Unchained - How AI Agents Hacked Smart Contracts for $1 Apiece - DEX in the City - Ep. 975

Episode Date: December 11, 2025

Sponsor: UniswapCitadel has sparked uproar with a letter calling on the SEC to regulate DeFi protocols as exchanges. But the company's requests may not be totally unreasonable. In this episode of DEX in the City, hosts Jessi Brooks, Katherine Kirkpatrick Bos, and Vy Le dig into Citadel's controversial letter and how it is a reminder that “crypto is a bubble.” They also discuss how the CFTC and SEC are in a “race to the top,” plus Jessi explains how AI agents can exploit smart contracts they haven’t been trained on for just $1 apiece. Plus, Vy calls on the crypto community to support Samourai developers. Hosts: Jessi Brooks, General Counsel at Ribbit Capital Katherine Kirkpatrick Bos, General Counsel at StarkWare TuongVy Le, General Counsel at Veda Links: Unchained: Kraken Valued at $20 Billion After $200 Million Raise From Citadel Securities CFTC Approves Spot Crypto Trading on U.S. Exchanges CFTC’s New Pilot Allows BTC, ETH and USDC as Derivatives Collateral Samourai Wallet Founders Could Serve 5 Years for $237 Million Laundering Samourai pardon petition  Timestamps: 🚀 00:00 Introduction  💡 3:05 What Citadel's SEC letter on tokenized securities and DeFi says about how TradFi views crypto 👀 6:50 Why Vy says Citadel's suggestions are not unreasonable 🤔 9:31 Is Citadel shooting itself in the foot? ❌️ 11:13 What Jessi says Citadel got wrong 📍 13:42 How crypto is a bubble (or a cult?), but Citadel’s position is more mainstream 🧠 19:39 Why the CFTC greenlighting spot crypto trading on regulated exchanges matters 💡 22:57 Katherine explains Bitnomial’s advantage 💥 26:53 Why Jessi says the CFTC and SEC are in a race to regulate crypto 🧏‍♀️ 31:30 Why KK loves the CFTC’s tokenized collateral pilot  🧠 33:47 Why Anthropic's study on smart contract security is so scary for crypto ⚠️ 36:31 How AI agents could exploit 1,000 smart contracts for $1 apiece  📝 41:42 How community members can support Samourai wallet developers 💫 44:00 Crypto good news shoutout for the week Learn more about your ad choices. Visit megaphone.fm/adchoices

What I worry about here is like Citadel Securities to me is not the voice to be saying we care about consumer protection. But I really think as an industry, we need to take those issues really seriously because the SEC is never going to allow capital markets to come on chain unless we can prove that they're fair and transparent. One of the things that I still have PTSD over is 2022, where a major contributing factor, you know, I was at a defy protocol at that time. And I was so furious because there was so much demonization of defy in the press narrative during the crypto crash. And we were all like, it's not defy that screwed this up, guys. It's actually C-fi masquerading as defy. We were this next creepy part because it got worse.

So then they were like, okay, let's point the agents at brand new contracts that were just put out into the ecosystem with no known issue. Within a short period of time, the agents found two. two zero-day exploits. Zero days essentially just like the builders have had zero days to fix any vulnerabilities following release, and they executed exploits. And they made money that cost more than what the agents cost. Hi, all, and welcome to Dex and the City, where the wallets are cold and the takes are hot.

First, we have Jessie, Web3 prosecutor turned Web3 protector at Ribbett Capital. Hi, everyone. And V from the SEC to Web 3. What's up? And I'm your host, Catherine, or KK, fluent in TradFi and conversant in deep tech over at Starkware. And V and I are reporting live from our hotel rooms at the Blockchain Association Summit in Washington, D.C. So we've been looking to some good stuff, but before we get started, here's a word from our sponsors that make this show possible. Are you a builder who needs to add on-chain trading to your product?

The Uniswap Trading API from Uniswap Labs offers plug-in-play access to some of the deepest liquidity in crypto. It's on-chain execution at an enterprise level. More liquidity, less complexity. Visit hub.uniswap.org to learn more. Before we get going, remember, we're lawyers, but we're not your lawyers. Nothing you hear on decks in the city is legal or financial advice, and it doesn't create an attorney-client relationship. For the fine print, check Unchained Crypto.com.

So we have a jam-packed episode today because, as usual, there has been so much going on in crypto, mostly good, but some bad. And speaking of bad, the industry was rocked the other day with a very strongly worded, lengthy article from Citadel Securities. So, V, jump in and tell us more about this letter and why they sent a letter and all the things. Sure. So first off, like, excuse the bed in the background. I tried to make it. I said, good. I'm not really good at it. So I also made my bed. This is how much to care about or this person here. Yeah, I usually don't do that in hotel rooms. Okay, so let's talk about Citadel. So this week, Citadel securities, our favorite little market maker and the king of payment for order flow submitted a comment letter to the SEC on tokenized equities and so-called defy trading protocols. This letter is fascinating because I think it tells you like exactly how a major incumbent thinks about this next potential chapter of market structure, right?

So here's the gist of their position. So Citadel says they support the idea. Sorry to interrupt. Before we get there, because I got this question and I know the answer, but I want you to explain it. Why would Citadel send a letter to the SEC? Like, what is the point? Can I just send a letter to the SEC?

like give us more info on just the background of where this came from. Yeah. So, so I mean, the general answer is yes. Anyone could, can submit like a letter, a comment, a question to the SEC. Usually this takes place in the context of a formal rulemaking, right? Where the agency, the SEC actually invites comment letters from the public. I think what probably prompted this particular letter, is Chair Atkins has been talking a lot recently about something called the Defy Innovation Exemption.

And I think that has made a lot of, so I think it's made crypto very excited about the possibilities there. But I think it has made some of the incumbents and Tradfai very nervous because he has not yet said what it's going to look like and how it's going to impact like the current market and market structure. right? So I think that is probably what prompted this letter. So in the letter, they do say they support the idea of tokenization and, you know, they acknowledge all the things that we know, right? The efficiency gains, faster settlement, investor choice, all the usual stuff that we talk about. But they draw a very bright line, right? So in their view, if you're going to trade tokenized U.S. equities, even on blockchain rails, you still have to play by the exact same regulatory rules that govern national securities exchanges and broker dealers today. In other words, they don't want any shortcuts,

no exemptions, and like no free passes for defy. And the letter essentially asks the SEC to do three things, right? So the first thing is they ask the SEC to identify and classify the intermediaries behind tokenized equity trading, including all of the actors like inside and involved in the DeFi protocols. The second thing the letter does is refuses any broad exemptions or it asked the SEC to refuse any broad exemptions from the definitions of exchange or broker dealer, right? And like, if you guys, you know, remember the last few years under J.R. Gensler, this was like a huge, like, point of contention between the SEC and the industry. And then the third thing that the letter asks for is they say, you know, if the SEC does want to modernize the.

the rules, they have to do it through a full notice and comment rulemaking. So the thing that I mentioned earlier, not a one-off exemption, like the Defy Innovation Exemption, whatever that ends up being, that Cher Atkins keeps touting. Right. So I think on its face, some of this seems reasonable, right? Like, I think the crypto industry, oftentimes we have very needyric reactions to things like this, but I would just like encourage everyone to kind of take a deep breath and like take some of these things seriously, right? Like, because I think there is some reasonable stuff in here. Asking for regulatory clarity. That's a hot take. That's how I know, but it should, but it shouldn't be, right? Like asking for regulatory clarity through a proper rulemaking process

is literally what the crypto industry was asking Gensler for for four years. And there's nothing unreasonable about that. Right. So I think that's totally fair. I want that too. You know, wanting transparency, fair access, market surveillance, custody standards, all this sort of stuff. You know, I spent almost six years at the SEC, right? Like, there are very real investor protection issues involved. And honestly, like, I think many serious crypto builders agree that we need stronger, just like assurances around resiliency and risk management of tokenized assets. I mean, this is something that like all three of us have written about and talked about at Leng if we want to attract issuers and investors to actually participate in these on-chain

capital markets. And by the way, there are a lot of folks in crypto doing just that, right? They're engaging in good faith with the SEC to figure out like what on-chain capital markets would actually look like. So I want to give a shout out to Superstate and Solana Policy Institute and many others that are actually doing this. So I think the other interesting point is like the idea that rules should be technology neutral, right? You hear this like all the time. Like what does it actually mean? I think the point that Citadel makes about rules being tech neutral is also not unreasonable, right? Because it just, that could mean that like just because a matching engine is run by code instead of,

a centralized intermediary doesn't mean that it should just like magically escape regulation if the function it's performing is the same right so especially if it's something that is kind of centralized like a lot of l2 sequencers today sequencers today are central pretty centralized i know i know but it's true right so like not necessarily some of them are right like do i mean do you want to do you want to expand on that well i think look like it's definitely things get complicated when you start talking about tokenized securities. Like I think we all kind of laughed when I think it was Hester Purse who felt the need to come out and write a piece that basically said, hey guys, remember tokenized securities are still securities. Like there's a spectrum of crypto where

it's gray, but there's also black and white. So tokenized security brings a lot more black and white or a need for black and white into the conversation. Jesse, I want to hear your thoughts, but really quick, I wanted to explain some context here that I think is creating some some angst over this issue. First, for those listeners who are not as familiar with the trad markets, Citadel is a leading global massive hedge fund, an asset manager that invests institutional money founded by Ken Griffin. It's extraordinarily powerful. I cannot underscore that enough on the policy fund. Also, because frankly, Ken himself has donated heavily to political candidates and super PACs. Citadel securities.

crypto. Yeah, including crypto. Yeah. You should talk about that. Application year, that's confusing. Citadel Securities, as we mentioned, is a massive electronic market maker, you know, providing liquidity for investors. They are both owned by Ken. You know, they're distinct but related financial firms. But the very confusing thing about all of this is that Citadel Securities has heavily invested in crypto. Like, not through a traditional venture arm, but a lot of strategic investments in major exchanges like Cracken and Emphra and all kinds of things across the spectrum.

So a lot of people were saying, well, why did they send this letter? Why are they shooting themselves in the foot? My take is that this is effectively a mechanism to kind of, you know, it's a long short on where things are going to end up. And then there's also a theory that this is a preview to an intent to sue the SEC on this basis and this is a roadmap for their lawsuit. So that's an interesting path that we might see and things might get really a lot uglier than this letter. But Jesse, go ahead because I know you have thoughts on risk alone. Yeah, I think it's so interesting because this is probably the only topic so far on

the show where I'm probably in between the two of you because I agree that like the rules that they're emphasizing as important are really like very important and we all really believe in them. What I have a problem with here is like they are the ultimate intermediary and of course they want to maintain a system that's based on intermediaries like it would just destroy their moat if defy was able to operate without any intermediaries right so like they want tokenization to exist they see the benefits of it but only if it's done by them or in the way that works for them so in many ways this is like the least surprising filing i've ever seen or letter to the SEC but the problem that i have with the letter is not necessarily like the nuance that V is able to read into it, but rather that it's

sort of forcing the SEC to choose and creating like a black and white situation here. And I think it's misclassifying what industry is asking for because as we discussed and as V you mentioned, like there is this innovation exemption idea that's out there, but nobody knows what it's going to be. And it's probably, I could bet on it, is not going to be a full blanket exception without any report. It's like here's like a whole new on-chain capital markets like overnight. Like I don't think

that's an unacceptive authority works. Like it needs to be conditional and narrow we need to get a real sense of what's required here. So to me like Citadel is saying look, SEC, you have to decide between regulation and no regulation. No regulation is bad for all these reasons. And these are all intermediaries

for all the same reasons. We're really like which is not accurate. Which is not accurate. I think they're better definitely goes too far. They sweep in everything, right? Everything. Validators, everything. Yeah.

And I think if this letter was submitted to the SEC a year ago, I would be more worried about its impact because we haven't spent this entire year educating about what all these different roles in Defi could be and why it's important. Right now, I think it does speak exactly to what you were saying, KK, which is like, we know litigation's coming. Rulemaking is definitely something.

that probably should come about, but like, we don't really know what's going to happen until we have more details on this exemption. Well, the other thing that I think this letter is really important to remind everyone in crypto, and I feel like I'm a broken record on this, but crypto is a bubble. We're all hanging out with each other all the time, talking with each other all the time. Now, it's a problem. It's a problem from an advocacy perspective. One of the things that I like about my ability to advocate for crypto is I have a crypto-sceptic trad by husband. And I use him all the time to pressure check my assumptions to effectively bring me back into kind of the trad perspective.

So I want to remind everyone in crypto that this letter is not outrageous to a lot of traditional financial services. So that might be troubling to crypto. And I'm certainly not saying Citadel's right with the concepts in these letters. I'm saying they're wrong on a lot. But it is a refresher and a reminder that how we think and view these issues is not how a lot of very powerful people and entities think and view these issues. So we still have work to do to educate and to advocate, for example, on behalf of validators, on behalf of L2s, on behalf of all of these

various market participants that should not be regulated. We need to explain why and we need to justify it and we need to speak in a way that trad markets can understand. And do you know what else we have to do? Like I know I sound like a broken record. I feel like I've written like 50 op-eds on this. But one thing I keep really pushing is when the industry talks about on-chain capital markets, we focus so much on performance, right, like speed, efficiency, and cost. And I think not enough on investor protection and market integrity, right? Like I've mentioned, you know, to you guys, the duty of best execution before. So that's just one example, right? It's a rule that exists in today's securities markets to ensure that brokers fill customers' orders fairly. That's a really important policy goal, like issuers and investors are not going to participate in capital markets where orders aren't treated fairly, right? So how are we going to achieve that on chain? What do we do about something like conflicted order routing, which basically exists everywhere in crypto trading today in the form of MEV and like other forces? Like there are a lot of projects

taking this seriously, right? Like flashbots has developed a lot of mechanisms to help solve this problem on the Ethereum blockchain and companies like Gito and temporal or harmonic have put out tools to address this. But I really think as an industry, we need to take those issues really seriously because the SEC is never going to allow capital markets to come on chain unless we can prove that they're fair and transparent, nor should they. And so that is, it's like something that I just, I want the industry to start thinking really seriously about that. Like V, that is, 100% on point. What I worry about here is like Citadel securities to me is not the voice to be saying we care about consumer protection and give it up the best ask everything. And so it's very easy for

DFI to dismiss the arguments like full stop in this letter when what you're saying is actually really true that they're making good points. They're just doing it a way that like misclassifies DIPI. Yeah, there's a lot of inaccuracies in there. Like regulators were the enemy for a lot of time and now trapped by it's not just here it's the genius act etc like are becoming the enemy and so honestly like when crypto has an enemy like we our bubble gets more entrenched and it's like you're against us or yeah speaking of bubbles kk i totally agree that like it's actually a great reality check to have a non-crypto like husband because literally every other week i ask my husband if I sound like I'm in a cult and he's like, yeah, kind of.

Or a friend or a mom. Yeah. Or a dog. It's always good to have these people around us that I'll live and breathe like Bitcoin. Come on, guys. We can't convert everyone as much as we're trying to do so. Okay. It's a longer, longer path. I think that's right.

And the other thing is, look, I think I have an immediate. negative visceral reaction when I see people trying to deal with these issues using a sledgehammer as opposed to a scalpel in the words of Commissioner Perce in her privacy piece. And we have spent so many years with the sledgehammer regulatory approach. And what is likely the best route forward for crypto is a scalpel. Now, it's a lot harder to do that as we've seen with legislation. But Citadel's sledgehammer letter was absurd. Again, not absurd to the trad markets, but, but absurd in how they were sweeping everyone into something that didn't make sense from a very technical perspective. Yeah, yeah, agree.

Okay, so we have another meaty topic that we're going to move to in a minute. But before we do so, another word from our sponsors. Hey, founders and developers. If you're looking to bring on-chain trading to your product, wallet, or platform, check out the new Uniswap Trading API from Uniswap Labs. It's your plug-and-play gateway to global, on-chain, liquidity, no deep crypto experience required, and no need to manage complex integrations or ongoing maintenance.

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Visit hub.uniswap.org to learn more. So two absolutely massive news items from the CFTC this week, speaking of good news, positive news, after talking about Citadel. The first was the acting chair, Caroline Pham, who has just been on a terror of progress announced that listed spot crypto products can change on CFTC registered futures exchanges. So as a refresher, those are called designated contract markets or DCM. I want to provide a little bit more background there because I am formerly the chief legal officer of a DCM and a crypto spot market. So derivatives or futures are traded on DCMs. So meaning that up until now, spot crypto trading in the U.S. has not happened on DCM.

It's mainly happened on kind of crypto-native platforms that aren't regulated by the CFTC or SEC. They're subject to this horrible patchwork of state licensing, like state money transmitter licenses, New York bit licenses, etc. Some of the spot trading also happens on kind of tread by platforms like Robin Hood. And there's other licenses that can be involved. But the CFTC's primary authority is over the derivatives markets. It's not over spot crypto and markets. But the big change, and this is huge, is that Chairfam came forward and was basically like DCMs can list spot crypto for trading. This was previewed months ago, so the industry actually had chance to comment, but now it's official official.

And we have already seen Bitnomio launching the first ever leverage spot crypto exchange. So I want to get thoughts from my other hosts, but a very nerdy point here. Margin trades in spot crypto are actually already considered by the CFTC to be retail leveraged commodity transactions, which means that under those specific transactions under the Commodity Exchange Act are a carve out. Like there's a carve out in the Commodities Exchange Act that designates what the CFTC has jurisdiction over that says that certain retail commodity transactions can be treated by the law as if they were futures contracts. So these transactions were already kind of like a secret exception to the whole no spot trading

on DCMs, but no one was really using this. Now it's a question mark as to where that, like is that where the jurisdiction comes from. So I'll stop talking, but the TLDR of all of this, like from an educational perspective is there has never been like clear guidance from the CFTC that futures exchanges can list. bought crypto as leveraged retail commodity transactions until now. And the real utility is that all of these DCMs can now offer retail access to long and short crypto, like with leverage. And it could also hopefully for centralized exchanges or for DCMs make it a lot easier

for those exchanges to offer these products and to navigate all of this without dealing with the state-by-state patchwork. if they rely on federal preemption. So huge advantage there. Everybody's going to want to DCM. So I know that V had some questions. I did. I love asking you all on my CFTC questions. So my my question was like like a competition one almost like all of that is super interesting. But like when I saw this, my first thought was, oh, like was just one company like granted like permission to do this? and it seemed to come out of nowhere. And so, like, that made me think about, like, I don't know if you guys remember,

but when, like, the SEC was basically forced by the D.C. Circuit Court to approve spot Bitcoin ETFs. Like, they did it in a very particular way, which is they approved all 11 applications at the same time. So, like, the first 11 applications, they approved them as a group. And I think they did that because they didn't want to give like any one market participant a leg up or an unfair like advantage or a head start. So like that was kind of my first thought when I saw the Bitnomiel news. So like do you can you shed any light on that?

It's a great question. So Bitnomiel is actually unique. I'm a fan of Bitnomail. They hold a DCM license. They also hold a derivatives clearing organization, a DCO license, which is for clearing. And they are also a futures commission merchant and FCM. So that is nearly a full suite of CFTC licenses. And it's what's called a vertically integrated structure.

So there's actually four pieces of a derivative market, the exchange, the DCM, the clearinghouse, the DCO, the broker or the futures commission merchant, the FCM. And then the matching engine, like the technology. So bitnomial structure is a one-stop shop. So traders don't have to involve traditional brokers and bitnomial kind of controls all the different multiple layers as opposed to relying on a bunch of different third parties. That explains in my mind why they were kind of first to do that. Because they already had all of the license, like the registrations they needed. Exactly.

And look, you don't need all those licenses to be a DCM and to list spot crypto. You don't. But what it does is bitnomial structure decreases dependencies. And they already offered futures perps. They're actually the one DCM in America to call their perpetual like product a perp. And they were the first to list perks. A lot of people forget about that and options. And now this week they launched the first ever leveraged retail spot crypto exchange.

So again, my take is that they had this good, like ready to go with this guidance, like with what, you know, fans' guidance, there's nothing preventing other DCMs. from moving forward and doing what Bitnomil is doing. The other interesting point I'll make is there aren't that many DCMs. Like, there really are not. It's a very small group of crypto DCMs. There's a lot of companies looking into getting a DCM. It's quite a process. It's quite an undertaking.

But I would not compare it to registering with the SEC because it has historically been more realistic to get a DCM. then to register as a securities exchange. And there are crypto decs, whereas as we. Yeah. There's like, there's also only like five like registered securities exchanges. Yeah, exactly. Like there are about many of them.

Yeah. Well, there's, there's, I think there's more than that. Maybe I'm, but yeah. Yeah. Yeah. It's a small number. It's, it's hard to get these licenses. So I'm the other, it's a notable macro point.

Like, we're not tomorrow going to see like a huge flood of DCMs. It's a process. And the entities that are already well positioned with crypto futures, if I were them, I would obviously be thinking really strategically about how, like, what direction do we want to take this guidance? On a regulator strategy point, I also think it's sort of interesting because the CFTC SEC, like whether it's totally true or not, like the crypto industry has always been like, which one do we want?

We should we pit one against the other? Which one's better? Which one has more power? Which was going to enforce less? And recently there's been all this news and, you know, evidence as well of them working together to try and push the industry forward as well as some other initiatives. But, you know, what's been going on lately at the CFTC, it really is sort of showing me that they're trying to push forward and show themselves capable of regulating this space. And I feel like it's sort of a race to regulate a little bit in interesting, innovative ways between the CFDC and SEC. And like if you layer that competitive aspect of it over the market structure bill and the drafting of it,

it sort of to me seems like they're all sort of trying to show legislators. Like this is how this agency can do it. And the CFTC is taking a strong position here of like, look, we as regulators are doing something really special. We're allowing new things that are going to work and be safe while we keep close tabs on it. Yeah. It's kind of like the CFTC is project crypto. And it's like, I think I said this on a prior episode, like, if you don't show that you can do a good job, you're going to get fired. And so like that's what they're trying to avoid, right? But it's good. I think it's like a race to the top in a lot of ways.

I love that point on the prior episode via the impigate where if this SEC hadn't like fumbled the ball during the Gensler administration, the SEC might have just effectively moved into the pad of all. Yeah, the primary regulator. So like that's a that's a. That's a. That's a. sad missed opportunity. But yeah, look, like chair fam is making a lot of progress, a lot of, like very quickly. And the sense is that she really wants to get a lot of, a lot done before she moves forward. Now, we finally, very realistically have the prospect of a CFTC chair. You know, Mike Selegg, like, it looks like smooth sealing, sailing Fortinem. I am a big fan of future chair Selegg, he's whipsmart. You know, he actually really knows and understands crypto.

I was very disappointed when there was that kerfuffle over the Brian Quintenz nomination. That was ugly. We don't need to get into that on the pod. But I think Chair Seelig will be great. And, you know, it's good that Chairfam or acting Chairfam is really getting shit done before she's heading out the door. I'm feeling very hopeful today. But I also think like the work that's being done, I don't want to say it's just the CFDC, but since that's what we're talking about right now by regulators to show like this can work in a regulated space is actually great for the industry because this is a narrative of cryptos unregulated. It's full of criminals.

And that narrative can fall apart when you see like actively regulated institutions doing this in a way that makes finance better. Yeah. And we know that I want to be clear. Like, none of us necessarily think regulation good, unregul, like no regulation bad. But what we're talking about here is crypto finance, like crypto trading, if it's not decentralized, hey guys, like if it's a centralized entity facilitating crypto spot trading, it should be regulated. I actually don't think that's a hot take. And one of the things that I still have PTSD over is 2022, where a major contributing factor, You know, I was at a defy protocol at that time.

And I was so furious because there was so much demonization of defy in the press narrative during the crypto crash. And we were all like, it's not defy that screwed this up, guys. It's actually C-Fi masquerading as defy. And, yeah, Celsius probably should have been regulated, like, clearly. So, okay, rant over, but that I'm sorry. So I'll continue that for many up. I was wondering if you were going to name the.

I think we all nerd to that pain in different overlapping ways. I got like a lot of gray hair over that time period, as did everyone. No one can see. So at this time. And occasionally I am like, have we learned nothing from 2020? I actually think this episode is more positive. And maybe it's because like we have a common enemy again, which is trad by. But I do think that like over the past week, if we judge how.

crypto's doing and the tenor based on crypto Twitter, it seems like we're all sort of unified again. So that's good. Look at that. I'm sure that will last, you know, a few months. A few months. But like, okay, Jesse. And, you know, one of the other things I have to add, on another positive note, another huge news broke from the CFTC from acting chair fam. She also announced a pilot program for tokenized collateral in the derivatives market. So we just talked about derivatives. We just talked about DCMs. I love this. Like, this was inevitable. This was a long time coming. I remember during the very, very dark days before the sun came out in the crypto regulatory environment, there was this massive tokenization summit in February of 2024, where it was basically all of the U.S.

regulators, global regulators talking about tokenization. And they talked a lot about tokenized collateral in the derivatives market. And to be specific, this covers ETH, Bitcoin, and U.S. CC. And the reason they talked about it is because I've always thought this is just a fantastic use case for crypto because it's very easily understandable. It's very easy to see the utility. And I'm talking atomic settlement, more transparency, automation, increased capital efficiency, cost savings, several other big moves forward. Like it's innovation in the derivatives market. You know, I remember, I'm old enough to remember when moving to T plus one. settlement, like, you know, faster settlement than before was huge. Now we're shrinking that gap more.

So in some ways, this feels abrupt to certain people. But I think if you were really focused or if you were kind of plugged into the trad markets, as I was before I joined crypto, I was with a big, you know, with CBO, CBO digital, the DCM. And you could understand why people were excited about that or more conceptually open to this than a lot of other facets of crypto. So that's another huge piece of positive news from the CFTC. I love it. Nice. Thanks for the roundup. Yeah. Okay. So everybody's probably sick of hearing me talk and we've spent way too much time talking about TradFi on this podcast. So we're going to we're going to wrap up with our third topic. It's actually super cool and I'm going to hand it over to our AI czar, Jesse, take the best of overview.

Oh, it's cool. It's actually like a little scary. But essentially what, um, came out last week is that Anthropic did a study showing that AI's changing how we should think about security on chain, which is a topic that we've covered before, but I think it's a topic that we need to continue to cover because it's only getting harder. Essentially, the security paradigm has changed because agents aren't just assisting hackers anymore, but rather they can be the hacker. They're creating and running an entire exploit from end to end, the same way that a sophisticated human actor would, but they're doing it faster. cheaper and with endless stamina because they don't have to sleep. They can work all the time. And so I think we need to be a little bit concerned and really understand what happened here

and what this study says. So I'm going to break it down a little bit. So essentially, Anthropic created a blockchain simulator and they put AI agents into it asking them to do something really simple, which is just look at the real smart contracts that have already been exploited in the wild and see if they can independently do it again. So essentially look at all these smart contracts, find the hacks, and see if you can recreate them. Wait, and Jesse, for our listeners who aren't familiar with Anthropic, tell us a little bit about what it is. Because candidly, I didn't know Anthropic until I dug into this.

Got it. If you've ever used Claude, that is from Anthropic. So it's essentially, it's way more complicated in this, but essentially it's a competitor to open AI. So some people use chat chavit, some people use Claude. I use both. So I'm not here to like say one or the other. But it's, you know, it's one that's very focused on security.

and safety, and it frequently takes the opposite position of other large AI shops about, like, the dangers associated with AI. And they, if you really want to understand security and AI, like, just go to Anthropics website and they have, like, amazing primers to help you understand how you should be worried about it. So they're really testing the products that they're putting out there into the world. And that includes testing how it could hack different scenarios. They actually chose smart contracts because they could then quantify how much money could be stolen by how much effort they put it and how much money goes in. And that's why smart contracts were targeted here. It wasn't like anti-cryptor or anything like that.

Like it was a test that they did. And I think it was a test that actually can really help the crypto industry understand the problem here. So essentially, just to get back to exactly what they found was the AI agents acting autonomously were able to recreate. exploits that already happened. Okay. So that's number one. And they were able to do it over and over again creating hundreds of millions of dollars of losses. Obviously, this was in a simulator. And okay, so we've seen these hacks before. Is it really that big of a deal? But then they made them test this on smart contracts that they weren't trained on. So how training works for LLMs is essentially to build an LLM, you put all this information in there to make it a foundational set of learnings. And that's called

pre-training and then you release it essentially. So remember when you used to use chat GBT and sometimes it would say like this does not this is not included in our pre-training information or our knowledge stops here. So if you release if you pre-trained until January 1st and then you release it, if you ask about something six months later, they might not know about it. Now that's gotten better with something called reinforcement learning and post-training and web search. But essentially it's very important to know what an LLM has been pre-trained on. But they were able to hack smart contracts that they knew nothing about beforehand. So essentially, they're not hacking from memory. They're hacking from learning. So they're learning based on prior exploits and

figuring out how to do new different exploits. Okay. That's so creepy, Jesse. I just have to stop. Wait for this next creepy part because it got worse. So then they were like, okay, let's point the agents at brand new contracts that were just put out into the ecosystem with no, no, issues. Like, they weren't any issues spotted. And within a short period of time, the agents found two zero-day exploits. Zero days essentially just like the builders have had zero days to fix any vulnerabilities following release, and they executed exploits. And they made money that cost more than what the agents cost. And why that's important is that the agents are sort of programmed to make money, right? So they know how to make enough money to offset any cost.

And as you watch them learning and getting better, it was getting cheaper to do this for the agents. So each contract that they tested, smart contracts for different vulnerabilities, cost about $1. Okay. So they could do a thousand smart contracts for $1,000 like this. That's insane. So the big story to me is not like AI can hack smart contracts. Like, okay, we sort of knew that. What does that mean?

There's hacked all the time. It's probably happening already. I think it's more that these agents can reason, iterate, use dev tooling, and autonomously execute a full chain attack from start to finish in a faster and cheaper way than humans. So the security vector has shrug. Like, if you put a smart contract that's there that control funds, you have to know it's perfect because an attacker can now spend a dollar to surface every latent issue and continuously harvest and automate a hacking machine. and I think this is so important because, one, it's really something that we need to think about and why we need to focus more on cybersecurity more than ever. But two, like, I am so excited about this idea of AI and crypto. The number of like podcasts about AI crypto intersection or blogs or

whatever is just endless, right? And we're still trying to figure out like, how does this all work together? But my question is like, and I'm excited about it too, don't get me wrong, as you can probably tell. But I'm just going to love the passion. No, I'm just not sure we're ready because what happens when agents are on chain day to day, like with 402 or with any other sort of trading mechanism? How do we deal with prompt injection? How do we deal with loss of control scenarios? Like, we're still trying to figure out how to deal with like the vulnerabilities and smart contracts that like DPRK can get at or humans can get at. And so the question now is like, how do we really respond? And it's the end in my mind.

of passive security. We need more active security measures. I love this because I don't know if you guys know this about me, but I love post-apocalyptic movies. It's my thing. Like, my husband will be like, there's a new show where everyone has died and gone underground. I think he would love it. And like, this is very aligned with that. Like, first they come for our smart contracts, then they come to take over our homes. Okay, anyway, but look, I think these issues are huge. We talk. We talk. a lot about regulation conceptually. But I always think of in crypto, there's three big buckets of risk. You know, one is like AML, KYC, criminal risk. One is regulatory, SEC, CFTC. The third is just security. And a good company has a strategy to deal with all three of those risks that are, that is both

proactive and reactive. And the security prong is often less legal and more, you know, the, the, the builders, the, you know, the technical people, the CTO that had a security. And I think your point is spot on is we need to start looking down the pipeline and see what's coming for us on the security sphere to make sure we're prepared. That was a pretty good way to end it, much more positive than mine. We'll get there. We are strong. Okay. So we have two more super quick things before we wrap up for this week. One, V is a really important shout out. So I'm going to toss it to V. Yeah, so just really quickly, I wanted to draw attention to the Samurai Wallet case. So this is a case that's almost identical to the Tornado Cash case.

And what happened here was the prosecutors agreed to allow the two co-founders to plead guilty to the least serious charge of operating an unlicensed money transmitter business, which carries a maximum of five years, as opposed to taking the case to trial and taking their chances at trial on all three. charges, which also involved money laundering and likely, to be honest, getting the max sentence of 25 years because the case had been reassigned to Judge Denise Coat of the S.E.N.Y, who like if people don't know, she's one of the harshest sentencers on the court. So Keone Rodriguez, one of the co-founders, ended up getting the max five years for the one charge that he pled to. And he set to report to prison on December 19th. He has started a petition for a pardon. So I urge all of you who care about developer rights and just the human impact of this case to sign it. We'll link it in the show notes. And I've also posted it on my ex account.

Seriously, important shout out. And we should talk more about this on a different episode because the three of us are very familiar with the process of pleadials. And a lot of people don't really understand the pressure and the calculus that goes into pleading out. And unfortunately, to some degree, these individuals were, you know, in the wrong time at the wrong place, you know, or just there, I don't want to call them. How much your judge matters? You know, how much your judge matters and how you negotiate and things like that. Like, it just makes such a difference and it can impact your life forever. What you're going to get assigned to? Yeah. Yeah. Which, which is, frustrating to say the least. So thank you for that, the important shoutout. And of course,

this is the second week of our weekly shoutout of Crypto Good News. So please send us your nomination, send us your ideas, valuable organizations, fun stories, interesting use cases. We have a great one that Jesse's going to touch on today. Yeah, thanks everyone for sending ideas in. And what V was just talking about is so important. So it's hard to follow. it. But here's something else that just gives you a little bit more hope about crypto. So essentially, there was a huge fire in Hong Kong. Probably many of y'all heard of it. Over 150 people have died so far. And it's like the biggest fire since post-1940s. And essentially, it was burning for days in like a certain apartment complex. And, you know, lots of stuff happens all over the world. It's easy

to ignore it. Luz is so crazy right now. But, you know, a lot of crypto companies did not ignore this one and they donated millions of dollars to help repair and help some of the victims or families of decedents. And it just sort of shows that like in all the crap and in all the news, like there's a lot of good things and good people happening. And especially in this time in the world, I think it's really important for us to continue to highlight them. 16 million. Absolutely. We are global citizens because we are crypto companies. We are borderless. But it still means we take care of humans on this earth. So It's that's a beautiful moment and a reflection. Good for those companies.

Shout out to those companies for being good citizens. So next week, we're going to have a special privacy episode that immediately follows my participation on the SEC's financial surveillance and privacy roundtable. Don't know how I finagled an invite to that guys, but excited to talk all about it'll be great. Starkware, the OGs of ZKTAC and all that fun stuff. And we are going to have our first ever guests on death. in the city. So, surprise test. So we will see you next week. That is it for this week's episode of deck from the city.