The Pomp Podcast - Jake Chervinsky: Defending Crypto from the SEC

Episode Date: September 26, 2018

Jake Chervinsky serves as Defense Counsel in U.S. government criminal investigation's at Kobre & Kim, a law firm based in Washington, DC. In this conversation, Jake Chervinsky and Anthony Pompliano discuss Securities Law, accreditation standards, terrorism financing, the applications of the Howey Test to crypto, and why Blockstream may be the most important company in the industry. As Jake says: he's a lawyer, but not your lawyer.

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Jake Chervinsky serves as defense counsel in U.S. government criminal investigations at Cobre & Kim, a law firm based in Washington, D.C. In this conversation, we cover securities law, accreditation standards, terrorism financing, the applications of the Howey test to crypto, and why blockchain may be the most important company in the industry. As Jake says, he's a lawyer, but not your lawyer. This conversation was a lot of fun, and I came away with tons of knowledge. I hope you find it as fascinating as I did. This podcast is presented by BlockWorks

Group, the only blockchain event and media production company I trust. If you're an investor, lawyer, accountant, or entrepreneur, and want to attend exclusive events and dinners, visit them at blockworksgroup.io. I promise you won't be disappointed. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

Before we get started, I wanted to tell you about our sponsor, Block Estate, a security token project in the $200 trillion industry of real estate. They've partnered with Polymath and Coinlist Comply API to create one of the first tokenized real estate funds, and they have a unique buyback and burn model to learn more visit blockestate.com all right guys i've got uh jake here this is gonna be uh this is gonna be pretty epic because i think we're gonna go down a bunch of rabbit holes so thank you uh thank you for coming on yeah pom thanks for having me absolutely all right so uh as a lawyer uh i know you can't say a bunch of stuff and you can say a bunch of other stuff so we're gonna uh see how we can make this

work. But let's go through your background first, right? So where were you born? How did you get into law? And then how'd you get into crypto? Yeah, sure. So I'm from Massachusetts, originally Newton, Massachusetts, just outside Boston. I came down to Washington, DC, which is where I live and work now for college, went to George Washington undergrad. I then went to George Washington Law School. And after that started working for a law firm in DC. So I'm sort of an adopted D.C. native. So I started working after law school for a pretty large law firm doing mostly anti-money laundering and anti-corruption compliance and investigations work. I did that for about two and a half years or so until 2016. I graduated law school in 2013. In 2016, I moved

out to Los Angeles, California. So I had a little West Coast experience, clerked for a federal district judge in the Central District of California. So that's a federal judge at the trial court in the federal judiciary. That was a one-year position, working in chambers, writing opinions, working on trials. When I finished that, I moved back to D.C., couldn't stay away from the East Coast, and I got a job with my current firm, which is called Cobre & Kim. It's a litigation boutique specializing in complex cross-border disputes and investigations. The anti-money laundering litigations just sounds badass. Yeah, it was interesting stuff. I mean, that's one of the things, frankly, that got me interested

in the crypto space. It's the intersection of law and finance. And I've also always been really into technology from a really young age. So growing up, I was going to computer camp and I was, you know, playing around on computers, programming, HTML websites, and like really basic stuff like that. Um, I also was a big video game player when I was younger. Um, so I sort of understood the concept of what a digital asset is and why people would be interested in that. So I think all of this stuff sort of combined to get me into the crypto space later on. Absolutely. It's, uh, we, we talk about it all the time, like the revenge of the nerds, right? All the people who are playing the video games are like, ah, these digital assets, we've been playing with these for

decades. Yeah, exactly. Right. Yeah, for sure. All right. So a lot of times you are participating in securities litigation, right? And I've had quite a kind of a background doing it. And then obviously, with all the crypto stuff, or actually, first of all, how did you get into crypto? So that's how you get to where you are today. But actually, where did the crypto component come in? Yeah, sure. So I think like most people, I came across crypto a bunch of times before it actually clicked for me. So the first time I ever heard about Bitcoin was in 2013, when I was working for my old firm, and FinCEN, the Financial Crimes Enforcement Network, had just come out with these new regulations for what they were then calling virtual currency

exchangers. And for one of my clients, I had to write up a summary of all of the most recent regulations in the anti-money laundering space. And so I spent like maybe an hour reading this regulation, learning as little as I could about virtual currency while still being able to write this explanation. But the whole thing struck me as, you know, like World of Warcraft gold, right? It was like some stupid internet money and made no sense to me why you would want to have it or why it would have value. I didn't come across it again until 2016. So when I was clerking for my judge out in California, we were hiring another law clerk and I was doing the interviews. And there was a guy who came into interview who had been working at a virtual currency exchange in

San Francisco. And so I was asking him in the interview, well, you know, that seems really interesting. How was that? And his take pretty much was, no, it wasn't interesting at all. I'm trying to get away from it. And I thought, okay, that makes sense. I guess this really isn't that interesting. And so it wasn't until last year, the middle of 2017, when, you know, honestly, I don't even remember what was the first thing that got me to start looking into Bitcoin seriously. I think it was like an article about price action, right? Maybe it was when the price had just gone up to 3,000. And I thought, all right, fine, let me figure out what this thing actually is. And again, like most people, I just, I fell down the rabbit hole and I couldn't stop reading

about everything to do with Bitcoin, how it worked, what the technology was, why it should have value. And that sprouted out into Austrian economics and monetary policy and decentralization and all of the things that we all spend a lot of time thinking and learning about. And then earlier this year, I realized there's so much going on in the legal world having to do with crypto that I wanted to make this the focus of my practice. So in about June, I decided, you know, let me get active on crypto Twitter, because that was where I was getting most of my information. And I was realizing there were so many people who were looking for and couldn't find even basic commentary and analysis about how the laws applied to crypto. And I thought,

okay, let me just do a couple of tweet threads explaining a couple of these basic things. Like here's how the SEC's ETF approval process works. Um, and it caught on. So, uh, I guess, I guess that's how I got where I am now. You're definitely famous on crypto Twitter. Now you're, you're like the guy who actually has like facts and information. Well, that means a lot coming from you. I think you have, you know, like many, many thousands more followers than I have, but, um, I'm catching up. Those are just the bots. Don't worry. Um, all right. So, so you've been participating in like the securities litigation and stuff, right? Let's start with what is securities litigation, and then we can kind of go into why it's important and how people kind of get into that situation.

Yeah, sure. So basically, securities litigation is any dispute having to do with the federal or state securities laws. So usually there are two ways that I get involved in a case involving securities litigation. Either the Securities and Exchange Commission, the SEC, is investigating or prosecuting one of my clients for violating one of the regulations or for committing fraud or market manipulation or something like that in the securities world. Or there's a private civil suit typically brought by investors against the issuer of a security. And that could be for issuing an unregistered security or for violating some other regulation like the disclosure requirements or something like that. Got it. And so in those situations, how many of those types

of clients already have, you know, lawyers kind of on retainer or some sort of litigation type lawyers around them versus, oh, I just got a bad situation. I need to go hire one. Yeah, it depends. I mean, most large financial institutions and issuers of securities that are established companies probably already have general counsel working in-house and they probably have a relationship with some large law firm. The benefit of my firm, Cobra and Kim, is that we have a little bit of a different business model. So we call it a conflict-free business model. We don't maintain long-standing relationships with large institutions like most law firms do. A lot of law firms here in New York will have a Fortune 500 client, and they'll do whatever kind of work comes

up for that client. We don't do that. And the reason we don't is because it frees us up from a conflicts of interest standpoint to take cases that are adversarial to a broader range of clients. So if there are, for example, the investors who are bringing a suit against a particular company that may be issued an unregistered security, there are other law firms that are already representing that company. They can't obviously litigate the case against that company. So we often come in as special counsel or conflict counsel to handle those types of discrete specialized matters. Got it. So you're like a SEAL Team 6 of securities law. I got it. I like that. Yeah, I like that a lot.

All right. So how does the securities litigation and law apply to crypto, right? In the sense of we've kind of described how it works in the non-crypto world, but crypto is like a whole new game here. Where do you see that playing out right now? Yeah. So the big issue right now is about the issuance of unregistered securities by ICO projects, right? So ICO stands for initial coin offering. In the normal context, if you do an IPO, an initial public offering, you have to register the security that you're issuing with the SEC. You also have to comply with a bunch of other regulations in the federal securities laws, like doing regular disclosures on a quarterly and an annual basis. You have to do disclosures when certain special events happen. You have to have

auditing programs. You have to do certain types of record keeping. These are all regulations that apply to the issuers of securities. In theory, if these ICO projects are issuing securities as they are defined by federal law, they should be complying with all those regulations, except most of them are not doing that right now. So the big question in the crypto space at this moment is, have those ICOs violated the federal securities laws, specifically sections 5 and 12a of the Exchange Act of 1934 by issuing unregistered securities, and how are we going to resolve that problem if so? Okay, so let's take a step back here and really kind of go into the details, because I think this is important, and it's something that a lot of people in crypto, I think, you know, they yell

and scream about on crypto Twitter around like, oh, security is not security, whatever, but I don't think they actually understand what we're talking about, right? So when you're talking about an issuer, this is somebody who offers a security or an investment opportunity to a set of investors, and the laws that we're describing are basically governing what you can do, what you can't do, who you can offer it to, et cetera, right? That's right. Yeah. Okay. And so let's start with the knowns, right? So there's definitely securities regulation or offering regulation around Reg D, Reg A plus, S, CF, et cetera. What are the other main concerns or main points of focus in the known bucket around securities law that ICO projects or crypto projects need to be

focused on? Yeah, so I think you've nailed a lot of them. I think the big issues right now, like you said, are Reg D and Reg S. Reg D is about whether or not you're doing a private placement, meaning you don't need to comply with the registration and disclosure requirements. Reg S is about whether the SEC has jurisdiction over an issuance that is conducted either in the United States or executed sufficiently outside of the United States that the SEC doesn't have jurisdiction over it. I think the problem that we're still trying to work out is whether a token is a security by definition or whether it fits some kind of consumptive use, some kind of utility token, for example, where the person who's buying it isn't buying it with the expectation of profit.

They're buying it for their own personal use or benefit or enjoyment. And if that's the case, then the token would not be a security under federal law. And I think last year, last couple of years, one of the main ways that ICOs were trying to do these issuances to raise capital for the purpose of developing their networks without subjecting themselves to the securities laws was to say, we're not issuing this for investors to make money. We're issuing it because it's going to have some use in the future. Therefore, it is not a regulated security. That was one of the main ways people were trying to get around the securities laws. Absolutely. And really what they're, what you're describing and what they were depending on was the interpretation of this Howey test, right? So maybe you can go into detail of like, what is the Howey test? How did it come about? And then we can talk about how it gets applied to crypto.

Yeah, sure. So the Howey test is the federal standard for determining whether a particular financial instrument is an investment contract, which is one type of security regulated by the federal laws. When we talk about Howey, we're talking about a 1946 United States Supreme Court case, Howey v. SEC. So here's basically the story. So Howie was a hotel operator that owned an orange grove on its property. And Howie decided to split up the orange grove into different parcels and sell the parcels to investors. Howie said that this was just a real estate transaction. They were just selling property. It wasn't supposed to be a security. But when they did the sale, they combined the sale of the real estate with a leaseback contract, which said that the investors were giving Howie the right to continue to cultivate and harvest the orange groves, and then the investors were going to get the profit from Howie doing, hopefully, a good job in harvesting and selling these oranges. And the Supreme Court said, this is still an investment contract. And basically, the ruling was, it doesn't matter what form your security takes. It doesn't matter if it's a stock certificate or a leaseback contract or anything else.

It doesn't matter what you call it either. All that matters is whether it fits these four factors in this test that the court set out. And the four factors are, number one, you have an investment of money. Number two, the investment of money is in a common enterprise. Number three, you have an expectation of profit. And number four, your expectation of profit is based substantially on the efforts of a third party or promoter. And so applying that to the crypto space, if you have a digital token that you issue and you hit all four of those factors set out in the Howey test, then you have a regulated security. What percentage of projects, right, so just on an aggregate basis, what percentage do you think are likely to be meeting the standard of the Howey test, meaning that they are a security versus not?

So that's a hard question to answer for a couple of reasons. That's why I asked it. Yeah, no, for sure. The reason that it's hard to answer is because it depends who's going to make that decision. And so it's important to understand how these regulatory enforcement actions go. There isn't really going to be a concrete answer whether any token is or is not a security. All there's going to be is hopefully an agreement between a particular project and the SEC about what the project is going to do to remedy the issuance that they made. So here's basically how an enforcement action works.

You're an ICO project. you issue a digital token. One day you get a subpoena from the SEC. It says the SEC thinks that you may have violated the securities laws by issuing an unregistered security. You then start this long drawn out process of exchanging information, probably exchanging documents. You sit down at a conference table like this one and you negotiate about how the issue is going to be resolved. And a lot of times the company won't even admit that what they issued was or wasn't a security, they will admit no fault, but settle the case by, for example, paying a fine or deciding to register their security while maintaining that it wasn't a

security in the first place. So it's pretty hard to answer whether any of these tokens definitely are or definitely aren't. I will say, I think that most of these companies in the end will negotiate with the SEC, will come up with some deal where they pay a fine, they register their tokens as a security, or alternatively, they give up and they decide to dissolve the company and liquidate all of their tokens. So I think all of this will get handled one way or another. What would be interesting, and what I'm waiting to see, is for one of these companies to say to the SEC, pound sand, we don't agree with you, you're wrong, our token's not a security, if you want us, come get us, we're going to court. And that's when we will finally get an answer from

the courts on what a digital token is or isn't. Got it. And so really the, what you described around that negotiation is, uh, the SEC saying, we think that you did this, the company can go in and if they want to play nice or they don't want to kind of drag this out into, you know, the bare knuckle fight, then there's some negotiation. And even if they do still believe they're not a security, they may just settle because it accelerates their ability to kind of get over the issue. Yeah, exactly. It's just, it's a, it's often a better way to resolve an enforcement action. Uh, it, it, uh, is less risky because if you do end up going to trial against the SEC, they're going to pull out the big guns. And if you lose that trial, the consequences for

you can be much greater than if you work out some deal with the SEC. So if you're not interested in what we call bet the company litigation, then you're going to make some kind of deal, whether you think what you've done is wrong or not. That said, when you sit down at that conference table and negotiate, what you're doing is pointing out all of the weaknesses in the SEC's case from the perspective of, hey, if we don't make a deal, we're going to go to trial. Here are all the arguments we're going to make to a judge why your case should be dismissed. Here are all the arguments we're going to make to a jury why they should side with us. Are you really willing to take that risk? SEC lawyers who have career risk if they try one of these huge cases and lose,

and that's how you end up using all of these issues as leverage to negotiate a good settlement. Yeah, and part of this plays into the SEC, from what I understand, they don't want to go to trial unless they have a very, very high level of confidence that they are going to prevail, right? Yeah, exactly. And the reason for that is if they lose one case, it will impact every other case that they're trying to settle in other conference rooms in other parts of the city. So they don't want to set any bad precedent that's going to hurt them as far as their broader enforcement strategy. Got it. What's the saying? You know, when you come at the king, you bet not miss. Yeah, exactly. Absolutely. So OK, so that all makes sense. And, you know, what are we talking about in terms of these settlements? Right. So SEC subpoena somebody to come to the table. They've got all of their reasons why they think what they didn't or they think what they did was not wrong. SEC's got all the reasons why they think what happened is incorrect. Are we talking about like big fines, like tens of millions, hundreds of millions? Are we talking about hundreds of thousands? Does it matter on how much capital was raised? Walk me through, is there a framework to think about these settlements? Sure.

So it can be anything. So I guess as a foundation, I would say this is just a business negotiation. Like any business negotiation, you're trying to expand the pie. You're trying not to treat it as a zero-sum game. You're trying to make whatever the best deal is for everyone. It can include anything that both sides will agree to. The typical things that a settlement in the securities enforcement world will include is a fine of some kind.

The fine is usually punitive, meaning it is a punishment for what you have done. There's also something called disgorgement. Disgorgement is the SEC taking back whatever your ill-gotten gains are. So you usually have these two separate calculations of how much money you're going to pay. Then there's going to be some remedial requirements. Like I said, if you issued an unregistered security, now you have to register it. Or if you failed to make a particular disclosure, now you have to make that disclosure. There could be heightened requirements.

So if you were chronically failing to disclose a certain type of information, maybe you need to do even more disclosures than would normally be required for a securities issuer. There's something called a compliance monitor, which is usually another law firm that gets assigned to watch everything you do for a certain period of time and then report back to the SEC to tell them, okay, they're complying with everything that you agreed to. So there's a lot of different ways that this can go. Got it. Okay. And then, uh, if there is a fine that goes into the SEC's pocket that to the investors get a piece of that kind of where does that money go? And, and, uh, you know, what is the, um, potential value that the investors in that, uh, security or non-security, uh, have a claim on potentially? So that gets super complicated, both from the, um, investor perspective and the

government perspective. There is an entire infrastructure in the government devoted only to figuring out when there is one of these penalties paid to the government, who gets what piece of it. And everyone who's involved in an investigation fights over how much should the SEC get, how much should the DOJ get, how much should the FBI get. There is an entire office, the General Accountability Office, the GAO, that litigates disputes between different federal agencies over which one of them should get how much money. So this sounds like typical government stuff, right? When you're trying to figure out with investors, again, there is a typical negotiation trying to settle a civil case. Most of these kinds of cases brought by investors are class actions, which have some more procedural requirements around them.

The deal with a class action is you settle this one case, but the settlement is supposed to apply to every single person who could possibly have brought this type of claim. So if there is a case, so for example, Ripple right now is subject to three class action cases in California. In theory, the class is any U.S. investor who ever purchased XRP. And that is at the issuance or if I went on Coinbase yesterday and I bought XRP, I potentially could join class action? So the allegations are that XRP is still today an unregistered security. Now, in theory, right, the Ripple fans who are listening to this podcast will say that XRP stopped being a security at some point in the past, if it ever was, because it became sufficiently decentralized. All that means is that Ripple would be liable for less of a period of time during which they had issued an unregistered security. That would affect the damages calculation, but not their liability.

But what's going to happen is when you settle that one case, you have to follow a lot of procedural requirements to make sure it's not unfair to all of the thousands of people in the rest of the country who are not directly involved in that litigation. So a federal court is going to do a whole analysis to make sure that whatever the settlement is, which probably involves the defendant paying some amounts of money to these investors who are theoretically injured, to make sure that's fair for everybody. And so it's a very long and drawn out process. Absolutely. And what you're pretty much describing is there's regulators of the markets, right, the SEC, etc. And then there's like a second layer of the regulators of the regulators, right? And so they're the ones who are figuring out where does the money go? Who gets it? Why do they get it, etc. And so you can kind of stack the bureaucracy on top of each other pretty quickly.

Yeah, that's true. And look, this is a big revenue stream for the government. So we haven't really had any big settlements yet in the crypto space. But just to compare this to another area that I've done a lot of work in, which is the Foreign Corrupt Practices Act team, which is the law that prohibits bribery of foreign government officials, you can have cases that result in hundreds of millions of dollars in penalties that are paid by defendants. I think one of the largest ones was over $1 billion. And look, the number of lawyers who are working for the SEC or the DOJ prosecuting this, they're not getting paid that much. So this is making a lot of money for their agencies. I guess this is one of the times where we're probably glad that SEC employees or lawyers don't get paid like incentive fees. Yeah, right. They would definitely be going after a lot more. They'd be a little more aggressive than they are now if that were the case.

All right. Just making sure. So, OK, so one of the things that we sort of see teams do is say, you know what? I understand that there is uncertainty around securities law, right, in terms of for crypto specifically. So we know what the laws are. I'm going to go ahead and I'm going to issue this token. I don't know if people are going to come down and say it's a security or not. I'm not going to register it. But what I am going to do is I'm only going to sell it to accredited investors. Right. So kind of it's this almost like hybrid approach where it's not a registered security with the SEC.

Sometimes they go ahead and use an exemption. Sometimes they don't. But as long as I sell it to accredited investors, then I'm okay. That's kind of their belief. Where does that fall in terms of less likely to be enforced on? How does that kind of play into all of this? And maybe people shouldn't even be doing that. So, yeah, what you're referring to is Regulation D and specifically Rule 506B and 506C of that regulation,

which pretty much say if you only sell a security to accredited investors, you do not need to register your security. You don't have to do all of the disclosures that are otherwise required. So if an ICO project succeeds in only selling a token to accredited investors, it has essentially complied with the federal laws because it's going to enjoy the safe harbor that Rule 506B or 506C provide. That's definitely, I think, what we're seeing in 2018 is most ICOs that are coming out now are only selling to accredited investors because there's enough capital there for them to raise what they need to raise, but almost no risk as far as securities enforcement down the road.

Got it. And then with that accreditation law, right, how much of the accreditation laws are driven by the issuance problems versus the other side, the enforcement problem, right? So what I mean by that is, as these accreditation laws were kind of created and put into place, is it because they're actually seeing what issuers are doing, and they're trying to react to that? Or is it they're trying to design a market from scratch that protects the investors, or maybe it's a hybrid of the two. Yeah. So, well, let me explain how the accreditation rules developed. I think that might help clarify this. So the accreditation rules date back to 1982. Prior to 1982, if you were an issuer and you wanted to raise capital by selling equity, by selling an equity security,

you had to register it with the SEC. You had to comply with all the disclosure requirements. There was almost no way around that unless you were just going to stay outside of the United States. In 1982, as a deregulation measure, Reg D was adopted for the purpose of saying, if you're a small business and you only sell to accredited investors, we will allow you not to follow all those other regulations. So in a way, it was a strategy to allow more capital formation by only allowing investors who could take the hit if the security ended up going to zero to purchase that security. You have to understand the point of the securities laws is to close the information gap between issuers and investors to make sure that investors have basic information about the securities that they're purchasing, about what the company's assets and liabilities are, what the risks are facing that company, so that they can make an informed decision about whether they want to purchase or not. And the idea of the accreditation laws is if we are confident that the investor will not go broke if they make a bad decision because they don't really have the information we would otherwise want them to have, then we're going to be okay with that. So I think that the accreditation rules are really to target both of those areas. It's saying we're going to relax the standards for giving information to investors, and we're also going to take away some of those protections that they have as far as filing lawsuits after the fact if something goes wrong.

So really what you're describing is kind of pre 1982 is this idea of is a really high bar, right? So you had a register, it was probably took a long time, it costs a lot of money, reg D comes in, and there's some deregulation or the ability to make it easier for people to raise capital in certain situations from certain types of people. So it's a little bit shorter time frame, probably a little bit less expensive. And then really, if I kind of extrapolate that out, Reg A+, which allows you to take certain types of offerings and offer it to non-accredited investors, is another form of deregulation along that same vein of making it easier to raise capital in certain situations? Yeah, that's exactly right. So all of these are legal mechanisms allowing issuers to raise capital by issuing securities without complying with the core requirements of the original 1933 and 1934 securities laws,

which were the original laws passed in the wake of the Great Depression requiring issuers to go through these registration and disclosure obligations. Got it. And hence why they're called exemptions, right? Exempting you from that law. Exactly. Okay. So walk me through the counter argument to the following. A lot of people say in crypto, we are using things like accreditation laws right that were created in uh you know pre-1982 we're using regulation that was introduced 1982 and then reggae plus recently and we're using the howie test which was uh created decades ago that was you know how we test for example the orange grove we're now talking about building you know a deflationary decentralized uh global reserve currency or a world's computer

kind of all these high tech type projects, how do we use, you know, legislation or regulation from decades ago to apply in these situations? What's your take there? Is that appropriate? Is it not? Should we change it? How do you come out? So I think you make a good point, which is sometimes events develop in a way where old laws just don't make sense anymore. And I think particularly when you move from the 1930s and 40s, and then even the 1980s, right, the pre-internet age. To a digital age, it is kind of hard to take these old regulations and apply them to this brand new type of asset that no one could ever have contemplated before the rise of the internet and particularly before Bitcoin came on the scene. That said, it is a foundation of our legal system

that we take laws that are drafted a long time ago and then apply them to conduct and assets that were not contemplated at the time the laws were drafted, right? We have the United States Constitution drafted in the late 18th century, where very little about modern life could have been contemplated at all. And yet we are taking those principles and we are applying them to modern life. So I think as long as the core principles make sense, you can still apply them to new types of products and new types of conduct, like what's going on in the crypto space now. When you look at the securities laws, again, that core principle, which is we want investors to have basic information about the securities that they're buying and holding. We want other market

participants like exchanges and brokers and custodians and brokerage firms and investment advisors and all these kind of people to operate honestly and not commit fraud and not be affected by conflicts of interest. All of these core ideas make perfect sense in the crypto space, right? If you're going to raise capital through the issuance of a digital token, it's really no different from raising capital through any other means that someone has used in the past. I think the difference is a digital token is fundamentally different in the sense of you can issue it as a security. And then as the life cycle of the token continues, it evolves from a security into not a security as it starts playing a role in whatever the network is that it was issued for.

That is extremely unusual and not something that was truly contemplated by the securities laws where you're talking about an investment contract or a stock certificate. These are not things that develop and change over the course of their lives. And so I think we really need some more clarity as far as when does a digital token go from being a security to not a security? How do we define that shift and how do we handle it as it goes forward? Absolutely. And what you're describing is we're just entering a new type of environment, right? And so one of the things that in the news that's recently come out is the SEC and Chairman Clayton

are contemplating ways to give access to non-accredited investors, right? So is there a way for them to kind of evolve or change accreditation laws to allow a subset of the population access to investments that maybe today they're precluded from, right? Yeah. Good idea, bad idea, maybe even have an idea as to what the solution could be.

Where do you come out on that? I don't know what the solution is, but I agree with you completely that we need one. I don't think that the accreditation laws make a lot of sense in 2018. In the 1980s, I think it made a lot more sense, and I'll tell you why. At that point, there weren't that many people who qualified as accredited investors, right? The standard to be an accredited investor is you make $200,000 in income if you're an individual, or $300,000 if you're married, and you also have to, or you can have $1 million in net worth, right? That number has not changed since the early 1980s. At that time, there were very few people who qualified for that level of income, just given inflation. And as a result, the pool of

private equity was pretty small, and the number of private placements was very low. So this just wasn't that big of an issue. At that time, the expectation was, if you want to raise capital through the issuance of a security, you're doing it through an IPO. And that was true for a very long time. It's only recently that we've seen a huge drop-off, maybe in the last 10 or 15 years or so, a huge drop-off in the number of IPOs. And there are a lot of reasons for that, that it just doesn't make sense anymore to be a public company. It costs between $1 and $2 million to do an IPO, depending on the scale. That is a huge amount of money for a smaller company that wants to raise capital. You have to comply with all of these registration and disclosure requirements.

They're not easy to comply with. You end up paying auditing firms an extraordinary amount of money every single quarter to do audits and release financial statements. It's just at this stage, doesn't make a lot of sense to be a public company, particularly when you have all of the scrutiny of the markets looking at on a day-to-day basis or on a quarterly basis, how are your margins doing, right? What does your balance sheet look like? And a lot of people, this is not specific to the crypto space,

but for example, Warren Buffett is saying, we shouldn't be focusing on quarterly earnings. We should change that. And so these are all the reasons why going public and now doesn't make a lot of sense. And we see so many more of these private placements, which are only done to accredited investors. And what that means is there is now very little opportunity

for unaccredited investors to get access to high quality capital. And that, I think, is why we have to change something about this rule, whether it's changing the wealth test to be something else that better reflects whether investors are qualified to get into a particular investment opportunity or something else. I'm not sure, but I do agree something has to change. Yeah, I mean, the classic argument is we allow people to buy lottery tickets, right? Right, exactly. No, for sure. I mean, look, the problem, I think, with doing a knowledge test, which I know is something you've talked about before, is I think one thing people don't understand about accredited investors is you don't apply to the SEC to get a license or to be an accredited investor, right? It's on the issuer to make sure that the people they're selling securities to are accredited investors.

If they mess up, then they are liable for dealing in unregistered security. And the wealth test, while I think it's a rich get richer, poor get poorer proposition, and it's a bad proxy for whether someone is sophisticated, I don't think being rich makes you any smarter, it is still a very easy bar for an issuer to decide, are the investors that I'm selling to accredited or not? And if you ask those issuers to develop and administer some kind of knowledge test, you are asking for a lot of problems and a lot of litigation. Could you imagine like Elon Musk, Mark Zuckerberg, Sergey, all these guys saying, you know, hey, I want you to invest in my company, but it'd be great if you took this like SAT like test first. Right. It's crazy. So, I mean, you know, I don't know what the solution is, but hopefully someone smarter than me will figure it out. Yeah. I always joke around and say that I know a lot of dumb, rich people. Right. So that should be the first warning sign. All right. Let's switch gears real quick and let's talk about some non-security based legal issues. So taxes. Right. I think a ton of people are dodging taxes for sure. They're not reporting this stuff. The number that we always joke around about is I think this year Credit Karma did a study. Less than 100 people out of the 250,000 people they surveyed reported any sort of taxable profits from crypto. Right.

So if you kind of look at all the numbers on the exchanges, et cetera, it's probably more than 100 out of 250,000. Are people like at big risk here? If so, what does that look like? Just talk to me about, you know, these people who aren't reporting the taxes. How big of a problem is this? Yeah. So as a legal matter, I think people are at huge risk if they are making capital gains in the crypto space and then not reporting those capital gains and paying taxes on them. You know, for a long time, I think people just didn't think about paying taxes on crypto gains when you're thinking about the people who are trading Bitcoin in, you know, 2010, 2011, 2012.

I don't think taxes was even something on the radar for them. We're also talking about some people who are, shall we say, more on the anarchist side of things and maybe they don't want to pay taxes in the first place. Is Satoshi's getting a tax bill, you think? Who knows, right? Hey, none of those coins have moved, right? So no taxable events yet anyway. Um, I, you know, also then for a really long time, there was this thought that crypto to fiat exchanges were not taxable events because they were like kind exchanges, which is this

exception in the tax code that says you don't have to pay taxes if you're moving from two different types of products that are essentially the same thing. And the IRS came out, I think last year and said, that is incorrect. It never was true. We are clarifying for certain now that it's not true. Every exchange of crypto to fiat was a taxable event. So I think there is a huge tax liability out there that has not been paid. Whether the government has the resources to go after that is a separate question.

The IRS is known for being a little bit less aggressive. They're under-resourced to begin with. They have some really smart people in their criminal section, but they just don't have the resources to be tracking down a trader who was making money on an early exchange on Mt. Gox in 2011 or something like that. So I think legally there's a lot of risk, but I think it remains to be seen what the government is going to do with tax enforcement because up to this point, security enforcement has been the main issue. We haven't seen a lot of movement from tax regulators at this point. Would it be fair to say that there is higher risk for people who have made those gains recently and the more gains you made, the higher risk you're at? Or do you think that everyone from the person who made a couple hundred bucks in 2011 compared to the person who made millions in 2017, they all have a similar risk profile? I think that practically speaking, the risk is a lot higher for people who are making money more recently.

And the reason I say that is because, number one, the government is watching now. And I don't think that they really were five years ago even. Number two, the government is developing new channels to get data and information from the on-ramps where people are putting fiat in in order to get crypto. So somewhat recently, for example, there was a subpoena to Coinbase where Coinbase had to start turning over information to the government about some of its more high-value clients. So the government is getting more information, and I would guess they're going to be focusing on the transactions that are happening most recently when they're sifting through that information and figuring out who do they need to send enforcement letters to to say, hey, you didn't pay taxes on X amount of profit that you realized last year. Where is that money? Yeah, I mean, the Coinbase thing was interesting, right? Because I think the government came in and said, hey, tell us everything about everybody. And I think Coinbase kind of put a foot in the ground and said, whoa, whoa, whoa, we're not going to give you everything about everybody. But there was, again, I don't know if it was kind of a settlement or an agreement around, and I may get this wrong, so correct me if I do, they'd give information on people who had more than like $25,000 or something that they either transacted or held. Walk us through as much as you can disclose there around what the government was looking for and Coinbase's position and why they took that position.

Yeah, so I think that's right. I don't remember the exact dollar amount, but basically the government, as always, wanted all information about every person who had ever opened an account with Coinbase, more or less, if I recall correctly. And Coinbase wanted to give over no information at all, because that's how this works when you get a subpoena from the government. There are, in a normal circumstance, there's two ways to deal with this. You can either make an agreement as the person who has received the subpoena to provide the government less than what they asked for, or you can file a motion to quash and go to court and ask the court to say, okay, these aspects of the subpoena are all right.

The rest of this is too broad. It's not relevant. And if I remember correctly, in the Coinbase example, they went to court, filed a motion to quash, and they got the court to limit the scope of the subpoena. But in the end, they did turn over a lot of information about their clients. And my guess is, I don't know this, but my guess is Coinbase and Gemini and any other exchange that's trying to do business in the U.S. is now providing some type of information to the government on a regular basis. Got it.

And then maybe we can even touch on Shapeshift, right? And so the whole situation there where, you know, they've pretty much always said that you can come, you can transact, no accounts, we don't have the information. and, you know, there's people who found kind of peace in the no account type model. Recently, they had to change that or they did change it. And so there was a bunch of debate around, did the government force them to do this? Is this something that they're, you know, opting into proactively? Kind of talk to us about, you know, why did they do that? And do you think that even the decentralized exchanges, et cetera, are going to all have to move to this model? Or do you think

that there will be some ability to kind of live outside of these requirements? So this is an issue with the Bank Secrecy Act of 1970, which is enforced by FinCEN, the Financial Crimes Enforcement Network I mentioned. It's a bureau of the U.S. Treasury Department. The Bank Secrecy Act requires a certain set of regulated financial institutions to do financial surveillance basically on behalf of the government and report certain financial conduct to the government. Shapeshift may in theory be a regulated financial institution called a money transmitter, which pretty much means you are an entity that takes money from one person and then transmits it by any means to another person or location. Eric Voorhees came out

a couple of days ago and said that adding KYC, know your customer requirements to Shapeshift, wasn't in response to an enforcement action from FinCEN, but it was in response to perceived regulatory risk that maybe FinCEN would go after them at some point for being a money transmitter, but not complying with all the regulations that apply to a money transmitter under the Bank Secrecy Act. I think that this will be a growing problem for the crypto space. Basically, everyone in the crypto space could be a money transmitter, right? If you're running a node at home, you could be a money transmitter because you are processing transactions between different people in different places. And there isn't a lot of clarity about how those rules

apply. And much like the securities laws, the anti-money laundering compliance laws are very onerous. It costs a lot of money to follow those laws. And the penalties for failing to comply can be very severe. So I think that this is a problem we're going to see expand a lot. You ask about decentralized exchanges. This to me is one of the most interesting things that will happen in the crypto space. The government has a strong vested interest in maintaining this tightly controlled, regulated global financial system that we have that the government uses basically as the only means for detecting international crime. Law enforcement depends almost entirely on financial institutions reporting on our financial conduct to the government. Decentralized exchanges are a way

for people to circumvent that regulatory system which will stop the government from having insight into the financial conduct of people all over the world which stops them from enforcing the anti-money laundering laws and stops them from enforcing other laws like trade sanctions laws and counter-terrorist financing laws and so i really wonder once the government starts to understand what decentralized exchanges are and what they enable how they're going to react to that. Before we move on, I want to tell you about our sponsor Block Estate, a new security token project in the $200 trillion real estate market. They've partnered with Polymath and Coinlist Comply API to create one of the world's first tokenized real estate funds. Tokenization is the

process of creating a digital token that represents ownership in a real world asset. You've heard me say it before, but a clear use case for this is real estate. Block Estate aims to bring increased liquidity to this massive market. We're really, really thankful to the Block Estate team for their support. So we'd appreciate if you checked out their website at blockestate.com to learn more. If you're intrigued by what they're doing, feel free to reach out to them or give them a tweet on Twitter. Thanks so much. Let's go really, really down the rabbit hole here in the sense of I like to think that the Hollywood movies of tomorrow are going to be based on all of the nuances of crypto today. So we've seen billions, for example, the Showtime show. They've started

now pay people in crypto and all stuff. But let's talk about the legal ramifications of if there is a truly decentralized kind of pseudo anonymous currency like Bitcoin, for example, that begins to be used within, let's say, terrorism financing, for example, right? Technically, every transaction is written into an immutable ledger, right? So there is some transaction history that is preserved, but you don't necessarily know who's sending and who's receiving, you just know the accounts. How does this play into how law enforcement looks at this? How regulators look at this? Is this actually the biggest threat to a Bitcoin type currency that the regulators don't have that control and so they try to kill it? Like, you know, just walk me through this. So this is definitely my personal biggest concern about the future of crypto. You know, we spend a lot of time talking about securities laws.

I think the securities enforcement issue is almost a distraction from what we're looking at five or ten years down the road. Once we get to a point where you can buy goods and services with crypto instead of with fiat, that's sort of what's holding back the floodgates of regulators being suspicious about this space is right now, if you want to buy goods or services, you are still more or less taking your Bitcoin or your Monero or whatever you have and converting it back into US dollars, reentering the regulated financial system, and then doing your transaction there in full view of the government. I don't think the government understands at this point what it looks like when there is a new financial system that is not under their well-developed financial surveillance regime. That, I think,

develops over time once we can buy goods and services with Bitcoin or even, you know, with Monero, something the government truly can't see, that is not a public ledger. If Bitcoin develops privacy, and there's a lot of discussion about how that's going to happen, either through confidential transactions or the Lightning Network, this is in many ways the end of the government's well-established method for detecting, preventing, and discouraging crime. And that includes drug trafficking, terrorism, any other type of crime that you can imagine where the criminals are by necessity going to try to integrate the proceeds of their criminal activity into this regulated financial system because otherwise they can't spend it. I hope that the government,

when they do realize that what crypto enables is for the world to transact without them watching, that they will not try to shut down the entire space. Now, I will say, I don't think they can anyway, right? The whole beauty of Bitcoin is that it's censorship resistant. The government can do whatever it wants. Bitcoin will more or less keep going. But I do think it would be a huge setback if, for example, the U.S. government were to say, starting tomorrow, holding Bitcoin is illegal.

I think that we may be able to prevail on the government that, first of all, any effort they make to try to shut it down will fail, and so they shouldn't try in the first place. And secondly, that it is a good thing for us to have financial privacy. Privacy, as I'm sure you know, is becoming a much bigger issue in 2018 than it has been in the past. We see that with Facebook and Twitter going to Congress to do hearings about how they're using our data. People are starting to care more about how their data is used. And I think that in a democratic society, we hopefully will be able to impress upon the people in power, politicians and regulators, that financial privacy is something that we not only want, but that we should be entitled to, right? The Fourth Amendment to the U.S. Constitution guarantees us a right of privacy. And so my hope is that the government will not take drastic action against Bitcoin, but that remains to be seen. And I think it depends on whether or not we see a genuine crisis around the use of cryptocurrency, which at this point we haven't, right? It hasn't funded some type of large terrorist action or anything like that.

So hopefully that will remain the case. What you're describing is this argument that like the violation of one's privacy is the violation of all of our privacy, right? Because it's the right that some people believe we have. And I think that the argument that the government makes is the tradeoff between kind of security, convenience, personal rights, et cetera. And so do you see a world where the government basically says we're not going to regulate it at all? Like we just can't and they just throw their hands up and say we're going to figure out other ways to detect crime and enforce on crime? Or do you think that they try to develop their own ways, whether it's the on-off ramps or something to kind of monitor the best they can? I think that they will do the best they can at any given time. Our government is not well known for predicting into the future and developing strategies to handle problems that are going to come down the road. They tend to react to the crisis of the day.

I think that as more of the world's transactions move away from the regulated financial system and onto blockchains, whichever ones they may be, the government will simply limit its surveillance to, as you said, the on-ramps where they'll monitor what they can and they'll more or less give up on what they can't. That's how it is now, right? The government can't see our cash transactions in person. They can't really see if someone loads a briefcase full of U.S. dollars and flies to a sanctioned country like Iran and makes some transaction using those U.S. dollars. So, you know, the government doesn't think that they can control everything that happens financially in the world. So I think they will simply scale back as the circumstances require them to scale back. I also think that law enforcement tends to do a pretty good job of developing along with technology. This is something that Andreas Antonopoulos talks about a lot and very effectively, which is, you know, the first use of any new technology is by criminals.

Criminals by nature are going to take as much risk as they need to because, you know, criminal conduct is by nature a high-risk activity. So, for example, the car is developed. One of the first use cases for the car is for bank robbers to get away from the police faster, right? So the police get a car that's faster than the ones the robbers have or come up with other ways of handling this type of criminal conduct. I think that will happen again. We saw that happen already to some degree with some of the dark net drug markets like the Silk Road, where, okay, law enforcement could no longer track the transactions happening on this dark net drug market. So what did they do? They ramped up other enforcement efforts. They used undercover agents. They started looking more for drugs that are being shipped through ports and through UPS and FedEx and things like that. So I think law enforcement will find a way to keep doing its job well while also allowing the rest of the world to have freedom of money. Yeah. I mean, it is a cat and mouse game to some degree, right? You know, you mentioned something that we've thought a lot about in terms of the way that a government kind of the heavy handed response to this could be to ban ownership of either one digital asset or all digital assets.

they could come in and they could say, you cannot own Bitcoin. It is illegal. And if you were found to own Bitcoin, we're going to throw you in jail, right? That would kind of be that most heavy handed response I could think of that a government could participate in. Do you think that that actually deters people from owning Bitcoin or does it actually drive adoption because people go and buy the thing that the government tells them they shouldn't do? I think a little of both. I love the idea that if the government bans Bitcoin, immediately the price skyrockets. I think that's a fantastic idea. It's like digital prohibition, right? Yeah, exactly, right? And I mean, that is true, right? Prohibition did not stop the trade of alcohol, and marijuana prohibition

today is not stopping the trade of marijuana. So this stuff doesn't work the way that the government wants it to. I don't think banning Bitcoin will end Bitcoin. I do think there are a lot of people, and I'll give you the example of my dad, who I convinced to buy Bitcoin by explaining to him, you know, here's what Bitcoin is. Here's why it's so important and powerful. Here's why you don't want to be left behind in this old legacy financial system. My dad is not going to hold Bitcoin if the government says it's a crime to do that. And so I think that the immediate reaction would be a big problem for price and adoption. I think it would slow adoption down a lot. On the other hand, the use case of Bitcoin is not for my dad. It's not really for

any of us in the United States or in the developed world. We want and should have the separation of money and state. We should have borderless, trustless, censorship-resistant money. But it's a lot more important for people in countries where the government itself is the criminal enterprise, where the banks are the criminal enterprise, where it is impossible to store your wealth without someone else who has censorship over it taking it from you. And so I think in those countries, they couldn't care less what the United States government does with Bitcoin. Those are the people it's being developed for. And the adoption rate will continue there just as fast as it would, no matter what the U.S. government does.

Yeah. And do you think this carries over not just on the currency side, but, you know, I've been on record saying I think every stock bond, currency and commodity is going to get digitized. Right. So we already see this in kind of the traditional world. Is there a difference Is there a difference in the government's eyes between owning a censorship-resistant currency versus, let's say, censorship-resistant stocks or bonds or commodities? Tokenize everything, right, Bob? Tokenize the world. I definitely think there's a difference. And one of the tropes that we hear from the legacy financial industry a lot is blockchain, not Bitcoin, right?

And that sort of underlies this concept of it's okay to take some tried and true traditional financial product like a stock certificate and then make it digital, which we've already done years ago, and now to put it on a blockchain, as long as it makes that financial industry more money. And I think that tokenizing some things like stocks probably makes a lot of money for the issuers, for exchanges, for a number of other players in the legacy financial system. Maybe not the DTC, but, you know, sometimes companies get disrupted, right? So I do think that there is a big difference between currency, which is something that the government controls for the purpose of taking on debt that it seems we have no way of paying off, for the purpose of geopolitical disputes, right? So we use our money. We use the U.S. dollar to litigate disputes with other countries. We use it for financial surveillance, right? The government has a monopoly on money and wants to keep it.

that is very different from tokenizing other physical assets or securities. Absolutely. And you're touching on trade there for a second. So, you know, a theory that people have, and I probably haven't looked at enough at the data to have an opinion yet. Take Iran, for example, right, where we've put a bunch of economic sanctions on the country. And so people's, you know, kind of thought process here is, oh, they're going to move to digital currencies where they're not included or precluded by these sanctions. And so now all of a sudden we are entering a new world where trade violations, trade sanctions via cryptocurrencies has to be addressed. One, do we think that's happening today? And two, is there any work being done in the legal world

to address this or either defend or prosecute it? It is happening today. There isn't really a good answer. I actually had a long conversation with one of my colleagues last week who does trade sanctions enforcement defense. Perfect. But yeah, no, because this, I mean, look, crypto is everything, right? It touches on every aspect of regulation. So this area, trade sanctions, is enforced by a different federal agency called OFAC, the Office of Foreign Assets Control. OFAC is aware of cryptocurrency. They know that crypto can be used to circumvent their trade sanctions list. So basically, OFAC has a list of people, entities, and nations that you're not allowed to do business with if you're in the

United States. And if you do, like if you send some product to Iran, you have violated the trade sanctions laws and you are criminally liable for that violation. OFAC is the one that's going to enforce that. OFAC has said that they may start adding Bitcoin addresses to their sanctions list, but that's about as far as they've gotten in thinking about how do you regulate or how do you apply the trade sanctions and export controls laws to cryptocurrency. I don't think that's very effective because the best OPSEC is to never reuse the same Bitcoin address. And also Bitcoin addresses are not inherently tied to any person. So adding a couple of old dead Bitcoin addresses to the sanctions list isn't going to do a lot. But the point my colleague made was the trade

sanctions laws are not about stopping every possible transaction with every single person or entity on that list. It's just about discouraging. It's about impacting behavior. It's about encouraging and discouraging U.S. companies from doing business with those people. So if you are, for example, a terrorist in Afghanistan and you are trying to use Bitcoin, I'm not saying that this has happened or is happening, but if you're a terrorist in Afghanistan, you're trying to use Bitcoin to conduct some terrorist plot, right? And OFAC puts your Bitcoin an address on the sanctions list, and you decide to just start using a different address, well, your name is still on the sanctions list. And it is still incumbent on US people to make sure

they're not doing transactions with you, the terrorist. So I think that it's going to be very hard for OFAC to figure out how to adjust the way that they do enforcement in the trade sanctions space to crypto. And for now, they're just going to do it the way they've always done it, which is the people and entities and nations that are restricted remain restricted. And it doesn't matter how you transact with them, whether it's with U.S. dollars or crypto. Got it. Yeah. It's so fascinating how how the evolution every time the government comes up with a solution to a problem, criminals are going to be one step ahead. They're going to figure out some other some other way to kind of circumvent. It's like you said, it's a cat and mouse game, right? This is how

it always works. It's how it always will work. The government can come up with a perfect solution for a particular problem. And some person who is willing to take on the risk of going to jail for the rest of their lives will decide to circumvent it one way or another. It's just the nature of things. Absolutely. There's a list of people I made one time and I said, I wonder if they own crypto or not, right? And so like Osama bin Laden, did he own crypto? Did he not, right? You know, does a Kanye West, an Oprah, right? You know, Putin, right? Do they actually personally Donald Trump, right? All these people. And my take is that Congress, I think recently started to require people to disclose crypto holdings.

And it's been a couple of congressional representatives that have kind of said, I own crypto, right? And they own Bitcoin, Ethereum, and all that kind of stuff. And so obviously that's going to continue as the market matures and more people kind of come in. But it becomes a huge problem when all of a sudden these sovereign nations begin to create their own cryptocurrencies.

And so how does the government deal with that, right? We're seeing it in Venezuela And, you know, other people are working on it. And so I think that there's a lot of complexities here that, you know, again, the government's just not prepared to deal with today. I agree. I don't think there's been a lot of thinking about this. My perception from what's going on on the Hill in D.C. and when you watch these congressional hearings is that most of the politicians are still struggling to understand the basic foundations of what crypto is and what it can do. It's like they're trying to find the president of the Bitcoin company so they can bring them in and ask him questions like they're asking Zuckerberg or Jack Dorsey or something like that, right? They just don't get this yet. And I think it's going to take a long time before they do.

And probably, as it often goes with issues like this, it will take them longer than they would need to to have any kind of rational response to it. Um, so I think by the time our government understands what this stuff is, it'll already be so pervasive and so well adopted that they won't be able to do anything about it anyway. They're trying to find Satoshi. They just don't realize he's not him, her, whoever's not paying taxes. Exactly. Exactly. Absolutely.

Um, okay. So, uh, let, let's dive in real quick, um, into, uh, some rapid fire questions. Uh, what do you think is a important company in the crypto space that maybe isn't on everyone's radar, but should be? um great question uh i'm going to give you one that that a lot of people uh do talk about but uh seems to be less in the news lately perfect which is blockstream and the reason i say that is because there's so much focus now on these companies that are building on Ethereum or that are doing Web 3.0

kind of stuff and much less focus on the development on Bitcoin. And I'm sure a lot of Bitcoin Cash fans, if any of them listen to this, will be very upset that I'm saying Blockstream. We scared them all away already. Yeah, I figured, right? We're like Blockstream shills here. But I think that the people at Blockstream are brilliant. And you know, we have this, this revelation about this bug in the Bitcoin code. And what I think is is most interesting in crypto, frankly, is what we already have and what we've had for a very long time, which is Bitcoin, and what may come sometime very far in the future, but we don't have yet, like whatever a web 3.0 platform might actually

be. I think a lot of what we talk about today with these securities issuances are probably not going to amount to much, just like in the internet age, the dot-coms that were coming out in the late 90s didn't amount to very much. I think that most of what could be built can be built on Bitcoin. And I think that Blockstream is one of the companies that is doing the most interesting work on that network. So for example, if you listen to Samson Mao talk about liquid and the idea of issuing assets on Bitcoin, this kind of stuff is to me what is most interesting. And yet, I think Blockstream just sort of sits out there as a company everyone knows, but no one really spends that much time talking about what they're developing, what they're doing. So that's the

company I am watching most closely. It's so funny you say this because I ask a lot of investors this. I say, what if we're actually overthinking the entire space and the simplest trade or investment is Bitcoin? Yeah. I mean, look, that's what the maximalists will tell you. I would not describe myself that way, but I definitely am a Bitcoiner. What attracted me to this space in the first place was the best use case of crypto, which is money. And I still think that's true. I love the idea that someday we have some of the more esoteric, interesting applications like decentralized autonomous organizations and decentralized exchange we talked about a little bit. I think all of that is fascinating. I actually think that the DAO was one of the

most interesting developments. And because it fizzled, we don't really talk about it. But I think DAOs are a really interesting thing to disintermediate, essentially, the corporate structure, which dominates most business in the world today. But probably all of that can get done on Bitcoin. And I don't know necessarily how strong the argument is that we end up in a world with many different blockchains on the theory that all of them can be secured in the way that Bitcoin is secured. So, uh, you know, look, I'm a lawyer, so I'm not a technologist or a programmer or an economist. So I don't know how that stuff develops, but I mean, I think the development on Bitcoin is still the most interesting development going on in this space. And if

you look historically, right, so you've got every time there's been protocol wars, right. And kind of this competition, um, there usually is five or less that end up being important, right? So the internet, the mobile, uh, world, et cetera. And so there's definitely not going to be 1900 as there are today. Right. And I mean, that's based on network effects alone, which, you know, that concept is at play when it comes to the blockchain space. But that ignores proof of work and securing your blockchain. If you have 19,000 blockchains, how secure is number 19,000 from an attack? And so, you know, unless proof of stake works, and I have no idea if it will or not, I don't think I know enough about the game theoretical underpinnings and the technology to say whether

proof of stake works or not. I think it's fascinating. I'm glad that it's going to be tried. But unless that really works, I don't think you can have very many proof of work blockchains at the same time that are secure. Well, and what you're describing here is probably one of the most important things that we try to get through to the institutional investors, right? So if you kind of draw a spectrum, on the far left, you have security, and on the far right, you can draw innovation right and so bitcoin is actually probably the farthest left you can get it's super super secure it's slow a lot of people look at the slow speed both in development in transactions etc as a negative right but if you look at through the lens of security it's a huge

positive right because there's no fraudulent transactions all stuff when you start to get farther to the right of that spectrum around innovation and kind of all of the things that people are doing and trying and experimenting with etc you have a trade-off you lose some security in order to accomplish some of that stuff and and so what you go back to is this framework of are really all of the other tokens and networks simply r and d for bitcoin because at some point bitcoin will get to the point where it will just incorporate you know smart contracts and you know asset issuance and all this stuff we're kind of seeing some early signs of that doesn't mean that that will play out forever. But I do think that when you go to a decentralized world,

security actually isn't talked about nearly as much as it should be, right? Because it ends up being the most important thing because without it, the whole thing goes away. Yeah, look, the whole point of a blockchain is to be secure, right? A blockchain is a database, a very slow, very inefficient database that is also very secure. There's a great flowchart that goes around Twitter, maybe you've seen it, and it's only two boxes. It says, do I need a blockchain? And it has one arrow and it says no, because pretty much nobody needs a blockchain. And yet you have these studies that come out where CEOs of Fortune 500 companies get asked, what is the biggest benefit of blockchain? And all of them say it's faster or it's more efficient. I think people just don't

really understand what this is about. There are a lot of applications for security. The security delivers censorship resistance. It delivers the borderless, trustless nature of cryptocurrency generally. So you need that security before you can build anything else. And that's why I wonder, do you start with the most possible security on your base layer and then build perhaps less secure but more efficient solutions on layer two or above, which is sort of the Bitcoin model? Or do you end up in this multi-blockchain world where you have different blockchains with different trade-offs at the base layer. And as a lawyer, I will stay out of that discussion and watch and see what happens. Yeah. Look, what you are describing right here is this idea that,

you know, humans in real time are beginning to trust machines more and more, right? And so we've talked a bunch about this on the podcast. We've written about this idea that as humans begin to trust software and math more than, you know, quote unquote, greedy humans, what occurs is you can remove lots of the middlemen. You can remove lots of the inefficiencies. And if this continues, actually the digitization of assets, whether it's currency, stocks, bonds, whatever, then leads into automation, right? So imagine how many things in the financial system are inefficient, not because we don't have technology that could execute the transaction or execute the action. It's actually because the asset is not digitized. And so once you digitize it,

then you can get more automation. And so in order for people to do that, they've got to trust the machines, right, over the humans. And, you know, it's scary when you describe it that way. But I do think that we're watching this kind of evolve in real time. I agree. And it is scary. And one of the sort of unspoken impacts of blockchain technology generally is a lot of people lose their jobs. Because you're right, humans are the problem in many of these systems. When you have a financial institution and you are keeping your records because you have people in the back office who are reviewing them and filing them and trying to make sure they are accurate, human error is the greatest introduction of error in that system. And so you improve the system greatly by replacing

those people with blockchains, which means that they all lose their jobs. So, you know, there are a lot of benefits that come with Bitcoin and the decentralization generally and the disintermediation of a lot of rent seeking third parties, which is one of the other reasons I'm really into this space. But I think that, as you say, we are figuring this out as we go. And there are untold implications that we won't realize until we see them happen. The greatest trait of our generation just may be long Bitcoin short the bankers. Yeah, for sure. All right. So let's keep going here. What do you believe in crypto that you think a high majority of other people would disagree with you with? So I think that most people believe that we are now working through the regulatory

issues and that they will get better and more permissive as we go. I think the opposite. I think that things will get a lot worse before they get better for a lot of the reasons that we have discussed already over the last hour or so, which is we're dealing with a lot of securities issues. The security issue only matters because one of the first use cases for crypto, other than money, was raising capital. And when you're raising capital, you implicate the securities laws by nature. So we have all of these securities enforcement cases right now, but that's not really the interesting thing about crypto. Eventually, there will be a professional system established where instead of doing an IPO, you will do an ICO. I agree with you about that.

This is going to get tokenized. there's no reason to spend all the money dealing with a traditional IPO when you can do this in the form of a digital token. And the normal securities world will simply adopt this new technology as the single way of raising capital. I don't think that that ends up being very interesting. There's obviously a lot of litigation to be done before we get to that point. But what's more interesting are these other issues that threaten the government, like anti-money laundering compliance and trade sanctions compliance and tax enforcement, these things we've discussed. And I think that right now, the reaction to the securities issue more or less is,

look, we've always had scammers who are trying to screw over investors. And that's all this is. They're just doing it with a different type of security than they were doing it before. The reaction will be different when the government shifts its attention to a truly revolutionary disruptive technology that fundamentally changes the way that they enforce the law and um you know go about their business on a daily basis you know look bad people do bad things regardless of what industry right yep um all right so uh you got a magic wand you wave it you can change any one regulation uh what do you change and why oh where do i start um so i would change the money transmitter laws that we were discussing before um i think

that, like I said, anti-money laundering compliance, I think, is the next big issue that's going to hit crypto because everyone is a money transmitter. If you are taking crypto and sending it to somebody else, we can do that individually now. We don't have to do it through financial institutions. Regulating money transmitters made sense when, in order to transact, you had to interact with this regulated financial system that the government had set up and was overseeing. It made sense when money was just one thing. It was the currency issued by the government. Money is fundamentally changing, right? Money is now whatever we decide to issue on a blockchain and then assign value to. And treating every person who transmits that kind of money

as a regulated financial institution that needs to implement an anti-money laundering compliance program is preposterous. And a strict application of the laws as they are now would say, if you run a lightning node, you're a money transmitter. If you are ShapeShift or you're an exchange or you're BitPay or you're any one of these entities, by virtue of your transactions in cryptocurrency, you have to comply with these onerous regulations. That I think is a huge problem and could slow down development in this space a lot and should be changed. Absolutely. All right. Time for the hard-hitting question um so let's just say that um we we give up and we say aliens are real um do aliens have pets are there human aliens and pet aliens um so are these aliens wherever they

are now or the aliens when they come to us when they show up like are they getting off the spaceship with like an alien dog not when they get off the spaceship okay if they're like at our level of development on another planet somewhere in some other galaxy, then yeah, I think they have pets because like, I think life probably develops the same way. We all like companionship. So probably they have pets then if they're so technologically advanced that they have interstellar travel, they're coming to earth to see us. I kind of doubt they have emotions left in that way. I kind of don't think they care a lot about pets. Um, which makes me sad because I'm a dog person. I love my dog more than almost anything. So somebody hit me earlier, uh,

recently with, um, you know, it's like Noah's Ark, right? So like humans don't go to space and we'd never bring pets with us. But, uh, but Noah's Ark, like that was the first thing two by two, right? That's a good point. Yeah. I mean, look, if I was going to go to Mars to live on Elon Musk's new settlement there, I would be bringing my dog. So I could be wrong about this. Actually, I haven't talked about this on the podcast. Uh, so Stephen Colbert did this, uh, thing with the, uh, Mars Rover. So he like somehow got the Mars Rover, uh, in New York city brought on, uh, Neil, uh, Degrassi and, uh, and, um, they took it for a drive down the block. So, you know, they get in this thing, whatever. And in it, uh, Neil says,

um, you know, some places in space that, uh, we know of, and we would want to go to would take so long to get there that a human could not last long enough, uh, in terms of life, uh, in order to actually arrive. And so there, there's a, um, a, a theory in, um, all of this space exploration world that actually we may have to put two humans on a spaceship, send them, and they have to create a baby on the way to the destination. Those people will end up dying, but that baby will have to be taught everything it needs to know by the time it gets to the, to the destination. Right. And that just blew my mind. I was like, Hey, forget alien pets. Like we're going to actually send people to the space to have sex in order to have a new astronaut. That one blew my mind.

Hey man, if we want to be an interplanetary species, I guess that's the sacrifice you make. Absolutely. All right. So, uh, I let everybody ask me one question before they, uh, before they leave. What, uh, what question you got for me? Yeah. So I want to know, so you guys have this great campaign that I love, which is get off zero, right? So what I want to know is first of all, how's it going? And secondly, what is the biggest obstacle that you're seeing? What are people telling you is stopping them from getting off zero? Yeah, so kind of, in summary, the get off zero is our argument to institutional investors that there's a qualitative and a quantitative argument for crypto. Everyone usually leads with the qualitative argument, or I'm sorry,

the qualitative argument, right? What they say is, you know, it's going to be potentially the global reserve currency, you know, it's censorship resistant. There's all these things that we all, I think, generally believe, if you believe in crypto, are important. Institutional investors, a very small percentage of them today believe that, right, and kind of understand it well enough to have an opinion and all that stuff. There is a quantitative argument to be made that there's all these studies where, you know, if you've got a 60-40 global portfolio, and you introduce 1% of digital assets into that portfolio over one, three, five years, depending on how you cut the data. You know, some of the data points are you can add between 100 and 400 basis points

of overall yield to your entire portfolio. You get a very similar, almost identical standard deviation of risk, and you can increase your Sharpe ratio by 15, 20 plus percent, right? So the quantitative argument is even if you don't believe in anything around the qualitative argument, you're going to make more money, right? And so if you are a fiduciary, you should get exposure, you should get off 0% exposure, get off zero, and kind of get skin in the game, you'll start learning and you can get some of these increased yields, etc. And so I even go as far as to say, I don't know of another asset class that has a higher yield per unit of risk than cryptocurrency, Bitcoin specifically, right. And so it's resonating, right, I think is the

best way to say it in the next couple of weeks, we'll have a couple of announcements as to kind of, you know, who is resonating with and how it's resonating, etc. That I think will kind of surprise people as to, you know, who, uh, some of those audiences have been, um, that the obstacle side is really interesting though. Right. So there's some people who just, they're not early adopters. They're scared. No matter what you tell them, you could, you could literally say, I already have the profit. I'm just going to give it to you. Not jumping in until, you know, a bunch of their peers do. Right. So I think that's one. Two is, uh, there's a lot of people who can't disconnect ICOs, regulatory uncertainty, Bitcoin, and like even infrastructure investments,

like buying equity in an exchange, for example, right? So I think that's two. Three is many times it's been the wrong people asking these institutional investors. So even if they're the best investor in the world, they have the qualitative quantitative argument, they can't get past the diligence. So if you think of most crypto funds, they really haven't been around that long. So we're talking about people, you know, most of these funds are like 10 people or less, they've got, you know, $20 million or less in assets. They don't have compliance, they don't have the regulatory licensing. They don't have track records and compliance departments and, you know, administrative support, all these things that an institution looks for when they make an

investment. They kind of go through the due diligence checklist, just people are failing left and right. So I think that that'll kind of get solved over time as people have more time to build those companies. And then the part that actually has been the most interesting to me on an obstacle basis is people who say, I don't agree with you. I actually think this is a complete fad or farce, but my kid believes. And so we've actually had conversations where somebody says, I don't understand my mobile phone. I don't understand, you know, YouTube or Spotify or all these different services that these kids use. But I also know that my kid was right about Uber. My kid was right about, you know, whatever social network or whatever mobile app they used.

And my kid keeps talking about this. And what I, you know, try to get across to these CIOs that has fascinated me actually works is I tell them, you as a fiduciary or an institutional investor would slap some of these kids in crypto who have double digit, usually over 50% of their net worth in digital assets. So it's not going away, right? I mean, literally, they have over 50% of their net worth tied up in these digital assets. Sometimes they put 1% and it grew. Sometimes they are taking their monthly paychecks and they're putting in more. I said, but when people have that much conviction, you've got kind of, you know, the virus has spread around, you know, kind of with capture all the mental energy, if it's not going to go away, now, it's not a question

of should you have exposure, it's a question of how should I get exposure, right? Should I put 10 basis points into like a beta exposure? Should I put it into more of a venture capital, a lending, you know, a buy the crypto asset itself, you know, all these different things. and there's like a almost like a um this uh this barbell if you will so you get the younger cios get it they're in the demographic they understand that they're digital natives all that kind of stuff then you get like the middle-aged crowd that's like no way you guys are all nuts like i don't even want to do a call right and then actually as you get farther into the older demographic they actually believe right and i think that some of it has to do with they remember

when money was backed by a commodity. They've seen enough governments screw over their citizens, right? Like there's some historical context that's really important in this. And if you look at like the people in crypto that understand the history of money or the history of governments and all of this stuff,

they believe because they have historical context. And so if you're just old, you actually may have enough historical context without having to go to do the research. And so I think that all of that tells me, you know, there's some cracks in the armor of the institutional investors are jumping in, right, that there's some, you know, endowments and all the stuff that have kind of already come into funds that exist. And then there's some that

are, you know, kind of on the edge. But I think that this idea of like the institutional wall of money, the difference is like, when you go and raise money from family offices, you're usually talking about, you know, $5 million or less checks from most family offices, right? Maybe even hundreds of thousands of dollars. You're talking about institutions that have, you know, $100 billion dollars and they take 10 basis points and it's more money than most of the funds have right and so it's just a whole different level of a game um and so when they start to come in that the the thing that i um that i think is actually going to be the most in uh important inflection point in crypto is this so as we see uh countries entering into hyperinflation and kind

of all these issues around their currencies we're starting to see some people go into digital currencies, right? Venezuela, I think the numbers are November 2016 is when the Boliviar entered into hyperinflation. The monthly volume on local bitcoins was like $215,000, right? Today, fast forward, it's accelerated into hyperinflation and local bitcoins monthly volume is like over $3 million. So about 1200% increase in that. Well, those people are running into digital assets because they don't trust their currency, they don't trust their government. There's going to be an institution or sovereign wealth or somebody's going to buy Bitcoin specifically. And then another institution is going to turn and say, oh, I probably should do that. And they're going to

buy a little bit. And then all of a sudden, everyone's gonna start looking around and it's musical chairs. There's only 21 million. And so when that scramble happens at the institutional level, there's a lot of institutions that actually could buy like 20% of the network, right? And so if you manage 100 plus billion dollars, if you really believed and you really wanted to, and you weren't worried about, you know, kind of your, your pension plan or your endowment or whatever coming back and getting mad at you, you could take $10 or $20 billion and just go ahead and buy a huge chunk of the network. If we start to see that type of FOMO and acceleration into the asset from an adoption standpoint, I think that everyone who understands

how economics and supply and demand work, fixed supply, increase in demand, there's only one thing that can happen, and that's the price goes up. That's going to be a really, really interesting moment if we get to that institutional FOMO. Right. Yeah. No, that's fascinating. I mean, it sounds very much like the S-curve of adoption for technology, right? So one way of saying that is it happens slowly at first and then all of a sudden. And I do think that's how this happens. It sounds really great. I think your pitch is fantastic. I think you're doing a service for the space. So thank you and good luck. Yeah, look, I go around and I beg for money for Bitcoin. Right. And, uh, and some people believe some people don't, but I, I always tell

them, uh, the same thing I say, I promise you the most important thing I will tell you is you won't remember who I am. You'll remember where you were, but you're going to remember somebody came and told you about this. And in 10, 15, 20 years, you're like, damn it. I should have listened. Right. So, um, no, man, listen, thank you so much for coming. You've, uh, you've taught me a lot and hopefully everybody else. So I, so I really appreciate it and hopefully we can do it again. Yeah, no, this was great. Thank you. Thanks again to our sponsor, Block Estate. To check out their tokenized real estate fund, you can check out www.blockestate.com. Hey, everyone, Pomp here. If you like this episode

of Off The Chain and want to help us take crypto to the top of the Apple, Spotify, and other podcast charts, please do us a favor and rate, review, and subscribe. To review, simply go to the Off The Chain homepage, scroll down until you see the five blank stars. taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts i appreciate you listening and see you next time on off the chain