Unchained - The Chopping Block: The SEC Is Attacking Crypto – Will Gary Gensler Succeed? - Ep. 456

Episode Date: February 15, 2023

Welcome to The Chopping Block – where crypto insiders Haseeb Qureshi, Robert Leshner, Tom Schmidt, and Tarun Chitra chop it up about the latest news. This week, Polygon Chief Legal Officer Marc Boiron joins the show to examine the SEC’s recent enforcement ramp-up. why Marc thinks NYDFS coming after Paxos is the most interesting thing to analyze in the SEC-BUSD spat whether the SEC and NYDFS actions against Paxos were coordinated  whether a stablecoin is a security and why the SEC might be inclined to go after Paxos how a stablecoin could resemble a money market fund whether the SEC action against BUSD consolidates Tether's dominance why Robert is nervous about the ramifications of the Paxos situation for all of crypto the unique characteristics of Kraken's staking services that led to settlement with the SEC the meaning of the settlement for other custodial staking services and staking in general why Robert voted in favor of the Uniswap governance proposal why Haseeb is fine with how a16z voted in the proposal how on-chain governance should be approached  Hosts Haseeb Qureshi, managing partner at Dragonfly Capital Robert Leshner, founder of Compound  Tom Schmidt, general partner at Dragonfly Capital Guest Marc Boiron, chief legal officer at Polygon Links Disclosures BUSD shutdown WSJ: Crypto Firm Paxos Faces SEC Lawsuit Over Binance USD Token Regulator Orders Crypto Firm Paxos to Stop Issuing Binance Stablecoin The Block: Gensler: SEC has been 'clear' on cryptocurrencies Unchained: Circle Told NYDFS That Paxos-Issued BUSD Wasn’t Fully Backed SEC vs. Staking Ethereum ETH Staking Deposits Kraken to Discontinue Unregistered Offer and Sale of Crypto Asset Staking-As-A-Service Program and Pay $30 Million to Settle SEC Charges Coinbase’s staking services are not securities. And here's why. - Blog Uniswap governance drama Unchained episode on the topic: Chris Blec on Why He Believes a16z’s Uniswap Vote Exposes DeFi as a Farce - Ep. 454  Wormhole vs. LayerZero posts Wormhole  LayerZero Explanation video from Unchained  Learn more about your ad choices. Visit megaphone.fm/adchoices

Not a dividend. It's a tale of two-quan. Now, your losses are on someone else's balance. Generally speaking, air drops are kind of pointless anyways. Unnamed trading firms who are very involved. D5.Eat is the ultimate pump. DFIPOTOC protocols are the antidote to this problem. Hello everybody. Welcome to the chopping block. Every couple weeks, the four of us get together and give the industry insider's perspective

on the crypto topics of the day. So first up, we've got Tom, the DFIven and Master of Memes. Next up, we've got Robert, the Cryptoanauceur, and Captain of Compound. Today we have a special guest, special legal guest joining us, Mark Boyren, who is the blockchain barrister and the chief legal officer at Polygon. And then finally, we've got myself, I'm a seed, the head hype man at Dragonfly. The three of us are early-stage investors in crypto, but I want to caveat that nothing we say here is investment advice, legal advice, or even life advice.

Please see choppingblock. That XYZ for more disclosures. Mark, great to have you on the show. It's been a while. It's been a crazy six months I can imagine in the crypto legal profession. How are you doing? feeling given all the craziness going on. Yeah.

First, thanks for having me. It's exciting to be here. You know, I don't know. I kind of get pumped by this, to be honest. Like, you know, you look at this and you're like, okay, this is why crypto exists, right? You've got the government coming at you. And you basically have to respond, right? And like that response needs to be like strong both on the tech side and on the legal side.

And I don't know. That's kind of why we're here. It's fun. It's fun. Okay. So it's kind of like a personal. injury lawyer seeing like a pile up in the middle of a city you're like oh this is this is what I got in the game for baby also says the lawyer who works for you know an L1 L2 that the government

never attacks the L1 and the L0. They're attacking an L1 now with B&B well okay okay well okay let's let's get into it there's there's today and we're going to have several different big topics that we're going to chew on so the three tip of big topics of the day the first is the SEC versus BUSD. The second big topic is going to be the Cracken staking settlement. And the third is going to be the Uniswap governance drama that we alluded to very briefly on the last show, but that finally reached its, you know, sort of nominal conclusion in the last few days.

So first we're going to start with the BUSD shutdown. So I'm going to give some backdrop. There's a little bit of setup for those of you who are not familiar with what's going on here. And then we'll jump into a discussion. So Binance, obviously largest exchange in the world. They issue a stable coin called Binance. USD. It's a third largest stable coin in existence, $16 billion in issuance, and it's used primarily

on the Binance Exchange, and it's, they've consolidated as being their major stable coin trading pair. So Paxos is a company based in the U.S. They work with a bunch of big, you know, FinTechs, like PayPal and so on to run their crypto for them as a back end. But their largest business by far was that they issue stable coins on behalf of other people, and the major person on behalf of whom the issue is stablecoin, who has finance. So Paxos, the regular business, the regular by the NYDFS and New York Department of Financial Services, and they were the issuer of BUSD. So they take in dollar deposits,

they hold it in a bank account, buy treasuries, do whatever, and then they issue BUSD as their liabilities. And so Paxos had partnered with Binance to issue BUSD. Binance does a bunch of other stuff with BUSD, right? They do all the stuff on B&B chain and also their fanciness, but BUSD itself is issued on Ethereum. It's important to understand that. Paxos, the issuer of BOSD,

was issued a Wells notice by the SEC. meaning that the SEC told Paxos, we are planning to sue you for your issuance of BUSD, which supposedly is because BUSD is an unregistered security. So Paxos gave a statement that they categorically disagreed with this claim. Then the NYDFS ordered Paxos to stop issuing BUSD,

and Paxos immediately complied. So they announced over the weekend that they were going to stop issuing any new BUSD. BUSD supply was only going to contract from here on out as people redeemed BUSD either for dollar, or for USDP, which is Paxos' other unbranded stablecoin product. It used to be called Pax. Now, it's called USDP.

Now, this Cablecoin is much smaller. USDP is like less than a billion dollars in circulation. And interestingly, so the SEC, neither the SEC nor the NYDFS supposedly, asked them to stop doing anything with USDP. The USDP still exists, and Paxos claimed that they're going to continue operating USDP their own stablecoin. The NYDFS gave a statement to Reuters saying that Paxos violated. its obligation to conduct tailored periodic risk assessments and due diligence refreshes

of Binance and Paxos issued BUSD customers to prevent bad actors from using the platform. Quote, the token wasn't administered in a safe and sound manner. And there was other news that supposedly circled, tipped off the NYDFS about BUSD not always being backed. So there's a story that broke about a month ago that was reported by Bloomberg that claimed that finance, so okay, again, we talked about BUSD is issued on Ethereum. when you use BUSD in Binance, you're not actually using BUSD on Ethereum, usually.

You're actually using BUSD that's wrapped by Binance on B&B chain. And this wrapped BUSD, this should be pretty simple, right? Usually when you wrap something, you just say, okay, I get one of these on this chain, and I meant one of these on this chain, and this one's a claim on this one-to-one. But that's apparently not what Bin-Nance was doing. Bin-Nus was doing all sorts of shenanigans,

such that the amount of wrapped B-U-S-D that was supposed to be backed one-to-one by B-U-S-D on Ethereum, was sometimes insufficiently backed, sometimes up to the tune of $1 billion, meaning that there was a billion more wrapped BUSD than there was actual BUSD. So all of this has turned out to be kind of a mess. And now we're at the point of trying to figure out, okay, is in fact the SEC going to claim that BNB, sorry, that BOSD is a security? If so, why?

What is the legal theory under which it would potentially be a security? And what do we think this means for other stable coins in the market? it besides BUSD. So, Mark, first of all, did I get the high level of that correct? And any details you like to flesh out for why you think this is happening? Yeah. No, I think that's, I think that's a perfect summary of it. I think the interesting thing is like the NYDFS stuff is probably the most interesting,

in my opinion, right? The SEC thinking is stablecoin security. Well, the SEC thinks everything's a security, right? So that's not like a huge surprise there. But I think on NYDFS, they're basically saying, look, taxes, you're issuing this stuff. And they pretty much implied, like, you're not doing anything wrong when it comes to the way that you are issuing it or the way that you're back in. But you're doing this with a third party, right, which is Binance. And what they're doing is a problem. And you have a relationship with

them. And by the way, this touches the product that you are issuing, which is, you know, B-U-S-D. And so you are going to be on the hook for actually looking out that this product actually works the way it's supposed to, right? And the problem is when you've got BUSD on BSC, you basically have a product that now Paxos has no control over and DFS is looking at that and saying, yeah, we don't feel so good about that. Why don't you wind this down so that that can't happen anymore? And I think that's like super interesting given the kind of collateral effect that a third party can have on a stable coin, right? Because like if you actually think about this, BUSD could be wrapped on any chain. I anybody. This is actually not something that Paxos actually has direct control over. But I think it's

the fact that Binance was doing it in such huge quantity and that they have a relationship with finance that makes it super interesting. Yeah. So do you think this NYDFS and SEC thing were coordinated? Or do you think it was all a response to this article that came out a month ago and they just happened to get publicized at the same time? I mean, it's really hard to think that this isn't coordinated, right? The agencies talk to each other, even like state and federal agencies. And when you see something like that, there's no reason to think that when you know that a product is regulated, that the SEC would not reach out to NYDFS about this. I would assume that that's actually the way it worked rather than DFS reaching out to the SEC. Otherwise, they'd be reaching out to the

SEC about like a lot of things all the time. And so I assume it's the SEC that ended up reaching out to NYDFS, but I don't have any evidence of that. Sure. Okay. So the NYDFS part is that, okay, you guys are allowing your business partner slash affiliate to engage in these shenanigans. you're on the hook for the way in which your product is primarily used, which is through this Binance bridging mechanism. And if the bridging mechanism is not sound and they're doing all sorts of weirdness, then, okay, you're responsible for how your customers use your product. If it's in direct affiliation like your partnership with Binance,

especially given that Binance gets a cut of the revenue, right? So, okay, the NYDFS part, you're irresponsible. I get that. So the more interesting part, I think, is the SEC part. That's, I think, the one that kind of rings out across the industry. So the SEC, presumably, is claiming that BUSD is an unregistered security. How, what? Like, how can a stable coin be a security? I don't want to go through the Howie test because everybody in Crypto has heard it so many times

that we're not going to subject to any further brain damage. But clearly, one of the prongs of the Howie test, which is one of the determinations of an investment contract, which is not the only type of security, but an investment contract requires an expectation of profit. And generally speaking, securities require some expectation of profit. on behalf of the buyer. A stable coin, by definition, you should not expect it to go up. Maybe it can go down, but it's not supposed to go up. So under what theory do you think this lawsuit is being brought against Paxos? I mean, I think you need to look behind

beyond like an investment contract, right? And we've got these other prongs of like or what other parts of the definition of a security, right, including a note, you know, and we've been introduced to the concept of reads more heavily recently. You also have concepts like a certificate of deposit, for example. You know, I tend to lean towards, you know, them looking at this similar to a note or maybe a certificate of deposit, which often have like this similar test, right? And even in that context, I still struggle to understand it. Because when you're looking at Reeves, which, you know, I'll walk through just real quick

because people don't know it as well as Howie, you're basically generally looking at like, is there an investment purpose or is there a commercial purpose behind like what you're doing? Is this broadly distributed or is it both distributed to like, narrow group of people. And then most importantly, the fourth prong of this test is like, is there an alternative regulatory regime or people often figure, forget, or collateral, hence the power of defy, or some kind of insurance, right? And so there's a couple of things that you can fall on there, right? And first, like, are people really looking at this for investment purposes? And like, yeah, maybe they use it in connection with investment activity. But the staple coin itself

is not something that people are looking for investment purposes. It is broadly distributed, right? So that hurts. And then you look at an alternative regulatory regime. And that's actually one of the more interesting ones, which is people often state to like point to state laws for, hey, there's an alternative regulatory regime. But basically a lot of case law and SEC guidance has already said,

no, the alternative regulatory regime needs to be something that like really replaces what the securities laws are intended to replace. So they've said that like state money transmitter laws, which are consumer protection laws aren't good enough. Right. And so you look at that and you're like, well, bit license is a little bit more than that. There's more disclosure involved.

Is that enough? I tend to lean like probably to like not. But regardless, when you look at the entire part of like the entire Reeves analysis, you reach the conclusion of like, yeah, sure, this is broadly distributed, but nobody's really looking at it for investment purposes. And ultimately, you do have this regulatory regime,

which is pretty robust. And there's really no reason to be treated. this thing as a security. So like I really struggle to comprehend like why it is this is treated as a security. With the one exception being, what you do see is that these stable coins are not fully backed by the dollar, right? And we know this, right? It's over time that's changed. But right, when you go to like the heydays of tether, you know, you really had like, you're blindfully, like trusting tether on that one. Even USDC was pretty aggressive. at a certain point in time, right? But now you look at them and you're like, okay, very little

commercial paper in USC's case, no commercial paper, I believe. You've got treasuries backing it. Like, that's pretty darn safe. Should you really treat that thing as a security? Like, what do they need to disclose to you so that you can determine whether you want to hold this? Right. And the answer is like, there's nothing that I want to know other than this is one to one fact. Right. And so then you go like, okay, well, what about other laws, right? That's actually where it's more interesting. But it's not with the SEC told Pax of, right, is, well, what about like the investment company's laws? What about like money market funds? Like, maybe the money market fund is the argument that looks a little bit better,

but you don't get any return on USC like whatsoever in any way, which is kind of different from money market funds as I believe they work most of the time. And so I really struggle to understand this one. And I think that's why Coinbase, frankly, is ready to go to bat on this, as they said. And I'm guessing Pax is probably ready to go to bat on it as well. And Paxel certainly made noises as though they were ready to go to bat. One of the statements that I saw floating around on Twitter was something that Gensler said in September, as he said, stable coins have features similar to and potentially competing with money market funds,

other securities, and bank deposits, and raise important policy issues, depending on their attributes such as whether these instruments pay interest directly or indirectly through affiliates or otherwise. What mechanisms are used to maintain value or how the tokens are offered sold and used in the crypto ecosystem, maybe shares of a money market fund or another kind of security. And so one of the speculations that I saw was that people were suggesting that maybe, I mean, one, maybe he's looking at these things as money market funds that, for whatever reason, don't pay interest, which is maybe even a worse form of a money market fund

because you're taking the risk and you're not getting any of the upside. Or alternatively, that you could look at BUSD because Binance just have a sort of earned product, right, that only takes BUSD. And so if you're looking at, as Gensel put it here, through affiliates, a pay interest directly or indirectly through affiliates or otherwise, meaning that if you put your your BUSD with Binance into the Binance Earned program, and Circle, of course, has something similar with Circle Earn, if you take your USC or your BUSD and you put it into the affiliate that is the issuer, or effectively an affiliate of the issuer, and they are earning you

interest, then that's basically just like a transmutation of a money market fund, where basically, you know, when you have just the, the raw stable coin with no interest, it's almost like you've basically withdrawn, but your money's not there yet, but you're not actually earning the yield that you were entitled to if you want to opt into getting the yield. This could be a very, I think somewhat tortured argument for how it's basically a sort of money market just with some, you know, slight bells and whistles. I don't know. That seems like one plausible way to read what the argument might be here. But of course, we don't know yet. Right now it's all speculation. Yeah, I think you need to rely a lot on like how these things are marketed, right?

and how they're actually used. And then like how you actually combine like, like just from a product perspective, like how do you actually like offer this product, right? And I think there is a very big difference. When you offer a product where on a page, you're like, hey, mint this stable coin. And then by the way, hey, here, you can deposit it right here. That's like very different from somewhere that says like mint this stable coin. And there's no world in which you see anything that has to do with a return on that stable coin.

And then need to go find that return. I think those are like two very different worlds because of exactly what like the risk is, which is like how it is marketed and what people's expectations are, not even talking about the Howie test, just talking about securities in general in terms of like what people would expect when they're minting this product. I think I agree with sort of this, or I can see this sort of angle. I think the thing that feels very weird to me about this particular story is singling out BUSD and finance in particular, as we sort of said, they're not going after USDP.

And everything that you guys have said has been true of USDC and Coinbase for, you know, what, two years now. You can, you know, meet USC on Coinbase. You can earn interest on your USDC and coin base. And like, yeah, Coinbase earn or lend and it get to launch. But like, you know, this other product has been live for quite a while. So it's weird to me that like I'm trying to sort of imagine like what are the specifics of finance, such that, you know, they would be targeted, but these other products would not be.

And I think, you know, one angle, as you sort of said is, well, hey, maybe it's a sort of bridging issue where you have, you know, finance sort of basically transmuting DUSD on Ethereum, which is like the core regulated product into this other thing. And we sort of seen issues when exchanges do that, right? This is what happened with Solit and FTX, where they were taking BTC and issuing, you know, solid BTC and then obviously that sort of totally evaporated. Or then so maybe there's like a consumer production angle there. You know, there's also sort of been this, this broader initiative and this broader wave around crypto debanking going on for the past, you know, two months or so. And so there's maybe another story, you know, that this is sort of like another, you know, operation choke point type

of thing where it's, let's just go after, you know, the things that these exchanges touch in the sort of regulated system that we can access as a way to sort of get them, given that we don't really have a strong, you know, precedent for going after them in whatever, you know, jurisdiction they're operating in. It did seem strangely quiet after FTX, that, you know, we weren't seeing a whole lot of guns blazing, doors getting kicked down, and it seems like this is maybe the response. It sort of took a few months of late. It sort of took a few months of latency. I think it's been a little bit over three months now since FTX went under. And now we're starting to see some of the after effects, which is mostly regulation by enforcement once again.

Obviously, the stable clinicians don't know what the rules are. They don't know what they're supposed to or not supposed to do, except what they might hear from NYDFS, which is a little bit more explicit than what the SEC guardrails are supposed to be. Ultimately, you know, we still don't know why they're going after, we're not going to know for a while, why exactly they're going after them. Is it because, I mean, you know, Tom, you sort of vaguely alluded to this, is it just because of the affiliation with Binance? Is it that, you know, basically, okay, well, big exchange, big overseas exchange is bad. We can't directly go after Binance, so we can go after their affiliates and make it very,

very clear if you're going to work with Binance, you're going to pay a price. Is it, is it the bridging issue? I don't see how that could make it a security, but I guess, you know, I can understand what the NYDFS would get on them for the, you know, Binance going to do all this weirdness, but it seems like a stretch to say that we'll be USDA's security because Binance did all this bad bridge accounting. I don't know. It does feel...

One thing is very clear, we're entering into a new regime now, and we're probably going to see a lot more things over the next two to three months from the U.S. regulatory side. I sort of assumed, honestly, in January, that, like, hey, actually, the response seems pretty muted in the U.S. It seems actually pretty reasonable that, hey, we're thinking about legislation,

we're trying to think a more holistic way to kind of govern the industry. And I thought like, wow, we're actually really getting set up for a pretty positive and forward-looking year and, like, more thoughtfulness about how the space should be legislated and regulated. And it seems like, okay, maybe I spoke too soon. And it's, you know, kind of kicked down doors and take names time. I think there's two things that we shouldn't underestimate. First is how slow governments really move, including the SEC.

And then second of all is their desire to go after, like, the weakest actor. If you look at stable coins, like, they're pretty well defended. Like, Paxos probably actually is the weakest defender because it isn't Paxos. It's Paxos that's defending it, not Binance. And we've seen from CZ that CZ is basically like, I'm backing away from this. Like, you figure it out kind of thing. But then on the point of like how slow they move, right, you think about it, Gensler took over. I can't remember exactly when now.

But he kind of laid out what was a pretty obvious strategy. I'm going to attack stable coins. I'm going to attack lending, and then I'm going to attack like any kind of exchange. And those things like take out to play out, right? So you see him go after defy first. And he's like, hey, you know, I want to go after, try to go after defy. You see him go after some like non-Defi protocol really. And then you hear news, you know, that he's like sent a subpoena or some voluntary request to uniswap.

And like nothing really comes from it. And basically what I think he realizes probably more decentralized than I actually thought. These centralized actors have a boatload of money in terms of exchanges. Let's leave that aside. Kind of let's take a look at lending. Well, lending took care of itself. Like, he didn't need to do anything. Those centralized lenders made it real easy for them.

And then they look at decentralized lenders. And they're like, that's pretty darn tough as well. Like, you know, probably not the best thing to go after it. And then they look at the stable coins and they say, okay, a lot of money. here, but that really is another choke point that we can attack. You know, let's put something together and, you know, work on it, work on it. And, you know, here we are. I really just wouldn't underestimate that this is like him having this three-pronged strategy, having kind of walked through this, and now he's at the point where kind of stable coins and everything else, right, is like

culminating. Yeah, look, ironically, the net effect of this is that it consolidates Tether. Tether becomes even stronger now that basically Paxos has had their legs kicked out. And, you know, It's kind of the same story as, you know, what happened with the big tech regulation and, like, you know, going after Google and going after Facebook and turns like, oh, you guys are monopolies, is that it really, it weakens the U.S. U.S. It weakens U.S. the U.S. has a monopoly on social media, and that's going to get torn away if these big companies become less competitive. The same thing is happening now with U.S. stable coins, right? Now, Paxos, like you said, is the weakest.

Obviously, Coinbase and Circle are going to fight much harder than Paxos is. And Paxos, if you shut off BUSD, that is the vast majority of their revenue is their issuance. a BOSD, right? This thing is, you know, over $10 billion of issues, $16 billion that they're currently collecting fees on. The vast majority of their business is this. So if you shut this off, they are going to have to fight for their lives and they're not going to have much revenue with which to continue fighting the SEC on this. And Binance, like you said, Binance has basically left them for dead and they're like, oh, it's fine, you know, whatever. We didn't, we didn't care that much about the stable going to begin with and, you know, we don't want to step into

the line of fire at this point when we've got much bigger. your things to protect. So it's really unfortunate that Paxos, which is a great business, at this point, vast majority of their revenue is now under direct threat. I don't know, Robert, what do you think happens from here with like the rest of the stable coins that are in the line of fire? Well, I think the worst case scenario that plays out is that, you know, Paxos is a smaller issuer than someone like center consortium that creates USD coin and that this creates some sort of precedent that gets used to attack other stablecoin issuers. $14 billion BUSD is a lot, but it's, you know, the third largest stable coin.

I think the bigger risk comes if there's precedent that gets used and established against other stable coins, U.S.D coin and tether. And I think that's the sort of doomsday scenario in my mind, which is stable coins are like the primary on and off ramp and bridge between traditional markets and crypto. And however effective, you know, this, you know, attack on crypto is right now by targeting banks and getting them to, you know, debank large, you know, crypto players. There's a lot of articles about this recently. I think by taking out stable coins are going to take out, you know, an even bigger on an offer for the majority of consumers and investors. And, you know, I think if it's successful, it draws into question, you know, how are people supposed to use this stuff?

And, you know, fundamentally, I think this will take a long time to play out, especially if Paxos is going to, you know, take this through the legal system and defend themselves. I think it might be years. But it has the potential to put a shadow over stable coins for the two years that this takes to play out potentially. And, you know, I think, you know, to the average user, I think this will be generally invisible. but I think the larger ramification is going to be the people that are saying, like, hey, I'm a traditional financial institution, should I interact with stable coins? Or, hey, I'm a bank or, hey, I'm a, you know, hedge fund, should I interact with stable coins? And they're going to say, you know, what?

The last headline I saw on this was, you know, there's active litigation about the security nature of a stable coin. And they're going to shy away from it. It just, it creates a chilling effect for what I perceive to be the most important asset class in crypto. You know, I think going after stable coins is impactful in a way that going after any individual company is not, right? If Celsius, you know, is shuttered or, you know, if Cracken has a piece of its business shuttered, it doesn't really have a permanent effect on the rest of the ecosystem. But I think stable coins have an outsized impact on the rest of the ecosystem when they come under attack. And so, you know, I'm quite nervous, frankly, about.

this action against Paxos because of the ramifications and the knock-on effects it'll have elsewhere. Well, I'm hoping that once we learn more about the nature of this lawsuit, that we see that there's some more explicit rationale that's not, okay, stable coin equals security, and it's something more idiosyncratic to what BUSD was doing or what finance was doing or something like that. That, I think, is our best hope at the moment. If, in fact, Gensler is going to say, stable coins are securities, bar none, unless Congress tells me otherwise, like, that's the way it is, then, I mean, the other, the other counter side to that is that, of course, there is, there does seem to be a lot of legislative energy behind having some kind of stablecoin legislative framework. And maybe that will be accelerated if, in fact, there is a, you know, some, some regulatory action and public outcry and more attention on this question, because the net effect of this, like I said, is going to be pushing stable coins overseas, right? If,

ultimately, Circle can't issue it and Paxos can't issue it, well, Tether is not going to stop. And Tyler, it's much harder to go after Tether, obviously, than it is to go after, you know, domestic U.S. companies. That being said, you know, BUSD, I, like, are any Americans using BUSD? Like, one, obviously Americans, by and large, don't need stable coins because they already have dollars. And then second, of course, Binance USD. Binance is a small player in the U.S. They have very small market share with, with, uh, finance U.S. And then, of course, in the U.S. You know, USC is by far the most well-known stable coin, uh, behind Tether. it does feel like a weird target to choose.

And I have to assume by the nature of that, that it's really a backdoor way of getting at finance than it is something more specific to stable coins in general or even about Paxos. You know, it's actually really unfortunate on the stable coin legislation, because that's just such a good point that nothing's happened on that front.

And unfortunately, right, in like the current Congress, it's just hard to see anything happening. But it is like the lowest hanging fruit possible. It's really easy legislation, honestly, when you think about like, what do we want to know? We want to know that you're holding assets that aren't just going to disappear. And we want to know that you're actually holding them. Basically, period.

It's not that hard. And so it's just unfortunate that we're likely not going to see that anytime soon, only because of like the makeup of Congress, even though I think we've got like a lot of folks in the House and Senate who, frankly, are really thoughtful on this issue and can deal with it quite easily. Yeah. It's a big hit to B&B as well because it, it, I think, I mean, again, speculation at the moment, but I think it seems to cast a bit of a specter that Gensler is going to be coming after Binance.

And especially with the affiliation with FTX, I mean, again, I think this is kind of bullshit. But the narrative that propagated in the U.S. by some parties that the downfall of FTCS was caused by Binance or caused by CZ in some way. makes him an easy target. And certainly, you know, now that he's consolidated market share and he's, you know, the big guy on the block and the biggest overseas unregulated exchange

or sort of under-regulated, let's say, exchange, I think it's very clear that there's a lot of, he's the biggest game that there is to hunt in this industry. And I think Genzo's going to be going after him however he can, even if it causes some collateral damage along the way. Were there, when this news came out, was there any celebrating at Polygon that B&B was taking a hit? We like never celebrate the failures of others.

More seriously, like honestly, it's not good for anyone in the industry. I mean, you know, all L1s, all L2s do well with this industry growing. This is like it's it sounds so like typical, but it's just true. Like there's so much more to grow. And like as you guys already know, like Polygon we're focused on like a way bigger market. So like the desire for like anyone to go down is like not big at all. It's really we just want to see like the market crowd. And this does not help that at all.

Right. Right. Well, the second big headline this week for the SEC was going after Cracken or their staking program. So there was a $30 million settlement with Cracken where the SEC basically got Cracken to shut down their staking program. So the staking program involved a number of token. I believe it was not ether, but a bunch of other stuff that they were, that they've been a long-running staking program with like, you know, Adam and other traditional staking tokens. And in their complaint, they listed some of the features of Cracken's Staking Program that they believed made Cracking Staking Programme a security, or unregistered security specifically. So some of the features of Crackens program that they pointed out.

The first was that Cracken. So normally you would think, okay, staking, how is that a security, right? because staking, you're just taking somebody's tokens, you're delegating them or whatever. Like, it's just kind of a software service. And a software service traditionally should not be a security. But Cracken had actually a lot of, a lot of kind of, quote-unquote, managerial efforts that they imposed in a lot of kind of strategic pricing that they did in this staking program. So the first is that the staking program did not actually pay the underlying yields.

It didn't even pay a percentage of the underlying yields. In fact, they promised a fixed percentage return to their customers, which was potentially irrespective of what the underlying blockchain paid. And they paid that on a cadence that was not, that had no bearing on how often the blockchain was actually paying out those rewards. They commingled their own tokens as well as customer tokens. They determined when and how many of the tokens to stake. So they have the liquidity reserve. They sort of capped for instant withdrawals. And they kind of managed like, okay, we need to make sure that there's this much buffer so that people withdraw at this time, whatever. They did not disclose how much their take

rate was in the actual staking. They did not impose bonding and bonding periods. They market it as an investment opportunity. They use words like returns and yield in their advertisements for this product. So the SEC claimed that all these features made Cracken's staking program a unregistered security and that it had to be registered or only offered to accredited investors. So Cracken decided they were going to shut down the product within the U.S. Obviously, international customers are totally fine to continue using the product. It continues unabated. So now immediately, after this was announced this settlement, Coinbase piped up and said, hey, well, we're different.

That doesn't apply to us because we don't do any of that stuff. We don't commingle funds. We are not an investment of money because users retain claim to their assets. We have the staking rewards tied to the blockchain rewards. We don't set the staking rewards and we just provide IT services, blah, blah, blah. This is totally different. If the SEC wants to come after us, we are happy to go to court and we'll fight them on this. So Coinbase made very, very clear that unlike Cracken, Coinbase was willing to go to the mat if they went after their staking services.

And this is important for Coinbase in particular because Coinbase, a lot of Coinbase's story for Wall Street has been the diversification of revenue. And staking, of course, is very high-margined business. It's pretty cheap to run a validator node, but obviously it scales with the amount of ether or other stakeable assets that you own. I think today,

there was an estimate that I saw from an analyst that said about 13% of their net revenues were expected to come from staking, a majority driven by retail. Of course, retail pays much higher margins than institutions. So losing retail staking, although it's a relatively small part of your deposit base, it's a huge slice of your margin. So retail pays much higher margins on, or much higher fees, basically, on staking. They pay something like 25%.

Whereas institutional clients generally play 5 to 10% of fees on staking, even though institutions are the majority of the AUM, retail pays a very large share of the overall. fees that would go to a company like Coinbase for their staking efforts. In the aftermath of Cracken shutting down their staking program, we saw Jesse, the CEO or the former CEO of Cracken, founder of Cracken, basically complaining like, look, we don't have the resources to fight this, but I hope somebody does because this is bad for innovation. And ultimately it makes it harder for us to actually provide this a valuable service to U.S. customers. And of course, we saw liquid staking providers immediately rally after this settlement under the expectation that now retail is going to have to be forced

to use alternatives that may not be through centralized providers. So what were you guys' thoughts on this crack and settlement and what do you think it means for staking going forward, particularly in the U.S., I should say? In case it wasn't clear, this is a U.S. story. It doesn't apply to anything outside the U.S. Let's start with Mark, the legal expert on the call. Yeah. So I think first that I want to distinguish personally.

partially out of self-interest, but partially because I actually think it's important is that this literally has nothing to do with like staking itself. And the reason I say that's because like, fud on crypto Twitter is like amazing. Right. And everyone's talking about like staking is going to be illegal. Staking is a security. And like that's not at all what this is. And frankly, that would be like an absolutely, I know there's been discussions about it, but it would be absolutely absurd outcome that would not be logical and all. And I can't understand like the legal basis for it like at all. And so it's really focused on like custodial staking. And I think most importantly, and I think Coinbase was frankly smart to make this distinction, which is like how this is

actually done is really important. You know, when you and frankly how it's marketed as well, right? So you've got like the marketing that Coinbase does that is kind of focused on, hey, first of all, we're moving towards like a really defy friendly company and hey, you can come stake here, you can secure networks. It's fantastic. Right. And then you had Cracken that was more focused on, hey, come earn this return. And the second that you start saying, hey, come on earn this return, I think I heard somewhere, like double digit, but like even like over 20% returns on some stuff, like you're going to, you're going to raise eyebrows. And honestly, that starts looking like the staking that you see in defy rather than the staking that you see on an L1 or L2. And so when you're, when you kind

to get to that point, you start saying, okay, well, let's analyze this under some kind of test, right? And you get to the Howie test. And I mean, really simply, you have to look at whether Cracken's efforts were actually significant in this. And, you know, there's a lot in the SEC's complaint that basically made it sound like Cracken was just giving some random percentage that they chose. I'm not sure that that's actually accurate based on, I think Jesse might have said it as well, that like they weren't actually promising like a fixed return. Like you were actually getting what you would get on chain minus some fee that Cracken took. And that is like very different from what they marketed, which I think hurt them a lot, which was come get this fixed percentage.

So I think that's like the first thing that like really hurt them. But like when you ultimately look at like custodial staking, you have to basically ask yourself like how meaningful of the role are they playing? And ultimately like what are you doing? You're custodying funds. Okay. Well, you're doing that for purpose. that have nothing to do with that staking in the first place.

So let's just disqualify that. And then you basically say, okay, I'm already running this node. You could run a node yourself, by the way. We could provide instructions. Yeah, it's complicated, but you could do it yourself if you wanted to. And so really, what are we doing for you? We're going to go ahead and stake your funds as well and give you a percentage of what we're earning there. It's not that much work.

Most of the yield, where is it coming from? It's coming on chain, right? And so if you think of like, who's predominant? efforts are these, it's really not Crackens. It's really the yield that's being driven, like, on chain. And so to me, this is really one that is very fact-specific, that is focused on, like, how Cracken actually marketed this. I'm not saying there isn't, like, an opening here for the SEC, but I definitely think that, like, the gap on, like, how easy a custodial staking service is to take down from a securities law perspective is way smaller than what you would think

at first blush when you look at the Cracken. facts. Yeah, that tracks. I did feel like this story freaked a lot of people out on crypto Twitter who didn't actually read the SEC complaint. And the more I read the complaint, the more I was like, oh, okay, actually, the more I read the, the more I actually kind of buy the argument that this was basically, I mean, it was one of the very first staking programs that was implemented.

And, you know, kudos to Krakken for being very early to this market. And the settlement, I think, was like, it was something like 70% of all the, profit that they made for U.S. customers from, sorry, I should say, from U.S. customers over the course of the staking program. So it's unfortunate. It's quite, you know, it's a lot of money, of course, to have to have to give up and to give up the U.S. retail staking business. But ultimately, they still have a big international business. They're obviously big in Europe. They still are continuing to stake there. So it's not the end of the line for even custodial staking. And of course, institutional clients can still stake custodially. It's not a big deal.

It's really just the kind of retail marketing and the structure of this particular staking program was such that you were trusting Cracken to do the right thing and they were not disclosing enough for the SEC to basically make it kind of a kind of have a field day with the way that this program was structured. Yeah, I think this is a case of, you know, you have a C-Fi platform that does sort of what it wants secret sauce managing assets to pay a return. And like the users don't have that much visibility into exactly how it works and what's happening under the the hood. And it seems reminiscent of all the things that brought down Celsius and blockfi and, you know, dot, dot, like all of these other platforms. And so I can see why, you know, there's an

interest in, you know, trying to regulate Crackens, you know, staking and staking is a broad term, you know, program here. Because it's reminiscent of all the other things that failed horrifically. I think what differentiates it is that it runs a lot of. lower risk of causing a calamity for its users than all of the other black box, you know, see if I, oh, we're going to make money for you, you know, give us your assets. Because it's not fundamentally lending everything to three hours capital and hoping for the best. It's participating in blockchain validation. But, you know, I think the argument that's being made against it is relatively sound.

You know, you're trusting them with your money. You have no idea really what's under the hood. And you just hope for the best. funny enough, this was actually what Anchor was originally, right? The anchor, Tara Anchor, from, like, the original idea for Anchor was that they were going to generate the yield that they paid out to Luna depositors by staking, by taking the assets that were held in Anchor and staking them, generating the yield and paying it out to customers. And so I think, I agree with you, Robert. I think there's a version of custodial staking that basically is just a pass-through IT service. and they can collect a fee, and that's totally fair,

and this is not a managerial effort kind of thing. But just the way that this cracking program happened to be structured, and to be clear, I totally understand why you would structure it that way in lieu of any guidance, because you're like, hey, we're the first to do this. Hey, it's actually better for customers if we offer a fixed rate. We AB tested it, and they like the fixed rate more than the floating rate, and it's easier to understand. It's easier to market.

They're like, oh, actually, they like it when we give them instant redemptions, right? Like instant withdrawals. That's a thing that they appreciate, even if it's a lower fee. So I understand as a startup founder, as an entrepreneur, naturally you're going to try to iterate your product to make it more attractive, more palpable. And of course, the SEC keeps claiming like, well, why didn't you come in and talk to us and register?

And if you just registered, then, you know, why do you people keep launching these products without registering with us? You know, the reality is that almost none of these businesses have ever gotten any indication that there is a real serious path to registration besides just shutting this thing down or sitting around and waiting in limbo forever.

In which case, I totally understand. understand why Crack and went in this direction. It seems like it was a great product. And obviously, that's why it got a lot of retail adoption. But ultimately, to your point, Robert, enough iterations of product improvement make it basically look like it's a, it's a, it's a, it's basically a fund that earns its yield through staking. And it pays out some of that yield to customers and customers don't really care how much of it they're getting. They just like, they love the fixed real. They love the insert with redemptions. It's a good product. They liked it. But ultimately, it is very reminiscent of many other kinds of investments.

products that would require registration. I do think that it's worth looking at like the source of the risk and how that source of risk is actually really different though, right? It's like when you look at CFI lending, the source of the risk is making bad investment decisions as a CFI entity in terms of like what you lend, you know, what kind of risk, you know, programs you had in place, things of that nature. And then you bring that back over to, you know, staking and you're like, okay, well, those risks actually don't exist? Like, what are the risks that exist? And the risks that exist that are the same are basically more like fraud-like risks. Like, you'd have to commit some kind of fraud to not provide the returns that you promised you're returning based off of some on-chain evidence of that, right? And, like,

making that transparent is like super easy, right? It's not that hard to say, like, here's our node, take a look at what our returns are like. So, like, I just think the source. that risk is so different that you can't really compare like lending and staking. I think where it gets a little bit more interesting is with ETH slightly because you actually have to do more things. And if you are an individual user and you're like, hey, I don't have 32 Eith. Like what am I going to do? I think at that point, it's like maybe arguably slightly different. I don't think that's generally the case. And so I just think that different that source. You don't think that the fact that they were managing like a liquidity reserve and they were trying to keep enough that they were staking in order to actually

pay the yield, but they were keeping enough aside to like forecast how much redemptions. Like that's the kind of stuff that a head fund manager does. Oh yeah. There's no debt. Sorry. Cracking, to be clear. I think there was like several things about that, the promised yield, the way they handled like the unbonding, but really like not correlated unbonding with when they paid things out.

There was a lot there that they actually had to like actively manage. So like I agree on crack. And that's why I think this was like below. Yeah, yeah, yeah. I don't think we believe that this is true for all custodial staking services. Yeah, okay. I totally agree with you that if you take away those elements, which Coinbase claims that they have, I haven't actually looked into the details, but Coinbase claims, look, we don't have any of those elements.

You stake, you do the unbonding, you do the bonding, you get paid out when the blockchain pays out. That kind of stuff looks like a pure IT pass through. That does not look like an investment product to me. But obviously, I'm, you know, I'm not the SEC, so maybe my opinion doesn't matter. Yeah, I think a few other staking providers, like Figment came out saying sort of the same thing, like, hey, it's sort of straight pass through. You know, we don't have this sort of liquidity pool. We're not sort of, you know, proprietary tokens. We're sort of blending into something that rewards or whatever.

So I agree, it's sort of categorically different. But I mean, I agree with sort of the first point, which is like, hey, if I were in, you know, Jesse's position three years ago when I was launching this, like, of course these are features that I would want because they're actually great for, you know, customers in like Lido and their V2, right? They will have a redemption pool. So you get, you know, faster redemptions. you know, to go through the unbonding period. Like, they're great to have. And it was funny when, you know, this settlement came out and Gensler went on like CNBC or something saying, hey, you know, if you're an entrepreneur, we have a form on our website.

You have to fill that out. And then that's all you need to do. And then you're good to go. And Jesse was, you know, sort of quote tweeting him and saying, you know, it's not literally that simple. You can fill that out and you can wait three years and not get any clarity and, you know, not get a green light. And like, that's your three years is death if you're a startup founder.

And so there's this really unfortunate conflict, I think, where crypto entrepreneurs want sort of clear, bright line disclosure rules, you know, some guidance on how they can be compliant. And the SEC is just not giving it to them. And they're going to this, you know, regulation by an enforcement path, which, which sucks. It's, you know, we don't sort of see the alternate universe and sort of the cost of this approach of all the teams that are not starting because they're too afraid because they don't know what's going to happen or they don't have hundreds of thousands of dollars or millions of dollars in funds that they can spend. spend for legal fees to get off the ground. So I can kind of see both sides, this argument. But overall, I agree this is like, I think very emblematic of such a clean, clear product that should be able to have been launched in the U.S. in a compliant way. And there was just no real guidance or clarity around it. And the thing that sucks is that like this right here is also Sam. This is

this is the consequences of what happened in November is they go after cracking, they shut down a staking program. And somebody had a great tweet that a little bit of a dunk on the SEC, it's like, wow, the SEC, after everything that happened last year, the best thing they think to do is to go after Paxos and Cracken, which ironically are two of the most kind of buttoned up, most compliant firms in the industry, which look, if you're, if you're Gensler and you're probably getting pressure from the executive to start, you know, making moves, taking doors, doing stuff in crypto to show that like, hey, you are the cop on the beat and we have this industry under control, I can understand that, you know, he has to do something.

And it's much easier to go after legible businesses like a Paxos and a Cracken than to go after, you know, it's like you were saying, Mark, like go after these DAOs that kind of unclear where the regulatory jurisdiction is and there's some overseas foundation or something or do I go after the, like, what do I even do in these cases? And yeah, they are really strong and very well-guarded doors to try to be attacking. Whereas, you know, Paxos and Krakken, Paxos will be interesting to see if they do fight and if they do end up taking this thing to court, that'll be, I'd love to see that.

Of course, that'll take years to play out. And in the meantime, there will be a chilling effect from the impending lawsuit. But in the case of Cracken, you know, it just wasn't worth fighting because, you know, they have bigger fish or fry. And ultimately, U.S. retail staking is nice to have. For Coinbase is a much bigger business. If Coinbase feels that the SEC is going to come after them, they absolutely will fight because it's worth it to them to protect that line of business.

But for Cracken, I can understand why they would say, hey, fine, you know, have it. Well, there is, speaking of defy and different kinds of targets of attack, there was a big drama around Uniswap governance. And it's brought up a lot of conversations related to governance, legitimacy, proof of stake, and how some of these decisions in on-chain governance are made.

So I want to rewind back a little bit because we talked about it a bit at the end of the last episode. So to recap, Uniswap wanted to launch on B&B chain. And the Uniswap V3 license is coming up soon, so there's a little bit more pressure and urgency to try to get this thing launched on multiple chains before the license expires and potentially Uniswop V3 competitors

are just getting forked everywhere. So we need to launch on BNB chain, and we needed some bridge to be able to pass messages from Uniswop governance over into the new bridge. Or sorry, over into the new chain. So the two candidate interoperability solutions were wormhole and layer zero. Enter A16Z. A16 and Z, of course, early backer of Uniswap. They led the Series A.

They own a shitload of Uniswap tokens. They delegated much of their tokens to third parties, including a lot of these blockchain university groups, so like, you know, the Harvard, Michigan, Cornell, blockchain groups, as well as they had their own tokens that they just kind of voted themselves. Previously, they had, I believe they'd never voted their tokens directly. They'd only used these sort of student groups to whom they had delegated tokens. But in this decision between Wormhole and Lair Zero, A6 and Z was also a backer of Lair Zero.

And they claimed they did not like Wormhole because Wormhole obviously had gotten hacked last year for $300 million with Jump made whole and they've had, you know, whatever issues. people then pointed out, well, layer zero also had issues, and this whole press-switch thing happened that we discussed in the last show. And ultimately, Wormhole just has, you know, more, whatever it is, I don't know, whatever the arguments are for Wormhole.

And so there was an informal poll that was done, that was sort of a community sentiment poll, and in that poll A-S-Z had not voted. But they sort of said, like, well, our setup, our custody, something, something, something, we can't actually vote, but we are against this. So please know that, as you are taking the kind of general temperature check,

is that we would prefer layer zero over wormhole or to reconsider the notion entirely. But most of the community was pro-wormhole. And so they said, okay, well, it seems like the community's pro-wormhole. A-6 and Z is kind of making noises, but whatever, let's go ahead and put it into an on-chain vote. On-chain vote takes place.

And A-16-Z, by far the largest single voting block in Uniswop governance, boom, 15 million votes, or 50 million uni, voting for no, screw wormhole, take it back to committee. And basically over the upcoming five days for voting, almost every other large party in Uniswop governance votes, yes, let's go through with Wormhole,

including Robert Leshner, who's one of the big uni delegates, including basically a bunch of the student groups that also were delegated their stake by A16.Z, and A16Ns, it sort of ended up getting a lot of public flag for the way in which they participated in this entire governance drama. So there are a few questions, I think, that are worth discussing in this whole thing. So the votes over, wormhole one, you know, it's going to be, it's going to be taking

a wormhole, whatever, okay, so that's over. A few questions. The first, Chris Black was on Unchained earlier this week, basically saying that this proves that proof of stake is bullshit and that proof of stake is not really decentralized and kind of attacks the legitimacy of on-chain governance. Second is, you know, do we think, okay, take that aside. Do we think that, that A16Z was right to vote the way that they did or that they deserved the flack that they got for the way in which they voted on chain. And then third, I'd like to hear from you, Robert, why you voted the way that you did. I know that you're close to the A16Z guys and, you know, I don't know if they delegated you any of their tokens. Maybe they did. I have no idea.

But how did you see this whole debacle playing out? It's probably the highest profile governance situation in defy in recent history. Well, it was definitely the most interesting. And, you know, first point is that, you know, highly contentious governance votes are healthy and build a stronger system. You know, I, you know, despise systems that are just like a rubber stamp. And I think, you know, if Uniswap government governance gets in the habit of just rubber stamping, you know, whatever proposals come along, it will be less healthy and less strong than if it has highly contentious, widely debated governance votes that test the community. So, You know, first off, I think this is actually really strong for Uniswap.

You know, I voted for deploying, you know, Uniswap on Binance Chain for a very simple reason. The license is expiring, and either there's an official deployment that has an opportunity to gain traction or there's not. And by the time Uniswap deploys on Binance Chain, 20 other projects have forked the code base, PancakeSwap has forked the code base. you know, it's a free-for-all. And so this is the Uniswap community's moment and opportunity to deploy, and time is not on its side. The sooner it happens, the better. And so, you know, given that context, I think then it's worth analyzing the tradeoffs between, you know, one brick provider and another

and whether the process was fair or unfair. So looking at that, I'll preface by saying, Robot Ventures is an investor in layer zero, as well as A16C, as well as many other folks in the community. We're not investors in Wormhole. But the way I saw this playing out was, I think actually really positive for Unoswap governance, which is it doesn't matter if A16Z bangs on the table and says change the rules. The Uniswap Foundation laid out a process for governance to go through the lifecycle. It doesn't matter if one stakeholder or four stakeholders, say, like, I don't like that process, right? That process was established. It doesn't matter that

A16Z didn't set up their wallet correctly, whatever. That's not you to swap governance is problem, right? It's like, what's their problem, right? Like, you shouldn't deviate from the established governance process because, like, one person complains. It doesn't matter how important or well-known they are, right? I actually think it's positive that the process wasn't modified to somehow include A16Z's off-chain votes that never occurred, right? So I think the process was followed correctly, and that's actually incredibly strong. I think, you know, when you look at, okay, given that there was a process and, you know, maybe Layer Zero would have won if A16Z got their wallet in shape, they didn't,

and the established process led to Wormhole being what was proposed for a formal on-chain vote. And in that context, you know, for me, I think it was a simple no-brainer of do we ship uniswap? as a community on finance, or do we wait and go back to the drawing board and spend another six weeks, you know, or eight weeks or whatever, you know, going in circles again and relitigating things and rehashing it, et cetera. I think, to be honest, layer zero is probably the stronger technology. But which technology is stronger doesn't really matter. One, because of timing and two, because the actual content of what's being passed over a bridge matter so much less than people think it does. So when people hear bridges, they think,

I have to lock my assets in a bridge and poured an asset over in another blockchain. You know, there's a huge amount of risk. You know, which one is riskier? Oh, wormhole was hacked. Oh, layer zero is, you know, security holes in it. Oh, my goodness. None of that matters. And the reason is the only thing that this bridge is being used for is to pass governance

messages from Ethereum voters to the contracts on Binance chain. And there's such a small surface area of risk in that compared to a, bridging process that you are trusting your assets to. Uniswap is famously not really a governance heavy smart contract. There's really very little for governance to actually do. It's establishing new fee tiers, which might happen once, right? And it's setting the fees on specific pools. Even if that goes horribly wrong through the governance process, users can't have their money stolen. Funds can't disappear. There's really negligible. to zero risk on the users for which provider is selected.

And this can evolve and change over time. So personally, I think the importance of the BRIC provider is massively overstated. And I think the importance of timing was understated. And all of that being said, I thought this was a very straightforward and obvious vote to deploy on the finance chain. And I think the correct outcome won. And, you know, I think everybody should actually be pretty happy with the outcome of this. Oh, I was going to say, I totally agree. This feels extremely bike-sheddy for the reason that Robert mentioned, which is it's literally just passing messages to, you know, B&B chain. And even the vote itself for it is like a approval of the Dow to, like, grant a legal license to deploy on this chain. So it's like all very sort of high level. And even beyond that, there's now a proposal basically to use multiple bridges. So use multiple bridges. You send all the messages, new chain. And then the governance process takes place and chooses amongst those messages. So it's like, you know, the actual importance of any individual bridge provider is so, so, so, so low. And yet, you know,

this is an extremely contentious governance debate for some reason. Well, it's a bit like academia and that the arguments are so intense because the stakes are so low. I don't think that's actually true, though, because, of course, for Uniswap, the stakes are low. For the vendors, the stakes are enormous because Uniswap, of course, is the biggest application on Ethereum, or, you know, maybe OpenC on certain days, but, you know, generally speaking, it's Uniswap. And, you know, being the preferred vendor for uniswap is just a big stamp of approval, right? So it's like fighting for a government contract. It's going to be aggressive on behalf of the people who are competing. And they're going to find different ways to compete, such as, you know, our connected

sugar daddy is going to go in and, you know, make a big appeal to see if they can get us on the fast track. That being said, the predominant way in which this was covered in which I've seen people talk about this is that A16C is like they're perverting the process or they're doing something wrong by, you know, taking it blah, blah, blah, which I think is is just clearly complete nonsense. I mean, maybe I'm obviously not as privy to process violations that they may have incurred. I have no idea. So Robert, maybe, if I'm wrong about that, let me know.

But it feels to me like A-S-Z has a lot of money because they own a lot of uni. And the way the proof of stake works is that if you own a lot of something, you get a voice. And A-Six-Z gets a voice. And their voice is that like, hey, we want it to use layer zero instead of wormhole. And now you could say, like, well, but is that in the interest of uni holders, or is that in the interest, of only yourself, well, if you own Unitoken, you're not a fiduciary to the other people who own uni.

You are responsible for speaking for your own interests. And the point of proof of sake is to aggregate the interests of everyone, as opposed to have everybody tried to aggregate everyone else's interests by guessing what they would value or what they would want, right? And so it's a little bit like,

you know, Matt Levine talks about this when it comes to indexes, right? Or indexers or the rise of passive indexes, which is, is that when people own more and more of the market, when they own lots of different names, it actually makes it so that it is in the interest of the sort of stakeholders in a protocol or in a company

for the average portfolio of somebody to go up in value, as opposed to for that particular stock to go up in value. So, for example, for Pfizer is the kind of company that actually incredibly produced an enormous amount of value for the world, for everybody's portfolio, everything else you own was benefited by what Pfizer did in rapidly distributing the vaccine and not basically price gouging

everybody on earth for the COVID vaccines. That was good for us, maybe bad for Pfizer's bottom line, but very, very good for the rest of your portfolio. And therefore, it is rational for shareholders to say, hey, do the thing that's better for my overall portfolio and better for the world, quote unquote,

as opposed to do the thing that's best for your stock price. I don't give a shit about your stock price. I own a lot of other stuff. A16D is basically doing the same thing. They're saying, look, I have a bigger portfolio than just un-swap. And yes, it may be at some mild lost uniswap,

but it's better for my overall portfolio if you use layer zero. I think that's perfectly legitimate. Now, look, the overall people who hold unique, clearly did not feel the same way. They did not also hold layer zero. And so they voted against it. Boom, proof of stake works. It aggregated the interests of people who own uniswap.

I think it works exactly as intended. I totally understand why it's easy to make A16C a villain in all of this, but I don't see this in any way as being an indictment of proof of stake. I see it as, yeah, it is totally okay for, people to have concentrated interests in your token base. That's why these tokens are sellable. If you don't like that, don't allow tokens to be sold. And second, if you don't like, you know, prove a stake, then I don't know. I don't know what else to sell you. Like, there's nothing else in town, really. Oh, than multisodes. So I think, by the way, that Robert's, like,

very right that, like, Uniswap governance is the number one winner here. I actually think A16s Z is the second winner in this. And here's like the real. Why do you say that? Here's the reason. The best surprise answer. Let's hear it. Yeah. Is that V. V. V. V. V. V. V. V. V. V. V. It's that V. V. It's the take a lot of risk being involved in governance. And people like really go after VCs for doing that. They don't realize how much of a benefit it is to portfolio companies a lot of the times. A lot of investors are saving Portco's asses, honestly, by actually participating in governance. Sometimes it's not through the best process. Sometimes it doesn't look good. Sometimes they're self-interested. Sometimes they're not. They are really helping their portcos. And so if you look at it from A16

Z's perspective, they often hold more tokens than anyone else. If there's anyone who's going to be on a hot seat from a legal perspective or the number of tokens that they hold and their participation in governance, it is A16 Z. So what's A16 Z defense against us? Well, they could say we're going to hold fewer tokens. Okay, they have no interest in doing that. So what they're going to do instead is they're going to say, let's delegate some votes. Why are we going to delegate it? Because we're going to have a contract that we open source so that everyone can see. That specifically says that when we delegate tokens to you, we have no right to tell you what to do with those tokens whatsoever. But the thing is historically, people vote the same way. And so you really don't see that playing out. And so now you

actually have a situation for A16Z, or from a legal perspective, the best thing possible happened. They voted in the way that they thought was good for who knows who it is, whether it's itself, uniswold, whoever it is. And then they have a ton of folks to whom they delegated tokens who voted against them. I'll go on and bet to say that A16Z will not stop delegating those tokens to those who voted against them. And now what you have is A16Z sitting there saying, we can own a lot of tokens. We can't win every governance vote. And by the way, our method of decentralizing votes is actually effective because here you go, you can actually see that people are not going to vote in the way that we want them to. They're going to vote in the way that they want them to.

And to me, that's, like, frankly, like a massive win for A16-Z. It is a great precedent. I'm sure they're going to bring this up forever now as like, here's the proof that, you know, when we own 10% of a token supply, we are actually a, you know, an honest participant in governance. We don't control governance. If people don't like what we want to do, they're going to vote against us. So I agree with you. As a precedent, it's great. I don't believe that's what they intended with this, because of course, they lost a lot of brand value, but they did gain some sort of legal precedent value that is going to be a useful defense in the future. But ultimately, like, the reason, I mean, one question

you might ask is like, how did we end up here? Like, why, first of all, why is ASE and Z delegating to all these student groups, right? Which are like, you know, I was chatting with, I was chatting with somebody at jump who was telling me, you know, when they were, when they were like trying to get a feel for what was going on in this governance vote. And they were talking to all these student groups that, of course, have been delegated a bunch of tokens, not just from A66C, but from all sorts of different funds. And, you know, these are basically kids, right?

They're like, you know, 21, like 22. They just joined blockchains because they thought NFTs were cool. And now they're managing, you know, tens of millions of dollars worth of stake to manage one of the most important protocols in crypto. Why did this, like, why is this happening? Right? And the reason why this is happening

is that basically there have been lawsuits against VCs that owned a bunch of tokens claiming that they are engaged in a common enterprise with the founders of a protocol. And so seeing these lawsuits,

whether or not these lawsuits were successful, just seeing this civil litigation, saying like, okay, well, we need to lower our risk and make it look like we're not affiliates or we're not involved directly in the day-to-day running of the protocol. We own quite a bit of tokens. It could sway a vote.

So let's instead delegate, okay, who are going to delegate to? Well, who are the most unobjectionable people that we can get a bunch of them? They are very, you know, they have great brand names. They look really great. We can have this wonderful educational story. Ah, the student groups, and we can delegate to Stanford and to Harvard and to Princeton. It looks so great.

Everybody looks wonderful. We also create a bit of a hiring pipeline for ourselves. And we end up here where basically a bunch of kids are deciding, you know, one of the most important governance questions of the day. And this is going to be looked at by everybody. like, wow, this is a great precedent to follow. You should do what 86D did and also delegate to student groups. And at the end of the day, where you end up

is it feels a little bit to me like the Uki-Dao situation, which is that individually, all these decisions looked very rational at the time. But they end up in this completely irrational place that basically Uniswap is governed by like 20-year-olds. And that feels like not, you know, if you had a holistic legislative approach

to how do you think onching governance should be done, you would not say, like, oh, you are liable for decisions that a Dow makes, you know, if you vote once ever, which is the Uki-Dao suggestion, right? Like, if the Dow vote once ever to do something illegal, everybody who ever voted in governance on anything, no matter how mundane, is also jointly liable, right? That ends you up in a very strange place. In the same way, like this civil litigation that's been brought against VCs has resulted in this weird thing that we're now all doing.

And every VC, you know, ourselves included, is pushed in this direction because all legal precedent, every single lawyer we talked to is going to tell us, yet don't vote your own tokens. That's a crazy thing to do. You should do what 860s did. And delegate, look at this kid. Look at this uniswap thing. Everyone's going to remember this. If you delegate to student groups, they will vote against you sometimes. That is a fig leaf of true decentralization. But it ends you in a place that doesn't actually end up, I think, in good governance. Which is not to say that, you know, anything against, you know, Michigan Blockchain Club or whatever, I'm sure they're great. But it does feel like, hey, shouldn't it be the people,

who have the most obvious interest in protecting the interest in this protocol or who know the most about it, who should be governing it as opposed to a bunch of student groups. But, you know, this is where the equilibrium has landed. I'll make two points to see. First, you know, I feel like you're being a little bit agist. You know, I feel like you've never read Ender's game. Okay, it's possible these quote unquote kids as you speak are really the best pilots of decentralized protocols better than you. Possible. Okay. Okay. Okay. I wouldn't neg on, you know, the student groups. And second, I'll just throw out there that, you know, uniswap and almost every other token that does

governance is actually a fork of the compound governance token and voting system at some degree. And when, you know, I was involved in, you know, helping to design the compound governance token, the concept of delegation was actually really core. For anyone who's like a solidity, you know, buff, you know, the compound governance code base, you know, has delegation built into the token itself, not, you know, some layer on top, but like the actual token itself allows you to specify who you want to vote on your behalf. And this was actually incredibly important to the original design thinking of this, being that, you know, individual token holders, you know, won't want to pay attention to every single vote. They won't want to participate themselves directly.

they'll likely serve the protocol best by delegating to someone who considers themselves a specialist in paying attention to governance. And even if student groups aren't like the perfect governance participants, I still think they're far better than token holders that don't want to pay attention at all and don't want to vote at all. I think it's a significant improvement to at least create an ecosystem where people can just say, oh, you know, I want to delegate to that student group because at least they're like, talking about this in a classroom, you know, on a Saturday night and paying attention to it. So I don't have to pay attention to it. And I actually think there's like a really powerful concept that, yeah, maybe one day it's not student groups. Maybe one day it's like the crypto equivalent of like ISS who like, you know, has analysts who like really dig into every single possible vote and like publishes an opinion piece and recommends, you know, some sort of outcome for it.

So I think it's only going to get better. I agree with that. I think Maker Dow delegation, like the Maker-Dow delegates, I think, are a good example of a very mature set of delegates that have very strong opinions. And, you know, it's not – I think that's where all these protocols, as they mature, are going to move towards, is having more and more sophisticated people to delegate to and kind of more well-defined conversations taking place that are not behind closed doors. But going back to the original thing and sort of Chris Blacken, a lot of other folks who look at this whole kind of circus and say, isn't this all a sham? And isn't proof of stake just a cabal of rich people

who actually own what's really going on? Tom, what's your take on this attack? Well, I think it's also, it goes back to what's really at stake here. Like, this is not a layer one. And I think, like, the security of proof of stake and layer ones has sort of been, you know, discussed ad nauseum.

Here, it's really more, you know, hey, at some point, there will be something actually extremely valuable to govern here. You know, there will be sort of this, like you said, large group of different stakeholders, with maybe professional delegates.

And so it's like, yeah, maybe we're role-playing a little bit right now, but that's kind of how you actually get to the end stage. It's like a startup. You role-play a big-boy company, and then eventually you become a big-boy company, and that's kind of where we're at. Okay, so uniswap, almost a big boy. Just a little more, and maybe one day we'll get there.

Yeah. Okay. Well, Mark, we're a little bit over time, so let's go ahead and wrap things. Any final thoughts? It's been a pretty fraught week of regulatory and legal action. Where do you think this is all going? And what should we keep an eye out on the near-term horizon?

Yeah. Good question. I think the answer is like a pretty obvious one, right? It's like we've got a lot of battles ahead of us. I think that there's like a couple things that I'm particularly paying attention to because I think they're really, really important. I think the centralized players are things that I'll note. that while they feel really important, and they are for like adoption, like in terms of

on ramps and things like that, they're not really the key things that like I focus on. Defi to me is like literally the thing that I focus on and like really care about in terms of like winning. And why is that? And simply because like most CFI players, if you end up having some regulatory regime that isn't great for them, it's going to cost them more. It's going to slow down growth a little bit. but it's like manageable.

But when you look at Defi, it's like so core to what blockchains enable, frankly other than like Bitcoin, if you could argue with Defi itself, that if those don't hold up and those become subject to regulatory regimes that just don't work for them, we're going to end up in like a really, really bad spot. And so from my perspective, what I'm really looking forward to is seeing like how it is that DPI holds up here is both from like a technical perspective. again in terms of like focusing on things like governance and governance manipulation and just the technical design

that actually makes it more and more friendship resistance in addition to frankly I think like other governance regimes that kind of work a little bit better than what we have now just because they frankly just aren't perfect and basically what's happened is you know compound created something that was great for years ago and everybody's gotten lazy since then and basically said let's not evolve too much let's rely on this and that actually hasn't been the best thing for the space.

Not because of where Comptown started, frankly, it's just because of what projects have actually done. But for me, it's like this big focus on DFI and really seeing how it is that we can hold off, you know, governments, frankly, against DFI. And then the last thing I'll say is just, I still hold up a little hope on registration. I think it's just like it's so important.

If we look at what's happening in Europe, we actually see that there is reasonable regulation that can actually be applied to a lot of crypto. And we really need something like that in the US. Now, I'm not hopeful for that. Your question was like short term and short term I want to see Defi win. But if we look a little bit longer, I just have hope for legislation that I think it's like vital to actually keep the momentum that we have in the space. Yeah. And Mark, I know you've been a champion of Defi. You were chief legal officer at DYDX back in the day. And now, of course, at Polygon, you're continuing the fight on a sort of higher level of abstraction than

a single defy protocol. But the one thing I will say before we sign off is that, you know, I'm spending a lot of my time in Asia these days. And Asia is actually quite a different story than what you're seeing in the U.S. I think for a lot of the folks I know back in the U.S., they sort of see this kind of curtain descending over crypto. That's not the way that every country is approaching crypto. Actually, a bunch of countries around the world, I sort of thought that there would be this coordinated kind of, you know, blitzkrieg from every single regulator and every single lawmaker to after FTX to say, okay, this industry is done, shut it all off. Let's try to choke it.

But if you look at, you know, Hong Kong, which, you know, obviously China banned crypto two years ago and all of a sudden Hong Kong is starting to open themselves up back to digital assets, try to establish themselves as a new digital assets hub and lure some of the companies that went over to Singapore back to Hong Kong. Singapore is continuing to compete for that talent. you've got Japan actually opening up to crypto. South Korea has never gone anywhere. A huge part of where crypto is happening is outside the U.S.

And as you mentioned in Europe, they have relatively sane approaches toward crypto legislation. And so I think, you know, Sam, SBF, FTX, all that stuff really hit home in the U.S. And of course, Sam being an American, despite the fact that most of the FTX customers were non-U.S. And most of the money loss, obviously, was non-U.S. The story really hit home in America.

and I think we're going to see a strong backlash, not necessarily a legislative one, but particularly, you know, Gensler, it seems like he's going to be leading that warpath for as long as he's continuing to maintain that seat. But globally, the picture is not quite as dark, and I think that's an important note for me to share just given that I've been spending a lot of time here in Asia,

and I expected to see that people would have the same attitude as they seem to have in the U.S., but they really don't. There's a lot of positivity here. So there's there's you know, Crypto's a global story. It's not just about what's happening in the U.S. Although it's a lot of what we talk about on the show. So anyway, with that, we got to sign off. Thank you, Mark.

Hopefully we don't have to have you back on anytime soon because there won't be as much legal troubles, but if there is, we'll give you a ring. But thanks for coming on. Awesome. Awesome. All right. Take care, everybody.