Unchained - Just a Coincidence? Coinbase and Polygon Lawyers See Bad Omens in SEC Crackdown - Ep. 458

Episode Date: February 21, 2023

A settlement with Kraken, a proposed custody rule, and lawsuits against Paxos and Terraform Labs. “This week has been a very long year,” said Polygon Labs Chief Policy Officer Rebecca Rettig. She joins Coinbase Chief Legal Officer Paul Grewal to interpret what’s going on with the SEC. Is it just one big push to cripple the crypto industry? “The fact that we’re all … trying to read tea leaves speaks to a failure in the system that relies upon one-off enforcement actions rather than a public rulemaking process,” said Grewal. Show highlights: how the implosion of FTX sped up regulatory actions  whether the SEC will go after other staking services why the statement that crypto firms should just register with the SEC is “disingenuous” what seems to be behind the decision to target the BUSD stablecoin whether SEC enforcement actions will be detrimental to innovation in the U.S. what features would make stablecoins securities why the SEC is alleging that the UST stablecoin is a security why “expansion of jurisdiction” is at the heart of the SEC’s proposed crypto custody rules why Paul thinks that forcing crypto innovation offshore could become a national security issue for the U.S. Thank you to our sponsors! Crypto.com FTSE Halborn NYU Guests: Paul Grewal, Chief Legal Officer at Coinbase: Twitter Rebecca Rettig, Chief Policy Officer at Polygon Labs: Twitter Links WIRED: Confusion Spirals in Crypto as the US Cracks Down Unchained:  Circle Told NYDFS That Paxos-Issued BUSD Wasn’t Fully Backed SEC Wants Tougher Rules for Crypto Custody SEC Sues Do Kwon and Terraform Labs WSJ:  Crypto Firm Paxos Faces SEC Lawsuit Over Binance USD Token Regulator Orders Crypto Firm Paxos to Stop Issuing Binance Stablecoin Bloomberg: US Crackdown Seeks to Push Crypto Back to the Fringes of Finance SEC:  Pocketful of Quarters, Inc. Statement on Safeguarding Advisory Client Assets Proposal CoinDesk: SEC Proposal Could Bar Investment Advisers From Keeping Assets at Crypto Firms Jesse Powell’s tweet Learn more about your ad choices. Visit megaphone.fm/adchoices

Think about the fact that in recent months and in the past year, we've spent billions of dollars, taxpayer dollars, to try to lure and incent the return of semiconductors to the United States for national security reasons. I'd hate to see us make that same mistake with respect to crypto. I'd hate to see innovations that were either originally or largely developed here in the United States pushed offshore and for the country in 30 years to be spending even more. money to try to lure that industry back after it's had a tremendous record of success in other markets. That's one way in which I think about the national security implications of what we're seeing coming from the SEC and elsewhere today. Hi, everyone. Welcome to Unchained, your no hype

resource for all things crypto. I'm your host, Laura Shin, author of The Cryptopians. I started covering crypto seven years ago, and as a senior editor at Forbes was the first mainstream media reporter, to cover cryptocurrency full-time. This is the February 21st, 2023 episode of Unchained. Futsi Russell, a leading global index provider, has applied its trademark expertise,

governance, and structure to digital assets, offering institutional quality data to build, manage, and measure investment portfolios. The Exchange-Vetted flagship index series measures the investable digital asset market from large-cap to microcap. Get your index data from a market leader. Find out more at footsie rustle.com slash digital asset. Become a disruptor in the emerging fintech

space through NYU Stern's new Master of Science in FinTech program. This one-year part-time program is designed with full-time working professionals in mind. Visit stern.n.new.n.org slash MSFT-Hifunchained. Web3 projects lost nearly $4 billion of crypto assets in 2022, but nothing is expensive than losing trust. Secure your company with Halborn's best-in-class security advisory solutions. Visit halborn.com for more. Buy, earn, and spend crypto on the crypto.com app. New users can enjoy zero credit card fees on crypto purchases in the first seven days. Download the crypto.com app and get $25 with the code Laura. Link in the description. Today's topic is the government crackdown on crypto. Here to discuss are Paul Greatwell, Chief

legal officer at Coinbase and Rebecca Reddick, chief policy officer at Polygon Labs. Welcome, Rebecca and Paul. Hi, Laura. Thanks for having us. Hey, Laura. Thank you. There's been a flurry of regulatory activity targeting crypto over the last few weeks. Before we get into all the details around the many different developments, let's just talk high level. Give an overview of what you think is happening here. Is there coordination? You know, is there some kind of strategy you see going on? Is there like one end target that they're all aiming at? What do you think is happening? I'll jump in to start. I think there are two things happening. One, I think there has been a long discussion about additional regulatory crackdown on crypto. Some of it probably was taking a while to wind its way through the various

agencies and regulators in D.C. But I do think the end of 2022 with the implosion of FTX really cleared the path for a lot of these regulatory actions to move much more quickly, especially because Congress, while there are a number of great policymakers working on various pieces of legislation relating to different aspects of the crypto markets and the crypto ecosystem will not be able to take those actions as quickly as the regulators will be. But I do think the other piece of it is nobody sort of expected crypto to have this, you know, clean entry path into sort of changing all of our paradigms and decentralizing and things like that. So I think some of this was inevitable. But I do think that, as I said, FTX really sped things up in terms of the speed

and the validity with which some of these regulatory actions could come through. Yeah, if you look back over the course of 2022, if three arrows and Celsius and Voyager and all the rest left kindling on the forest floor, there's no question. FTX was the bolt of lightning that set things on fire. The other thing I think that we're seeing happening now is that you've got a number of regulators under tremendous pressure to do something and to show that they are reacting and responding to the events of the past year. And if you combine that at the same time with a long, painful downturn in the crypto market, you just have a perfect storm or combination of events, which in many ways makes the actions we've seen over the last week or two entirely predictable. Sorry, one other point I'll put on it is I think what we saw through 2022 was this idea, you know, there were all at every conference you'd see panels like institutional adoption of crypto,

you know, the institutions are coming. and international regulators like the Financial Stability Board and the Bank of International Settlements had put out a lot of different pieces of research that said things like, once crypto starts touching the traditional markets, we really have to start being careful because, you know, this is an unregulated asset class as of now, and the volatility in the markets may really tip things on the traditional side. And so I think to Paul's point, when we really saw FTX and watched it and heard about how it had fanned out into some more institutional players, there was even more impetus to really crack down, as Paul said, through some of these other regulators. So one thing I noticed, neither of you said, and I'm seeing a lot of this on Twitter. So I have to ask about this,

is that on Twitter, it seems like a lot of the crypto community finds that a lot of these regulatory actions are either kind of overreaching. They're not appropriate. They're like the regulators feel like they have to do something, but it wasn't really the right thing. I see people mocking the regulators saying, oh, you didn't save me from, you know, FTCS stealing my money, but now you're going to prevent me from making money via crack and staking or, you know, whatever. Just those, that may not be an exact quote, but, you know, those kinds of sentiments. And basically saying the regulators are just doing whatever, but it doesn't make sense and the stuff that they should have been paying attention to, they didn't. So, you know, do you think that that's a valid kind of criticism that we're seeing

from the community? I think it's valid to ask why so much activity seems to be focused on one-off enforcement actions that look by definition backwards and retrospectively on events that have long since happened and have already hurt people in real ways. I think what a lot of people are asking in that same spirit is where are the rules that could and should inform how we all ought to be keeping customers and investors safe prospectively. We, for example, at Coinbase have been calling for rulemaking now for months and months. We filed a petition with the SEC back in July. We heard nothing.

We filed comments to our own petition, raising additional questions that we think could and should be answered to keep consumers, customers, investors safe. Still haven't received any answer. And in the meantime, we're seeing the enforcement actions continue. Again, in a sort of ad hoc. hawk in one-off way that doesn't really do much to keep people safe, which is I think what most people actually want to see happen. I tend to agree with Paul on that.

And I think what people are reacting to is what Paul was saying. So I think the overreach question here is, okay, we had a singular enforcement action against the way Cracken had set up their staking as a service. And then we have a subsequent statement by Chair Gensler where he says, this should be an admonishment to anyone who does staking as a service, right? and Coinbase did put out a statement afterwards, and I don't want to steal your Thunderpaw, so I know you'll talk about it. But, you know, instead, the way we do staking as a service is fundamentally different.

And there are other parts to the complaint, which, you know, distinguish either the types of disclosures that may have been enough that certainly distinguish staking as a user or, you know, in a more crypto-native way, just on a blockchain network. And so I think the statements that really do cause fear in the crypto ecosystem, and again, with retail users because the statements, you know, may happen. And then Cher Gensler's on Squawk Box the next morning talking about it and really speaking to maybe not even retail users, but what we'd call normies, you know, just traditional people who are in the financial markets. And the message they're getting is crypto is bad, crypto is for criminals. And so I think that

there is this massive chilling effect, even through these one-off enforcement actions. I think the other piece of it is enforcement actions are not precedential law. They don't set the law. What they do is they say this set of facts and circumstances, the SEC thought was illegal. And the important part to take away is cracking did not admit or deny liability. They settled to, you know, have some finality and some certainty around it so they can go around conducting what other other parts of their business they believe are important without going in for a long haul fight with the SEC. I think the other piece of it that we need to take away is a lot of companies have just settled because what they've seen is these long,

protracted litigation. So the ripple litigation is a great one, right? That's been winding its way through the district court only for years about whether XRP is a security or not. And people don't want to, you know, there are some great people who do want to fight and I and believe that they are in the right. And I support doing that 100%. But a lot of people don't want to do that just for business reasons. And so these types of enforcement actions, even if the, you know, industry players believe they are right, will just settle and move forward to call it a day. And so then you, use those settlements as some sort of chilling effect when they don't have real legal precedential value. And I think that may also be what people are reacting to as well.

So what you're saying is sort of like any program that's set of exactly like Krakens kind of knows, okay, we need to change it. But then the question is for any for any other program that has any different features, then it's a question of, okay, well, now are we in the clear? Now are we in the clear? And there's no clarity around that. Is that? Okay. That's exactly right. And the complaint against Cracken does give some nuances and some details of like it's different here and this is different. But that you, what can you take away from that? If you go get a, you know, a Wells notice or a subpoena or something from the SEC and they say, well, you should have taken this away from the Cracking complaint. You don't know if that is true or not. Or you say, well, I took this away from the Cracking complaint. And this SEC can say, well, that was wrong. That's not the right interpretation. So it doesn't give any true regulatory clarity unless, as you said, Laura, It's set up exactly to a T the way Crackens was. Even there, of course, we're still talking about allegations, a complaint, nothing that's been proven in a court of law, nothing that has any binding precedential effect.

So even the precedential value of the complaint against Cracken is really only to give some limited insight into how the SEC views that particular staking product or program. It doesn't give any insight whatsoever as to what the law actually is. And that's the problem when you rely upon a regulation by enforcement regime instead of noticing common rulemaking that's required by Congress. Well, so I don't know if you guys want to have a moment where you kind of try to analyze the settlement because my next question for you was going to be whether or not you think that there's any broader implications you can take from the settlement for either direct staking mean just like a solo staker.

for centralized exchanges offering staking as a service, or for decentralized liquid staking providers, such as LIDO or Rocket Pole. Did either of you feel like you kind of could come away with any rules for any of those based on the settlement? Well, when we looked at when we looked at the settlement and did our level best to look at how the Cracken products were characterized in the complaint, it became very clear to us that Cracken's products operated in a particular way and in ways that were very different from other staking products like CoinBases. For example, with CoinBases staking products, there's no question about who owns the assets as part of the service. Title always remains with the customer. It never passes to Coinbase. It never passes to anybody else. And so a primary motivation as we surmise from the complaint simply doesn't apply in a host of other situations.

There are other important differences. For example, with the Cracken staking product, there seemed to be a particular concern with the ability of customers to get exactly what they had expected in terms of rewards, in terms of commissions and fees and so forth. That's not an issue with other staking products like Coinbases for the simple fact that the rewards, to extent they're earned, are set by the network. There's no discretion there. that's just basic network math.

And the commissions that Coinbase sets are fully disclosed in our help center. So at all points in time, customers understand what to expect. So, you know, there are important differences that distinguish other products like Coinbase is an issue in the Cracken complaint. But we do think that beyond that, there is a broader question of just how far is the SEC willing to go and eager to go to cast a pall over all staking, to raise questions and cast aspersions about staking in general. And obviously, staking is a very important part of the proliferation and growth of many different projects and networks.

And so even where, as in this case, we think we stand clearly separate apart from what was at issue in the cracking case, it's very important to Coinbase and many others in the industry to speak out about what we're seeing because that, cloud that's being cast, those questions and the spursions they're being thrown about, can often be as damaging as a complaint or a verdict in district court. Yeah. And to sort of build on what Paul was saying, again, this is all we can take away from allegations and a complaint that have not been admitted. I do think the complaint does make distinctions with user staking on its own. Paragraph 39 of the complaint says the crack in staking program

has several features that differentiate it from staking and earning rewards on your own. So they do think about it from an individual perspective. And paragraph 44 does the same thing. It says the returns that investors receive from the Krakken staking program differ from the returns that an investor could expect if the investor staked directly. And then it goes on to say some other things. So I do think it's the SEC's complaint here against Krakken and let's keep it narrow is focused on a centralized actor providing.

a service, taking custody, not making disclosures that the SEC thinks are appropriate. But I do think that the SEC, at least in this complaint alone, and Paul's right, we've heard rumblings about how far regulators are going to go against individual staking. But in this complaint alone, it at least shows some willingness to distinguish a custodial staking as a service program from user staking on their own. And I think that's a really important distinction. Okay. Well, one other thing that I saw people kind of laughing about was when announcing the settlement, SEC Chair Gary Gensler urged crypto companies to come in and register. And in response, Jesse Powell, the former CEO of Kraken and the founder and disclosure of Cracken is a former sponsor of the show. He tweeted,

oh man, all I had to do was fill out a form on a website and tell people that staking rewards come from staking. Wish I'd seen this video before paying a $30 million fine and agreeing to permanently shut down the service in the U.S. How dumb do I look? Gosh. And then he put a little gas emoji and then a little light emoji. So who's right here? Like, is Gensler Wright? Should Crack and have registered and if so, like, register as what? Or is it kind of what Jesse then later tweeted, which was he wrote, and this was about the custody rule that was being proposed. He wrote, step run, require registration a custody crypto. Step two, don't let anyone register, which, which actually, I think Collins Belton made that point on my show a couple years ago.

But anyway, so what's going on here? Well, Laura, look, whether or not Cracken should have registered or anyone else should register for their products is an entirely separate question from whether anyone actually can register. And the suggestion somehow that registration is simply a matter of going to a website, downloading a form, and completing a few fields is to put it gently, laugh at least. These are complicated products. There are real challenges in terms of fitting these very new technologies into some very old structures. And the reality is that for most new projects in particular, putting the central exchanges to the side from, registration isn't a practical option given the burden, the expense, the number

of lawyers and accounts that are required in order to complete even a basic filing. that it's important to not lose sight of just how impossible it is for most to comply with the rules, even where they're interested in complying with rules. Now, central exchanges like Coinbase and others, we are extremely interested in complying with the rules. That's why we do. We have very recent experience registering with the SEC, of course, because when we went public in April, 2021, we had to complete an S-1 and go through that entire registration process. So I think there's a fair and reasonable conversation to be had about where registration ought to be

required and what rules ought to be established, again, ideally through a public process that's transparent or registration. But let's not minimize and dismiss serious work and serious burdens on ordinary people by suggesting that all they have to do is click on a few links on a web page and be done. But, you know, even that aside, I think the word we have to focus on in what Paul said is impossible. And it's not impossible just from a burden perspective. Lots of companies, and it's, you know, a lot of them are large and have very large revenue models can pay lawyers and pay the fees and spend the time. The burden itself isn't what we should be focused on right now. And as you mentioned, Colin said this on your show a long time ago. I was in private practice for a long time

representing crypto companies. Lawyers have been tweeting about it recently. If you take a client as outside counsel into the SEC or if a client goes in, a company goes into the SEC and goes to Corp Finn and says, I would like to register. The typical refrain, and Paul may have a different experience, but the typical refrain is, we're not sure what to register you as or we're not sure how to register this product. And so the impossibility point that Paul made is not just about the cost. It's about the, the fitting new paradigms into these old rules. And then you may get, you know, a Wells notice or subpoena later from the enforcement arm of the SEC. And you say, well, I tried to go and register with Corp Friend, and they told me I couldn't do it. So I think, you know, that is more the disingenuous point.

And it goes back to what I was saying before about this PR tour to go tell, you know, in a video, the American people registering with the SEC is just, you know, like filling out a Google form is, is disingenuous because it is a much more complex product and it is a much more complex process. and it is especially for products like new, innovative, technologically based products like crypto that were not contemplated back when the securities laws are written in 1933 and 1934. So if you guys were to come up with a wish list of what you'd like to see from the SEC to kind of fill in some of those pieces that you say are just sort of being left blank at the moment in terms of like a framework for operating within the bounds of what is

legal to them. What would that look like? Well, Laura, the good news for for me and for Coinbase is that we don't have to come up with a wish list. We've actually published our wish list when we, when we petitioned for rulemaking last July and raised something like 50 or more separate questions that we think need to be answered, again, in a public, transparent, open process in order to strike the right balance between, yes, of course, protecting consumers, protecting investors on the one hand. and at the same time, nurturing innovation in an important emerging industry. To give you an example or two of questions, I'd like to see answered as part of a public rulemaking process. I want to start with where Rebecca pointed us just a minute ago.

For crypto projects and for issuers, the disclosure requirements that would apply in any registration scheme need to account for some of the very unique features of crypto, both positive and negative. On the positive side, so much of the activity and actions of the project when it comes to crypto are publicly available on the blockchain. Don't require any particular new set of disclosures and schemes beyond what people can observe for themselves. And we think that's a real positive. On the negative side, because the registrations that have been pointed to involve the same level, of accounting and other disclosures that you would expect of a company looking to go public, we think there needs to be some recognition or accommodation for the fact that most, or at least many of these projects, are self-funded at the time that they would have to register

or are receiving their first rounds of funding. And so there just needs to be an accommodation, I think, for the burdens on issuers, because, you know, an exchange could register as a National Securities Exchange tomorrow. if they don't have assets to list because none of the asset issuers are able to comply, there's nothing achieved there. We think it would be a hollow and empty victory. So those are at least a few of the ideas I'd like or issues I'd like to see confronted in a rulemaking process.

There are many, many others as well. I'm going to give a somewhat contrarian answer, which is I don't want to, I do want to see rulemaking from the SEC on some things, but what I want to see more than anything, and people should remember, rules promulgated from the SEC can change in to administration, that's true of a lot of regulatory bodies. We've seen that, you know, with the OCC and rules that were put into place that were then rolled back when the administration changed, I really want to see a robust market infrastructure bill that lays out a good system for how centralized crypto actors should go forward and thinking about this technology for sure.

And then rules can be made within the bounds of that bill. But I think the legislative process is really where we should start. And I am hopeful because there are, a lot of very motivated policymakers on the Hill who are working on different bills, on different aspects, stable coin bill we saw come out. The market infrastructure bill, I think people are really thinking about. But that's where I want to see people put their efforts right now. And then we can see rulemaking within the bounds of those bills afterwards. All right. We're going to tackle another big topic here. And this kind of starts with a sort of confusing set of actions, at least to me, being a non-legal person. So we have the SEC, I guess.

guess issue a Wells notice against Paxos at the same time that the New York Department of Financial Services asked Paxos to stop issuing BUSD. So do you think that those actions were coordinated? And what was the intention here? Is it something that has to do with stable coins themselves? Or is it really, as I saw a lot of speculation about, a way to kind of get it financed and cut it off from like US dollars or the equivalent? You know, what do you think was kind of going on there? It's pretty hard to imagine or to believe that actions announced nearly simultaneously weren't coordinated in some way. But even if that weren't true, I think the fact that you have multiple agencies at the state level and at the federal level, all interested in the same issue, certainly suggests that the stable coins that were issued by Paxos, the BUSD, were attracting a unique amount of attention for important.

reasons. Now, I will say that NYDFS, the Department of Financial Services, at least based on what's been publicly reported, which is, of course, all that any of us know, focused on some very specific issues that were separate apart from the securities law questions that we've been debating when it comes to stable coins across crypto. The issue appears to have focused, from the DFS perspective, on diligence. Was Paxos and is Paxos properly examining who's on their platform, who's gaining access to the coins and so on and so forth. And separately, Paxos is diligence on Binance. And so those topics, of course, stands separate apart from whether or not these were

actually securities. What we've seen, I think, those in this instance, is another example where state regulators have an important role to play and are demonstrating their ability to properly supervise these markets, regardless of whether or not there's. is merit to this particular case or not, I think the fact that you've got state regulator stepping in is something that people in crypto should be paying very careful attention to, even as we're all being drawn to the fireworks coming out of the SEC on a daily basis. But I do want to back up and explain why the New York Department of Financial Services is looking

at Paxos at all, which is the New York Department of Financial Services regulates Paxos, I believe, is a trust company. And I think Coinbase is also a regulated trust company, which I assume will come up later in this discussion under the New York state regime. And being a trust company, the easiest way is to liken it a bit to being a bank. It's certainly not a bank, and I don't want people to be confused by that. But I do think it's an important distinction. And once you are under the DFS regime, you are subject to regular examinations by a state regulator. They are very onerous. You have a very high bar of requirements, both on the financial side and on the cyber requirement side. It's a very strict regime. So, you know, what happened recently that may have brought questions about finance even more to the

four, maybe what has motivated DFS because it's not that DFS woke up one day and said, oh, we don't like finance because they have clearly been regulating Paxos for many years. Paxos has been going through clearly successfully examinations and frequent contact with DFS. So I do believe that there's probably something more finance related that has might, that has potentially come to light and agree with Paul that, I mean, regulators within the United States, both at the state and the federal level do coordinate amongst themselves frequently. And so there may have been some real coordination here. We'll never know, but we can only speculate on that. But I think it's important to understand where DFS was coming from. It's not like they had always

been regulating them, unlike the SEC, who doesn't regulate Paxos, at least today, you know, from a regular standpoint. Yeah, I think that's exactly right, Rebecca. If I can just add one other quick point, Laura. I think if you take a step back and look at this particular example, it's reasonable to ask, why are we all guessing as to whether or not there's coordination here? Why isn't that a matter of public record? It seems to me that if there are legitimate and appropriate concerns that are shared by state and federal regulators, they should be perfectly willing to share them in a transparent open forum so that we all can understand what those concerns are. And there won't, there won't be any mystery about whether there's any kind of shadow coordination campaign going

on. I think the fact that we're all guessing and speculating and trying to read tea leaves speaks to a failure in the system that relies upon one-off enforcement actions rather than a public rulemaking process. And so it sounds like both of you feel that kind of the main purpose of this had to do more with Binance than stable coins generally, or do you see any broader implications for stable coins in general? I'll give the lawyer answer, which is it depends. Not all stable coins are created equal. A lot of them look very different. And I think that's why there was a big push last year to build out a stable coin bill to bring some uniformity and some certainty around it, both from what backs these stable coins, the amount of reserves, the

necessary disclosures, and the like. I think that Chair Gensler has made some comments to say, yeah, I think that some of these stable coins will be regulated as some form of security or at least under the securities laws. But I don't think he has made the same type of sweeping statements he's made about all tokens. All tokens are securities or almost all tokens are securities the same way about stable coins. I think that there are nuanced distinctions and hopefully those will apply as we go forward more than anything. And I'll just sort of keep hammering this home. I hope there's legislation that distinguishes what is and is not a security. and how stable coins should be regulated going forward?

Yeah, I think the differences do matter when it comes to stable coins. The fact of the matter is if you're talking about USDA-backed stable coins, the argument that they somehow qualify as securities under the current case law and the statutes that constrain the SEC's jurisdiction are pretty weak. And lawyers will happily debate those until the cows come home. I think, though, that there very well could be other types of products, other types of algorithmic staple coins, for example, that raise more interesting questions around whether or not they qualify securities. But again, it's important that even if the

complaints are narrowly drawn and the cases are specifically focused, that the rhetoric around this law doesn't expand into a sweeping condemnation of an entire asset class in a way that chills innovation. And unfortunately, that's exactly what we're seeing. And that's the concern that I have, that even if the cases themselves may have merit in certain instances or others, that the rhetoric itself does lasting damage to an asset class and an area of innovation that's just getting started. In a moment, we're going to wrap up this conversation around stable coins, but first a quick word from the sponsors who make this show possible.

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So one question I do want to post you is that Chair Gensler did make references to how stable coins could, depending on how they're structured, have some resemblance to, for instance, money market funds, which I think are regulated as securities. So do you see his point there? And because Paula, it just sort of seemed like you were saying it sort of stretches the imagination to imagine they could be regulated that way. But I wanted to hear your take on if there's any certain types that you feel might be securities. Yeah.

Well, as I said, I think the arguments for USD back stable coins are particularly weak. At the same time, there are certainly other types of stable coins that are, in market and are being developed every day that may raise more interesting concerns. And like what features would make you think that they might? I think that, you know, to the extent that you have expectations of profit, for example, being driven by decisions made by providers or issuers that are entirely in the control of those providers and issuers that aren't disclosed that are subject to whim and change and that ultimately reflect an amsymetry or disparity in information,

I think it's appropriate to ask questions. But the sweeping suggestion that I believe the chair has made in other contexts, Rebecca is right. In this particular case, the issues, I think, have been more narrowly addressed, aren't helpful. They aren't helpful at a time and a point in our industry's evolution where these products are still being built, tested. and evolved. So there's just, I think, a lot of opportunity here to be more thoughtful in addressing

legitimate concerns. Analogies are always helpful. Money market funds and other things, I think, are useful as ways of understanding and framing these new products and services, but we shouldn't suggest to American innovators that this entire asset class may be off limits, because what those American innovators are going to do is take their innovations elsewhere. And that's not something anyone I think in this country wants to see happen. Yeah, and I think when you're talking about this money market issue, Laura, there are, I think he was referring to, you know, potential investment companies, but there are really strict percentages of how these investment companies worked.

The Securities Act, that Investment Company Act that regulates investment companies, lays out a very prescriptive set of rules. So you'd have to look at each stable coin on a case-by-case basis to see. see if what these table coins are backed by, if they're not fully USDA or USDA equivalent backed, meet those thresholds in the Investment Company Act, which I can't remember them off the top of my head, but there are very specific percentages. Jumping off from some point that Paul made, which I'm not going to be able to phrase it the way he did, because I don't remember exactly what he said, but it just reminded me of this lawsuit

against Terraform Labs in Doe Kwan. So I don't remember Paul's phrasing, but basically it was something about the value of that stable coin being dependent on, you know, these other people or something. It wasn't exactly that. But the point is that obviously, you know, in the complaint, we can see that the SEC is asserting that UST, which whether or not you call it a stable coin, it's up to you, but has, you know, a long thing called a stable coin. And their argument was that basically because it was connected to Luna, which they said was a security, and the price of that depended on the price of Luna, that that was why. And if I've, you know, butchered that explanation, then please feel free to correct me. But, um, so is that kind of

where you were going, Paul? Like I didn't know if that's kind of what you were thinking about, like any kind of algorithmic stable coin. And frankly, my kind of mini question within that question is then, would fracks fall under that? Because frax is, you know, not quite exactly like Terra. It's, you know, more collateralized. So, so I think you got, I think you got the basic chain of logic right, Laura, from my perspective. As I said, and as I think Rebecca alluded to as well, the details of each coin and project matter. And so it may, it very well may be that one to construct an algorithmic stable coin under certain circumstances that really do implicate the federal securities laws and the fundamental concerns that lie behind those laws, which is, again,

to take a situation where an investor is at a fundamental disadvantage in terms of understanding the operation of the project and the discretion retained by the people running the project. In those circumstances, there may be a reason to apply the federal securities laws in the way that the SEC has suggested in these cases. But that's not a reason to suggest even casually that somehow all stable coins now may be subject to the federal securities laws. because the implications of that are significant. Stable coins are not a corner case, use case when it comes to crypto.

They are an important part of the crypto economy. They are in many ways, I think, the most successful and certainly the most prolific example of product market fit, right? So I think that language matters and I think that precision matters. We'll see if, as we move forward, certain stable coins, in fact, are deemed, but not by a regulator alone, but by a court or by legislators as securities. But we're not at that point yet. We're still very much early in the process.

Let's jump to your Terra point, Laura, because when Paul was saying, you know, if there are stable coins that somehow give you, you know, an expectation of profit and you think, well, that is antithetical to the title stable coins because you're just expecting to get, you know, one to one. But what the SEC complaint against Doquan and Terraform Labs alleges with respect to US, is that they marketed it as a yield-bearing stable coin. And the reason it was yield-bearing is because they created the anchor protocol for deposits of UST and then marketed the 19 to 20 percent yield, all of which was generated by centralized

actors. And that's what the complaint goes on to say, that the yield really came from the same types of this lending activity that the SEC took issue with, with BlockFi, right? For example, in that, where they were taking user assets and finding different ways to deploy it to be able to give the users the promised yield. And I think Chair Gensler even said somewhat recently, like, if you're using the term yield, you should really think about where it's coming from

because you're probably creating a security, something along those lines. And I am sure I'm paraphrasing, but it was a really sweeping statement. And so that's where this comes from. I don't think all algorithmic stable coins necessarily would be categorized as securities again, like it goes through it.

but fracks or other algorithmic stable coins, which hold its peg theoretically through some software or, you know, smart contract-based system wouldn't necessarily be a security under the same theory as UST because UST really was much more part of this scheme, right? It's not that it was UST alone. There is this language under the securities laws and in the case law that if you create a scheme where there's an investment, where there's an expectation of profit, then you've created the investment contract. So it's that whole thing together. That is what really created the scheme here that the SEC believes violated the securities laws. So right now, if a client came to you

and said, we have this idea for a stable coin, what would you advise them in terms of either how they should structure it or how they should not structure it based on what you read in the complaint against Terraform Labs in Doquan? And beyond structure, market as well, structure and market, I should add. Even before you get to the complaint, we have at Coinbase, of course, been a reseller of USDC for some time now. And our experience with USDC, I think, you know, offer some important lessons on what we think any responsible stable coin issuer ought to do in order to make sure that people

have confidence. For example, reserves, a huge topic with respect to stable coins and disclosure requirements around reserves. We think that's a basic requirement that not only is something that consumers and investors ought to expect, but that helps to foster confidence more generally that when someone, for example, is putting a dollar in and getting a stable coin in return, that that dollar is going to be there when they want to turn that stable coin back in and get the dollar back. So disclosures super, super important.

We also think it's very important for stable coin issuers to be, extremely clear about title and the way in which title operates and ownership operates, because that also seems to be something that has quite reasonably on this point. I'll give the SEC credit, you know, been an object of interesting concern. The last thing I would say is that, and this breaks my heart to say this as an American, I think any stable coin issue ought to first ask whether or not the United States in this current climate is necessarily the best place in which to develop the project in the first instance. Even a short while ago, I might have not even paused on that point.

But I think in this particular climate, with rhetoric coming out that seemingly sweeps in all sorts of stable coins, regardless of all the careful work that people put in to be fair and transparent, it certainly suggests that perhaps other jurisdictions are worth at least looking at. And are there any particular ones that you think are getting it right and are good for entrepreneurs? Well, whether they're getting it right or not, Mika, the markets and crypto asset regulation, which is the very comprehensive set of regulations in the EU, which have already passed the European Parliament. They haven't been enacted yet. They are expected to be enacted and finalized in April. Have a very large set of robust rules for stable coin issuers. Very clear, clear on disclosure requirements, clear on reserve requirements. The reserve requirements are very onerous. So, you know, that's something to keep in mind. but you at least will have certainty and finality. And there is a rulemaking process through the EBA, the European Banking Association or Administration that will allow stable coin issuers to go and say, here's the how we think we can implement the rules that are in MECA. So there is a process by which

there's a clear set of laws and regs. You know what they're going to be. They won't even be enacted, by the way, like effective until 2024. So you have a lot of time for compliance under MECA. if you're setting up your stable coin now or your stable coin project now. So there is that. And then the UK just put out its consultation on crypto assets on February 1, which also has a very set of robust recommendations for stable coins. Stablecoins already constitute a financial instrument under UK laws and they are continuing to promulgate laws and regs under their current regime in the UK. There's no certainty or finality yet in the UK the way there is under Mika. the way this crypto asset consultation looks like from the Treasury Department there, very, very

similar to Mika, where they're focusing on centralized actors first and they are pushing decentralized actors and defy and things like that down the line and taking feedback on all of it. You know, it's interesting, right? The UK and EU are not the only examples, but they're, I think, excellent examples of how to get the rules right. Look at the process that they followed. the promulgation of proposed standards, the opportunity for public input, the rigor, I mean, the raucous debate in some cases, right, Rebecca, around some of these topics. Companies like Coinbase agreed with a lot of what we've seen in Mecca. We didn't agree with everything.

But there was a rational process that involved lots of public input and that was transparent. You don't see when it comes to the UK or the EU a lot of scrutiny by lawyers of individual complaints or allegations or speeches by particular commissioners in order to glean what the rules are going to be on a going forward basis. The contrast between that and what we're seeing in the United States, I think, is pretty damning in terms of how our country, how this country has been going about setting standards. Well, now let's talk about the SEC's proposed role around registered investment advisors that want to store digital assets or to use a company to do that. This proposed role would require those RIAs to use so-called qualified custodians.

And there's only one crypto company, I think, that fits that bill at this moment. So the way CoinDesk put it was that the bill would largely push RAs to use non-crypto companies. And I was wondering, you know, what your thoughts were about this proposed rule. Well, I'm not sure which one company you're referring to because Coinbase certainly has been a qualified custodian. We were qualified custodian the day before the proposal was made. We were qualified custodian on that day and we're going to be a qualified custodian going forward. And so in some ways.

Okay, so maybe I saw Ram Alawali had tweeted that only Anchorage fit the bill, but maybe I misinterpreted it as tweet. But anyway. He may have been referring to there being only one company, Anchorage that is OCC or federally registered. But the rule specifically recognized that state chartered trust companies like Coinbases can, in fact, qualify as a custodian, which we think is actually an important vindication. And I, again, credit where credit is to applaud the SEC for that recognition. But the fact of the matter is that the RIAs are going to be subject to new standards in how they interact with QC, with qualified custodians. And at least as we are reading the proposal, it seems pretty clear that there is an extension or expansion by the SEC of its jurisdiction over not just securities assets, but non-security assets as well. And this raises, I think, some important questions about, again, the rule of law, whether or not

jurisdiction is properly constrained, whether the agency is recognizing that it doesn't just have free rein to sweep in whole chunks of the crypto or digital economy because it can't. So even though, you know, we thought that parts of the proposal were productive and positive, this is a big deal for crypto and something we're all going to pay very careful attention to. Yeah. So to put a gloss on that. Dodd-Frank, with which Chair Gonsor is, I think, intimately familiar because he was chair of the CFTC when Dodd-Frank was enacted, did give the SEC power to regulate investment advisors and the custody of their client assets over all custody of any assets. So this loan does, you know, this new proposed rule alone is not what expands the SEC's jurisdiction over being able to regulate investment advisors.

Dodd-Frank definitely did that. And we can say that there has, the QC and the RIA rule hasn't been examined, I think, I could be wrong, but at least for 10 years, something like that. And there's been a lot of talk about changing these types of custodial rules, especially because there are a lot of new types of assets and not just something like crypto, but there are lots of different types of assets that registered investment advisors hold or invest in now. So some of those things we have to say are positive, right? That's consumer protection. That's within the SEC's jurisdiction. I do think this is not retail users, right? The investors in most registered investment advisors are large, sophisticated investors, right. It's what we call LPs. So the idea of investor protection here does relate to much more

sophisticated investors. I love Coinbase's very positive spin on qualified custodians and because they are a trust company under NYDFS, that is a very reasonable interpretation. I think there has been another interpretation. And I think this is where ROM's tweet comes from about Anchorage, which is, well, only if you're a federally chartered bank, can you be a qualified custodian now based on the way the rule has been written. And I think there has been speeches and commentary by a number the commissioners saying, and including by the chair, saying the state banks should not be allowed to be QCs because they're not meeting the same standards as the OCC chartered banks and the like. And by the way, banks can do it. And we're totally happy for them to be qualified custodians.

And then Chair Gensler referred to the fact of this joint statement between the Fed, the FDIC and the OCC, which said nationally chartered banks should not be allowed or should be very circumspect about engaging in any type of their business with crypto assets. So while it does, in theory, look like there's a path forward under this rule that you could still have qualified custodians who hold crypto assets under the prudential regulators who they have said, oh, well, banks shouldn't really be touching crypto. So it's sort of this backdoor way to maybe cut off the. ability for registered investment advisors to have qualified custodians who have crypto. I hope

coin bases, right? Because I think that would be a way that you'd really cut off funding to the entire industry. And I think, you know, we have to really think about whether that was intentional or not. There's another important actor in all of this, of course, which goes beyond just the federal regulators and the RIAs and the coin bases of the world. It's the states themselves. And I think one of the interesting things to really focus on as this rule. And again, it's a proposed rule at this point. We are at the very beginning of a very long, and I suspect difficult road ahead. I think we should all pay a lot of attention to what New York and other states are going to have to say about the quality of their supervision, right? Because I think Rebecca is exactly right.

There was either an explicit or at least an implicit, I think, editorial in the SEC's proposal about how effective or frankly how competent states were to protect these assets and make sure that these assets were properly protected in general. That usually doesn't go unresponded to when it comes to one jurisdiction in its authority versus another. So very eager to see that debate takes shape as well. I do think on the expansion of jurisdiction, the one place that is interesting to think about is that the SEC actually doesn't regulate qualified custodians directly. They regulate registered investment advisors and all assets that they hold. But this almost seems like a way to regulate qualified custodians because they lay out a certain set of requirements that any qualified custodian

has to meet for the registered investment advisor to use that qualified custodian. So that's really the expansion of jurisdiction that comes into play. It also regulates what contracts should look like between registered investment advisors and qualified custodians. So it's now putting new requirements on contractual arrangements for qualified custodians, which they didn't have before. So that is an expansion or a way of, you know, sort of backdoor regulating qualified custodians that didn't exist before. So one thing that Rebecca alluded to earlier was that some of these different actions kind of cut crypto off from the banking system or at least kind of shrink the avenues, you know, in which they're connected. And there have been a couple of articles making this exact point, one in Bloomberg and one in

the Wall Street Journal, about how banks basically are getting the notice that, you know, they need to tighten up on their activities with crypto companies. And I was wondering, you know, I'm sure you've heard there's some people who equate what's going on here to Operation Chokepoint, which happened earlier in the Obama administration and was an effort to basically kind of shrivolve. up certain industries that it did not approve of. So do you think that that's what's going on here? Well, I think that at some point, these actions line up in a way that you have to wonder, is it all just a coincidence? And I think beyond that, you have to ask, why are we confronting restrictions, withdrawals, debanking of legal, recognized, highly regulated companies in this country?

There are all sorts of fair questions to ask about the operations of different firms in crypto. And I would point out outside of crypto. But the notion that somehow the right way to constrain activities that give rise to concerns is to cut off their oxygen or slowly deplete them of oxygen, which of course in the financial world, there's no more important source of auction than banking services. I think that's something that is as much as anything explaining the, a strong reaction we're seeing not just inside of the crypto community, but in the broader financial services community as well. That's a dangerous precedent. And it may be that crypto is currently the object of that particular approach. But if the government gets away with that with crypto, what's to say and what's to stop them from getting away with it as to a whole

host of other legal, safe, regulated industries in this country that happen to be out of favor with policymakers. You know, I think that I'll take a little bit of a soapbox on this and say the U.S. has been a leader in innovation for decades, right? There have been amazing, and I'm talking way, way back when we're thinking about electricity or trains or things like that. And there was always resistance to those new innovations too, and there were always grifters and frauds. All those things happened along the way. Honestly, there's been a lot of talk in the EU that Mika came to the way it did because a lot of the European member states felt like they were left behind for Web 2.

If you really look where the large tech giants are today, I think the biggest, like Spotify is maybe the biggest when you're looking at the EU. And there are no other real large tech giants out there in the EU now. And so what I'll say from just a broader perspective that, and I know I'm sort of been saying this throughout this episode, but the best thing we can do is get some legislation into place. So as Paul was saying, we don't have to speculate about what's, What's everyone trying to do? What's going to happen next? And I don't want crypto to all go overseas. A lot of it has. Electric Capital has put out a great report. And I know you did an episode about this, Laura. But it showed that there has been continued innovation and developer activity that's being pushed offshore from the United States. I don't want to see that happen. I want the U.S. to keep its place as a great place for innovation and a place where people can come and really meet out their dreams and things like that. So I'm hoping that that's not the intention, that there is a very sort of understandable fear post-FTX,

especially given Sam's proximity in D.C. to people and some, you know, questions that have, legitimate questions that have been raised thereafter. So, you know, I am hopeful that there is a big turnaround here and that the industry stays vibrant enough and stays strong enough throughout what is going on now, which is a literally a day today, because we saw, got another SEC enforcement order come out today against a, you know, a basketball player who had done some promotion of crypto assets. So it's really a day-to-day thing right now that's going on here. But I do hope the industry can stay strong enough to meet this out and to be able to continue to, you know, grow in the United States as well. Yeah, hilariously, it was the same Ethereum Max token that they had gone after Kim Kardashian for. You know, one thing in the kind of run up to this episode when we were just sort of emailing about what we were going to discuss. Paul,

you said something about how you were concerned with the national security implications of sending crypto innovation offshore. And I didn't know what that meant. And maybe Rebecca started to allude to that. But yeah, what does that mean, national security? I'm not sure how they're related. Well, I'll share what I mean by that. And I suspect, in fact, I think I know Rebecca has views on this as well based on our comment. I would say that, look, the fact of the matter is that in the last 25 or 30 years, the United States has had an unfortunate history of pushing innovation that was originally developed here in the United States or substantially enhanced here in the United States to other countries and jurisdictions and seeing those industries not only survive, thrive overseas,

never to return. What's a good example of that? Think about semiconductors. Think about what this country contributed to development of semiconductors. Think about how much of that industry moved overseas and also think about the fact that in recent months and in the past year, we've spent billions of dollars, taxpayer dollars, to try to lure and incent the return of semiconductors to the United States for national security reasons. I'd hate to see us make that same mistake with respect to crypto. I'd hate to see innovations that were either originally or largely developed here in the United

States pushed offshore and for the country in 30 years to be, spending even more money to try to lure that industry back after it's had a tremendous record of success in other markets. That's one way in which I think about the national security implications of what we're seeing coming from the SEC and elsewhere today. The other way I think about this too is that, and I think we all need to think about it in these terms, if I can suggest that, the innovation, the talent, Rebecca alluded to the fact that we're seeing so much developer and engineer activity taking place outside the United States, that takes. That takes a lot of the talent is part of our national infrastructure in an important way.

And so to do the extent we want to continue to attract and develop that talent here in the U.S., not just for purposes of building great products in crypto and Web3, but more generally, we need to create at the very least a hospitable climate, to say nothing of a welcoming climate for these types of projects and networks. And right now, I don't think we're doing that. And I think if we continue down this road, we're going to see ourselves repeating the same mistakes as we've repeated over and over again over the last three decades? I mean, I think there is a, there are legitimate national security concerns, most of which are, there are other jurisdictions

that are building. So first of all, the U.S. has been systematically debanking itself in other developing countries right now. So where we might have had a banking presence or somehow push the U.S. dollar, we've been taking ourselves out of developing countries. The country that comes in to take our place is China and in most of these countries. And one thing we know, although we may not know, you know, details about where they are, but they have been developing a CBDC and they are far ahead on it. Certainly then where we are now, there are certainly lots of legitimate concerns about CBDCs, especially on the privacy side. And so it is understandable that we are not there. So I am in no way saying that we need to be building out our CBDC program right now. And there are, there's a lot of

work going in, both at the Fed level and with a number of, you know, members of Congress who are seriously examining CBDCs. But I think the national security concerns really come with if we are pushing this offshore and if we are debanking from other places, then the question is who steps into either our shoes or who steps into a place of power that we may have been in before. And yes, the U.S. dollar does have sort of a worldwide, hegemony is too strong of a word, but it is a very strong currency internationally, and I don't think we want to lose that. And crypto is so global, it is borderless. And I think if we think that some ban or otherwise, you know, true squeeze on it in the United States is going to long-term protect consumers, I think we do have to take into

account concerns that Paul and others have raised about what that will mean for the primacy of other countries that we may not be as, that may not be as favorable, maybe national security threats the U.S. So I know it's a little bit grim from the national security side, but I think that's a real issue that we need to be grappling with. And both policymakers and regulators need to be thinking about that as well as they're making, you know, policy for crypto in the U.S. Yeah. The one thing I would have to say about that is that I do think that in terms of the more like permissionless innovation, obviously those people aren't going to go to China. And I would imagine if people had a choice, they wouldn't choose, I mean, maybe some of them might be forced for economic reasons to choose

like a CBDC coming out of China or whatever. But I think most people would choose something where they're not going to have to deal with all the things that you have to deal with when you're dealing with the Chinese government. Those are two separate issues. Where software developers go, I agree. It's not China, right? Where you're going to go to the U.S. You can go to the EU, you can go to the UK. There are lots of great crypto companies in both places, including and especially in the UK. That's more like developed, permit. missionless development. I'm saying what are what do we need to be thinking about in terms of really squeezing on crypto in the U.S. from a national security perspective. And it is that if we don't

take this this technology seriously from an innovation perspective, it may compromise us from a national security perspective. But I agree. Those two issues are very separate. And no, I do not think software developers are one of China. And one other thing that I wanted to follow up on, you know, is something, I think it was maybe Rebecca, who made this point earlier, just about how the SEC has kind of already changed its stance between the different administrations, obviously under Jay Clayton. We had Bill Hinman, who was the director of finance, make a speech saying that ether at that moment was sufficiently decentralized. And then now Chair Gensler keeps hinting that he believes ether is a security.

So I was just wondering if you could talk a little bit more about the differences between the two SECs and then where you think things could go if. you know, somebody else comes in to, to head up the SEC, because, you know, I keep reading these news stories that Chair Gensler maybe is angling for a different job. So what's your take on how all that might affect crypto? It depends. It depends who's in there, right? I think that, and it depends on, you know, who the next administration is. In theory, Chair Gensler has, I think he's served for two years, and he would have three years left. But if the administration changes, two, years in, most chairs don't stay under a president who didn't appoint them. And I suspect Chair Gensler would

leave if the, you know, the president changes. And then the question is who, you know, who would a Republican appoint to come in? But if Chair Gensler leaves and, you know, President Biden is still in office or a Democrat is still in office, I think we have really no idea what could happen next. You could have someone even more aggressive as we, you know, saw from Chair Clayton to Chair Gensler. So. And anytime there's change in leadership, of course, there are changes in priorities. That's understandable. That's reasonable.

I think markets generally adapt to that. But when it comes to crypto, there are so many basic core issues that are being managed seemingly at the whim of a single person or a particular group of leadership. And to Rebecca's point, that's why we have legislation in so many areas of the law to settle these questions so that there isn't such a dependence on one particular leader or administration or another on fundamental basic topics like what is an agency's jurisdiction? What is the appropriate market structure for a huge and growing asset class? We can manage change just fine. But it points once again to the need for legislation or at the very least rulemaking that is informed and that is sustainable and is durable so that we're not having to reverse course and change investment decision priorities simply because somebody is elected to move on in their career.

All right. Well, last note that I want to end on is just Hester Purse keeps making these dissents and they're quite pointed. and I wanted to just quote from one of her mic drop moments here. This was her dissent to the Cracken Settlement. She wrote, A paternalistic and lazy regulator settles on a solution like the one in this settlement. Do not initiate a public process to develop a workable registration process that provides valuable information to investors.

Just shut it down. And so clearly, you know, the SEC isn't fully aligned internally on all these issues. You know, obviously the chair. has the final say here, but I imagine we're going to keep seeing a lot of discussion and perhaps some zigzagging from the regulators and the government when it comes to how crypto is going to be regulated. But this has been such a great discussion. Where can people learn more about each of you and your work? I'm on Twitter. I'm Rebecca Reddick-1. And you can hear some of my thoughts and ideas there. And I'm at I am Paul Graywall on Twitter. And if you go there,

I hope you'll be inspired to join this debate. These issues we've been talking about, Laura, are not just things that the Coinbase is in Polygon, labs of the world should care about. Anyone who cares about consumer protection, innovation, the future of Web 3 needs to be paying attention and needs to be getting involved. All right.

Well, it has been a pleasure having you both on Unchained. Thank you. Thanks so much for joining us today. to learn more about Rebecca, Paul, and The Crackdown on Crypto, check out the show notes for this episode. Unchained is produced by me, Laura Shin, with up from Anthony Yun, Mark Murdoch, Matt Pilchard, Zach Seward, Juan Oranavich, Sam Shre Rum,

Ginny Hogan, Ben Munster, Jeff Benson, Pamma Jimdar, Shashon, and CLK transcription. Thanks for listening.