The Breakdown - The Fight for DeFi in Washington, D.C., With Miller Whitehouse-Levine

Episode Date: November 11, 2022

This episode is sponsored by Nexo.io, and Circle Editor's note: This interview was recorded on Oct. 24 and so it doesn’t reference the events of the last week.  On today’s “Breakdown” interview, NLW is joined by Miller Whitehouse-Levine, policy director at the DeFi Education Fund. They discuss the state of regulatory discourse in Washington, D.C., along with key recent events including Treasury Department sanctions.  Find our guest on Twitter: @millercwl - Nexo Pro allows you to trade on the spot and futures markets with a 50% discount on fees. You always get the best possible prices from all the available liquidity sources and can earn interest or borrow funds as you wait for your next trade. Get started today on pro.nexo.io. - Circle, the sole issuer of the trusted and reliable stablecoin USDC, is our sponsor for today’s show. USDC is a fast, cost-effective solution for global payments at internet speeds. Learn how businesses are taking advantage of these opportunities at Circle’s USDC Hub for Businesses. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsors today is “War” by Enoch Yang. Image credit: Stephanie Keith/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

What is DFI is definitely question number one. I think the more difficult, profound questions are around societal utility. I think that there are a lot of folks in Congress and among regulators that think the existing financial system works quite well and that the risks in it, at least since the global financial crisis have been appropriately mitigated. And DFI is coming along and messing with the magic, so to speak. 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 nexo.io and circle and produced and distributed by CoinDesk. What's going on, guys, is Thursday, November 10th, and today we are featuring an interview with Miller White House Levine. But before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right guys, well, today I am joined by Miller Whitehouse Levine. Miller runs policy at the Defy Education Fund, which is a nonpartisan research and advocacy group that's working to explain the benefits of defy, achieve regulatory clarity for the future of the

global digital economy, and help realize the transformative potential of Defi for everyone. In his role as policy director, Miller is charged with developing the execution of programs that bring the organization's mission to life, which, as you will see, are pretty interesting. Miller was previously at the Blockchain Association and has the deep knowledge of what's going on in the DC crypto debate. Today, we discuss why the Defy Education Fund is getting heavily involved in the Okie Dow case, the state of Defi and the regulatory discourse, and much, much more. Hey, this is Breakdown Editor Rob, just with a note that this interview was recorded on October 24th. All right, Miller, welcome to the breakdown. So good to have you here. Thank you for having me. Finally. I'm excited to be here. Yeah, yeah. So, I mean, we were just talking about this before the show started. But, you know, like, sometimes when I'm preparing kind of my notes for a show, it's like, okay. So this is the thing that I think is super interesting about this person or what they're doing, even if maybe it's sort of, you know, not necessarily kind of what a ton of other people are spending their time on. Whereas for you, it's just like, you are living inside. I think a lot of the issues that just day and day out make up the kind of the kind of the.

the substance of the breakdown. So I'm really excited to chat. But before we get into all of that, if you want to give just kind of a brief background of who you are and what you spend your time on, I think it would be great. Sure. Yeah, I got into Bitcoin in 2013, 2014. I was in high school at the time and I've been in crypto personally or professionally ever since. After graduate from college, I immediately started working in crypto at a multi-client lobbying firm, had some crypto clients, one of which was the blockchain association, where I went next and ran policy for that organization, which grew substantially through no part of my own, I don't think, during my tenure there, and joined this new organization, the Defi Education Fund last August,

which was created pursuant to a UNISw-DOW governance proposal to focus on Defi Education Policy, research and advocacy. So we got started up last August, and we go about trying to accomplish that mission in various ways. We meet with policymakers, try to explain to them what the hell DFI is. We write comment letters in response to rulemakings or regulatory proposals. We offer our perspective on legislation, which I'm sure we'll get to today. And we also participate in litigation.

Most recently, the Upi Dow case. We file the brief and we'll be filing additional briefs and participating in oral arguments at the end of the next month on that issue. And we also make grants to other organizations and individuals, be they in the policy world or not, but to the extent that there are folks out there who have really awesome ideas that can contribute to our mission to unleash the potential of defy around the world from a policy perspective. we fund that too. So we try to be everywhere and make the case for defy as governments around the world increasingly our habit under their microscopes. Super interesting. So I guess to kind of expand on the defy education fund just a little bit, how do you guys

kind of see it as different or related to the sort of other expanse of policy and advocacy groups that have sprung up over the last few years? Yeah, so I think that, you know, first of all, we don't have members. We're a C4, so we're not representing anyone's specific interest. We solely represent our mission and no one else's interest. And, you know, in comparison to other organizations like Coin Center, who I think has done a fabulous job of advocating for their mission, I view ours as a bit more expansive in some ways and a bit more narrow than others. For example, I think that the Uki-Dao case being a great example, clearly something that is precedential for DAO's and users of DFI protocols, but doesn't really get to the question

of whether software development or the right to freely publish and develop software is being threatened. So I think that in a way we've kind of filled the gap. I think we also serve as sometimes an effective coordinating group for other advocacy groups in Washington and around the world on defy issues. Very few organizations have in-house defy expertise and, you know, to the extent that we could be the people that people want to call, pick up the phone and call to discuss defy issues, I do think that is super valuable for us to be doing. You know, I think in particular representing, you know, the interests of defi users is something that we do well. Being a defy user makes that a lot easier. And I think that compared to trade groups in particular, which are representing corporate interests,

it makes sense. And I hope we are effectively representing the interests of individual users and the technology itself. One of the things that's super interesting about the regulatory moment that we're in right now is, so we clearly are in sort of a, I don't know, Endgame is the right way to say it, but we're now at the point where a lot of kicking the can down the road is going to turn into something, right? There is sort of a big push to actually finally get something on the books. And this is happening both in the U.S. It's happening in other parts of the world. And in the case of Europe, we got sort of the, or we have a Mika coming. And Mika sort of still intentionally kicks a can a little bit down the road with Defi, right? And it feels like,

you know, so we're recording this on Monday, October 24th. It'll probably come out about a week later. But obviously, a lot of the conversation that we've had over the last call it month to two months in the U.S., one of the subtext of it is, are the bills currently in discussion and debate dealing with the entirety of the crypto industry, inclusive of defy and things that touch defy, or are they sort of really focused on centralized institutions? and a different type of player. And in some ways, I feel like part of the discourse that's happening is it's almost should they be separated again in the context of U.S. Should we have more kind of discreet bills? Can we kind of turn what is up for debate right now into something where, you know, Defi is at least not not kind of screwed in the short term as we figure out a better regulatory

apparatus? Does that resonate with your experience? I mean, kind of Defi is starting to come into the spotlight as the thing. almost most at risk as we get closer to kind of actually getting regulation or legislation on the books? Yeah, I think that, you know, overall, I completely agree with your assessment. I think that, you know, generally when there's legislation proposed that captures defy, it's generally our experience that that's unintentional and we can go to the, to the member or the draft or the legislation say, hey, look, there's this, you know, thing called defy. It's,

new and four years behind crypto as far as, excuse me, centralized players as far as the like policy regulatory conversation is concerned. And generally the reaction is like, okay, cool, thanks for flagging that, definitely cutting it out. I don't want to deal with this problem. Because precisely the reason I just said, it's way too soon, I think, for comprehensive legislation to be passed that touches defy in any way. You know, nobody was using defy when, the first conversations about custodial spot market regulation were happening. And we're just getting, you know, years later to the point where Congress is ready, you know, industry, I think is an agreement and movement on custodial stable coin. Custodial spot market regulation is baked and,

you know, I think appropriate generally at this time. I think that the unique aspect of the DCCPA is that it did not unintentionally capture defy, that is certainly the intent. The idea being that if you're regulating the spot markets, then regulate the spot markets, be they, C-Fi or D-Fi. And that is, I think, rightly thrown everybody for a bit of a loop, because that conversation is difficult to have in a six-to-eight-week period under the gun of a legislative deadline the end of the year for all intensive purposes. So I think it would be, you know, I think it's entirely appropriate what Mike does did,

which is essentially start a comprehensive process that the commission is going through to consider how they're going to vindicate their policy objectives in the context of defy. And I hope the U.S. follows suit, you know, DCCPA or not. Man, there's a lot to dig into. I'm trying to figure out the right kind of sequence in. Maybe let's go back to sort of the more general piece. So holding aside the specific context of this piece of legislation where this became unintentional. What has your experience been around sort of the most common questions, the most common

misunderstandings among policymakers as relates to defy? Yeah, I think it's, you know, I think people have a lot of trouble getting over like the quantum step to understanding something like Bitcoin. And then they're like, oh, wait. you know, there's turtles all the way down all of a sudden with this defy stuff and other networks, be it, you know, file chlorine or the uniswap protocol. So I think there's like a bit of that. Definitely get a lot of questions, you know, what is the difference between a cryptocurrency

and the defy protocol? And what is defy is definitely question number one. I think the like really more difficult, profound questions are around societal utility. I think that there are a lot of folks in Congress and among regulators that think the existing financial system works quite well and that there risks in it, at least since the global financial crisis, have been appropriately mitigated. And DFI crypto is coming along and messing with the magic, so to speak. That isn't, you know, a question that comes from a place of misunderstanding or a lack of education.

It's, you know, a question of what one values and what one thinks is important. as far as the goals and objectives of policy are. And that's always a much more difficult or at least a tricky conversation to have because for the most part, questions from policymakers, regulators around DFI do stem from just a lack of awareness, education, or knowledge. But for certain, for certain number of question we hear from people is, yeah, what is defy? Want to keep more profits when trading? Get the best possible prices and trade with 50% lower fees on Nexo Pro. The new spot and futures trading platform uses aggregated liquidity of over 3,000 order books collected from multiple sources. Utilizing the complete Nexo suite allows you to

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Just go to Circle.com backslash transparency to see why U.S. SDC is a trusted stable coin. Let's talk about some of the specific things, I guess, that you have been working on. And maybe let's talk about the Uki-Dao case, obviously, because that's been so kind of in the news. And I guess maybe first of all, explain a little bit about kind of how you guys, you know, heard about this, you know, what sort of initial reactions were. And then, you know, how you guys decided to get involved. Yeah. So I first heard about it because I subscribed to CFTC's press.

release emails and I got this press release about two FCFTC actions won a settlement and won a complaint. The first action was a settlement with the developers of a protocol called the BZX protocol and then a complaint against an alleged entity called the Uki-Dao that was filed in the Northern District of California. So read the complaint and the theory of liability that the CFTC adopted, meaning the legal theory that they're using to try and figure out who is responsible for the alleged misconduct of the Uki-Dao is why we decided to get involved, because what the CFTC said in that complaint is that any Uki-Dao governance token holder who voted on a governance proposal is personally liable for the functional.

of the associated protocol. And notwithstanding that, you know, Uki-Dao has some pretty unique and, frankly, bad facts around it, that legal theory goes well beyond the specifics of the Uki-Dao case. And as one can imagine, has pretty profound implications for every governance token holder in the United States. We think potentially, which is why we wanted to get involved. number one to explain that those potential broad implications to the judge and also to discuss whether the CFTC's service to the purportedly Uki-Dao governance forum website was valid service. One of the weird parts of this case is that the CFTC has brought complaints against, has brought a

complaint against the Uki-Dow. but at the same time, intends to hold those individuals, governance token holders who voted liable for the Uki-Dao Protocol's functionality. And, you know, one of the points we made in our brief was that, you know, okay, if the CFTC intends to hold those people liable, they would eventually have to find those individuals.

And a fundamental pillar of due process in this country is that you have fair notice that you're being sued. And so you can go and defend yourself. And so in our brief, we make the point that it would be far more appropriate if the CFTC eventually intends to find and hold those individuals liable, if they're successful in this case, that they go out and find those individuals now and serve them not via a website that is purportedly affiliated with the UkiDow and those people that they intend to hold liable. So there's a lot of issues at stake, you know, the service issue being a big one. But as far as, you know, I think broad defy implications, it's concerned, certainly the idea that participating in governance forever and always gives you personal liability for the functionality of the protocol is top of the list.

There's so much that was weird about this particular piece and I think why it was such a flashpoint. First of all, you know, I think part of the reaction to the community was, and maybe this was sort of a false sense of security that never should have been the case, but there was definitely kind of a narrative of the CFTC not doing the regulation by enforcement thing that we kind of come to expect from the SEC that went out the window. Oh, yeah. This kind of also, from a, from a timing standpoint, crashed into the fact that legislation was moving forward on kind of multiple ways to put the CFTC kind of, you know, in a more, in a stronger leadership

position. So you have all the people who are reacting, not just to the CFTC in general, but to the CFTC in that specific context. And then you have the weirdness that you just articulated. And I think, you know, listeners will be able to tell, I am not a lawyer. But the try to have your cake and eat it two moment of holding individuals liable, but then serving a website like auto responder bot, basically, it's such a strange thing. And, you know, when the CFTC, to the extent that they've commented on, which I think has only been, you know, the chairman a couple of times, it's always just about the, oh, well, it was so bad we had to do something as kind of relates to the, you know, the specific functioning and how it relates to this other enforcement action. But, you know, it sounds like

what you guys are concerned most about has almost nothing to do with that piece of the equation. That's right. You know, I think that, you know, in a lot of ways, they had a governance token attached to a normal business. And that wasn't registered with the CFTC. And we've gotten into this morass because for some reason, the CFTC decided to base their theory of liability on the fact that there was this purported Dow, you know, attached to the side of what I think is otherwise rightly potentially described as an unregistered business. What I mean by that is, you know, it's that the highest individual number of wallets that voted on a Nuki Dow proposal was 12. I don't know if that even represents 12 individuals, you know, it could be one guy

with 12 different wallets. And so, you know, it's, I think, a very weird case for the CFTC to be making law, you know, precedent for potentially the entire country because I think that they could have adopted other theories of liability and not heard of peep from anyone, frankly. Do you think this is reflective of sort of, you know, the, it's been memified as regulation by enforcement, but really what it is is sort of an attempt to create norms in the absence of actual lawmaking process, right? and this is what's been so frustrating to people. You know, I noticed sort of a shift probably around a year ago where crypto companies basically

started to say, okay, I guess we're going to have to avail ourselves of the legal system versus kind of waiting for regulators to have substantive, proactive regulatory discussions on this stuff because that's kind of, you know, that's your only natural response to sort of the actions we've seen. What is the sort of the goal or the hope as relates to this case, you know, what would be the positive outcome and what are the steps between here and there? You know, I think there's so many different ways that this could play out. I mean, ideally, and it's, you know, I would say probably pie in the sky.

The CFTC tweaks their theory of liability such that, you know, no other part of the case changes other than they're not trying to hold people liable on the basis of having voted using a governance token. Hold people liable, for example, for promoting an unregistered futures commission merchant, making money off of it, promoting it on Twitter, what have you. Anything other than Dow governance token holder, that would be number one. There's infinite possibilities, but there is a process that is in place moving forward. The judge originally granted the CFTC's motion for alternative service, essentially saying the court ruled that the CFTC's service to the website was valid, which is something we

commented on in our brief and asked the judge to consider reconsidering that order, which he has agreed to. So the ball is now in CFTC's court to respond to ours and others' amicus briefs to essentially argue that their service was valid. We will be able to respond to their response by November 14th, and then it will go to oral arguments on November 30th. So we'll have much more clarity on, you know, where things go from there. There is no, you know, no defendant has showed up. So right now, we nor other Amici are parties to the case. So it kind of puts us in a weird situation. But we'll see where the judge goes after November 30th. Yeah. Weird, I think, is a good description of it. But I've never seen anything like it. But it's like to live at the

frontier. Yeah. It's certainly cutting edge in a bad way this time. Yeah, right? What are other kind of big flashing red topics for you guys outside of this particular case that you're thinking a lot about? This and DCCPA is really top of the list right now. You know, Congress is kind of winding down. The elections are coming up. I don't think the stable coin package is going to move this year. Yeah, they haven't even released a draft yet.

But I think that will be top of mind next year. And then there are some more, you know, latent issues that I'm always. thinking about and worried about. Number one is the SEC's exchange rulemaking. They issued a notice of proposed rulemaking earlier this year and solicited comment on a proposal to expand the definition of a national securities exchange to include persons who, quote unquote, make available, quote, unquote, communication protocol systems. Anyone who does that, they don't define what a communication protocol system is, which means it can be interpreted, you know, in any which way, as potentially being national securities exchanges that would have to comply with regulations like the New York Stock

Exchange. They never mentioned crypto or defy in that rulemaking. So, you know, we are dealing with smoke signals here, but it seems that based on our understanding, you know, at the very least, it would have implications for defy intended or unintended a bit beside the point. Ball is in the SEC's court on that one. They could finalize it this evening or we could never hear about it again, which is, you know, what we're hoping for, at least what I'm hoping for. And then, I think the other issue that is top of mind right now is tornado cash. We're seeking a general license for U.S. persons who had assets in the protocol before its

designation. And I think my number one objective there is to convince folks in Treasury and the government that sanctioning open source software protocols is a bad idea for many reasons. Number one being that it doesn't accomplish their objectives in any coherent or systemic way. The goal being that they don't do that again, I think is the best outcome from the tornado cast situation. We'll see whether they have the legal basis too. There are multiple challenges in the works, some individuals from Coin Center. So we'll be closely monitoring those.

Grayscale litigation's active, ripple litigations active. So there's a lot going on right now. Europe is working on their DFI reports. UK has a lot going on themselves right now, but crypto and D5 being one of them. Encourage that, you know, Sunac is going to be prime minister. He's probably like the most crypto-friendly legislator

outside of Lisa Cameron. in parliament. So that will be interesting to see play out. Some of the international groups like Ioska, which is kind of the international club for securities and market regulators, is putting together a DFI report. So there's a lot going on. I know I'm forgetting like 18 things, but definitely right now, top of mind, DCCPA, Uki-Dah. So in an ideal world with all of this going on, you can press a freeze button and just spend a year or two years teaching, you know, policymakers about this space. Practically speaking, how much do you anticipate this being just live fire drills from here to forever where hopefully each time you kind of fight off the worst

excesses of what legislation might do and then, and hopefully kind of teach some people along the way versus there being sort of a more proactive policy, you know, advocacy, you know, know, educational element along the way. Yeah, you know, I think that part of my job is equipping my organization to be able to do both, which is why I need to raise a bunch of money. I think that there is no prospect for anyone in DFI policy to not be dealing with live fire drills over the next 10 years, probably. And so it's a matter of being able to walk and chew gum at the same time because you're

absolutely right. You know, being proactive is hard. to do when there's so much going on. But I think to get to a good place down the road, it's absolutely critical. From the standpoint of the average kind of enfranchised crypto user who cares about these issues, what are the best ways to sort of be a part of the fight in a way that's sort of more than just arguing on Twitter? Yeah. The number one proactive thing you can do is email or call your congressional office and explain to them why you care about defy, why you think it's useful, why you think it's cool, and should be protected.

You know, the more that legislators hear from constituents who are, you know, the people they care about, that they care about the tech and their ability to use it, the way better all of this will eventually shake out. Because, you know, if they've heard from a few constituents and this issue pops up, they will not only recognize, you know, what the term defy means, but also be like, oh, you know, I do have constituents that care about this. which is very, very important. So I think that, you know, if there's one thing,

I think that people can do proactively to, you know, advance, hopefully what ends up being a good outcome here is to speak up as to why they care about DFI, why they use it, and tell their elected representatives that. Awesome. Well, listen, Miller, it's super great to hear kind of more of the inside baseball of this stuff. I would love to have you back, especially as Uki evolves and you guys are kind of, you know, learning more about the state of play on the ground.

And in general, keep up the good work. And we appreciate all you guys are doing. Awesome. Thank you so much for having me. My pleasure. One of the most interesting trends for me over the last year or so is the crypto industry getting comfortable availing itself of the legal system. And I think I want to point out that this is not an antagonistic thing, despite the fact

that obviously all legal challenges have an element of antagonism to them. What you're seeing in cases like the Okie Dow case and Defy Education Fund getting involved is basically people with deep legal knowledge and deep crypto knowledge saying, look, we got to have it out about how the traditional system is going to absorb or adapt these new forces. And one of the ways that we can do that is through legal challenge. I think that we should see this not as some scary step or a sign that things are getting more contentious in DC, but that things are actually progressing towards some outcomes that provide cliques. clarity and insight and new battles to fight. I want to thank Miller not only for being on the show,

but for his and everyone else who's in DC's work trying to fight for those positive outcomes. I also want to say thanks again one more time to my sponsors, nexus.com. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.