters, helping them at new products, going through the entire lifecycle of examination, enforcement, M&A, and in some cases is helping these entities wind down. So really be fortunate enough to see every facet of the industry since the beginning. That's awesome. Well, definitely some follow-up questions on that one, but maybe before we do, Josh, would love to hear your story and how you got into the space. Absolutely.

Thanks again for having us on. My journey to crypto and fintech, I'd say begin right out of college. I joined a boutique in SQL Promontory that worked on financial regulatory consulting. So it was right in the soup of the financial crisis and got thrown right in to work on failing bank projects. So a lot of things go wrong. And I remember vividly in 2008 being there, showing up on a Monday for a bank I was working for, and they didn't open for business.

And a lot of people lost their jobs. It was a real front row seat to how things didn't work very well. And it made me really interested in understanding more about how the system worked from a legal perspective and how it didn't work. So I went back to law school. I did that. And then got back to a Wall Street firm where I was doing banking and securities work. And then got my big break.

That firm brought in the first New York Trust project for a crypto exchange in 2014. And that's where I met Dana. He was on the other side over at DFS. And I thought that was just fascinating. A couple big takeaways there. One was, it was really fun just to see how old laws of New York banking law could be applied to this new tech. And it was just really interesting stuff to do.

And the second big takeaway and a little bigger picture is this was a time right after the financial recovery, dot Frank, banks are getting bigger, tech companies are getting bigger, governments get bigger. And here you've got the seeds of this technology that if it were to grow could really be a counterweight to those four. forces of centralization and keep more economic control in the hands of people. And I thought that was really meaningful and fascinating stuff and wanted to make a career of it. So 10 years on, I've been fortunate to do that with Dana. That's awesome. Dan, I can't imagine what it must have been

like to be working on the government side of this in the early days of this industry. I think back around what I even thought Bitcoin was back in 2012, 2013, and we were talking about disrupting credit cards and this is going to be for merchant payments and things like that. So the industry itself has evolved so much. What was it like in those early days just trying to get a handle on what this technology was? There was getting a handle on the technology, and also there wasn't very much to learn by comparison to where we are today. Going through things like the 51% attack, and was that even a possibility in the double spend problem, really just rudimentary questions that today no one even really talks about. In 2014, you started

to see it. That was when Ethereum came to the fore. That was when XRP ripple that was created. And it was really companies that were entities that were concerned with, is regulation going to stifle innovation? And that whole narrative is moved on from what we're concerned about stifling innovation to we need regulatory clarity in X, Y, and Z component. Every market cycle winds up being very different. And this one is different than all the rest. with institutional buying at a level that's never been seen before. Improving regulatory clarity within the U.S., New York State, leading a lot of these areas. UK, EU, the mega regime, just more market infrastructure that's in place,

that's allowing for sustained developer activity and intensifying competitive landscape. So that's how it's different. But if you look at where things were prior to 2015, but then also with each of, of the peak and valley of the various market cycles. There are so many similarities that we continued issues that I think you have to keep an eye on. So yes, right now we have a potentially friendly regulatory regime. Certainly, this was a big topic of the election here in the U.S. Friendlier partners in Tradfai. But all those parties, the regulators, lawmakers, tradfi, the industry itself, we all react to headlines and they are very aware of reputation,

risk appetite. So that's going to keep an eye out for things that could undermine that level of competence. Everyone's excited about potential new legislation, but these are things that can't be an unfunded mandate and need to keep an eye out for how do those new laws, how do those new regulations wind up being implemented. We've seen different promises of transformative legislation or regulatory regimes through the years that either just haven't really come to pass. headlines. I think those continue to be the same depending on what channel you turn into it or what you read. Criminality, price, politics, technology, these are all consistent issues. One thing that I think the cycle will be the same as those early cycles, you're going to have companies that are too early or can't find

product market fit or meet regulatory headlines. So how can you be smart about just understand that that's going to happen? There've been lots of successes and those survivors can understand the cyclical nature of all this and just can't turn a blind eye towards like it's going to repeat itself. It's never going to go back to those very early days where when I left government and started working with Josh and went into working with your participants, there was a question, is this thing going to go away. I don't think we're ever going to go back there. People said Bitcoin was going to either go to zero or a million. I think it's more likely to go in that positive direction. So things are going well. But I think we can't turn a blind eye toward the circle of nature of all of it.

Let's just hope that this cycle doesn't end with a cataclysmic centralized exchange below up like several of the past cycles. We should be so fortunate. But I guess that feeds into the regulatory. And I know that you guys are working with some of the highest profile companies in the industry and obviously you can't name them by name. But I would love to just get a sense from you guys around a snapshot of what the law practice looks like today at Paul Hastings in this industry.

So right now I'd say it's two big buckets. We do a lot of work with regulated entities. And these are the entities Dana was talking about your trust. companies, national banks, others that have a bank supervisor. They have a prudentials regulator that's in there examining them and looking after them. And those entities are generally crypto-focused and they are engaged with custody activities, exchange activities. And they also want to roll out new products and services. And we help them with that. So one of the big ones that has been coming up recently is, can we launch a new stable coin out of our entity? So Dana and I help

companies do that. And it's a pretty involved process. First, you've got to confirm, is it legally permissible to launch a stable coin out of this particular charter that you have. Sometimes you've got to persuade the regulator of that first. Then once you've checked that box, then you look into what it takes to persuade the regulator. You can do that in a safe and sound way. By that, I mean, do you have anti-money laundering controls? Do you have the cyber controls, so on and so forth? And you submit all that stuff, and then if you're successful, you get that approval at the end of the line.

Another big bucket of the practice, or what we would call the entities that are trying to still be tech companies and not be regulated entities. those companies, they're the staking service providers, non-custodial wallet providers, some companies that are launching network tokens in a way that's intended just to be done for use and not as a capital raising instrument. So for those, the approach is a little different. We first want to help them develop a roadmap and analysis to say, hey, do you have a real sound basis for saying you should be regulated? And as so, what are the guardrails you want to put around that? And how do you make sure that you have coverage across the waterfront, across your marketing channels, your contracts, et cetera, to defend them be consistent with that position. One thing the data I also do will go in

if the client wants in those cases and do no names calls with regulators, sometimes even go in and try to get no action relief with regulators. In the prior Trump administration, we'd gone into the SEC, for example, the Division of Corporation Finance, we got no action relief for some clients to say that, hey, our token isn't a security. Over the past four years, the door hasn't really been open for that sort of outreach of the SEC. It's good to hear that word again, though. A lot in the industry have not heard that word in a while. I know.

We're hopeful that with Atkins taking over next year, that that door will be open because that dialogue with regulators, there's really no substitute for it, hearing what they're thinking and being able to gendily share what's going on in the industry and what ideas seem directionally right, which ones don't is important to good constructive engagement between industry and regulators. That makes a ton of sense. Go ahead, Dana. Yeah, where we've really excelled and grown has been in the area of these novel digital

asset requests and licensing issues. And Josh is saying that's given us the ability to do a series of first, the first National Trust Bank, some of the first chartering in New York and in other states, helping to get approval for novel products. And to do that, it's really understanding what is within the scope of permissible law, but then also what is acceptable from a policy standpoint when you're working with a regulator. Is it a new type of product or a new type of charter that as a policy matter they want to get involved with or have, frankly, as much as the personnel to supervise for some of the smaller state banking jurisdictions that do have state chartering regimes, very often you're not going to get through the door on a novel

request because they just don't have the personnel or don't have the experience to have supervised specific products. And then in talking to clients, it's also figuring out how do they see themselves, that they see themselves as a financial institution that they see themselves as a tech company. Very often, the founders are technologists themselves and have developed really transformative tech. And that's a story that they want to tell. The story that they're telling investors. And that becomes a story that they want to tell regulators because they're rightfully proud of it. But then it becomes a discussion with them about, well, the regulator, they might. is going to go to what new risks does this bring out? How are you solving for those risks?

What unintended consequences could this new technology or this new approval lead to? You then have a discussion about transparency, which can then lead to a level of trust, which then in turn leads to the ability to have a good, solid working relationship that allows for newer novel approvals as you build up that credibility in the state chartering space. It's the type of thing that if you have good regulatory, sell regulatory supervisory history, that as the OCC opens up again, it allows for transferring those charters to the OCC potentially. It's this virtuous cycle that requires counseling, requires time, but we're really fortunate that for many of our clients, these are multi-year engagements where we've seen them through the highs and the lows,

and we can have that dialogue over time. I would say it's an understatement to say that it has been a really difficult time to operate a crypto business in the United States for the past few years. And there's the normal startup challenges, but then there's the murkiness in some areas, but also just the shifting wins at some of these agencies and at some of these states where you're operating under one set of assumptions for a few years and then an abrupt phase. The OCC would be a good example there in terms of the chartering. But curious if there are any lessons learned from helping some of these crypto companies get U.S. approvals that translate through various regimes, whether they be

Democrat or Republican, or there's just some common lessons. A few lessons there might be, well, first of all, looking out for windows of opportunity for when you can move more quickly with regulators. Over the past three to four years, as you mentioned, Matt, it's been a cloudy outlook on the regulatory side in the U.S. But there are moments when, especially if there's leadership changes in agencies, you can move quickly and you can get in and you can try to get a new approval or a new charter. Last time we saw that was in 2020.

At the OCC, there was a window where entities were able to go in and see charters, then that window closed. So I think one lesson there is you don't know when those windows will open. You want to be prepared for when they do and have that be on your roadmap and to have all your ducks in your road to be able to move when the opportunity is there and when it opens to go move because you don't know when it's going to close, as we saw in 2021 with that change in administration. And then following up on a point, Dana mentioned having a roadmap important in tough times for all

the reasons that we just talked about just to protect yourself if there's an aggressive enforcement landscape. But it's also important moving into bull markets and being able to make the transition because when deal opportunities come up and people are moving quickly and trying to strike while the iron is hot, there is that increased risk of just getting out over your skis and doing something that year, two years, three years down the line might fall apart, might get criticized in a regulatory exam, might lead to lawsuits that could complicate longer-charbed business objectives, like getting acquired or going public. We've seen that past cycles where that overhang caused deals to not go through.

And it's something like, boy, if we just stuck to the roadmap, stuck to the strategy, we'd be in a better spot. So I think that's one of the lessons learned is we're moving from winter into spring to not lose sight of that roadmap. And if anything, to bring it down and say, hey, what do we want to be focused on looking into 2025 to make sure that we stay disciplined and we stay within our risk tolerance? Yeah, I agree with all that. And I think that these various strategies that work in.

those difficult regulatory engagements. There are also things that lead to better outcomes in the context of M&A. In the past year, we've touched eight different M&A projects, only three of which have ultimately gone forward and the others felt to the wayside because the origins process for various deal-based reasons. But the fact of the matter is, depending on the size of the acquirer, if it's a larger institution, if it's an institution that doesn't have a similar level of risk tolerance, they may not have the level of understanding of the uncertainty in the industry and choose to say that's not something that they want to do. So having those ducks in the rows, Josh is highlighting, that can unlock M&A, which I think going to be very big in this cycle.

The other thing would be difficult regulatory landscape, no doubt, taking a look at what are some of the things that were put in place during the Biden administration that could now potentially go away and unlock new opportunities. So is that 1201? example. If that goes away, you think you'll see more acquisition from banking entities. How does the risk tolerance align? Those larger banking entities may want to see a clear history. And if they're looking at four or five different custodians, they're going to want to go with good tech, but then they're also going to say which one has the most regulatory hair on it. And that could have them choose one over the other. That makes sense. I was going to ask you us what some

common pitfalls are in the bull market. And it sounds like buying something that you later regret would be high on the list. buy something you regret for different reasons. One would be, does it have the regulatory hair on it? So, what are the outstanding obligations or issues with that and these regulators? What's the scope of approvals that if you think you're acquiring an entity for a license, what are the scope of approvals that exist and how difficult would that material change process be to get the type of product approval that you want in place? Is this even a license that you need? Is this an aqua hire? How are these personnel going to work with your entity? How are they going to be integrated? How seamless is that going to be? And entities can spend a lot of time, waste a lot of time trying to figure out who is it

that they're going to acquire and spend time on discussions. And I think it's important to ask that integration question right away. It's important to ask, is this within the same scope of services that we need? Ask that question right away. Because, yes, it's a strong market right now, and there's a lot of funding going on. There's a lot of money out there. But the clock is ticking. Absolutely.

I would add to that a few other pitfalls. There might be in that. securities area where it's been such a friction point, obviously, the past few years. Obviously, things may lighten up a bit on the federal side, at least from an enforcement standpoint, but that doesn't mean that law still don't apply. You have the laws on all the books, and especially on the state level, where at least we saw in the last cycle, state AGs would come up and still remain active. I think we can expect to see that, especially in the Democratic-leaning states, if they perceive that there is any sort of enforcement void being left at the federal level,

that states like New York, others may step in and try to fill that. So if you're a crypto company and thinking, boy, I could just clearly open up, there still are a lot of things to keep an eye out for. And again, just reiterating the importance of sticking to that roadmap, launching stuff that really works, that is usable, that's compliant with those longstanding principles, at least until you get a federal law in place. I know we're going to touch on this later. That could help clarify market structure issues.

It's still important to keep those fundamental principles. of view. That makes sense. In that regard, I think another really important area is you can feel it's loosening up, you can feel perhaps a more permissive environment and legislation that's forthcoming. But there are going to be aspects of the law that if they're not enforced, have a very long tail on them. So one thing that comes to mind is OFAC and the sanctions compliance. So you've got a borderless technology. We have entities that are working active all over the world, even if enforcement in the sanctions area went away or diminished over the course of the next

couple of years, there's a 10-year statute of limitations on bank fraud in the sanctions arena. So you could have a good environment right now, but you could still, if you don't have proper controls in place, you could still be engaged in activity that down the line could either have unintended consequences or have enforcement. And come back to the M&A idea, those are the types of questions that I think sophisticated participants are going to ask. The travel rule compliance thing is just baffling to me that some folks still aren't in compliance with the travel rule. I feel like we were talking about that in 2013 and the technology exists to become compliant. I'm very surprised that the market structure has not evolved there.

I don't think people think of it. It's core to U.S. foreign policy. The idea of labor of economic warfare, it goes back to the war of 1812. The idea of imposing sanctions, it's not going to go away. and in the early 2011, 2012, 2013, there was a whole slew of enforcement against larger banking institutions, billions of dollars in penalties that were imposed. I think that that is something that down the line we're going to see more of in this area. But you're right, that just been a perennial issue. Yeah, and strict liability, too, if I'm not mistaken. It's absolutely. And I think part of the issues there, I think matter just to some and asserties around rulemaking is involving the travel rule. I think Finson had a proposed rule out for a long period time around how unhocely walls would be treated. And I think industry is waiting to see how some of those initiatives land, but completely agreed

regarding the need to just get structure in place that complies using some of those industry bodies that have been working hard to put stuff that works in place. And even if it doesn't line up exactly with where the end regulations are, you could true it up later. And it also just helps protect you, your software, your business from being used by bad actors. And that's the thing that we see time and again. It's like, well, you may have arguments that what you're doing doesn't trip these requirements. But if you have the bad luck of having your product, be the one that's the favorite means

for North Korea to fund its nuclear program. The government has a lot of breath under these laws to try to come after somebody and to find a throat to choke. So it's just all the more important to make sure that you're doing what you can to have a good, reasonable program around those issues. As we're in this call maybe like first wave of tokenization, we've got projects around tokenized money markets, ETFs, stable coins, tokenized deposits, tokenized bonds. As you start having tokenized versions of these vehicles that are then traveling around globally,

if you don't have those controls in place, you're just potentially baking in problems down the road. And every government body, every regulator views the world through their own jurisdictional lens. and I think the industry has been really focused on because of just a level of enforcement that has been focused on the SEC and securities compliance and enforcement activity there. But it's just only one part of a comprehensive view of the world. Yeah, that's spot on. So I'd love to talk a little bit about what 2025 and beyond is going to look like here from a U.S. regulatory landscape.

And maybe the first thing on the docket is stablecoins. So if we just look at within our portfolio where the most growth is, I'd say it's in the stablecoin category. Some of these businesses are just growing faster than probably any business in the history of crypto. Just the demand for dollars internationally seems to be insatiable. And if you look on chain, I think some days 70% of every blockchain transaction is a stable coin transaction. So it's very clear we need something here. Seems like it's a priority. Franciilla said it's a first 100 day type of priority. But what would a stable coin bill look like from your guys' perspective? So agreed. It's been a very, very fast growing area. And I

I think for good reason. It really is a killer app for blockchain, having dollar value that can be transferred instantaneously, a lot of real good bona fide use cases for it. And it's also an area, one of those rare areas where you're seeing bipartisan consensus that you need some federal legislation around this market. And what we're seeing among the different bills that have been put out there are a few trends, a few commonalities. One is, it looks like Congress is trying to leverage and learn from the leadership that the New York DFS had demonstrated by getting out there early and setting forth robust standards for what the reserves need to consist of. Very safe, short-term cash equivalents, effectively.

You need to have clear redemption commitments. You need to have transparency to the reserves and a means of auditing them so people can have faith that the reserves are actually there. Those time-tested protections we've seen DFS apply appear to be in most of these bills, which we think is a good thing. And I think it's a testament to states being the laboratories of democracy and really proving this out. But there's also areas where states just don't have the power to legislate and enforce other

necessary aspects for this inherently cross-border activity. Some of those are clarifying and just confirming the bankruptcy remote treatment of stable coin reserves, formalizing ways for U.S. regulators to coordinate with international regulators because it's not just something that happens interstate, but it's also something where there's very much a global market to this and you need those coordination mechanisms. But really recognizing that stable point activity requires some form of bank or bank-like regulation. It doesn't have to be a full-service bank, like an insured depository institution. But to have that capital requirements, supervision, examination, something at that level of

that New York trust company or charters like that, if there's a federal option, I think that's something that we're seeing in all these bills, and it seems to make sense for the industry as well. Yeah, I think the states need to continue to play a role. I think that the dual banking system has worked well. You've touched with the states being the laboratory of innovation. And the fact is with the DFS guidance and with a substantial amount of time in the market, supervising entities there, there are a lot of really good lessons learned. I think that there are and should be roles for both state and federal regulators there.

But then it's borderless. So the maker regime, obviously, you have Staplequinzer being a shit of Singapore. You've got inconsistent approaches to things like reserve management. you have potentially consistent approaches that could impact the bankruptcy remoteness of reserves. These are all, I think, things that need to be worked through. Stable coins have that initial market because you have got billions of people live in places where they're worried about the value of their money. They're worried about hyperinflation.

They're worried about devaluation, their currency. They don't trust their own banking systems. So, yeah, they're turning to stable coins. You've got companies that are a part of that ecosystem because of the yield that can be generated from those reserve assets. But I think in order for it to grow in scale, it probably needs to go beyond that payment, rich currency type of offering. We don't know what's going to happen with interest rates. So what happens with the staple coin in a lower zero interest rate environment, which that could potentially happen.

So I think the next thing to look out for would be stable coins that either are things like white label platforms that stifloins are issued with partners, stable coins that are issued in tandem and with assets that are on chain. So I think the whole tokenization area is that scales, you'll probably have more market opportunities for stable coins. Key areas around things like payments and payroll and card services, having all of those integrated in that stable coin ecosystem, those are all the types of things that I think are going to facilitate growth.

Just thinking back past market cycles and the failures in governance, the frauds that have hit, like garden variety fraud, I think you're going to see that same thing. cop somewhere here in this cycle. If that activity happens in the stable coin space with unregulated issuers, for example, I think that that's the kind of thing that could cause regulators, lawmakers, to react negatively. And then the pendulum swings in the other direction. So that's another thing to look out for. But I think that this is probably the application of this market cycle probably has some of the most promise. Banking relationships, though, need to probably loosen up. Right now, there are very few. But I think as those providers grow, as the use cases,

grow. This is probably the killer use case of the cycle. Well, I hope you're right about preserving the state pathway because I look at the bill where it says $10 billion asset cap, and that seems really low to me. That would be a very small stable coin issuer. And you look back on this past cycle, there really wasn't a federal pathway. So it makes it tricky. Yeah, it obviously depends which of these bills end up becoming the leading horse. But I think the Higgardy bill would have provided an option for the appropriate federal regulator to allow the state issue to remain understate vision, but I agree that may not be strong enough for those who want to remain under that state system. And I think one of the important design questions that may create the political

space for that compromise to allow a more entrenched and viable state option in this space would be how do we deal with the risk that there is a failed stable coin issuer at scale? Because this market is getting massive and already one of the largest markets for treasuries in the world. And especially if we move into a macroeconomic climate where certain other purchasers of treasuries aren't buying as many, well, this could be a way to sponge up some of that decreased demand and really become an instrument of economic and fiscal policy in a way. But that brings in bigger central bank type questions about what protections do you have there. So certain bills, I believe Lomas-Chilbrand had a mechanism where the FDIC might step in as receivers. So you put that full

bank receivership protection behind it. Other bills have provided mechanisms for reserves to be pledged so you could get access to liquidity so you don't have to engage in a fire sale. of those treasuries. But our hope is, as people really start getting into the brass tax and finishing up these bills, there's a lot more attention given to those mechanisms, because if those could be applied uniformly across state and federal issuers, you could then have that foundation to have the comfort to allow state issuers to remain that and they don't have to convert to federal issuers. Much in the same way that we have state chartered insured depository institutions, they don't

have to convert to becoming national banks at a certain point because there is a sufficient degree of federal oversight and involvement with what they're doing. Yeah, you guys must deal with some interesting companies because you could imagine a world where it's, hey, congratulations on your stablecoin company. Here's your SIFI designation. Your whole business is now a SIFI. Yeah, the Treasury's, F SOC has still been being at Drummond, say we may use these tools over the past few years.

They haven't to date, but that's one wild card that's out there. So I would say that the holy grail for a lot of entrepreneurs has been a market structure bill that would give clarity around securities versus commodities and how the spot market should operate around both of these. Tokenized securities at scale aren't even a thing yet really in this industry. They're really just on the margin. And obviously, a lot of cryptocurrencies out there have been accused of being an unregistered security by this SEC.

So I guess the question is, do we get a market structure bill? And also, are there just some things the SEC could do here in 2025 that would answer some of these questions in advance of a market structure bill? All good questions. I think, first of all, the stable quid bill is probably the lower hang for that's the one that we're hearing will probably move first. Mark structure is just harder. There's just a lot of different constituents and really difficult legal issues. In terms of what the SEC could do out of the gate, they could issue more precise guidance around steps and principles that issuers could take

that would presumptively put them outside the scope of securities registration requirements. That had been done in the past. The SEC gave some guidance in 2019, but it was very just a huge bunch of principles and it wasn't clear to industry and counsel, which was done. ones matter most and how they fit together. So guidance that would be more around here in particular models that could work if done in this particular way. And what I'm thinking of in particular, some of the 2016-17-air network token launches that were really focused on use and having real use right out of the gate, selling tokens, more as a beta software, they're not committing to developing, using funds to develop them more. So you cut off this theory that they were really a

failed fundraising instrument. And lay out a model like that. For there to be anything, broad systematic fix and approach, you would need legislation for that, especially if it's something that would need to supplant or clarify parts of the Howey test, because that's a judge-made doctrine. And even if the SEC isn't enforcing certain aspects of that, it wouldn't stop private plaintiffs from going in and bringing suits. So you really do need a federal law to create a clear pathway for tokens that, say, governance token issuers that are going to be centralized for some period of time, there may be a need for disclosure for some period of time until they reach a sufficient degree of decentralization. And then at some later point, just like Ethereum did,

move to a point where it was really just a commodity because there was no material information that insiders would have that would be relevant to somebody deciding whether to hold or sell the token. Yeah. And I think that disparities are always going to exist in terms of approach. even if we got a market structure bill in place in the U.S., it then becomes, okay, how will each of these bodies go about implementing their various mandates? So it would be good because the uncertainty around enforcement gets diminished as that specter goes away, and then you move into like, what is day-to-day life like, do those bodies have people in place that are sufficiently on top of the topic that they know the questions to ask and you don't fall in this never-ending cycle of back and forth.

The people become the policy at a certain point. So I think that market structure bill needs to go along with, what is the funding, is there money to pay these people so that they can be in seat and take these jobs on? But then even if you have that in the U.S., then I think you still have regional disparities between U.S. and non-U.S. players. I think the U.S. probably always running towards the higher side of the bar. So I think getting rid of the uncertainty around the specter of enforcement, I hope that does a lot. But reg lag is a thing and there's always going to be a certain level of uncertainty. And when you're interacting with these various government bodies, also the point about funding and personnel, are they in a spot where they know what questions to ask, where they know how to quantify the risk? Probably a really good time to be an M&A lawyer with this market structure bill potentially coming.

because if you just look at all the banks and the broker dealers out there and how many of them are actually in this space, it's very few. And it's probably for these reasons. Absolutely. And we're seeing, obviously, the past month with the election results, entities that just haven't had a crypto strategy coming back, say, well, we need to revisit this. We need to see, should we have a strategy in the space? And is there really time to build organically? Or at this point, do we need to acquire? Do we need to get something, go out, get an existing proven market participant? And as Dana mentioned earlier, in addition to the market structure clarity, I think it's clearing up that, staff accounting bullet 121 around 3 minutes custodial crypto. That's a real niche issue, but it was a huge blocker. It was been a huge blocker to banks being in the market to acquire custodians or even to custody assets under their own umbrella because you had to book custody crypto as a safekeeping liability. And for ordinary corporations, that's something that was annoying, but they found a way to deal with it. For banks, you've got statutory capital requirements. And it just would really create friction around that. So if that is we decide that I think we could really see M&A. open up on that front too.

And that could theoretically be day one where Sab 121 goes away. Exactly. That's been something that's been a real blocker towards the regular institutions wanting to jump in or be able to jump in. So outside of market structure and the obvious, hey, banks are coming to the market, broker dealers are coming in, we're going to see technology companies coming in. Are there any other categories of just broader capital markets that you expect to start to penetrate into this industry?

So I don't know how much it's going to penetrate the industry. because it's moved very slow, and it's a risk-adverse industry. But I think that there is a real role to be played by insurance companies in helping to create frameworks for what should be put in place from safety and sound in the standpoint. What should regulators look for in approving, licensing, new products where they don't know how to quantify the risk? So the thing I keep thinking about is there were really no building codes up until there were some rudimentary ones. But in the 18, You had people that were representing the fire insurance industry that lost huge sums of money at various city fires that then sat down and said, okay, well, here's what a modern building code

should look like. And they helped develop the model building code that was replicated in a lot of different jurisdictions. I think there's something like that here where you have novel technology that somebody needs to come in and say, if you have this, this and this place, here would be our willingness to ensure something like a product that involves bridging. Or here's what we're we need to be in place in order for us to insure a custodial product. Insurance companies, they are entities that have real financial skin in the game and could help set expectations that could be replicated by regulators and lawmakers and lead to further clarity, streamlining things for the industry. That's a really out-of-the-box answer to that question. I was not expecting to go that direction,

but I think you know our insurance guy, so he's going to be really happy to hear you say that, Dana. But it makes a ton of sense. That's how you probably get some clarity on how you should be running certain custody schemes even on the inside of a big bank. That's right, because if you're an outside party that's got money that's at risk, and they're willing to insure a product from failure one, and we've got consumers that could potentially recover from something like that, but it could give lawmakers or give regulators a place to start. We're also seeing just seeds of that being used already,

the custodial space where trying to persuade regulators, hey, this new custodial technology, something that's safe and sound. It's something that should be approvable. well, the regulators often don't have that native expertise to go test that stuff themselves. So they'll want to say, was there a third party that's got skin in the game? Like Dana's saying, who's willing to put their money behind that proposition. Well, insurance company would be one of those. So they see what insurers are willing to insure this technology at the same rate that they would,

the legacy one, that's a helpful data point getting your custody technology approved. So we just spent 10 years trying to get the banks and the broker-dealer CEOs on board. Now we've got to think about the insurance company CEOs. My sequel. Guys, this has been great. Really appreciate you giving us the lay of the land in terms of where this industry is going. Where can we send people that want to learn more about your practice? Paul Hastings.com. You can see Josh and I, our bios. We can reach out to us on LinkedIn as well.

Awesome. All right, guys, really appreciate it coming on. Thanks, Pat. Thank you. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island.Vc. To listen to all of our podcast episodes, please go to On the brink dashpodcast.com or just click on the tab in our website. Thanks for listening.