The Breakdown - “Good Reason to Worry” What the BitMEX Indictment Means for DeFi and Bitcoin

Episode Date: October 3, 2020

Today on the Brief: Market reaction to Pres.Trump contracting COVID-19 Subpar September jobs report Decentralized exchanges have third straight 100%+ growth month    Our main discussion features Stephen Palley and Preston Byrne of Anderson Kill.  Yesterday, BitMEX was targeted with both civil and criminal complaints, with the CTO being arrested for violation of the Bank Secrecy Act.  In this conversation, NLW talks to two crypto legal experts to discuss: The specifics of the charges How long this investigation has been in the works  Whether there was anything surprising to legal experts Why the criminal complaints represent an escalation of enforcement  Whether there are implications for other industry areas, particularly decentralized finance  Find our guests online: Stephen Palley: @stephendpalley Preston Byrne: @prestonjbyrne Anderson Kill: andersonkill.com

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, nexo.io, and elliptic, and produced and distributed by CoinDesk. What's going on, guys? It is Friday, October 2nd, and my God, if you thought you were going to have just a chill Friday rolling into the weekend, think again. Yesterday, the crypto world absolutely exploded on news that Bitmex had been accused of just a slew of illegal activities by not only the CFTC, but that there were actual criminal indictments for the Bitmex leadership from the Department of Justice as well. Today, I'm joined by Preston Byrne and Stephen Paley, who are both lawyers with Anderson Kilt,

to discuss this from a legal perspective. but first let's do what I'm sure is just a casual brief. First up on the brief today, the President of the United States has been diagnosed with COVID-19. You don't need me to tell you about this. Everyone in the world knew about it as soon as it happened last night. All I wanted to share is some immediate news about how markets reacted. Futures immediately fell in the U.S. with the Dow poised to fall about 400 points upon open. The NASDAQ 100 was immediately down to.

2.2%. Australia's ASX was 1.35% down. Bitcoin was also down, although again, that might have been related to the other big news that we'll be focused on. And volatility was up majorly. The VIX was up 10%. This is a great test of that investing belief that we were talking about yesterday that markets hate uncertainty. Right now, it certainly seems like they do. Next up on the brief today, a frankly crappy jobs report. We got the September jobs report, as we always do, the first Friday of the following month, and economists had expected that we would add 800,000 jobs. Now, even if we had gotten that number, it still would have been the lowest job-adding number since April, but instead, we got 661,000. This was the first month since April, where net hiring was below 1 million. Part of this

comes from the idea that we discussed a few episodes back that the easy gains post-COVID-19 crisis, or at least post-lockdowns, are gone now. Of the 22 million jobs lost in March and April, 11.4 million have come back, and it seems like it's going to be harder to get the rest. Even as new jobs are added, we're seeing many second-order effect layoffs. I talked about the Disney layoffs and the shell layoffs earlier this week, and we have another 32,000 or so air airline layoffs that are poised to happen as well. Importantly, this new round of layoffs are much likely to be more long-term, based on restructuring and new go-forward expectations. Last on the brief today, before we get into this big main topic, Dex Volume Decentralized

Exchange volume, was up 100% for the third month in a row. This is really just a quick follow-up to earlier in the week where I argued that if DeFi was the crypto game of the summer, we were poised for a Bitcoin fall. Credit where credit is due, September did see the third consecutive month of doubling the trading volume. This time it was 103% in September from 11.6 billion in August to 23.6 billion in September. Now, the August jump number was 160%. So the rate of growth slowed, but it was still a pretty big month. That said, only a few individual dexes. Curve uniswap and zero X grew by more than 50%, and in a lot of ways, uniswap with its new token was the main driver of growth. This to me, if anything, just reinforces the point that I ended on in that episode, which is that there's nothing incoherent about a resurgence of Bitcoin in the volatile context of the larger macro environment, while also a cooling of what has been absolutely a white-hot defy moment.

With that, however, let's waste no more time and get into our main conversation, the Bitmex charges. As I mentioned at the top of the show, the CFTC and the Department of Justice have charged Bitmex with a slew of issues, including violations of the Bank Secrecy Act. As part of this one co-founder of Bitmex, the CTO has actually been arrested. Since then, more than 32,200 Bitcoin worth about 337 million US have been moved from Bitmex, which is 19% of the exchange's total funds. But each day there is a daily withdrawal at 1,300 UTC, so it's likely we'll see even more come off of Bitmex. I'm joined now by Stephen Paley and Preston Byrne, who frankly you probably know from the faithful crypto-Twitter Legal Corps to discuss their takes on everything that happened.

All right, gentlemen, thank you so much for joining the breakdown today. A lot of people who are obviously focused entirely on this story. And I appreciate you guys coming on to help shed a little bit more light about what's actually going on. And maybe just a place to start, I guess, is what is actually going on, what actually happened yesterday. And I guess from there we can maybe get into the implications and ramifications. But let's just start with what are these charges, these accusations that came through. around Bitmex? Yeah, so two separate things happened.

One, and this is the first thing that I saw, the U.S. Commodity Futures Trading Commission sued, I'm just going to refer to loosely as BitMex, although it's a bunch of different companies, sued BitMex, Arthur Hayes, Ben Peter, DeLoe, and Samuel Reed for violating the Commodities Exchange Act for being an unregistered futures commission merchant operating a facility for the trading of swaps without being registered as a swap execution facility or as a designated contract market.

Basically, they were selling futures derivatives products to America, to U.S. persons. The other thing that the CFTC points out is that someone who was doing this was required to follow and comply. with certain components of the US Bank Secrecy Act, which leads to the other development that happened. Preston, do you want to explain that? Yeah, sure. So the other development is that the Department of Justice filed criminal charges against, you know, this is Arthur Hayes, Ben Dilo, Sam Raine, and Greg, Dwyer. And basically, that was for violations of the BSA. Now, criminal charges, we're talking about So the requirement on these futures commissions merchants under U.S. laws that they have to maintain adequate K-Y-C-A-NL programs.

And so it's new-your client and anti-money laundering. The government is alleging that that didn't happen. And so that's a crime in the United States, which is punishable by up to five years in prison. So they were charged with that and also conspiracy. So this is serious business. It's not the kind of thing that goes away by, you know, like EOS paying a $24 million fine. and then the SEC walks away. This is a really very big federal problem to happen.

And if you look at the complaint, which I have up on the screen, you'll see the size of the alleged violations. The CFTC says that during the relevant period, Bitmex conducted trillions of dollars in digital asset derivative transactions. Preston, we're talking about this yesterday, he pointed out that's notional, of course, but it's still a fairly large number. And they earned, according to this,

Bitmex accepted Bitcoin deposits worth more than $11 billion from at least 85,000 user accounts with the U.S. nexus. Now, obviously, U.S. law doesn't apply to things that happen solely outside the U.S., but if you do this kind of business with U.S. persons, which the CFTC and the DOJ said happen, you have to comply with certain parts of the U.S. law. Interestingly, too, so the question would be, it looks like there's one count for a violation of, to BSA, each individual Bank Secrecy Act violation is subject to up to five years in prison and a fine. So five times 85,000 is like a half a million years in prison. Obviously, that's not the way this works, but those are really big numbers. And it looked like sort of the immediate impact was to slightly spook the market.

You'll see a huge, was like a two and a half point drop at about 10 a.m. yesterday. And I suppose people would say it's not a big deal. And I'm not a trader. It does. Like if you look at it in the broad scheme of things, it's not huge, but it was definitely a precipitous bread. Certainly. It's not nothing, right?

It wasn't nothing. It didn't, the market didn't truck it off. And the fact that it's, you know, still the top thing that people are talking about a day later is testament, I think, in these markets just with how fast they move. You brought up something that I think was one of the biggest questions, maybe the biggest question that I saw people who wanted clarity or more information on, which is jurisdictional, right? And so what gives the U.S. the authority to go after this company that's theoretically registered somewhere else where it's easy to bribe people with just a coconut?

I mean, it's pretty simple, actually, surprisingly simple. You can be anywhere in the world, but if you come into the United States and you do business with people who are in the United States, you have to comply with U.S. law. It doesn't matter that they went to the Seychelles. In fact, if you read through the indictment, believe it was the indictment, not this complaint, it's clear that the government basically, they looked at it and they were like, yeah,

you went to the Seychelles for the precise purpose of avoiding U.S. legal requirements, but you still maintain offices in the United States. You allowed U.S. persons to use your platform with sort of a wink and a nod. You received notification that you had knowledge as at least in 2018, you're required to follow AMLKYC procedures and you didn't. So if you're like, if you're doing business in, I don't know,

Madagascar and you have a website and you block VPNs and you block US IP addresses and you do, you know, rigorous AMLKYC, the U.S. You shouldn't have any problem with U.S. compliance. Looking here at paragraph 23 of the indictment, you know, the defendants also to allow customers, including individual retail customers, to register without providing sufficient identifying information of documents, to allow Bitmex to form a reasonable belief that it knows its true identity. Prior to, in or about August 2020, this last month, or, you know, a month and a bit ago, customers could register to trade on Bitmex anonymously by providing only a verified

email address. And this is happening in the context when they knew they were under investigation by CFTC for at least a year of half. So this is a, you know, These guys have been, allegedly, have been violating the law for a very long time. And so I'm not, we shouldn't be too surprised now when Vincent decides to do something about it. Yeah, that was going to be my next question is, you know, the news first broke that the CFTC was looking at these guys from last year, something like July last year is when it seems like an investigation started. And then earlier this year, they announced that everything would be moving to AML. there was sort of a poor one out for Bitmex moment on crypto Twitter. But there was like a six-month grace period or something,

where it was like next April there would be implementation of KYC. It was something like that. So I guess the question is how much of a surprise was this really? And this is obviously subjective. And perhaps even if the government having an issue with what Bitmex was doing, wasn't necessarily a surprise. Was there anything about the specific? of how this came down that you wouldn't have thought or that was surprising to you?

I mean, this news always drops when I'm in the middle of doing something else. So like the timing, I would just, I would appreciate it if the authorities would check with us first. So I don't have to drop, you know, working on a project so that I can send out a 20 to storm. Yeah, exactly. And then have to stay up until midnight doing the work that I needed to do in the morning. Other than that, the only thing that surprises me is that it took this long. There's a question about timing, you know, whether they knew this was going to happen. Obviously, the CFTC investigation's been happening for what, like a year, a year and a half now, at least. They took depositions. It appears that they received, you know, some volume of internal documents. The question I have,

and we're just not going to know this, is whether they knew that they were going to be criminally charged. The indictment, so for those people outside the United States who don't understand the process, an indictment in American criminal law is basically, it's a document that says what the charges are, the criminal charges against you, and it lays out the basic facts, and then it explains how those facts have proven to be true beyond a reasonable doubt would support criminal charges and conviction. And we should also hasten to add that all of these allegations are unproven, and that in the criminal case, all of the defendants are presumed innocent and lessen until they're proven guilty, beyond a reasonable doubt. The allegations in the civil complaint are also unproven and have to be proved.

The burden is less than in a criminal case, but they still have to be proved and they're unproven. But the question is, did they know the criminal case was coming down? The fact that it was sealed and the fact that who was it, Preston, who was arrested? So that's an interesting point. The CTO was arrested in the U.S. And so that tells me two things. One, that the CTO didn't think he was going to get arrested because he was the CTO and not an operational part of the client-facing business.

And two, yeah, that they just didn't conceive of the fact that a CTO would get arrested. I think people are skittish because they arrested the CTO of Bitmex. That has caused some of this quiet in the market. I think particularly, you can almost feel it in the D-Fi space, people kind of looking at it and going, oh, no, one of the engineers got dinged rather than just the people who were doing the commercials. So I think that does represent an escalation of sorts, or at least it's a materially different than what we would have seen from, for example, the Liberty Reserve cases where we didn't see any engineers getting arrested, but we did see the, and that's like a 10-year-old money-wander case. So this is different in that respect. And a query whether that raises some interesting defenses or whether this guy was more involved

than just doing software work or whatever. But I think people in the crypto industry who have been playing fast and loose have good reason to worry at this point because the DOJ has shown that they're going to start enforcing U.S. anti-money laundering law and they don't care who you are,

how big you are, or how innovative your product. Yeah, I think that there are two interesting threads to pull on there. one is this idea of this being an escalation. I definitely read the same kind of mood in the market that you did, Preston, which is a feeling of perhaps not surprise around the sort of civil piece of this, but surprise that there was an actual arrest. Even the indictment itself,

when it was kind of brought home with an updated story a few minutes later that the CTO had been arrested, was something different. And then that, you know, you hit the nail on the head with the main question. that I see people asking, or perhaps the main debate, which is, what are the implications? And obviously, this being an industry that has no problem at all flipping the narrative or trying to flip the narrative to be self-serving, there are a lot of folks trying to kind of articulate why it's good or somehow good for D-Fi.

This is good for Bitcoin. Yeah. I was we started to my office and said that yesterday. I'm just, I'm pulling up, the reason I look distracted is I'm pulling up the indictment. And I'm trying to see if it's been unsealed yet. But it wasn't unsealed on the docket, though. 20 CR 500. Yeah, no, I actually like long term, I don't, again, like, to be clear,

I'm not a currency speculator. This is not investment advice. One of the reasons why I don't investor speculate in the space is because sometimes I think maybe I know too much and it wouldn't be, it wouldn't be fair. But I think long term, this is not a bad thing for Bitcoin. It's neutral. if anything. It's going to impact price, I'm sure. The other thing to keep in mind, I mean, one thing that it's hard for us as lawyers in the space, when you see a lot of people

doing quote, unquote, regulatory arbitrage, which turns out just to be sloppy legal structuring. So from our standpoint, we've been telling people about Vincent for years. We were telling people about ICOs for years, and we were widely disbelieved between 2016 and 2019. And so where we are now is this sort of come to Jesus moment where the crypto space is understanding that the law is the law, you should obey it as written. And there isn't a special exception for you just because Bitcoin is involved. And this is a lesson that the DOJ has had to keep the space pretty much every three or four years. It started with trend and shavers back in 2012. They then did it again. What was his name? Josh Garza in 2014. So every couple of years,

you get a big takedown for BSA violations, and then it scares everybody straight. And so it'll be interesting to see what happens, particularly in the DFI space, which seems to think that these regulations don't apply to it, in the wake of this prosecution. This episode is brought to you by crypto.com, the crypto super app that lets you buy, earn, and spend crypto all in one place

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It's still under seal, which means that we can't see when the criminal complaint was. was filed. Can you now see the criminal indictment? Yep. Yeah. So these are the criminal charges. So we don't actually know when this was filed. So one interesting theory from Jake Trevinsky, which is that basically they've been negotiating a settlement. He was speculating. He was speculating. He said potentially they were negotiating some kind of local settlement here. And then it was the end of fiscal for the regulators on September 30th. And so maybe they said, okay, well, if talks break down by that point, you know, will file the next day. So, you know, TBD, what all this means?

Are you looking for Lambo? Yeah. That's not word searchable. They did mention the Lamborghinis. Yeah, it was the, talking about 2018 in consensus when they rolled out. Yeah, I remember that Lamborghini. I was there. I had nothing to do with it, but I did see it. You see, Kcase Benson is listening. I did roll my eyes. I was like, why would you, I guess, like without dumping on them, it's not really my job. I'm not here to judge. but you do have to wonder about the wisdom of running an offshore exchange and then showing up in the United States and renting Lamborghinis and tweeting about it. Well, it's certainly fascinating. I mean, different people play different strengths.

And part of Arthur Hayes' mystique for whatever mystique he had was that unbelievably cowboy, you know, I mean, even the letters that he writes, you know, from the desk of Arthur Hayes, which are always some of the best. reading in this space, but they are very pointed. They're sort of completely non-politically correct in the context of the crypto industry. But you do get a sense reading through some of this that there's a little bit of a like, are you fucking kidding me, dude? The part about the Seychelles, this is the fact that they set up there, given the surrounding facts and circumstances, if you look at this paragraph on page nine, And you can see, this is what I was saying before, the fact that they did that is actually used as evidence, as used as a disbordant allegation, that they, these affirmative steps,

for those affirmative steps purportedly designed to exempt Bitmex from the application of US law, demonstrate that from or about September 15th and including up to at least September 20th, they willfully cause Bitmex to reject adoption. So the thing they did to avoid the U.S. is actually a thing that shows that they violated U.S. law. That's what the DOJ is saying here, if that makes sense. Yeah, I mean, it's super interesting. I mean, so this gets back to the DFI question, right?

Because I think that, I mean, Preston, to your point, every new round in crypto, there's a new logic for why existing regulations aren't going to apply in some way. And the idea, I think, or part of the difference that, that the defy industry perceives or as trying to sort of narrative eyes with regard to itself is that it is sort of decentralized. There aren't these sort of like individual points. There's anonymous founders and things like that.

You're never anonymous. That's garbage. The FBI, you have a Twitter account. So that was the thing with sushi, right? It took a bunch of armchair detectives about 10 minutes to figure out who the guy was and some dude living in Thailand. And so the FBI, of course, is the vast apparatus of U.S. law enforcement and the ability to serve a subpoena, a very short notice on any provider of information services in the United States, you know, and obtain all kinds of identifying information.

And they're very, very good at how people are. So the thing with DFI is that there are a lot of bad things going on in DIPI right now. The worst one that I've heard of is that investors are requiring startups who raise funds to indemnify them from the risk of regulatory. reactions. And so to indemnity, again, for those who aren't familiar with the U.S. and our lawyers, that means that they're saying if anything bad happens, you founders who are investing in and were demanding sell tokens, you have to pay our legal fees. Right. And protect us against costs and expenses and fines, right? And so that tells me that when these investors are making those deals with startups, that they're basically outsourcing most of the risk onto the founders.

Now, founders who are in a, you know, I remember, I founded a startup. up once. And I remember closing my first round. It was a million bucks. And it was the best day of my life until I realized that I had a ton of work to do and then go raise the next round, right? So it's extremely tempting when you've got an offering and you're starving and you're dev and you're trying to build something new and cool. And someone comes along and says, listen, I'll give you a ton of money to do it and on these really oppressive terms. Now, BC funds that are investing in this crap know that when they do so, right, they're going to take their tokens and they're going to go flip them on the secondary markets or whatever else they're going to do.

And that's their strategy. Their strategy is to make money by flipping tokens. That's what these crypto funds do. But in exchange for that, they're putting a ton on the shoulders of these devs who will principally be liable if anything goes wrong with this or if there's regulatory intervention. And so sometimes you'll see something which happens more or less within the contiguous borders of the United States and someone goes and boom, I'm not going to name names, but we've seen some very big token launches that occur in the U.S. recently.

And that's deeply problematic. From both a BSA standpoint, so this is like BSA being, you know, Department of Justice, FBI, handcuffs, courthouse, and also from an SEC or CFTC perspective, depending on what the product is, which, again, is fines, penalties, restitution, and disgorgement. So in either case, we see a very lax attitude that is, that is, the big money in this industry has an interest in making sure that founders produce products that make the money. they don't have an interest in founders producing products that make the founders, you know, happy over the long term. And so I think we have a kind of weird incentive mismatch where people are doing stupid stuff because VCs are willing to fund it, but not because it's in their interest or because it's something that will keep in our jail. Part of the reason that this feels like Groundhog Day is that there's always like a two-year lag, right? Like on when this happens. And so, you know, the news stories are kick in its fight. And I think that it contributes to a sense of, well, that's for them.

You know, and we've moved on in some way. People forget that the fact that it doesn't happen now doesn't mean that it won't happen later. And if you look at the Bitmex, if you look at the CFTC complainer, you look at the criminal indictment, references things that happened in 2015. If it goes back to 2015 to 2018, you know, you've got long statutes of limitations, five for criminal, six for civil. So I don't think anything in that KIC decision that came out the other day, which we haven't talked about, totally predictable.

We predicted it. And at the time, you know, people are like, yeah, kick, they're going to fight the SEC. You know, they're going to take them on, telegram. You know, they've got all this money. And it's like, the idea that somebody who's got a billion dollars or 500 million or 200 million or 200 million has more resources than someone who actually controls the money printing press is absurd. literally absurd. It just doesn't make sense. You can be a billionaire. You can be Jeff Bezos, the richest man in the world, and you can't hold a candle to U.S. law enforcement.

That just doesn't. Or, you know, that's true of other sovereigns, too. It's not just the U.S. But my prediction is, just like we predicted KICC and we predicted that FinCEN would act this year. That was a prediction I made in my end of the year for the block at the end of last year. we'll see, you know, there'll be fallout from the defy stuff in the next two years. It might not happen right away, but if I were a big defy protocol with a company based in New York with an office of market makers in the financial district, I might be thinking really hard about shutting that down and going someplace that doesn't have an extradition treaty and hiding out in a bunker for a few years.

I don't wish that on anybody. I mean, it sounds like we're making light, and we're really not. It's just both the Preston and I have been in this space, if you will, since 2014, 2015, and we see the same things over and over again. And, you know, we get a lot of people, you know, flipping us the bird at the time, telling us that we don't understand. And we actually do understand. And we're very sympathetic to the project of Bitcoin in particular. And it's frustrating to see people getting an avoidable trouble.

And it's really, it's painful. I don't like feeling that these matters, because it's so painful. But once you get under the regulatory microscope, there's a lot of document disclosure and a lot of intrusion into your life and the life of your friends and your family and everything else once you come under that microscope. Right. I mean, you know, the question is, okay, so like maybe you have a way where you can get $50 million or a couple hundred million or a heck a billion dollars by doing something that's questionable.

You know, if somebody says, you know, yeah, there's like a regulatory, arbitrage risk. You know, the question I would ask, guard of the developer would be like, well, whose risk is it? Is there a amount of money that would make it worth it for the U.S. government

to have a microscope up my ass for the next 30 years, right? Do I really want to leave this country, give up my citizenship, and never come back? You know, maybe for some people, that's, those are risks that they're willing to take.

The reason that we're both simple country lawyers, you know, is that we just, that's not the way of the role. I stupidly turned stupidly inverted commas. I don't regret doing it. I turned down 13,000 ether because when in from the pre-mine allocation, because I was like around the community in London when it happened, because I was concerned about the securities implications. There's concerns turned out to be correct. It's just that the SEC declined to enforce against them.

So we take the very cautious approach, a very long-term approach, sometimes four or five years ahead of time. You can see the problem starting and an entrepreneur will say, well, that doesn't get me to my national. fundraise. That doesn't get me to the next 10,000, 100,000 million users. So what I'm going to do is I'm going to do this other thing. Right. And then you're on like a, you know, interpol, what's it called, Preston? You're on a red list. You have to worry about extradition. Like, is it worth, is it worth it? Or wouldn't it just be better to develop something that has a product? And, you know, it's frustrating. But, you know, build something that people want, they want to use and make money the old-fashioned way instead of like with Fugazi this,

you know, just like making shit up and pulling shit out of the air. So like the cool stuff that we're working on are with, you know, protocol developers, layer two, protocol developers and people building on that who are not doing, you know, we get questions like everybody else is doing it. Should we? And sometimes frustrating to our clients when we say, you know, we'd rather you didn't and you shouldn't. Or layer one, but they're just not selling it. Yeah, yeah, yeah.

Right. So layer one, they're going to hash a genesis block and be doing with it. Like, all of that work is still out there. It's useful. Being able to do micro payments at scale on a peer-to-peer basis, that's one of the things that got me interested in Bitcoin. I didn't realize that, like, it was totally naive to the sort of financial training aspect of it. That's not part of my background.

So all of that cool work is the author to be done and is being done. What do you guys think of the sense, which I think is emotional, maybe understandable, of a double standard when it comes to crypto versus other types of traditional financial spheres? Well, I object to the IRS asking a question about crypto on the 1040. I do think that's problematic. I frankly, Preston and I disagree about politics. And I'll let him like, I don't mean this in a partisan way, but I object to me in a country where our president can get away with paying $750 bucks in taxes, but the IRS is going to,

I know, I know. We have a bet on the outcome of the election. Preston's going to be buying me a nice steak dinner or a herring dinner because I don't actually need steak. But I guess if I lose, I'll be forced to eat the steak. Given the events of this morning, it's entirely possible we both lose. Yeah, there's something to that. I also think the Bank Secrecy Act doesn't really make sense

as applied to a lot of what goes on in crypto. It was never the intention. But, you know, there are plenty of white-collar criminals sitting in prison. It's not like just because you didn't hear about people getting arrested for violations of BSA doesn't mean that it didn't happen. It hasn't been happening for many years. Yeah, all the time, every day. I think one of the tough things for legal professionals in this space is on the one hand being sympathetic to the desire among participants for rules and regulations to be different, for the law to be able to move as quickly as. as new technologies while also still recognizing that all of that wishing and feeling like it should

be so and two bucks gets you like 75% of a cup of coffee. An analogy is I did a bunch of work on drones a couple of years ago. Again, like I was too early. I wrote a long paper on drone technology and law like six years ago. And all of the people were like, you know, FAA regs are like behind the times and they're stifling innovation. But meanwhile, like, you know, drones were like crashing and like taking out kids' eyes and people were flying these things without licensing. Well, what happened was the FAA, the regulations actually were changed and updated so that hobbyists could use these things without having to get basically a full pilot's license. I'm like, I'm short-circuiting it.

But the notion that the law wasn't nimble enough, I'm sorry. I don't want a zillion drones flying down my street and into my window and, like, injuring people. So, like, the law is actually a conservative force that does provide a certain measure of protection. It also develops. And the regs were actually changed so that you could get a much more simplified license for flying one of these things. But I've never been one of those, like, all innovation is good. Some innovation is bad. not to be not to be gruesome but zyclon b was a very innovative way of killing people right just because

it was innovative doesn't mean that it was a good thing when cars were first developed there were no speed limits and there were no speed limits there were no traffic lights like the law does adapt it just takes time and we don't like i'm not a legislator i don't make the law that happens across you know down the street the one thing i'd add to that though is part of our practice and the clients we really like are the ones who come there are two you know there are two types of inbound that we get one of them is inbound that says I want to do things and are you going to write the opinion that I want and we're getting we don't get many of those because we're quite people don't know people don't but I still get

Twitter and like DMs and stuff like that like hey I'm doing an ICO or I'm doing a thing well you want to promote it on your Twitter feed and what would cost and so you know anyway Bafamloules is the typical response to that but anyway the other type are people who are smart developing real tech and what they do they've got something, some critter, which walks right up to the line and usually in the first or second iteration goes over it, right? Amazon Web Services, right, is the backbone for all things. It's the backbone for Bitmex, but Amazon Web Services isn't breaking the law. So there's a very fine line that's right when you're dealing with crypto, when you're trying to automate

some financial process on a blockchain or some other type of distributed system and you are continuing to play a role in it or not. And so the question is, what side of the line do you fall on and so usually with some design tweaks by removing saying okay did you really need to be in custody of this yes no okay if the answer is no then don't be in custody of it do you really know so that those types of design changes that you can make can take a non-compliant offering which does maybe a little more than it should into a compliant offering which maybe does a little less than the founders want but is nonetheless compliant and therefore can be safely deployed yeah and you know bitcoin's been around for a little bit more than 10 years and it's on the Bloomberg

it's not illegal to use in the United States. A regulators concluded pretty early on that proof of work mining is not money transmission. It's Bitcoin is not a security. So I would say law isn't necessarily the enemy here, right? And the law does has actually responded rather quickly. And you know, the other thing too is people like, we need more guidance. We need more guidance. It's like, are you like you're begging the regulators to tell you what not to do?

And they've done that. We'll have like FinC, multiple times, the SEC, FINRA, the CFTC, the IRS had something they issued a week ago saying they need basically more help with surveillance technology. So like you really like you've been begging for more guidance. I mean, now you got it, right? Yeah, I appreciate you guys jumping on so quickly. But one last question just to wrap up. Best thing that can come out of this, worst thing that can come out of this for the industry. as a whole.

Best thing that can come out of it is behavior modification. Yeah, people act better. The worst thing that could happen, I'm not actually like, I don't have much doom and gloom about this. Honestly, like the allegations are bad, they're bad actor allegations. I think that the guidance is pretty clear. I mean, I suppose the worst thing that could happen is U.S. banks could get spooked.

compliance departments could get spooked and banking could start to be pulled from compliant exchanges. I just don't see that as happening. That happened to one very, very prominent crypto company in England a few years ago. I'm not going to name it, but they, I mean, we're talking one of the big players was banking with very basically bulge bracket banks in London. And then they got their banking pulled from them because of compliance concerns over stricter UK AMLKYC rules. So that's a very real possibility.

Yeah. But as far as I'm aware, Bitmex didn't actually have banking. Right. It was Bitcoin only. So that's... I mean, you could see some U.S. banks taking you more conservative approach, reading and being like, the top line headline, if you're not following it, is like Bitcoin and is criminal, right?

Right. You know, like, you don't know anything about you. You're like, see, we told you. It's all criminals. Which obviously is not true. But, you know, there was a statement from the OCC a couple of weeks ago, basically, you know, sort of laying the ground for banks being able to custody digital assets. There's, you know, Cracken, I believe Cracken received a bank charter in

Wyoming for special depository institution. I know there are other applications in the hopper. It seems unlikely that Silvergate or signature are going to pull banking from Coinbase or Gemini, which are both, I don't know about their listings recently, which are, scratch my head, but they're fairly militant otherwise about AMOKYC. Well, I appreciate it, like I said, for you guys jumping on so fast, and I'll make sure people have all your Twitter so they can yell more questions at you. Enjoy chatting with you. Take care, man. So let's try to sum up a few parts of what we just heard.

First is, to lawyers who have been watching this space, it's not exactly surprising that we're seeing some amount of action from the SEC around this. activity which they've clearly identified as illegal. That said, it is also clear that this is an escalation, particularly in the context of the criminal complaints. That escalation seems to have the industry more spooked than just the other part, right? It's very different to think about jail than it is to think about fines. When it comes to implications, the way that I'd characterize both Stephen and Preston's opinion is that it's not so much that this means something. new, particularly for those in Defy, it's that the same principles that have applied since

2017's ICO boom are going to apply now, and that just because it takes the law a little while to catch up doesn't mean that you're going to be able to outrun it. Personally, I am sympathetic to the idea and the frustration that entrepreneurs have with legal codes that feel like they're designed for a different era, for a different type of context. At the same time, I think that we do have to recognize that we've seen this game play out again and again and again in this industry. This time it's different thinking is a really dangerous place to be, especially if you're the one taking the risk. I hope Bitmex is able to fight this. I hope that we can see more of a sea change in how the U.S. regulates things, but for now it's hard to see this as anything other than just

one in what is going to be a very long streak of actions where the U.S. government tries to make sure that it wrestles this industry into compliance with its rules and regulations. What do you guys think? Hit me up on Twitter. Let me know at NLW. And as always, I appreciate you listening. Until tomorrow, guys, be safe and take care of each other. Peace.