Unchained - DEX in the City: Why the Market Structure Bill May Not Be Good for DeFi

Episode Date: January 15, 2026

Thank you to our sponsor, Mantle! After months of anticipation, U.S. Senators have unveiled draft crypto market structure legislation. In this episode of DEX in the City, hosts Jessi Brooks, Katherine Kirkpatrick Bos and Vy Le are joined by Blockchain Association CEO and former CFTC Commissioner Summer Mersinger to unpack all the provisions that stand out. These include the bill's attempt to draw a line between centralized and decentralized platforms, the amended stance on stablecoin yield and exemptions for assets with ETFs. Would the bill “sweep up all of DeFi?” Has crypto lost the fight over stablecoin yield? And is Trump playing interference for crypto? Hosts: Jessi Brooks Katherine Kirkpatrick Bos TuongVy Le Guests: Summer Mersinger, CEO Blockchain Association Links: Tether Freezes $182 Million in USDT on Tron Senators Move to Curb Passive Stablecoin Yields in Market Structure Push How the Crypto Market Structure Law Would Expose that Trump’s WLFI Isn’t DeFi Jessi and Katherine's paper on programmable risk management Learn more about your ad choices. Visit megaphone.fm/adchoices

There's just a fundamental misunderstanding of what DFI is, what a protocol is, who's involved, who has, to your point, you know, what is control, what's not control. And it's really been tough to try to educate them to fully understand it. At what point does ongoing judgment turn rule-based compliance or rule-based risk management into human control? And that's what I can't quite figure out in this bill. It's actually very ambiguous to me that even if you do sanction screening or some other compliance measure through a fully automated mechanism, you could still be exercising control. Hi, all, and welcome to Dex in the city where the wallets are cold and the takes are hot. First, we have Jesse Web3 prosecutor turned Web 3 protector at Ribbett Capital. Hi, guys, what a morning.

And indeed, from the SEC to Web 3. Hey, everyone. And I'm your host, Catherine KK, Fluent and TradFi and Conversing in Deep Tech over at Starkware. So first, before we get going, remember we're lawyers, but we're not your lawyers. So nothing you hear on decks in the city is legal or financial advice. It doesn't create an attorney-client relationship. And for the fine print, as always, check Unchained Crypto.com. Today, we have a jam-packed episode as always.

I know, I know. You want to hear about crypto, market, strong. structure legislation. The big news was a new markup on that bill dropped late last night. We're going to explain what that means. And we have a very special guest joining us a little later in the program, Summer Mercinger, CEO of the Blockchain Association, one of the premier trade organizations for crypto in D.C. We are going to give you all of the alpha and the intel on that markup and what that means for

you as builders, lawyers, individuals trading or interest. in crypto. But I want to start with something else. So stay with us. We are going to shift to that topic then. For the next few minutes, we wanted to raise the news yesterday that Tether actually froze 182 million in USD tied to five Tron addresses. So this was also big news, somewhat overshadowed by crypto market structure. But you guys, this is Tether. For a while, Tether was kind of the bad guy in the stable coin mix. changed a lot. It follows their voluntary wallet freezing policy introduced in, we believe, December 23, to align with Treasury and OFAC sanctions compliance. And I think the major thing we want

to discuss is this freeze forces a question the industry keeps dodging. You know, when we ask for regulation, what power are we agreeing to trade away and who gets to wield it in the meantime? Jesse, tell us more about this and why it matters. I've got to think about this so much. So I'm So glad you framed it that way. But, you know, you gave a framing on what happened with the tether freeze. And, you know, tether has frozen before. So has circle and lots of other entities. So that is not the new story.

But it is a really huge amount, which I think is worth commenting on here, which is over $180 million on Tron. And what's going on with the tether freeze matters today on market structure day, but also just generally for the crypto industry because freezing is no longer an edge. case, it's becoming a design assumption that's built in, and it's becoming to be baked into legislation like Genius and now sections of the newest draft structure, market structure bill, which we'll talk about. So in other words, issue or level control already exists. And what I think is really, really concerning and we should be talking about is that most people don't understand it. They don't understand how, when, and why, and whose get to control your money. But before we get into

that sort of debate. Let's be really precise about what happened. So we use the words freeze, but that's very different than seizure. And I want to make sure that we don't use them interchangeably like many do because they are not the same thing. A seizure, which we're not talking about here, but has happened a lot in the past, is a court authorized action. So it's the government actually taking control of assets. That can be subject to a seizure warrant, which is like a search warrant under the Fourth Amendment. But a freeze is going to be different. So that's issuer level control, like what happened here?

The funds are still in chain, but they just can't move. So it doesn't matter how many jumps you are from the tether being issued or the USDT being issued. You can still programmably be frozen in your wallet, right? That's very new. For enforcement, it's very new for issuers. So the freeze can happen after a court order. So it can be like a search or seizure warrant that says you have to,

freeze, but frequently it's earlier. So in response to a request from law enforcement, which sounds like what happened here because there is reporting it's tied to law enforcement, sanctions exposure, or just risk analysis. So let's be clear, like banks do this too. This isn't just crypto. What's different here is that it can be outside of the what you think to be control. I'm putting quotes up for people not watching the video, but like it can be outside the what you thought was the control of tether because you're on tron you're like in your own wallet you're in a different jurisdiction but in fact they can actually impact your funds so now that we have the explainers out of the way let's acknowledge why this all makes us a bit uneasy a private company

is immobilizing your money before a court has spoken and they can do so anywhere in the world sort of the opposite of what we talk about in crypto and what crypto has been building right isn't that sort of the whole point of a lot of what we're building here. So I guess just to get back to what you were saying, KK, is like, when we ask for regulation, what tradeoffs are we actually making? And I'm not saying the tradeoffs aren't worth it. I'm saying that I don't know if people fully understand them and are considering them when we talk about how we want to build our regulation. So freezing exists because many of the worst actors in crypto will never show up in the U.S. courtroom. You can't reach the person, but you can reach the person.

but you can reach the money. I did this all the time, so I'm not hating on freezing under the right circumstances, and we did it with court permission, but, you know, we had child pornography cases where Bitcoin and other sort of forms of tokens were involved that don't necessarily exist or anymore, and we were able to freeze them. More importantly, it happens all the time for DPRK, North Korea cases, Iranian cases, Hamas cases. That was a big part of the Hamas case I worked on. But with these new bills, issuer level freezes are moving just from practice. That happens, you know, this issuer decides to do it here and maybe not here, but rather a policy. But I want to like pause and take a second to give a little credit to the bills because it's not just saying everyone has to do this,

but rather the market structure draft that we got late, late last night, why we all look exhausted or I look exhausted, is that the draft doesn't invent the power, it's actually trying to discipline it a little bit. Like, for better, for worse, it's trying to put rules around it rather than just saying, okay, well, tether's deciding to freeze in this circumstance, while circles doing in a different circumstance, et cetera. But what we need to pay attention here is like what kind of control are we codifying in these bills? And maybe this part of the bill isn't getting as much attention because, you know, it's not the things that we're going to talk about later, like the defy portion of the bill or the stable coin interest. or many other aspects that crypto Twitter are talking about this morning.

And we will too because they are important. But I just don't want us all to overlook it because we as crypto users ultimately bear the consequences of how this is exercised and when. And we need to make sure we understand what the tradeoffs are and are we okay with them. Jesse, first I need to say you look great. You do not look fired. Okay. And I hate when people say you look tired.

Yes. My name. I have physical jobs. We work hard. Second, I want to move on to crypto market structure, but before I do, I want to highlight something really important, and that is the power of economic sanctions more generally. It's interesting. Like, you know, I spent years in private practice defending offshore entities, sometimes in sanctions

related allegations. And in many ways, OFAC has more power. And, you know, obviously this is up for debate that any other U.S. including the Department of Justice. Because if you have an offshore entity and they get indicted by DOJ, it's like, okay, fine. Maybe I'm in a non-extradition jurisdiction. Maybe I just, you know, stop my executives from going to the United States. But OFAC and economic sanctions effectively cut off individuals or entities from anything

touching the U.S. dollar, which if you know anything about financial services and crypto to some degree still, everything revolves around those wires, that process, that engagement with kind of the U.S. dollar, frankly. So the fact that Tether is doing this and one of the drivers of this kind of freezer is their policy that they change to adhere to kind of sanctions in AML, it's powerful. And it means that you're always going to have projects, crypto or tradfai, where first and foremost, they consider how they ensure that they don't end up on the wrong side of this. So that just cannot be understated. Shifting to market structure, actually, really quick, really quick departure before we get into the meat of things.

We're going to have summer on later. So I think now is actually a perfect time to very briefly call out our crypto good news and then we're going to completely shift. Because I don't want to forget this and we're going to run out time at the end. So the one quick shout that I wanted to do on crypto good news before reshift of our future is the giving block. So guys, I don't know if you've been asked about this. It's kind of like you're a lawyer at the family reunion and everyone asks you about their will and you're like, I have no idea what you're talking about. I have actually informally advised a number of 501c3s that have nothing to do with crypto that want to start accepting crypto donations. And in certain cases, I have recommended that they explore the giving block.

And it's super cool. It acts as a bridge between nonprofits and crypto donors. It's actually a platform. It helps establish organizations accept and process crypto in a way that fits into their existing workflows. I think that's a beautiful thing. We need more things that are going to facility crypto and normies talking to each other and working to each other, working with each other. So quick shout out to the giving block. Yay. Woo. Okay. On to crypto market structure, which is fantastic, but also. complicated. It's not as straightforward as crypto good news. So I want to hand this over to B, who has really been at the front lines of crypto policy on a number of fronts. But before I do, I want to remind everyone how a bill becomes a law. It's introduced. It is referred and reviewed

by committees. There is a floor debate and a vote in both chambers. There is a conference committee that works out of compromise if there's different versions. There's president. action. We're all familiar with that. He can sign it. He can veto it. And then the law is implemented. So where are we with a markup and what is actually a markup need? It actually means that the bill is formally, formally debated, amended, reviewed by the committee before it can move forward in the lawmaking process. And the reason this is important is if the markup goes badly, the bill can die. The markup is also kind of in many ways the last chance to make and consider any changes to the bill. So the big news this week was we were supposed to have both a financial services

committee markup and an agriculture, two separate committee markups on Jan 15th. Ag has punted into later in the month. Financial services is moving forward. And now we're all looking at this revised bill. Some parts of crypto are very happy with parts of it. Other. parts are very upset. One big, big point of contention is defy the tell us more. Yeah, so I'll, there's a lot of new stuff in this bill, but I wanted to focus on defy in particular just because there's a lot of new stuff in that section in particular. And it's just been one of the most hotly debated parts of the bill. So I'll just start out by saying or acknowledging that like, Congress has a really hard job, right? There's, I think, always this tension between what you enshrine

into the statute and what you leave to regulators to deal with or what you just like don't enforce it or don't regulate at all, right? And it's, I think it's really hard to strike the right balance, especially when you're talking about a technology that is very new and also still evolving, sometimes quickly, right? So I think, you know, they, they have. have a very hard job and nowhere is that more like acute to me than in the defy section. So again, we've all had very limited time to review the new language, but I did want to give some initial thoughts just on what I'm seeing. So at a high level, the draft is trying to draw a bright line between decentralized protocols and infrastructure and protocols or parties

where, you know, there's some sort of control over trading. execution, custody, or access. And that side would potentially be regulated as brokers, exchanges, or some sort of regulated financial intermediary. So all of it really comes down to this concept of control. But I think the difficulty here, and it's something that, you know, we as crypto lawyers have been thinking about for years, this concept of control is actually really hard to define, right? So the way that the current language tries to define it is, I would say, like, in three different ways. One is, is there discretion over trading or execution, right? So do you route trades? Do you match counterparties? Do you decide execution timing? Do you modify prices or

priority? Do you intervene in execution outside of like pre-coded rules? Another way they define control is do you have unilateral authority to do things like alter issuance or distribution parameters to change execution logic, to restrict access to the protocol? That's a really important one that we'll come back to or to pause. Sorry to interrupt, but one important thing about this, and you can confirm your thoughts as you're talking about control, is one of the things that I see in this bill is that they're effectively leaving this decision on control and what is defy treasury, which is very scary to me. Like, yeah.

I think as well. Yeah. So actually, I think Jesse, do you want to talk about that later? Because I think you've been following that part of the bill a lot more closely. We should definitely come back to that because that's a really important part of it. And that's obviously, that concept is very offensive to defy general. Yes. Yeah. It's a lot.

And it's concerning. But Jesse, why don't you cover that later? I'll just like, I'll finish kind of explaining how I read how it defines control more generally. So the other thing it says is if you can do something like pause or restart trading, if you have discretion to do that, that could potentially fall under the standard of control. And then the third category is about like user interfaces or front ends, right? So like websites or apps that allow you to access the DPI protocol. And the question there is can you restrict who can trade?

Do you exercise discretion over which assets or pools or strategies that users can have access to you? Can you intervene in execution and do you route orders or somehow like materially modify the outcome? Right. So I have I have a few thoughts on this. First is a substantive one, which is I'm concerned that there are a lot of ways that this control standard could be interpreted to sweep in, in my opinion, pretty much all real world defy as it exists today. And I know that's like a really spicy take. but I think the language is too broad and a lot of things too big. L2.

Yeah. Yeah, totally. So, yeah, so I'll just, I'll give a few examples. And I think for us, this will hit, especially close to home because all three of us have done a lot of thinking and writing about, like, different kind of measures that DFI protocols use and have been experimenting with to try to keep users safe and to respond to, like, emergencies or things like that. Right.

So, like one example is asset curation, right? So I mentioned some of the ways in which asset curation could be considered control and thus subject you to regulation. The reality is that many defy protocols decide which tokens or pools are supported to manage risk and to protect users, right? But under this bill, that sort of discretion could be read as control over trading, even when it's transparent or rules-based. And then another example that I'm sure a lot of people are familiar with, many defy protocols, I would say, I mean, I don't know if it's most of them, but many defy protocols, including a lot of the ones that, like, people have been using for years and that people generally think of as, like, pure defy. They have some form of a kill switch that allows a centralized party or, like, some

small number of parties on a multi-sig to pause the protocol to respond to security incidents, like hacks or exploits, right? So it doesn't allow you to unilaterally reroute or like withdraw funds. It just lets you pause things and sometimes just for like a defined period. Right. So under the new defy language, this alone could mean that they're no longer exempt and potentially have to register as like a broker or something. And not to mention like I think it can be very nuanced, right? So like there are a lot of different ways that kill switches are activated or a lot of different ways that they're designed, right? So some Defi protocols have kill switches that are centrally triggered, but they're subject to a time lock of like 24 hours where users or token holders can vote to

veto the pause, right? So like, would a situation like that or a mechanism like that, would that count as utilateral control? And the same issue arises with other kinds of emergency risk controls, right? doing things like temporarily lowering allocation caps or increasing collateral or like responding to an oracle failure, disabling a function during an exploit. Like all of these things, I think, are just basic safety engineering. And a lot of times they're done in ways that are transparent and pre-programmed and automated. But even so, under the new language, I think all of those kinds of actions could be treated as impermissible control over trading conditions. And, you know, just even applies to things like really scary because

we don't want to disincentivize projects from doing this. And I'll also raise like, we don't have time to go into this in depth, but some people miss this just yesterday, the U.S. FTC, Federal Trade Commission, which is often in charge of kind of consumer protection, issued a proposed complaint against the Nomad Bridge, the Nomad Token Bridge, late to a half. And one of the things it said is they made a number of highly problematic kind of concerning statements in this. So I would check it out if you're not familiar. But including that the company failed to incorporate circuit breakers or a kill switch that could immediately cease the auction on the bridge. Right.

So this inherently contradictory. And that's a good switch, but you can have a kill switch because, you know. And the, you know, the prosecutors in the tornado cash made the same argument, right? because the defense was this was like fully autonomous. Like we don't have the ability to stop or block anything. And they said, well, you should have built that in. Right. So but this bill is saying if you build that in, you're no longer decentralized.

And so I think there is just a lot of conflicts here. Yeah. Like is that what Congress is really like intending to do here is to discourage things that like protocols might want to implement in order to like respond to emergencies and to keep are safe and that sort of thing. I think that's a really important question to address. It's so hard. And the other thing is, I want to be clear, before Jesse weighs in, I want to be clear that I think all of us are in favor of legislation.

Like, my fear is that we don't have legislation and we have a different administration. So it's always a little scary for as a GC to more vocally criticize clarity and any bill because I don't want the perfect to be the enemy of the good. But a lot of the things we're saying constructively, this is why it's important to see these things during the markup period. So they can be changed before they become long. Sorry, Jesse. Yeah. Like, this bill is humongous and will change a lot of things.

So we want to make sure people understand it and know the pros and cons and then be able to make their own decision about whether to support it or not. I guess what I was going to talk about is control. It's such a hard concept. And I think we've all sort of put that out there as a test to think about. And it makes sense legally. And it's been something that lawyers in crypto have been talking about forever as something to focus on. But perhaps that we've over indexed a bit on the risk associated with using the word control and the concept of it. Because in the real world, for example, sanctions at illicit finance, like it often requires continuous interaction with tooling, not binary control.

And yet we're looking for this answer. and I don't think we're going to solve this right now on this pod, but we're looking for this answer of like, how do we have a clear decision for developers on whether they're looped in or they're not? And control seems to be a good way to do it, but the more that we build and the more that there's different types of projects doing different types of things with different incentives,

it's hard to say that this line, whether it's control or anything is the right way to go. And we have summer, so I will assume that. Hi. Today's episode is sponsored by Figure, which is transforming financial services using blockchain. They're the largest non-bank mortgage lender in the U.S., with over $19 billion unlocked on their lending platform. Now they're offering industry low crypto-backed loans at 8.91% interest rates at 50% LTV for BTC, ETH, and Sol. They differentiate themselves by offering decentralized MPC custody, which protects your crypto ownership

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about your gambling or the gambling of someone close to you, please go to conicsonterio.com. Or even buying more Bitcoin, figure makes up transparent. Visit figuremarkets.com slash unchained to take advantage of their crypto-backed loans today. We talk a lot about hair on this podcast. It's over. I should have you. I hate to blow dry my hair. It's like my vein of my existence. And so I just keep going shorter and shorter trying to save time in the morning. I can't work for the pinky hot cut. It looks very chic.

It looks very chic. Thank you. Okay, to our listeners, I'm going to pass this to V to introduce our very special guest, but we're so happy to have you. Okay, yes. Hi, Summer. Thanks so much for joining. So she needs no introduction, but Summer Mercinger is the CEO of the Blockchain Association

and a former CFTC Commissioner. We're so grateful that she's taking time out of, of what is maybe like one of the most eventful weeks we've ever having crypto policy to kind of just like give us an update and her outlook. And actually summer, I was so curious to see if you'd be like zooming in from a broom closet in the Dirksen building in between meetings or something today, but it looks like you're in an actual office. So that's good. Okay. So thank you again for joining us. We don't want to take up too much of your time. I know you're really busy. But I just wanted to start off by asking like how you're feeling right now, especially given the mission.

night text that was released last night. There's a lot of new stuff in there that I think we're all still working through. But what is your general take so far on the latest draft? Do you think the markup on Thursday is really going to happen? I know the Senate Agriculture Committee has already punted on there. So what are your thoughts on everything? Yeah, I think the markup will definitely happen. At this point, there's the question of, is it a bipartisan? markup or a partisan markup. You know, the text came out as bipartisan, but what we were hearing this morning is that there were no Democrats supporting the text as a yet, but these are very fluid conversations and they're going on constantly. So I could very well see a situation

where they have a markup on Thursday and they have some bipartisan support. If that happens, and they get out a committee with a good bipartisan vote. I think we're on a fast track to seeing this move to the Senate floor, you know, within a month, it's not less. Agriculture, you know, I think the fact that they punted to the last week in January, I think that was good. They really wanted to be a bipartisan markup at the Agriculture Committee. They weren't there yet. And they just felt like if they had a few more weeks, they could get to.

a good place. And I know they are talking daily. They're having negotiations on some of the last issues that are outstanding between the two sides. So it's all moving in the right direction. I always say legislation is so hard because something completely unrelated could totally throw it off track. So it's hard to predict. But things feel like they're moving in the right direction. and I feel like maybe I was more pessimistic last week. And this week I've felt a lot more, you know, kind of optimistic about the potential for this to get to the Senate floor. Okay. So that makes me feel better at least.

So you've been in the room for a lot of these meetings that have taken place, including with participants from the Tradfi side. So like some of the big banks and organizations like SIFMA, can you tell us what that's been like? And like how much are you talking to them directly? Yeah. So I know on a lot of the DFI stuff, they brought in the stakeholders directly, DFI and SIFMA and just said, you know, can you guys get to an agreement? And, you know, I think those conversations have generally been going well. And I think sometimes it is you just get people in a room and they sit across one another and it gets, you know, it gets hard to throw bombs at each other when you're sitting, you know, face to face.

And so I do think that having those stakeholders in a room talking has been very beneficial. I've been spending a lot of time on the rewards issue. I would say the trad-fi has been less willing to negotiate on that. They really feel like they have the upper hand in that, you know, they can just push through an amendment and get what they want. That's been a little frustrating. But I think the good news is we have the White House on our side on that issue. We have a lot of, you know, Chairman Scott and a lot of his, the members on the Republican side on our side with the rewards issue. So I think ultimately we can get to a good place.

I don't know if the text is there yet. But, you know, again, it's trying to have these conversations, you know, real time and you're working line by line and word by word. And it just takes a long time to get everybody to a good place. And I'm on your war's issue. I just want to remind our listeners, what Summer's referring to is the fact that a lot of the banks have been fighting. I would say any crypto market structure legislation more generally, but particularly is this one issue where, you know, there are rewards linked to stable coins because obviously it compromises

a fundamental value proposition for their business. So just wanted to explain that really briefly. On that piece, Summer, the other thing that has arisen quite dramatically out of the blue is, as I think everyone knows, just recently the president tweeted his support in cutting off credit card interest rates at 10%. This is not a crypto thing, but this would be very devastating economically for credit card issuers and cause some major market movement in Tradfai. And there is a sense that banks are really exerting a lot of authority and fighting clarity and now they have to ship their resources to fight the credit card thing. and like this to me feels very Washington chess game.

Like what is your what is your take on that? And not to mention the CCRA note notice that came out, I guess this morning from Trump. So I'd love just all of that our response as well. Don't forget to define CCRA for our list. Yeah, the credit card responsibility act. It's it's had so many names. I was working on this issue when I was in the Hill in early 2000. I mean, this is the like this issue comes.

up all the time. You say the word interchange to any financial services staff on the hill and they want to go in a corner and hide. So there's, it's kind of a, this issue comes up all the time. You know, it's, it's never had the votes to get added to any legislations or when it's been close to having votes to get added to legislation, they've shut down the amendment process on the Senate floor. So that particular bill, and again, this would cap interchange fees on credit cards. So that particular approach, that particular bill has had many opportunities to make it to the floor, to make it to a floor vote, and politically it's just not occurred.

Having the president weigh in is probably definitely changing the game, changing the landscape here. I agree the bankers have been fighting so hard on the rewards yield issue and they have activated the community banks on it too, claiming that this is going to harm community banks. Well, this is a much bigger issue for those same banks, you know, having a cap on the interchange fees. This pays for a lot of marketing material that those companies do, you know, when they white label those cards. They get a lot of, they get a lot of revenue from those interchange fees. So this is a bigger issue for the bankers to have to focus on. And I think, you know, that was part of probably what the president was doing here is maybe reminding them, hey, you need to play ball because it's not just about rewards and yield. There's a lot of other things that can come up.

And, you know, it doesn't take, you're not, you're not the fan favorite right now. now. Yeah. And just be careful what what you're putting out there and where you're, you know, pressing buttons. Yeah. I think we're still all digesting like a lot of the new language from the draft, but it looks like where the stable coin reward stuff landed for now is that you can't get rewards or yields on merely holding balances, but for other kinds of activity you can. So I think some people are kind of looking at that as like a partial victory at least for the banks. Like, what are you, what are you thinking of it right now? And do you think it's close to where it's something that like BA could get behind?

Yeah, we've been working on this with stakeholders very closely. And this is where I'm like, we've been going word by word, line by line. The draft text that came out, you know, it had pieces of what has been offered on the staple coin side. There's some new language in there that's probably not, you know, palatable. But I guess the question, what we have to figure out, what we have to think about is there are the votes for an amendment that probably is a little more restrictive. Senator also Brooks has been looking at language that would, you know, again, restrict to deposits, but also include anti-evasion Act language and also language that would create a study on deposit flights and then allow the regulators to have a role. making based on whatever they find in that study. That's a hard no for stakeholders. So I think what everyone is trying to decide right now is can we get somewhere that we can hold the votes,

we can prevent an amendment that's going to be worse from getting adopted in committee and try to find, you know, language. Nobody's going to love the language. It's not going to be perfect. In fact, even the fact that we're dealing with this in market structure is frustrating because Genius was just passed in July of last year. They just started the rulemaking process. So it's kind of unfortunate that we are going back and reopening a bill that just went through a pretty, you know, a pretty major negotiating process to get to where, you know, to get Genius done. So I think that's, we're kind of weighing that. Like, what is, what is the path forward here?

I think the amendments that we see, the Senate Bank Committee has told their members, if they want an amendment, they must file it by 5 p.m. Those will be listed on their website. That'll give us a really good idea of, okay, where are people going on this issue, where they're voting to be, and, you know, how do we handle that kind of a next step? So it's a very kind of touch and go process of this. Yeah. Can we shift to Defi for just a second,

which is kind of like one of the other big, very hard-fought, hotly contested issues in this bill? So there's a lot of new... If we're going to get to Defi, which is really meaty, I just want to ask really quick, Summers take on this weird ETF thing. Because that's very... Yeah, because I want to have a meaty conversation on Defi,

but the other thing in the bill that a bunch of people are very upset about is exempt. crypto assets that have existing ETFs as of Jan 1 from certain disclosure requirements. Very convenient. What is your take on that? Because I think that's really upsetting

a bunch of crypto market participants. Yeah. So it's an interesting fix. You know, I think the idea behind it was you know, some of these disclosures are so onerous that you're almost looking like you're doing public, you know, like your public company. and that level of disclosure. And for some of these, you know, kind of more mature blockchain, you know, I think going

that route was going to be really, it's going to be really tough. And when you think about these ETFs, by having those products, there's been some level of, you know, kind of the SEC has looked into them. They deem these as commodities already. So these are, you know, their products on commodities. and there are disclosures involved with the ETF. So I think the idea was, well, if you have an ETF trading, you know, there's already disclosures there.

Some of the due diligence has already been done. So let's carve that group out. I think this is really interesting. This is where blockchain association can be probably most helpful in this whole process. I think there's a path forward. You know, it could be that that data is a little bit too narrow and maybe we try to span it out a little bit. But I do think we can get members in a good place, both those who it's really important to have that ETF carve out and those who may want to use that at a later date, but wouldn't be

able to do it by the date in the bill. So this is an area where we are literally getting members together. We're talking. We're going back and forth. We hope to have some sort of negotiated language that we can send up to the Senate and say this works for, for, for, for, you know, both sides. Absolutely. Yeah. So with respect to Defi, I think it's very meaty, like Catherine was saying. We were just talking about this right before you jumped on, but it seems like the framework really revolves around this idea of control. And I sort of have a number of issues with that, but one is I think that that idea conflates the idea of decentralization and permissionlessness, which actually, are not the same thing. And what it incentivizes, I think, is like, it disincentivizes protocols from implementing any kind of user or market safety measures, even if they're fully

automated, that could trigger regulation. And I just, I don't know if that's what Congress intended to do. So I think as an industry, we should look at this language really carefully. But the other question I had for you, especially because, you know, you used to be a commissioner at the CFTC. So I'm really curious your thoughts here. The other like issue I was thinking of with respect to the new defy language is really like a process one. Like to me, it seems highly unusual for Congress to legislate with this level of technical granularity. Like I think typically this level of like definition and technical parameters and rules are typically left to the agencies to figure out through like rulemaking or guidance or decisions whether to enforce against like a company or not.

And just in my opinion, some of the stuff in here is is really technical. It's really in the weeds. And it's like I don't know that Congress should be weighing in at that level. And certainly I think Congress should be giving us more than 24 hours to weigh in as market participants in stakeholders. So this is just a process issue, right? So like, I'd love your thoughts on that. Like, is this the kind of stuff that you would typically expect the CFTC and the SEC to weigh in on as opposed to Congress? Like defining with like 50 different factors what control means. Yeah. It's, it's, this has been interesting because normally you would say you want

technology neutral bill language so that you're not locking in any one particular technology. let the regulators who have a little more flexibility, slide the parameters, but don't lock it into law. But everyone is coming off of this like Gary Gensler nightmare, and there's a lot of people who are so afraid to turn over details to the administrative agencies that they've really asked for, you know, very specific language in different areas where you would normally leave it to rulemaking.

I don't think around that's what we're looking at with this issue, but I've seen it a lot throughout this process that people are just kind of scared of the regulators writing rules. And so they're asking Congress to be more specific. There's, you know, the DFI stuff is really interesting. The section five, they got it right. It's in a good place. But they added some new things in section three around illicit finance that are not okay. And so it's like whackamol, right? You get one area in a good place and then another one pops up.

I think we've been on the hill talking to senators about, you know, how do we maybe get some of these sections out, get them removed, and how do we move forward with amendments on this? You know, it's tough when you are up there talking to members and staff, there's just a fundamental misunderstanding of, what DFI is, what a protocol is, who's involved, who has, to your point, you know, what is control, what's not controlled. And it's really been tough to try to educate them to fully understand it. And a lot of times what we see in the text is, you know, a reflection of that lack of understanding. You know, you can talk a little more about the specifics of what you think is maybe going too far on the defy illicit finance side of it. So it's something we've talked a lot about, and I know we've all had meetings on the hill

about this topic and have had thrown out different proposals to touch base on them, some included some not. Yeah. Yeah. I mean, some of it is this idea that, you know, that you would have somebody constantly keeping up with some of the, you know, if you put something in place that you would have to constantly monitor that, and then that suddenly is like, is there control? You know, I think there's some questions around, you know, front ends,

although they have a new term for that in this language. I don't have my crutch with me, Lindsay Frazier, who is amazing, who knows all this stuff, much better than I do. I bring her with me everywhere I go. But it's really this, there's a lot of new definitions that do not make sense. There are some conflicting definitions in there. And it's creating kind of new requirements and responsibilities that just don't work for DFI. And so we get rid of that section and recognize it's not going to work.

Well, it's important. Just to get out the fact that Lindsay, who recently joined VA as head of policy, was former had a policy for uniswap. So that kind of comes in handy when you've been in middle of Defi as part of this conversation. So that's great. I'm sure she's trading on that understanding and information. So, Jesse, like, we were going to touch on this right before you joined Summer. But actually, I would love your thoughts on this.

You, Jesse, do you want to, like, talk about how you think the control definition or the control standard in the new Defi section would apply to something that in reality, almost every defy front end does today, even the ones that everyone considers pure defy, which is sanction screening. And it's usually automated. But yes, can you talk about that? And then Summer, we would love your thoughts. You know, Jesse and I, like, summer,

we have a special place in our heart for programmable risk management. And all these things that defy can and should do to make it safer. But obviously, we don't want that to mean that they all of a sudden get swept into regulation. Well, yeah. I did read your paper, so. Oh, we're aware.

Listen, nurse, we'll put it in the show notes yet again. Okay. Not afraid of self-promotion. I think I'm Jesse. Sorry. Go ahead. Yeah, absolutely. I think that more and more projects are overlaying sanctions checks, but also just sort of like illicit finance tools that also help with cybersecurity. It's not just about sanctions, but it's also identifying actors that could potentially hack your protocol, right? And so we all know about chain analysis, TRM, there's many others blockade predicate. And these provide really important tools that you can frequently set it and forget it for a while.

But that's not really how it works. And that's not really how we encourage projects to use it because then it doesn't really help them. And it doesn't really protect their users in a way that's continuous. And so I feel like the bill tries to make this line between discretionary. control and everything else. But like risk management doesn't fit cleanly into anything because in practice, layering these tools on and enforcing sanctions isn't binary, just like cybersecurity protections aren't binary. To me, like the build doesn't really resolve what continued or action puts you over the line of why. So like, let's be a tangible example, right? So let's talk about chain and TRM.

Most projects have that in some form or they use it just to stop any explicit, address that is listed by OFAC or other like sanctioning entity and another government. But over time, overlaying that requires updating lists, tuning heuristics, responding to false positives, and coordinating with counterparty. So like at what point does ongoing judgment turn rule-based compliance or rule-based risk management into human control? And that's what I can't quite figure out in this book. Well, so you know what I would add to that? It's actually very ambiguous to me that even if you do sanction screening or some other compliance measure through a fully automated mechanism, you could still be exercising control, right? Because one of the parts of the definition is

it, do you control access? It doesn't say whether it's automated or discretionary. Do you restrict which tokens can be allowed, right? Do you exclude low quality collateral from your protocol? Like all of these things could potentially sweep you into the definition of control. But these are all things that defy protocols do every day. And it shouldn't mean that they should be regulated, like, as brokers, right? These are just like smart engineering. Totally. And one more point.

That's a predicate, for example, that puts policies in and can change them. Do they become that for all the projects that they're working for? Like, where is the line? And the other thing, summer, like, I want you to opine on this before. Obviously, the three of us feel very passionate about this. We don't have any opinions. You have a many perspective as an XCTC commission. And I have never been a regulator, but I've dealt with regulators my entire career, especially doing white-collar defense.

To some degree, I often say to crypto, we have to give regulators a degree of credit in terms of there's a lot of regulators, yourself included while you're at the commission, that were highly pragmatic and reasonable. And, you know, this is true of enforcement as well. Like there is a spectrum. Jesse knows this, DOJ in particular. They're not going to indict unless they can convict, for example. But how do you feel about this provision where there is a theoretical possibility? which is scary for crypto having been burned of kind of this overreach. Yeah.

I mean, and again, this is like a demonstration of the fundamental misunderstanding of how this works. I'm sure whoever is working on this section thought that it was a set it and forget it type thing and that, you know, nobody ever had to go back and make sure it was still operating the way it should. And, you know, I think trying to get in front of those folks to make them understand what this means and what they've created by with this language. So, you know, that's, that's that piece of, at least with the legislation, you know, going on the regulatory piece of it. It was always

interesting to me. We'd, we'd bring these DFI cases. I always dissented on them. And it wasn't necessarily because I was saying, oh, I think this protocol. And, you know, I didn't know enough. I didn't have enough information. I couldn't have said this is absolutely decentralized. I didn't have all that information. What I knew was that they found somebody that they could go to and threaten with the lawsuit. And they did. And they never explained to them, well, here's how you could, here are different ways you could abide by the existing regulations.

And so to me it was always more of a like, there's got to be a way where, again, you've stay technology neutral, you don't try to get into these debates about, you know, control and, and, you know, who is, who's doing what. And just look at it more from the standpoint of, you know, how is somebody supposed to operate within the broader context of what's legal, what's, what's allowed under the regulations. So you don't have a future administration that just uses the law and the rules as a weapon against something they don't understand. Absolutely. Summer, we're almost at time. So I just want to take a moment to say thank you so much for knowing us, we're taking the time on a really busy stretch. Although we are in crypto. We always say that. Like,

what is there a time when we're like, oh, it's really chill? And this week is crazy, though. Like, that's worth. We don't have to do that every day. This is an extra than the busiest week ever. Yeah. Yeah. Don't say that. It will get worse. Absolutely. Fighting a good plight. Thank you for your leadership at BA. BA is doing a lot of really great work on behalf of crypto in Washington Blockchain Association.

Check it out, listeners, if you aren't familiar. And, you know, I, again, as Jesse said, keep doing God's work. And thank you so much for joining us. Oh, thank you, Summer. This is fine. And on that note, that for this episode of Dex in the City, thanks to you, our listeners. And we'll see you next week. Have a great week.