Unchained - Under the First Crypto President, What Will Regulation of the Industry Look Like? - Ep. 747

Starting point is 00:00:00 I think we will have an SEC that just functions better and more effectively than what we've had under Chair Gensler. And I don't want to make this personal, but all of the folks I've talked to who know Chair Gensler personally will say that he's a politician first and, you know, a regulator or an operator second. And that's not at all what I hear about Paul Atkins, right? Hi, everyone. Welcome to Unchained. You're a no-hype resource for all things crypto. I'm your host, Laura Shin. We are now featuring comments and reviews on the podcast in the show. And there was a recent comment by Marquay's on last Friday's episode, which was about

Starting point is 00:00:37 incoming SEC chair Paul Atkins and was a little bit spicy. He said, quote, Atkins is a huge supporter of making it easier for private equity to raise money with no questions asked, the kind of thing that led to the great financial crisis, which supposedly is why crypto is anti-Wall Street. So kind of spicy. But if you want to hear your take on the next episode, feel free to comment on this episode on X or on YouTube. And this is the December 10th, 2024 episode of Unchained.

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Starting point is 00:02:16 Good to be here. Hey, Laura, thanks for having me back. Last week, President-elect Donald Trump made the nomination that the crypto community had been waiting for. And Untoen was actually the first report that Paul Atkins had been invited by Trump, and that was later confirmed after Atkins accepted. The cryptic community was very excited about this. And I was curious to hear your opinion on what Paul Atkins would be like as SEC chair. And Jake, why don't we start with you? Yeah, absolutely. Well, I think it will be something close to the opposite of what we've experienced under Gary Gensler for the last four years or so. You know, I think it's a mistake to make two

Starting point is 00:02:53 precise of predictions, but I think in general, the tone from the SEC is going to be extraordinarily different. I think we're going to have a commission that is supportive of innovation in the United States and that wants to see the crypto industry grow and flourish here, whereas over the last four years, we had an SEC that viewed its job as essentially destroying the industry by driving it out of the United States. And, you know, the SEC is a commission that is very much led by the person in charge, the chair who sets the agenda for the entire agency. And I think what we should expect from a chair Atkins is changes in a couple of different ways. The first is, I think very quickly, we will see a change in the SEC's enforcement priorities. So I don't understand Paul Atkins

Starting point is 00:03:40 to be a person who believes in regulation by enforcement. And I think what we will see is the SEC no longer taking novel positions on legal issues in the courts as opposed to engage in a public process through rulemaking and trying to figure out the right way with, you know, public input, how, if at all, it should be regulating crypto. So I think that's the first big change that we'll see in enforcement. And then I think the second big change will be in rulemaking. And as listeners probably know, the SEC under Chair Gensler proposed a number of different rules that would be extraordinarily damaging to the crypto industry, some of which they finalized and then were sued over and then lost in court and those rules were undone, like the private

Starting point is 00:04:23 funds rule or the dealer rule. And I think that a chair Atkins will not pursue any types of rulemaking of that sort. I think that probably many of the rules that are still pending would be withdrawn or abandoned. And then again, we would have a real public process to try to figure out to what extent is the SEC going to regulate this industry. The last thing I'll say, and then I'm curious what Mike's thoughts are, is I think the one big outstanding question is the degree to which this SEC has any role in regulating crypto in the first place. And, you know, the SEC has been the most active and aggressive regulator in the U.S. thus far with respect to crypto. But there really is this core question whether the SEC has any business at all regulating this industry or whether that's

Starting point is 00:05:08 really the proper purview of the CFTC or some other agency. And so again, I think the question will be, will Chair Atkins, who is very much a free market libertarian, think that the SEC has any role to play, and if so, to what extent we'll see the SEC involved in the future? Yeah, I absolutely agree. Atkins is a free market libertarian, and he's a fan of Milton Friedman. I think he's going to look with skepticism upon the past SEC's positions on crypto under Cherkensler. And, you know, in particular, he's been critical of the response to FTX.

Starting point is 00:05:45 For example, he said that FTX really should never have happened if we had a a compatible regulatory framework to address crypto assets. He's praised Commissioner Persis' token issuer safe harbor. And beyond crypto, he has looked with skepticism upon broader prescriptive regulatory frameworks for equity market structure. For example, years ago, when NMS was proposed, he was critical of the rulemaking. He actually was one of the Roebuck and commissioners that dissented on the rulemaking. and in particular looked at the way that the framework impose specific requirements on broker

Starting point is 00:06:24 dealers and market participants rather than relying on principles-based market structure. And he viewed this as hindering innovation in our capital markets. And I think that same skepticism will be really important when he looks at the crypto regulatory framework. I think he will work to create a pathway for issuance of crypto assets, whether those issuance transactions constitute securities transactions are not, I think he'll look at those transactions and consider whether we should be treating them as securities, whether the assets that are being offered in those transactions are securities. I think he'll re-look at the custody rule proposal,

Starting point is 00:07:02 safeguarding rule proposal, and probably try to come up with a structure that's workable for the custody of crypto assets to the extent that they fit within the custody rule. I think he'll look at staking transactions. I think he'll look at secondary. markets. And I think it'll be very critical of the current approach of regulation by enforcement and also the use of staff accounting bulletins such as SAB-121 that don't necessarily represent the views of the commission and don't go through the formal rulemaking process. So I think the SEC under a chair Atkins will be a very different agency. They'll be taking a hard look at their regulatory framework for all asset classes, not just crypto, but also waiting to see what happens

Starting point is 00:07:44 in the legislature in terms of any sort of broader authority. So it'll probably be more of an interim solution where they're looking to clear a way for the asset class to flourish within the United States, to bring back innovators to the United States and not discourage them to offer exclusively offshore and to kind of create an environment where there's a more accommodating framework for companies to develop in the United States. Something that was kind of interesting to me is, you know, when we talk about just how different he's expected to be from Gary Gensler. I saw that John Reed Stark, who had worked with him at the

Starting point is 00:08:19 SEC, noted that even just like his personality is quite different. It's not even just that his political views are different, but he said something like Atkins is known for knowing how to disagree without being disagreeable. And, you know, as we've all heard, I think Gensler himself had a little bit more of an abrasive kind of personality within the agency that, you know, led to Stafford's being unhappy. So, you know, even if there's other people in the agency who may not always agree with him, I think Atkins will at least be able to, you know, do so in a way that's like more congenial. So because he probably won't be approved for a few months, you know, similar to how Gensler himself has unapproved until April of 2021, who would you expect to be acting chair during that time?

Starting point is 00:09:10 And what do you think they might accomplish or do you think they would kind of be a little but hands off until he's sworn in. Yeah. Well, first, if you don't mind, I'm just interested to respond to your point about Chair Atkins or potential Chair Atkins and his sort of personality and the difference there, because totally aside from politics, I think we will have an SEC that just functions better and more effectively than what we've had under Chair Gensler. And I don't want to make this personal, but all of the folks I've talked to who know Chair Gensler personally will say that he's a politician first and a regulator or an operator second.

Starting point is 00:09:46 And that's not at all what I hear about Paul Atkins, right? This is a really serious person who's going to take this job really seriously, understands the SEC extraordinarily well, having been not only a commissioner before, but having worked there before. And I think that that is just going to be a benefit totally aside from the politics for both crypto and also for the United States. In the interim before Chair Atkins were to take his position, what do we expect to see?

Starting point is 00:10:10 And I think we will either see an interim chair purse or UADA. Those are the two Republican commissioners who are already at the SEC. And very interestingly, both of them worked for Paul Atkins when he was previously a commissioner at the SEC. So I think there is an open question how much progress they will want to make before he can be confirmed by the Senate. But I would imagine, and again, speculation, but I would imagine that they're all already in communication, given that they have this pre-existing relationship about what they expect to do together in the coming years. And you could imagine a Chair Atkins, who, of course, has a really broad focus, as Mike was saying, he's obviously not going to come in and focus solely on crypto, delegating some responsibility,

Starting point is 00:10:55 especially about crypto regulation, to Commissioner Purse, who's obviously been at the forefront of this issue for a very long time, or to Commissioner Ueda, who's taken a really strong interest and done some great work on it recently. And you could see them start to develop and put out for public comment or even just to circulate internally some ideas about what the SEC might do so that they're ready to hit the ground running once Chair Atkins comes into the role. So that remains to be seen, but that's certainly what I would hope and expect to see. Annette, do you know how they would decide who that acting chair would be? I'm not sure, Mike, do you know how they figure that out? It might be up to the Trump transition team. It's usually the more senior term of the commissioner

Starting point is 00:11:37 that would be appointed acting, but there's discretion to select is my understanding. Okay, so then I don't know who's more senior. Is that Hester Perce? Oh, okay. I believe so. Yeah, I think it would be since she was there before Commissioner Ewaita took his seat. Okay. Well, so there will also then be two spots for non-Republicans, and these would be permanent, or not permanent, but, you know, they would fill for, you know, a term. and the Democrats apparently may be re-nominating

Starting point is 00:12:09 current commissioner Caroline Crenshaw for that role. Crypto people are not happy about this. She was somebody who, despite the court telling the SEC that they had to approve Bitcoin ETF still objected. And I wondered, you know, why is it that you think the Democrats are considering renominating her and how likely is it to do you think that she actually will be re nominated?

Starting point is 00:12:34 and then also voted in. Yeah, I think it's hard to say at this stage, right? Because we just saw Senator Tim Scott, who's going to be running the Senate Banking Committee, sent out a letter today advising the Democrats to hold off on these appointments and nominations until there's a new Senate next year. He's also told the Democrat agencies to hold off on any new financial rulemakings. And really, there's a lot of politics at play here, right? because the Republicans are going to need to get to new chairs confirmed on the market regulatory side.

Starting point is 00:13:10 There's going to be a new SEC chair, a new CFDC chair, and there will also be other appointments that need to get confirmed. And so it's likely that we would see some sort of package. So it is possible that Caroline Crenshaw could be confirmed as part of a package where they've packaged together some other Democrat nominees. And in exchange, there's, you know, willingness to approve the nominations on the Republican side. But it's, you know, this is all horse trading. And so I think there could be some negotiations and politics at play that could delay this vote. But it's not clear as we're kind of at the 11th hour of the confirmation hearings now. Yeah, I totally agree with Mike about the politics at play here. It's hard to speculate why exactly Senate Democrats would put Commissioner Crenshaw up again now.

Starting point is 00:13:55 But I will speculate. I think it's an attempt by the outgoing Senate banking chair, Sherrod Brown and folks who view regulatory issues the way that he does, that is to say, similar to how Senator Warren or Chair Gensler have viewed them, an attempt to sort of have the Hester Perce of the left in place for the next four years, right? You know, Hester Purse was a thorn in the side of Chair Gensler and the Democrats as they were attempting to destroy the industry. You could imagine having a Commissioner Crenshaw who's writing the same kinds of fiery dissents, similar to what what she did with the spot Bitcoin ETF approval, every time that Chair Atkins decides to take some action that she and others who view regulation the way she does think is inappropriate.

Starting point is 00:14:43 In terms of the likelihood that she will be reconfirmed, I'm going to go out on a limb and say, I do not think that she will be reconfirmed. I think this does come down, as Mike said, to politics, but ultimately politics comes down to whipping votes. And what the Democrats would need to push Commissioner Crenshaw through is to keep all 51 of their votes in line to get this done in the next month or so. And it's not that hard to imagine that there are two Senate Democrats who would vote against this. You'd have to hope that Senator Gillibrand would not support Commissioner Crenshaw. And then it's just a question whether there's one other Democrat who would show up to vote no. And I don't think it would be a great look for the outgoing Senate Democratic majority to try to, you know,

Starting point is 00:15:25 push through Commissioner Crenshaw and then lose some of that political capital. that, as Mike accurately said, they're going to need when they do come up with, you know, new picks for the future. So I don't think that Commissioner Crenshaw is going to get through and I don't think that she should, frankly. Yeah, that makes sense. It's like how important really is it to have this when, you know, they probably need that political capital for other more important things. Well, so whether or not there are, you know, two other non-Republican seats available, you know, for commissioner, at least we will have one. And the regulatory reporter, Veronica Irwin here at Unchained, reported on Friday that it actually looks like Chuck Schumer is going to kind of give Elizabeth Warren the lead on, you know, figuring out who that should be. Obviously, because he's or he will be the Senate minority leader, he would have the ultimate say, or, you know, is currently the Senate majority leader. So who do you think are some good options for those spots who are not Republican?

Starting point is 00:16:27 And by the way, Cody Carbone was on the show on Friday, and he kind of surmised that basically it, the rule is like you can't have more than three people from one party. So like Trump could try to get like an independent in or something rather than having two Democrats. But regardless, like who do you feel would be good for for those spots? So a couple of quick thoughts. So first of all, funny enough, the rule is not that you need three Republicans and two Democrats. It's that you cannot have more than three people of any particular political party. So indeed, you could have two other seats that are neither Republicans nor Democrats. Historically, that's not the norm.

Starting point is 00:17:05 And, you know, typically the minority party in our bipartisan system gets to pick the two minority commissioners at the SEC. But we are in an environment where norms are being broken all the time. And, you know, President-elect Trump has not shown himself to be particularly favorable toward norms when there's some alternative that might be more beneficial in his mind. And so we could see a sort of wildcard play where the Democrats, Democrats don't get to pick the minority seats in the way that they usually do. The other thing is the reason why it's likely that Senator Schumer is deferring to Senator Warren on

Starting point is 00:17:37 those picks is because she is very likely to be the ranking member of the Senate Banking Committee as the most senior Democrat on the committee who isn't going to take some other position in the Senate. And it's just ordinary, you know, it's basically regular order for the ranking member of the Committee of Jurisdiction to be in a position of making those picks. We'll have to see, you know, ultimately who those picks are. I won't throw out any particular names, but what I would say is, in my mind, the right thing for Democrats to do would be to pick pro-business, pro-innovation moderates who can take

Starting point is 00:18:14 those seats, as opposed to the anti-innovation, anti-business progressives that the Biden administration put in charge of so many of the financial markets regulators, and which frankly cost them a whole lot in this election. I don't want to say that it was just, you know, that perspective on regulation that cost Kamala Harris the election. I think it would be sort of silly to say that that was the only cause. But clearly it was extremely damaging to Democratic electoral prospects to pursue this type of hostile regulation of business, not just crypto. And so I would hope to see Democrats learn a lesson from the 2024 election and adjust to a more moderate perspective. But again, with Senator Warren being the one potentially in charge of making those picks,

Starting point is 00:19:02 I guess it's hard to hope that we won't see more of the same. And wait, just out of curiosity, like, I don't know if you hear any gossip. Like, do you know if she is chastened at all? Or is that not something you, you know, have heard or what even hear? You know, without divulging anything particular, I think the general perspective is more a doubling down than it is learning of lessons. And that's sort of historically been the case. right, the view is like, well, they didn't go hard enough after crypto. And if only if they had

Starting point is 00:19:31 gone harder and been more successful in killing it, well, that might have helped them more than and sort of, you know, pivoting to some other type of view. Very disappointing, but also not surprising at all. Okay. Well, Mike, what do you think about, you know, either who could be some of those commissioners that fill the non-Republicans seats, I guess we'll call them? Or, you know, Yeah, just how you think even that might be decided. I'm skeptical that it will be independence that they try to fill these seats with. I mean, to Jake's point, the statutes for each of these agencies, the CPD and SEC in particular, actually provide that it cannot be more than three commissioners

Starting point is 00:20:15 from one party. Historically, it's always been three from the majority party and two from the minority party in terms of the presidency. And it's really a political process of appointing these folks. Usually the Democrats will have their choices. Republicans will have their own. And there's some dealmaking that goes on behind the scenes as to who is actually put up and confirmed.

Starting point is 00:20:38 And so I would be surprised if the Republicans tried to put in place, really effectively take an extra seat by putting in place an independent that's likely more aligned with the Republicans because that's just going to. going to show bad faith and cause trouble down the line. I think there's going to be some effort to have an olive branch and work in a bipartisan way at these commissions. I think what's going to be most important is actually getting a full commission. It's really difficult to actually get things done when you have, you know, when Chris, actually, Christian Carlo was a commissioner at the CFDC, who's the only commissioner at one point. It's really difficult when you don't have a full commission

Starting point is 00:21:18 because there's Sunshine Act laws and other requirements around promulgating regulations. And so things can work much more fluidly when you have a full commission. It also provides for more thought leadership on the different issues from both parties. So I think there will be an effort to have two Democrat commissioners, three Republican commissioners at each of the agencies. I'm not certain who will be the best position to get those appointments. Usually it's, again, be kind of something that's vetted through the Democrat Party, to the extent they're Democrat appointments, there will be lists that are circulated. And the Senate, of course, will have the opportunity to go through confirmation hearings with those candidates.

Starting point is 00:22:05 So I agree with Jake that it should be a pro-business, kind of more moderate Democrat choice. Just because I think that that type of candidate will work in the best manner with the Republicans in a more collaborative way, it's nice to have a 50 rulemaking vote as opposed to always having one holdout or two holdouts on political terms. I think there's definitely going to be an effort to work collaboratively between the parties with persons like Atkins and control and Commissioner Perth, who I'm sure understands being in the minority and how difficult it is when you're ignored. And so I think there will be some efforts there to be collaborative. Yeah, I actually will throw out one name. And this is like only through a crypto lens. So I don't really know, you know, anything else about kind of the other ways that an SEC commissioner, you know, would be viewed or like what lenses they would be judged on. But, you know, back when like during the election, we had reported that one of the names that Kamla Harris's team was considering for SEC true was Chris Brummer, who I'm sure.

Starting point is 00:23:13 people are familiar. Like he's testified on behalf of the crypto industry for like many, many times in front of Congress and is a, I think he's like a Georgetown law professor. But he actually has a, you know, a startup that is focused on crypto disclosure, which, you know, somehow seems in line with like, you know, what that's he's supposed to be about. So anyway, moving on. So as we know, Paul Atkins is going to sort of usher in this new era at the SEC. And yet, as he comes in, Gary Gensler is leaving behind this whole mountain of, you know, Wells notices, you know, lawsuits all against the crypto industry. There's also, you know, lawsuits from the crypto industry against the SEC. And I wonder what you thought Atkins was most likely to kind of keep in terms of

Starting point is 00:24:06 these different, you know, legal actions against the industry and which ones he's most likely to discard. Well, I guess I'll take my my shot at this first. I think one thing is importantly, Laura, a timing issue. So as you said, you know, we might not have a Characchans for a number of months. At the same time, we might get some new leadership in the enforcement division that might have a different perspective. Now, it might be that we won't get new enforcement leadership until after Chair Atkins takes his role. But a lot of these decisions actually likely get made not at the chair level, but at the enforcement division, because it's up to the enforcement division to decide basically everything about its investigations, right? The question of opening or closing an investigation

Starting point is 00:24:51 is not a decision typically made by the commissioners or by the chair. And so all these Wells notices that we've heard about, you know, in media reports, those aren't things that the commission has necessarily voted on at the commissioner level. So you could imagine a new enforcement director, even without necessarily input or direction from a Chair Atkins deciding we're going to just pull back or abandon these Wells notices. We're not going to bring these new enforcement actions. That's a totally different question when it comes to the lawsuits that have already been filed. And as listeners will know, there are a number of cases that the SEC has brought that are currently in court. You know, the ripple case is a big one heading up on appeal now.

Starting point is 00:25:34 There's also a handful of cases, mostly against the centralized exchange. right, Coinbase Cracken and Binance being sort of the big ones that folks have been watching. It does require a vote from the commissioners to settle or walk away from cases like that. But I do think that A. Chair Atkins would instruct the enforcement division to start, if they haven't already, some type of settlement negotiation, again, to back away from this position the SEC has taken of regulation by enforcement. That is taking the view that digital assets themselves are securities, I guess in the SEC's new parlance, that they represent investment contracts, even if they aren't investment contracts themselves, as they trade in secondary markets,

Starting point is 00:26:18 thus making the centralized exchanges in violation of the Exchange Act of the Securities and Exchange Act of 34 by not being registered national securities exchanges. You could imagine the way that the SEC moves away from that position is by coming up with some type of settlement, right, It's something to save face as opposed to just totally abandoning these cases and just walking away and pulling the complaints, where, you know, Coinbase or the other exchanges will admit to some sort of minor infraction and then, you know, commit to some type of remediation, pay a fine, something of that nature. And then sort of move on and continue doing business. And then we can shift focus from the enforcement context into the rulemaking context. That's sort of what I would expect to see. I'd be a little bit surprised if we get to the end.

Starting point is 00:27:05 end of next year. And we're still in the same position that we're in right now where the enforcement division is trying to essentially drive these companies out of business by saying that the core of their product lines that is listing digital assets for secondary market trading is in violation of the securities laws. But again, it'll remain to be seen sort of who the enforcement division is led by and what that person wants to do and how that informs the decision that the commissioners end up making. Okay, wait. So first time, I want to fill in a little bit of background for the listener. One is that, so John Reed Stark tweeted that Gary Gensler has actually just promoted some people that John Reed Stark was calling the best, brightest, most experienced

Starting point is 00:27:48 and dedicated crypto enforcement lawyers in the SEC ranks to senior executive positions, running the SEC's trial unit and their crypto unit. And basically, the SEC actually didn't publicly announce these promotions, which apparently is unprecedented. And John Reed-Start, was saying, but actually these are well-deserved promotions and they're a done deal. So from what you're saying, it sounds like you're saying that even when Atkins comes in, even if he has, like, his own philosophy that's different, he actually can't affect any cases that are currently going through the litigation process. Is that what you're saying? Not quite. So he will get to pick his own new director of the division of enforcement. And that person, you know,

Starting point is 00:28:32 basically decides what the enforcement division is doing. Now, he can't necessarily fire those individuals you mentioned who got promoted, but there's a lot of flexibility to decide what those people are working on, right? So in theory, they could just get assigned, regardless of what their title is, to, you know, sitting in the basement and reviewing Edgar filings all day, every day, right? Just because they were promoted to a title that sounds like chief litigation counsel or something like that, doesn't mean they stay in charge of making policy decisions at the enforcement division. I also don't totally agree with John Reed Stark about this. I think the report is a little bit overblown. This is something we see pretty often at the end of an administration. It's a promotion

Starting point is 00:29:15 to a new title that makes these folks a little bit more, let's say, attractive to the market when they decide to leave the SEC, right? So there are going to be law firms who want to hire some of these people right now, and we could talk about this if you wanted to, folks who have been doing crypto enforcement are a little bit toxic, right, because companies like Coinbase don't want to hire law firms that are hiring these, you know, anti-crypto enforcement lawyers. And so there's an argument that getting a quote-unquote promotion, changing title, saying that there's some other focus than, let's say, head of the crypto enforcement unit for some period of time before heading into private practice gives a person a little bit better chance of getting a good partnership at a good

Starting point is 00:30:00 law firm. I don't really think it means that Gary Gensler is somehow stacking the SEC in a way that can't be undone by leadership in the next administration. But I don't know, Mike, if you have a different perspective. Yeah, I totally agree. I mean, I think the way that I think essentially what Gary Gensler's doing is giving titles out and so it's going to be beneficial to these individuals when they leave the commission, frankly, whoever the, whoever the, the new chair is, if it's Paul Atkins or whoever else, they will appoint a new division director, and they can also indicate to that division director that they should pursue, settle the negotiations or get these cases dismissed. So the division director can recommend to the commission that they

Starting point is 00:30:42 dismiss these actions and kind of cease to pursue these actions. And I think under a President Trump administration, the aim is going to be to reduce taxpayer expenses, reduce unnecessary burdens, hidden taxes on industries. And so it would not be surprising to me to see a commissioner or chair Atkins wanting to actually dispose of these actions altogether. They've cost the industry hundreds of millions of dollars. And really, they're not consistent with the mission of protecting investors or preventing fraud. And I think the commission resources that are being allocated to these types of actions can be repurposed. I don't expect a new administration to take it easy. fraud, manipulation, you know, Ponzi schemes, pump and dumps, shrug poles, all these sorts of things.

Starting point is 00:31:31 And so all the, you know, the issuers of sketchy tokens and things like that might be sweating a bit. But I do expect the administration to be much more favorable to companies that really want to do the right thing and come up with a regulatory framework that allows them to do so. Given the limited authority that we discussed in the beginning of this discussion, really the SEC is not in the business of comprehensively regulating crypto markets. These are digital assets that have insumptive utility. They're used for various purposes. They're not traditional securities instruments. And so really the SEC's mission is going to be focused on looking for offerings that involve digital assets, perhaps regulating those offerings, figuring out where they fit within the securities market structure, but likely not coming up with a whole new regulatory structure for these products

Starting point is 00:32:20 or trying to police the registration of exchanges for crypto assets to the extent that Congress does not tell them to go and do that. Yeah. So in a moment, we're going to talk a little bit more specifically about some of the court cases. But first, a quick word from the sponsors you make this show possible. Get some of the highest rewards on ETH with the high growth vault by Kelp. High gain leverages blue chip defy strategies with R.S. Heath across Avey, Pendle, usual, and elixir.

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Starting point is 00:35:19 And then somebody responded. She's a journalist. Owning crypto would create biases and thus all to her neutrality. Instead, we're lucky to have a person who's not shilling her bags. Do you prefer getting leased from a KOL? That is the dumbest thing I've ever heard. So don't forget, if you want to hear your take on an episode featured in a future show, comment on this episode or an X on YouTube.

Starting point is 00:35:38 Back to my conversation with Mike and Jake. So I did want to just call out probably, I think, two of the biggest or most high profile cases that the SEC is pursuing against the crypto industry. And so the first is Coinbase, which kind of came up a little bit already in the conversation. But, you know, as you know, they're basically going after them for not registering, even as the industry has talked about how SEC has not offered companies like Coinbase a way to register anyway. So what do you think will happen to a case like that? I mean, I think this case will be viewed similarly to other cases, right? The SEC is going to

Starting point is 00:36:15 look at whether there's fraud. In this case, there's not been any allegations of fraud. They'll put it in one bucket separate from perhaps some other cases and work to come up with either a settlement that's favorable to both sides. There doesn't have to be an admission or denial of liability. So there could be a settlement here that doesn't concede that any crypto assets are securities. It could be that it's possible that of the hundreds of assets listed on an exchange platform, one of them maybe is a security, maybe that's what they settle upon, no admit, no deny. And there's a simple settlement and everyone can go about their way. Perhaps some assets get delisted, perhaps not.

Starting point is 00:36:52 Or there could be just a full dismissal of the action. I actually think under this administration, under kind of this Trump 2.0 deregulatory scheme, there's a good possibility that the more likely path is just to get rid of these actions, not even to settle them, just to dismiss them and tell the industry, we want to work with you. we want to come up with a regulatory path where these assets can be distributed and traded, whether it's within the SEC or CFDC, that's for the legislature to decide. And in the interim, we'll create pathways for that to work. But we're not going to impose hidden taxes and things like that through regulation on these

Starting point is 00:37:31 businesses. So I do think there's a distinct possibility that it's dismissed outright. Otherwise, I would expect a settlement where there's no admission or denial of any liability. I totally agree with that. and I think that's what should happen and is most likely to happen is a total dismissal of the case against Coinbase. I think that it is so noteworthy how hard Coinbase has tried for so long to comply with the securities laws and just been refused in a completely unreasonable way, a way when sometimes we hear Democrats learn, for example, in congressional testimony, sometimes we see Democratic members of Congress learning in real time

Starting point is 00:38:08 how poorly Coinbase was treated by the SEC and are shocked at the realization that this idea come in and register was just a total farce. And so I think there is more than enough political cover for the SEC to say, we're walking away from this completely unreasonable case. I do think that's different from some of the other cases. I don't want to jump ahead of you, Laura, but I will emphasize the point that Mike made, which I think is absolutely correct, which is differentiating between a pure regulatory violation on the one hand and an allegation of fraud on the other hand. I do not think that this SEC under Cherakins is going to walk away from allegations of fraud, which again do not exist in the context of the Coinbase case.

Starting point is 00:38:52 The other differentiation to make is between primary issuances and secondary trading of digital assets. You know, the industry has argued very vehemently that in the secondary market, market, digital assets should not be treated as securities, but there's a wide difference of opinion about whether the initial sale of a digital asset could be done in the context of a securities transaction. In other words, there is an investment contract at play. The digital asset isn't the investment contract itself, but the sale of the asset, combined with all the promises that the seller is making, does constitute an investment contract that the SEC has jurisdiction to regulate. You know, that's sort of the ICO.

Starting point is 00:39:35 case in a nutshell. And I think we could imagine cases against ICO issuers going forward as well, because again, there isn't such sort of clarity, at least from the industry's perspective, that the securities laws don't apply. Yeah, I think if you look back to the Dow report years ago, the Clayton SEC kind of almost announced its policy on crypto in a pretty big way with this investigation report on the Dow. And I would expect to Chair Atkins or other commissioners to kind of announce in the same manner the policy as to what is a security, what's not a security, what types of offerings might constitute securities, and what sorts of software protocols are kind of outside the scope of any sort of registration scheme, what type of platforms might be part

Starting point is 00:40:22 of that registration scheme. And it might be done in a bunch of different pieces through exemptive releases, rulemakings, statements and testimony. But I would expect some action pretty early on to set the stage. And I think it will really draw a line in the sand where if you engage in some of these activities prior to these public statements and proposals, that might be something that is not necessarily prosecuted or actions taken against you, but you would be expected to come into compliance. Whereas things that happen after the fact, there's likely still to be enforcement consequences. And in particular, I think fraud and manipulation, things like that, there's going to be enforcement no matter what. What I would expect really is a reallocation of resources from going after

Starting point is 00:41:10 companies that are in good faith trying to comply with laws and regulations and a targeting of those companies that are actively evading those laws and regulations knowingly, willfully, etc., or engaging in some sort of fraud or manipulation. Yeah, like even if you just look at Twitter from all the people who are like, you know, we're going to set up an office in New York or I'm moving back to the U.S. or you know, whatever. It's definitely people who, you know, have already built something are like solid entrepreneurs, you know, not people who are advertising like, oh, great, now the U.S. is a great place for me to perpetrate my next scam.

Starting point is 00:41:48 I did want to also ask, though, because obviously, say Ripple is probably, I think, the case that's furthest along when it comes to the SEC and crypto. And it seems to me that crypto people tend to view something like the Ripple cases. is different from the Coinbase one, and that perhaps, you know, it offers up either more legitimate or at least like meteor questions that aren't this sort of, you know, fake charge, basically that the SEC is alleging against Coinbase for, you know, not registering for something that they actually can't register for. But I wondered what you thought would happen now to the

Starting point is 00:42:23 Ripple case, especially because, you know, parts of that have already been decided. Ripple is another case where there was no allegations of fraud. And so I think it would be viewed similarly to the Coinbase action where the SEC lost on certain of the counts, essentially in that case, right? There's kind of a victory in part that the token in and of itself is not a security. When it's sold on exchanges and blind bid-ass transactions, those transactions themselves are not subject to securities laws. And so that's a win in part for the industry, for sure, and a loss for the SEC. Under the Gensler, SEC, there's been an appetite to continue to pursue this further, that actually might not be the best strategy because I think

Starting point is 00:43:05 this Supreme Court, if it makes it all the way up, is going to smack that down and it could actually put the agency in a position where it has less authority over transactions. And so I think this SEC is going to be much less inclined to continue to pursue this litigation, but again, it will have to go through that same path of the director of the division, deciding to either settle these outstanding. Well, there's really effectively not any settlement, but withdraw the litigation, essentially not continue to pursue an appeal in that action. I agree with that.

Starting point is 00:43:38 And I do think, you know, the first question, of course, is what does the SEC decide to do here? The SEC is the one that decided to bring the case. It's up to them to decide if they want to pursue it or if they want to withdraw it. I, you know, I, again, don't want to speculate as to what the folks at Ripple would want to do. And obviously, they've got the best legal team that money can buy both. in-house and outside representing them in this case. I imagine that they would be happy if the SEC decided to just drop the case entirely. On the other hand, you know, there is an appeal pending. As far as I can tell, and Mike, tell me if I'm wrong, but I don't think we know yet which issues are

Starting point is 00:44:13 on appeal. We just know that both sides wanted to appeal different aspects of the district court order, but neither of them have said what they actually plan to appeal. Is that right? That's my understanding. So, you know, it could be that either of them would say, look, you know, although, um, we have a different perspective, right? The SEC could say, although we have a different perspective than the prior SEC about these issues, we do want to get some clarity from the Second Circuit about particular aspects of the case. You could also see the folks at Ripple thinking, even if they were offered some sweetheart deal in settlement, if the SEC were, you know, not to want to just walk away from the case, them saying, look, we think we've got the better view of the law,

Starting point is 00:44:48 and we do want to bring this up to the Supreme Court. You know, if they've talked about having the Ripple test as the successor to the Howie test, and they might say, no matter what sweet deal the SEC wants to offer, we're not letting this thing go until we take it all the way. So I think it's an interesting and really hard to predict situations. We'll just have to see how it plays out. And so if that were to be abandoned, then with the win that they already got about how the tokens in and of themselves are not securities, does that stand? Or like, what happens to that part of it? Yeah.

Starting point is 00:45:21 I mean, look, that was an order from a district judge on a motion for summary judgments. or motion to dismiss. Now I'm forgetting what the stage of the case was in, since we've seen so many of these orders. And that stands, right? You'll find it on Westlaw. Every lawyer will see it, and it's worth what it's worth. You know, importantly, as a district court order, it's not binding precedent on anyone. And we've seen other district judges, like Judge Rakoff, for example, in the terror case, go different ways. And so, you know, it still stands in the sense that it's just as persuasive as it was, you know, as it would be without the SEC walking away from the case, but, you know, still not binding in any way on anyone. All right. So there's another basically,

Starting point is 00:46:07 like, trend in crypto that might change under Atkins's leadership of the SEC, which has to do with the whole area of token launches, token fundraising, air drops. There has been, you know, chatter about ICOs coming back. Obviously, there's like a few different projects that are kind of working on that. I don't think the ICOs would look exactly the same as they did in 2017, 2018, obviously. But given the fact that people are saying that the AirDrop meta is broken, hyperliquid actually had probably one of the only positive ones from the last several months that people were happy about. So what do you think token launches or fundraising might look like under an Atkins-SCC? I would expect some changes in particular around the clarity of what is and what is not.

Starting point is 00:46:53 subject to securities law registration. So the Securities Act requires that all offers and sales of securities be registered with the SEC. This is what has led to much of the initial litigation around ICOs and token distributions and now Airdrops. The question is twofold, what is a security, whether it's the token itself or some sort of offer or sale of a token, and then what constitutes an offer or a sale subject registration? And the Airdrop question is really, whether there is a sale at all because you're giving away something for free. And so that's a piece where I think the SEC can easily come out with some clarity, perhaps by doing a safe harbor or some guidance around what constitutes a sale under the securities laws

Starting point is 00:47:39 when you're distributing crypto assets for free. For example, in an air drop or in a game distribution or through some other sort of activity, there are some cases called the free stock cases where the courts have found that there may be a sale if you're giving up some information, for example, filling out a form and receiving security. But those cases all involve actual stocks. These assets are not necessarily securities. And then there's the secondary question kind of of of what is a security and what sort of offer and sale constitutes an investment contract or that sort of thing.

Starting point is 00:48:11 Again, I think the staff or a new commission come out with some sort of staff bulletin, advisory, rulemaking, et cetera, clarifying what is. and what is not a security, and that's going to make it a much clearer path. So you'll know, for example, what is subject to registration, what is not, what sort of offerings may be exempt. So there are exemptions from the registration requirement. And then the staff can actually potentially broaden these through future rulemakings, through no action letters and things like that, exemptive releases. And that can allow for more types of offerings of crypto assets within the United States,

Starting point is 00:48:50 even if they constitute securities offerings. So even if the token itself is a security or if the offering itself is a security by providing for more exemptions and clarity around what is and what is not subject registration, I think we can see a lot more of these offerings. And then the big project that the SEC might take up under Atkins, which would not be surprising because he actually worked on similar matters in the past related to traditional assets would be registration requirement changes. So changes to the disclosure regime, changes to the actual registration process to make it much more accommodating to crypto asset issuances.

Starting point is 00:49:28 And my understanding is actually when Atkins was a commissioner in the past, I think he worked on changes to disclosure for executive compensation, for options offerings, for various types of securities offerings to tailor that a bit better and to provide more guidance around what those should look like. I think he also worked on changes to the MDNA disclosure rule. So all of this can be great experience for approaching crypto asset markets and saying there are certain things that are very different from the way these assets trade, certain things that need to be disclosed perhaps, certain things that don't need to be disclosed, certain things that are outside the control entirely of the issuer. And so tailoring those registration forms will make it much easier and can also make it much less cost class related to these companies. I mean, part of the issue is that it is so expensive to do a full registration of a securities offering. And so most companies today rely on exemptions and do private placements and smaller offerings or offering outside the U.S. By creating a more streamlined and efficient process for registration, then these offerings could be done on a registration statement to the extent that that's necessary. And then the SEC can provide some clarity on the back end around whether the assets themselves remain, remain.

Starting point is 00:50:45 subject to that registration statement or if there's something else entirely. And that's in part Hester Persis Safe Harbor, where you look at this kind of offering distinctly from the token at some point because it's sufficiently decentralized or has sufficient utility. So I totally agree with everything that Mike said. So I'll try not to just repeat him, but to maybe add a few different thoughts and fill some gaps. So first of all, on air drops, I don't think air drops are going away. I think a lot of people viewed air drops as simply a regulatory compliance strategy. If you don't sell the asset, then the securities laws won't apply. And I think there is obviously a very strong argument there.

Starting point is 00:51:21 We could nerd out on the difference between the free stock cases and analyzing an offer or sale under the securities laws versus the definition of an investment of money and howie context of finding an investment contract. Totally aside from all that, though, I think that people did air drops in this industry not just to comply with regulation, but because it aligns with the principles of crypto, which is that we want the users of these public goods and these protocols to be the owners or to be at least incentive aligned with those protocols, right? To have an internet that's not just dominated by big tech giants, but where the people who are using the internet have some

Starting point is 00:51:59 meaningful skin in the game without having to pay money to buy a financial instrument. And so I think we will continue to see airdrops as time goes on. I know that a lot of people thought that, you know, airdrop meadow was broken. All air drops just went straight down. But I think that Haseeb actually mentioned on the chopping block recently, that might have just been a function of the bear market, right? If you launch a new token and everything in the market is going down, the air drop token is going to go down, I think it's going to be really interesting to see what happens on charts when we see air drops like hyperliquid in what's, you know, feeling like a pretty strong bull market. On the regulatory side, though, I think it's reasonable to expect that the SEC

Starting point is 00:52:39 will not view error drops as securities transactions, but that is not guaranteed, and that is also currently the subject of ongoing litigation. So as many people know, in addition to my work at Variant, I'm on the board of the Defi Education Fund, a nonprofit focused on defy policy, and DEF has brought a lawsuit against the SEC, the BEBA, the SEC, the SEC, the SEA. The BEBA, the SEC case. And Laura, you had our phenomenal chief legal officer, Amanda Tuminelli, on the show, to talk about that case. And that case is ongoing, as are many other offensive impact cases brought by the industry against the SEC. And so in addition to us watching, what does the SEC do with its enforcement cases, it's also going to be really important to see what does the industry

Starting point is 00:53:26 decide to do with its offensive cases. And without, you know, divulging anything about litigation strategy. I think it's reasonable to assume that the industry is not just going to cross its fingers and hope that Paul Atkins is going to be nice to us, right? We have legitimate claims in court, and I think we're going to pursue those claims until there is an adjudication or some commitment from the SEC that is binding on them to ensure that they are following the law as it is and not as Gary Gansler thought it should be. The only other thing I'll add is to emphasize all of what Mike said about outside the airdrop context, in the ICO context, how do we get to a point where founders can sell tokens to the retail public without running afoul of the securities laws? And this is the

Starting point is 00:54:13 thing that the current SEC and prior SEC simply never decided to provide a clear pathway for compliance. And I do expect one way or another, there will be a way that founders can sell tokens to retail investors while still protecting those investors consistent with the SEC's mission. And whether that's in rulemaking, as Mike described, or whether we get that primarily from legislation. So for example, the exemption that was in Fit 21, which would have allowed public sales up to $75 million with some compliance and disclosure obligations. One way or another, before along, I do think that there will be some pathway for compliance

Starting point is 00:54:54 to those types of sales. In the meantime, folks should probably not just do ICOs. Not legal advice, not your lawyer, but a lot of people think it's just sort of a free-for-all wild west to just start selling your tokens to everyone. And I think that would be a real mistake because I don't think this SEC just ignores the law and, you know, you can get away with anything. So we'll have to see how that plays out. Yeah, well, one last question on this topic, you know, because the industry is very much

Starting point is 00:55:20 interested in Hester Purse's token safe harbor proposal, how long, like, for, while, like, how likely do you think it is that this SEC would adopt something like that? And if so, like, how long would it take for that to happen and kind of get spun up and be working? I think it's quite likely that Paul Atkins would take this up, right? Because he has worked with Commissioner Perce in the past. She's been on his staff. He also is very friendly with other folks in the building, many of the career staffers who were there when he was a commissioner. So I think he has the staff and knows who would be best place to assist with this. So it's something that, They have infrastructure in place to kind of get moving.

Starting point is 00:55:58 And Hester Purr has already done a lot of the intellectual work on, I'm preparing this twice now. I think there's a 2.0. And so he might have his thoughts as to how it gets implemented. So it might be a rulemaking. It might be an interpretive release. It might be done even through a new action letter. So there's various ways that this could start to come into place.

Starting point is 00:56:19 I would imagine that Chair Atkins and a commissioner of purse would favor rulemaking. for some of the stuff, but because there's such a time constraint where this market is really developing quickly and there's not much guidance, there might be a rationale for actually doing it through an interpretive release or something like that more quickly. But I do expect something of this nature to be done. I don't know if it'll be in the exact format of the Safe Harbor, which was a few years ago now that it was last updated, but in particular following some of the recent litigation where courts are consistently looking at tokens as distinct from the investment contract wrapper when they're offered and sold. There might be some sort of guidance that gets

Starting point is 00:57:04 put out pretty early on distinguishing the object of the investment contract or the token from the investment contract itself and creating some disclosure regime or regulatory regime around how these offerings occur and what is actually subject to registration, what is not, and providing for more of a pathway for these things to be traded in what looks more like a commodities market today and kind of makes sense given that these tokens are primarily associated with open source code. And really our commodities, physical commodities are kind of the first open source assets out there.

Starting point is 00:57:40 And so I think it makes a lot of sense to there to be some disclosure around offerings, but not necessarily around these open source products that are trading in secondary markets. I was just going to say, I totally agree. and maybe to add two quick thoughts there. One is from an industry strategy perspective, and what I mean by that is, what should policy advocates in the industry be thinking about right now?

Starting point is 00:58:02 There's a tradeoff between speed and durability in SEC policy changes. What I mean by that is there are some things we can get done very fast, but that are not guaranteed to survive another change in administration. So things like guidance, for example, we can get that done really fast,

Starting point is 00:58:19 or the SEC can put it out very quickly, but the next SEC could show up and immediately reverse it, as frankly this SEC might do to policy set by the Biden administration and chair gansler. So then what we might want to focus on is rulemaking that is, again, slower to Mike's point, but also more durable, not so easy for the next SEC to just walk away from because they can't just rescind in their own discretion, something that's been added to the Code of Federal regulations. more durable than that, though, is legislation from Congress. And that's really where this has to go

Starting point is 00:58:53 in order for us to have regulatory clarity in the United States. We cannot be leaving this stuff up to whatever leadership at the SEC happens to think at any given time. We need Congress to step in and decide how are these markets regulated? And importantly, by whom? And that's the second thought I wanted to add is there is this question of how the CFTC fits into all of this. And there's always been this turf war between the SEC and the CFTC over different parts of the crypto markets. And you could imagine new leadership at the CFTC telling Paul Atkins, hey, buddy, this isn't your game anymore, right? We're the ones who should be doing this rulemaking. And you could see hopefully some constructive partnership as opposed to a turf war between those two agencies to actually decide in a cooperative fashion,

Starting point is 00:59:42 who's going to regulate what and where are the clear boundaries between the two agencies. So I think it's impossible to know what happens at the SEC without also figuring out what's going to happen over at the CFTC. Yeah. And actually, can you both build on that? Because I did wonder, you know, we are hearing that the Trump administration probably prefers to give the CFTC the lead on crypto regulation. And I wondered, you know, first of all, if you thought that that indeed was likely, you know, according to these reports. And if so, then how would the split of duties look between those two agencies? So I do believe that that's absolutely likely. I think the way that the split will actually work out is that you have certain offerings of digital assets. It's very similar to the original Howie case, right, where there were these offerings of orange groves paired with a services contract. Here you have certain offerings of crypto assets where there are certain promises and commitments made. And those offerings are to insiders or to persons where there's information asymmetries. And those might be regulated by. the SEC under this regime because that's just our traditional securities regulatory framework.

Starting point is 01:00:48 There might not need to be any new legislation addressing the securities reach over those types of offerings. On the CFTC side, once those offerings are out there, the CFTC today only has authority to police fraud and manipulation in these markets. It doesn't have the authority, for example, to require exchanges to register and regulate those exchanges. It doesn't have the authority to regulate brokers and dealers and other intermediaries or even custodians within those markets. And so that sort of authority is something that the CFTC might be looking for. And that's something that the Ag Committee within each of the House and the Senate will be thinking about as they want to potentially expand their reach as well over crypto assets.

Starting point is 01:01:35 So I think there is really a clear line in the sand between traditional securities markets where things that are not securities themselves can be offered in securities offerings, and then markets where you have commodities that are offered and traded and all sorts of intermediaries in those markets that are regulated by a CFTC under new authority. And then you have stuff that's kind of in the middle, but really fits with the SEC rather, are tokenized security products. So you're going to have even commodities that are tokenized and look a lot like a commodity fund. You're going to have other types of real world assets tokenize. stocks, things like that, that traditionally would fit probably within the SEC's purview just because

Starting point is 01:02:16 it's within a tokenized wrapper unless there's some agreement between the agencies or something else worked out in the legislation. And there's historical precedent for joint authority over, for example, security futures and certain hybrid instruments. There's actually tests in the securities and quantities laws for what constitutes a hybrid instrument, what actually is subject to one agency versus the other based on whether it has more security-like features than commodity-like features and things like this. So I would expect some delineation along those lines, but broadly speaking, crypto assets that are freely trading in secondary markets will likely be within the CFDC scope and offerings and tokenized security products will likely sit within the SEC.

Starting point is 01:03:04 So generally I agree. And I think Mike has expressed a very well, the sort of conventional wisdom and the simplest and clearest line between the two agencies. Let me add some complexity and maybe a little bit of chaos to the situation, though. So I think to Mike's point, the sort of conventional approach would be the SEC regulates primary issuance, right? The SEC is a disclosures regulator. They know how to handle the sale of an asset that goes along with some promises that justify some disclosures in order to address information asymmetry between the seller and the buyer. the CFTC regulates the secondary markets.

Starting point is 01:03:40 They know how to regulate facilities where these types of instruments trade. So if you are going to be a digital commodity exchange, you're going to register with the CFTC. And then there will be some joint rolemaking for the weird stuff in between where, you know, there's either joint authority or the two agencies decide who gets authority. Totally makes sense. There are, however, some objections on both sides of this. And this argument is playing out right now within the industry because the industry itself is not on the same page. There's not really a consensus about whether this is the right approach.

Starting point is 01:04:12 And some people will say, the SEC does not regulate other primary issuers of non-security assets. The SEC does not regulate Nike when it sells sneakers, even though people might buy the sneakers, hoping the value goes up because of Nike's efforts. The SEC doesn't regulate Patek Philippe when it sells watches or Hermes, when it sells bags, et cetera. So why should the SEC be regulating digital assets when otherwise the only distinction here is physical versus digital in the context of the asset being sold. On the other side, people will say the CFTC does not regulate commodities markets. It regulates commodity derivatives. It is the commodity futures trading commission. The CFTC has no experience regulating direct commodities markets. Why would you give the CFTC

Starting point is 01:05:00 jurisdiction over this massive market when it has no experience doing this? And as frankly, in the eyes of many people, the sort of less well-funded or less well-developed agency as between the SEC and the CFTC. Another criticism of this entire concept is, why do we have two separate agencies regulating one market? And if you look at other countries, you don't see two different financial markets regulators. Now, we happen to have an SEC and a CFTC as sort of a quirk of the historical creation of the two agencies at different times for very different purposes. But in a digital world, where the two agencies are regulating very similar types of assets, their jurisdictional remit has really converged in a way that may not justify having two

Starting point is 01:05:48 different regulators at all. And so why should the crypto industry decide to opt into this outdated structure when we have this new opportunity to get regulation right? And so really, I'm saying all of this just to convey how complicated this is and how many directions it could go and also how important it is that the industry get on the same page and row in the same direction or else we're going to spend the next couple of years arguing with each other and not getting anything done and that would probably be the worst case of all. Well, Jake, one question about that. You know, when people talk about how it doesn't make sense

Starting point is 01:06:23 to have the two, I have heard for a long time that because I think like literally like I don't even know, seven or eight years ago, I think I asked, oh, would it ever make sense to just have one regulator for digital assets. And at that time, at least, people in the crypto industry actually said, no, that they didn't feel that it was necessary to change up the current structure that we had, like whatever, you know, we didn't need to spin up a new agency. But I don't know how that conversations evolved, if at all, like, is that something people are talking about? Or are they literally saying that, no, we should just merge the SEC and CPD did in one thing? Or what are the current thoughts on that? Well, I'm curious what Mike's hearing. Look, I'm hearing all kinds of stuff from all

Starting point is 01:07:04 all different angles. And I think, you know, one perspective is the Trump administration and the Republican sweep in Congress gives the industry an opportunity to start fresh. And so we should rethink the sort of political compromises and tradeoffs that we worked out in the last administration and the last Congress. We should rethink all of that from first principles and not ask, what compromise did we need to make in the 118th Congress to get the Financial Services Committee and the Agriculture Committee in the House on the same page, and then to try to get something through a democratically controlled Senate and instead think about what does good regulation for crypto look like

Starting point is 01:07:44 and start from there. That said, politics aren't going to change all that much, and we still do have to engage with political reality. And, you know, there's a reason that what I described as the conventional wisdom is conventional. It's because it's the thing that makes the most sense. So I would imagine that there's a lot of discussion, and then ultimately we get back to something, you know, really quite similar to what Mike described

Starting point is 01:08:05 initially, which, you know, is sort of the most pragmatic and fastest path from here to regulatory clarity, which is worth so much and is frankly worth compromising in many ways in order to get there sooner rather than later. Yeah, I think this is a really meaty topic, but there's been debate around combining the CFDC and SEC together for ages, and there's a lot of politics around the different committees within the House and Senate that would not like that due to their various authorities over these agencies. But I think the one core issue that runs through all of this, right, is that blockchains and crypto assets are really just technology standards. And so it really should not necessarily be a single agency regulating this stuff. It touches

Starting point is 01:08:49 a lot of different agencies. It might not just be the CFDC and SEC. Treasury has a role. You know, even the Energy, you know, the Department of Energy might have a role. So they're electricity issues. And so I think we should be looking at this similar to AI and other technologies as an important technology within our markets, and it touches many different regulatory regimes. And so to the extent there are securities markets that run on blockchains, I don't necessarily think we should not have the SEC, which has all the experience in the world regulating our equities markets and debt markets, not having a say over how that's regulated, just like we shouldn't have Treasury totally isolated,

Starting point is 01:09:29 from matters that can impact our GDP and other economic matters, we should have a holistic view over these markets and have different regulators playing a role. And I think the CFTC kind of just slots in here really well because it does have fraud and manipulation authority over these markets. We do have examples, for example, with the Federal Energy Regulatory Commission that regulates the energy markets, right? And that touches commodities markets as well, touches securities market sometimes also. And so there are precedence for distinct agencies to regulate these markets. But the CFTC does have authority over the derivatives markets in these assets. And so it has a lot of data that it's collecting on how these assets trade in the spot market,

Starting point is 01:10:13 that it can use to regulate derivatives markets. And now it would have even more data to the extent it's regulating these spot markets as well. But the nice thing about the CFTC is that it is a principles-based regulator. It's not, the Commodic Exchange Act is actually designed with number of core principles for exchanges that I think would work very well in a world of crypto where these exchanges do not look like traditional securities markets, complying with something like reg-NMS or best execution. These rules that are very prescriptive would not work necessarily in a decentralized marketplace. And so the CFDC actually could be a good regulator for the technology. Yeah. So in addition to just, you know, how the CFTC and SECC might divide their responsibilities, there also is this question of who the CFTC chair could be. Our regulatory reporter here is hearing some immersingers in the lead. There's also current commissioner Carolyn Pham, who's also a contender. Both of them would have the advantage of being able to serve as the interim chair until they're confirmed. There's also Jill Summers that Fox Business is reporting is another contender. And then,

Starting point is 01:11:22 And then finally, parian boring of the digital chamber, although at least I think what Veronica's hearing is maybe she's not a top contender. But what are you hearing either in terms of contenders or the types of qualities or qualifications that Trump would look for in that role? And, you know, what would you like to see in that role? Well, I haven't heard anything particular about it. And I think, you know, as often happens, the transition team has been focused on, you know, the cabinet level secretaries first.

Starting point is 01:11:51 and then the SEC and the CFTC comes later. So I think there hasn't been, at least as far as I'm aware, a whole lot of discussion or sort of drilling down into who the top contenders are. I do think it's always worth thinking about the current commissioners. And, you know, Summer Mercinger has been a phenomenal commissioner in so many ways. I think she would make an extraordinary chair. You know, the same thing with Commissioner Fam. But, you know, basically until the palace intrigue down at Marilago plays out, and that really is where, you know, the transition is happening, you know, going down and taking meetings, I think we won't really know a whole lot more about it. And look, it also may not be clear for quite some time. You know, the Trump transition team has actually

Starting point is 01:12:31 moved very quickly on some of these nominations, and it often takes much longer to figure out who these folks are going to be. And we do live with an interim chair for quite a while. So, you know, I wouldn't hold my breath to figure out who the next CFTC chair is going to be and don't really have any sense of who the top contenders are at this point. Yeah, I think there are a number of great candidates out there that are taking meetings and involved in the process. And we might know relatively soon. It's hard to say exactly when. But I think no matter what the transition team is going to be looking for someone

Starting point is 01:13:01 who can work very collaboratively with Paul Atkins, if he's going to be the new chair of the SEC, and it's going to be very important that the two agencies collaborate. I know there's been a lot of talk about interagency, MOUs, and other commitments around collaboration. And so I think that's going to be a key criteria. Hey, everyone. It's just a quick heads up,

Starting point is 01:13:20 that after we wrapped recording, Veronica Irwin, our regulatory reporter, broke news that there's a new top contender for CFTC chair, Brian Quintenz, who was a former CFTC commissioner and currently the head of policy at A16C crypto. The other top pick is still Commissioner Summer Mercinger. Interviews at Marilago happened Monday at the time of recording and will continue to happen on Tuesday the day this episode comes out. There are more details on the rest of the candidates, including agreements by our sources on who is still in the running or not. Read the full article on Unchained or check out our regulatory newsletter to find out these other candidates. All right. So now let's also talk about the new incoming AI and Cryptozar, who is going to be David Sacks.

Starting point is 01:14:07 Honestly, at least what our reporter heard here is that a lot of crypto policy people were a little bit blindsided by this announcement. I think first they thought that the role would be a dedicated a crypto role. And second, that is not a name that had been batted about for the Crypto's R role. So I wondered, you know, first of all, why you thought Trump put that together with AI and then also what your opinion is of David Sacks for that role. Well, my sense of why it's a combined role is because it's really a technology policy role. And, you know, the main technology policy issues right now are AI and crypto. But I would honestly be surprised if his role was limited even just to those two areas. And I think it does make a lot of sense to sort of combine those two issues and technology

Starting point is 01:14:53 policy in general, because this is a question of how we want to balance innovation against, you know, other sort of priorities that, for example, the Biden administration was pursuing. And I think that having all of those decisions flowing through, you know, one sort of central world does make a lot of sense. It's important also to talk about what a cryptos are would actually do, right? And And the point of a cryptos are is not to make every policy decision on behalf of the White House. I don't think anyone is doing that on behalf of a president Trump. The stated purpose is in some way to play sort of a clearing function or a connecting function between all of the different agencies and stakeholders, including Congress, in figuring out

Starting point is 01:15:39 how to keep them moving in the same direction. The federal government is a very large organization, and it's very hard to keep it moving in the same direction. And I think the main challenge for the cryptos are is to just make sure everyone across the administration and also, you know, to the extent that they're talking to Congress, is focused on the right issues and is pursuing what the White House wants to see. So I don't know that it's David Sacks for, you know, developing his own ideas and agenda for what crypto, you know, regulation or legislation should look like, but rather playing that role of coordinating everyone who's working on that. You know, to the question about the surprise of David Sacks,

Starting point is 01:16:17 I would say that, you know, folks who are close to politics weren't so surprised, right? We all sort of understood that David Sachs had worked really hard to be a champion for president-elect Trump and was, you know, very deep in that world, had been engaged in fundraising and promoting, you know, the Trump campaign. And so it's not surprising to see him get a top job within the White House. I think the surprise was from folks who thought that the Crypto-Zar would be someone who had worked intimately inside of the crypto industry. And David Sachs is someone who seems to have a very strong understanding of what we're up to in crypto. You can see him tweeting about Bitcoin,

Starting point is 01:16:55 you know, 10 years ago, long before most folks understood what was going on here. And I think he has the pulse of sort of what the industry is working on. But he's not from the industry in the sense that a lot of people expected. And I don't think that's a bad thing, right? I think it's good to have someone focused on technology policy who has a broader view of how technology is developing in the United States, generally speaking. So I'm excited for what he's going to do, and hopefully he'll put a positive focus on crypto in this administration moving forward.

Starting point is 01:17:24 And then, wait, one thing, and maybe you didn't answer this specifically, but I just missed it. So essentially, like in this role, like what power does he have exactly? Is it sort of like he is kind of a translator, you know, to Trump or, you know, just kind of a, what you call it, just like a central, you know, place

Starting point is 01:17:45 where different people who work on these issues can talk to? Or what exactly is the authority that he would have? It's a great question. It's not clear. And Tsar is one of those great DC words that sort of means whatever you want it to mean in the moment. And so I think, look, it's going to be, I think in part up to President Trump to tell David Sachs what he wants to accomplish. And then it'll be Sachs' job to go out and make it happen. And then in part, it will be Saxes' job to figure out what can we get done. what is the highest priority and how can I make that happen? But, you know, the announcement that the Trump transition team put out, or that President-elect Trump himself put out on truth social, choosing David Sachs didn't say a whole lot about exactly what the role was going to be. I think it did reference developing a regulatory framework so that the industry can get the

Starting point is 01:18:38 clarity that it has always asked for. And that's a wonderful goal. But I think it's, you know, it's open to interpretation. So we'll have to see what, what Sachs is. decides to do with it. And Mike, what's your opinion of David Sachs and how he got appointed and why? Well, I think it's a really historic decision to create a new crypto and AI czar and really put these two new technologies on the same plane and view this as something that's really strategically important for the country. And President Trump has also spoken about things like a Bitcoin Strategic Reserve, about redomesticating crypto businesses that have left the country. And this will really be in line with that mission to create a crypto capital of the world right here in the United States.

Starting point is 01:19:18 And I think that's the most important piece, the matter who the new cryptos are. And I think David Sachs is an excellent pick because of his experience as an operator, really working with technology companies, investing in technology companies, understanding what can actually drive growth of these businesses in the United States. And there's an expectation that there will be a crypto council where there will be members of industry, there are not. actually participating, formulating opinions and recommendations. And I would expect that to include both the new Defi world as well as some of the old Tradfai world, kind of working together, sorting out their differences, providing recommendations to the White House. And then hopefully

Starting point is 01:20:00 we'll see some executive orders come out of that process and collaboration with the agencies on actually implementing these things. So I think we're going to see a very different crypto collaboration with government under this administration than anything we've really seen under Trump 1.0 or even certainly under the current administration, where a lot of the industry's recommendations are actually going to filter up to the White House and that can trickle down to the agencies and ultimately result in some rulemakings and also influence the legislative process with Congress. All right. So there's one other major appointment that will have some impact on crypto that we should discuss, which is Scott Best

Starting point is 01:20:40 for Treasury Secretary, what's your opinion of both of him in terms of how he'll impact the crypto industry and just what you expect to see from him? So I think this is an extremely important role that I think doesn't get as much discussion as it should. You know, we spend most of our time and I've spent most of this discussion talking about financial markets regulation, but national security and law enforcement are just as likely, if not more likely, to determine the future of crypto in the United States. I think that, for example, the Treasury Department's decision to sanction tornado cash and also its efforts to try to force, you know, anti-money laundering compliance, which really turns into surveillance of all transactions in the form of requiring know-your-customer diligence, identifying all users of decentralized protocols.

Starting point is 01:21:33 These are the kinds of things that determine how widespread and how successful crypto will be in the United States. And Scott Besant is going to be the person who makes those decisions along with one other recent selection, the deputy secretary, who I think will also be very important over at Treasury. And I think unlike Paul Atkins, it's really hard to predict what Scott Besant thinks about crypto. He doesn't have much of a track record discussing it. He also wasn't, it seems, selected to focus on anything related to crypto regulation. The Treasury Department has a really big. big job and a lot of it has to do with the American economy and, you know, the sort of power of our standing in the world. And I think that's much more what Scott Besson will be focused on rather than crypto regulation. So I think we do have to wonder, is this Treasury Department going to take a different perspective on some of the illicit finance, national security and law enforcement

Starting point is 01:22:32 issues that have played to the industry? And I, you know, I think that it seems like a Secretary Bessent will take his cues from President Trump. It seems pretty obvious that one of the ways that he got the job was by understanding very well what President-elect Trump's sort of policy priorities were and then speaking to how he would implement them very effectively. And so I would assume that as Treasury Secretary, he would follow the same types of patterns in understanding that he needs to address crypto regulation in addition to the economic issues that he was selected for. But I think it will require the industry engaging with him quite a lot

Starting point is 01:23:11 to explain why the Treasury Department has such an impact on crypto and how we can manage some of those illicit financial risks without sort of abandoning all the benefits of decentralization and permissionlessness in crypto. As Scott Besson has said that the Biden financial regulatory framework has really been a return to central planning, and he wants to undo that. And so I believe that Scott Bessett will be really a catalyst for deregulation in our financial markets, and there will be coordination between the White House, the administrative agencies, and Treasury on looking to reduce these regulatory taxes, essentially, that burden technology businesses within the cryptosphere, AI businesses, and other financial market participants. Many of these

Starting point is 01:23:57 regulations that are really prescriptive and centrally manage do not necessarily result in more efficient markets or less fraud and abuse in our markets. And so I think there will be a hard look at the financial regulations under Treasury, things like whether the money services business regime adequately addresses the anti-money laundering concerns in the Bank Secrecy Act and whether there are tweaks and changes that can make it more simple and easy to comply. But I don't necessarily think there will be a view that we can just allow for, you know, elicit financing and sanctions violations and things like this. I think they'll continue to take a hard stance there. But with more of an understanding that there are technology businesses that

Starting point is 01:24:45 exist at the edges of how these regulations work, and there might need to be accommodations made, there might be things that are pure software that don't necessarily have the ability or we don't have any need necessarily to regulate them like intermediaries. And so I think we'll be much more open-minded. And he certainly is someone who's spent a lot of time trading in foreign currencies and other financial assets and is no stranger, I think, to crypto. But it will certainly be a newer technology most likely for him to be in a role to regulate as a first time Treasury Secretary. And so I do expect more of an openness to engage with industry just across the board. And I don't think Scott Besson will be an exception. Yeah, I think you both make really good points there.

Starting point is 01:25:28 And, you know, what Jake said initially about this kind of like nexus between innovation, privacy, and national security, I do feel like that is like one of the kind of thornyest things where, you know, all of those are incredibly important values. And yeah, there's just questions about how to, you know, maintain all those values while, you know, crafting smart legislation. Okay. So I know we're running out of time. But last quick question is just obviously Operation choke point 2.0 broken to the more mainstream consciousness when, you know, and Mark Andreessen went on Joe Rogan. And I just wondered if you guys had any thoughts on what might happen in that regard in the Trump administration. Like if you think there will be an investigation or, you know, if there will be like laws that will prevent, you know, or prohibit this type of behavior or just where do you think that is going? I do think or at least I hope there will be an investigation.

Starting point is 01:26:20 And, you know, I worked on this issue when I was at the blockchain association and we sent FOIA request to all the prudential regulators that we believe. were involved in Operation Show Point 2.0. And, you know, without, you know, divulging anything privileged, it's very difficult to get information out of these agencies, right? And so I would hope that the Trump administration sort of opens the doors to what was really going on behind the scenes there. But I think in terms of what to expect, we should expect it to stop immediately. And I think we'll see that very quickly in some of the sort of public policies that are actually known, like Sab 121, which was part of Operation Choke Point 2.0, stopping the banks from being able to custody digital assets.

Starting point is 01:27:02 We could see that get reversed very quickly. And I think that, you know, the prudential regulators, for better, or frankly, for much worse, are extraordinarily powerful. And this was the problem with Operation Choke Point 2.0 is they basically got to just tell the banks what to do behind the scenes with no transparency and no public process. And, you know, they can use the same power to basically reverse what they had just done. So I do think what we will see is the prudential regulators under new leadership backing off of this instruction to the banks not to open bank accounts for crypto companies. I think then the question will be, to what extent of the banks actually want to bank those companies, right?

Starting point is 01:27:42 To what extent was this compliance departments just doing what they were forced to do by regulators? And to what extent are the banks themselves somewhat anti-crypto and going to sort of take up the mantle of choke point 2.0 on their own for their own. you know, political, personal, or business reasons. So I think that the situation on the government side will change very dramatically and rapidly. And then we'll have to see, you know, what the sort of outcome is when the banks are free to do business, how they want. I agree. Absolutely, that there's going to be a sea change on day one where these regulators are not going to

Starting point is 01:28:16 penalize or discourage banks from banking crypto businesses. And it's ultimately going to be a question of whether the banks want to do so, whether that's within their risk parameters. But I think the crypto czar, crypto AI czar, will actually play a role here and that there will be a crypto council of industry participants that will include certainly traditional banking institutions. And I think there will be discussions as to what are the pain points? What should this regime look like? Why are there banks that are not willing to bank crypto companies to the extent that that is not a regulatory requirement and really come up with the regime that works here and come up with some

Starting point is 01:28:55 compromises to encourage these banks to actually continue to bank crypto companies, because I think that is going to be an important feature of a new Trump 2.0 crypto policy where there is going to be an encouragement of companies to come to the United States to develop crypto products and technology products. And certainly a banking infrastructure is going to be a key piece of that puzzle. Yeah, I still also think that, you know, At least me personally, maybe I'm way out there. But, you know, when Silvergaden's signature, you know, all those either closed or refers to close, like, who knows there might be even a revival and kind of like more crypto-focused

Starting point is 01:29:40 banks where they like sort of specialize in that? Because there are some questions about whether it even, which is like a bad thing for the regulators to try. Because we had written an article here where it seems like the regulators were trying to force them to cap their deposits from crypto companies to 15%, which, you know, we were saying, or at least some of the people that were sources for the article, we're saying that that might not make sense to have a bank that does not specialize in crypto and isn't aware of like all that, you know, kind of particularities with serving the industry, if that even makes

Starting point is 01:30:12 sense. And then the other thing is to see also what happens with custodia. But anyway, you guys, this has been an amazing conversation. Thank you both so much. Where can people learn more about each of you and your work. Well, thanks, Laura. For me, it's always on Twitter. So find me at Jay Trevinsky. And thanks very much for having me on. Thank you, Laura.

Starting point is 01:30:30 You can find me at at Mike Selegg ESQ on Twitter. It's been a pleasure having you both on Unchained. Thanks so much for joining us today to learn more about Paul Atkins, David Sacks, the CFDC chair race, Operation Shinkpoint 2.0 and everything else involving the Trump Administration and Crypto. Check out the show notes for this episode. Unchained is produced by me, Laura Shin. both up from Matt Peltred, Juan Mammatmanich, Megan Gavis, Pamishandar, and Margaret Korea.

Starting point is 01:30:53 Thanks for listening.

Unchained - Under the First Crypto President, What Will Regulation of the Industry Look Like? - Ep. 747

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