Unchained - Why the SEC's Proposed Rules Affecting DeFi Could Violate the First Amendment - Ep.344

Starting point is 00:00:02 Hi everyone. Welcome to Unchained, your no-hyfe resource for all things Crypto. I'm your host, Laura Shin, author of The Cryptopians. I started covering crypto six years ago, and as a senior editor at Forbes, was the first Main Tree Media reporters to cover cryptocurrency full-time. This is the April 22nd, 2022 episode of Unchained. Galaxis create unstoppable communities by issuing NFTs with interactive dynamic utility traits. allow any creator to engage with, reward, and monetize their following. Point change is the easiest way to earn passive income using crypto. You can safely deposit cash or cryptocurrencies to earn up to 20% annual yield. There is no lending or market risk, just simple, high return yield farming. Create an account today at tri-defi.c. And receive 40 USDC.

Starting point is 00:01:00 That's try defy.cc slash unc. If you're frustrated that your bank account isn't crypto-friendly, it's time to make a change. On Juno is a powerful new checking account that lets you buy, spend, and earn in crypto. It's free to open an account and even comes with a metal card. Download the Onjuno app today. With a crypto.com app, you can buy, earn, and spend crypto in one place. Download and get $25 with the code. Laura, link in the description. Today's guest is Peter Van Valkenberg, Director of Research at CoinCenter.

Starting point is 00:01:37 Welcome, Peter. Hi, Laura. It's great to be back. Yeah, nice to have you. This week, CoinCenter filed a comment letter with the Securities and Exchange Commission about a proposed rulemaking about the definition of exchange and alternative trading systems. What did this proposed rulemaking say? So the proposed rulemaking doesn't. a few things, but the main thing it did that we were concerned about is redefine the term exchange in the regulations, which basically determines who needs to come in and register at the SEC as an exchange or as a member of an exchange. And if you don't register, you can have a big fine levied against you. And if you had your registration revoked, maybe for some reason, like trading

Starting point is 00:02:23 unregistered securities, you're no longer allowed to do those things that are defined as being in exchange. Now, the old definition of exchange was pretty narrowly focused on using established methods to bring together orders for buyers and sellers of securities. The new definition, however, is about making available communications protocol software or systems that others might use in order to bring together buyers and sellers, not even necessarily orders. And so, you know, from Coin Center's perspective, were a digital civil liberties organization, worried about things like free speech and the ability of people to publish software, we were really quite concerned when we first saw this proposed rulemaking,

Starting point is 00:03:05 because it basically seems to say that you need to register before you're allowed to publish software that might be used by other people to trade securities. So a lot of people felt that this rulemaking really was targeted at crypto, blockchain, defy, in particular, or kind of related fields. And yeah, the rulemaking actually didn't ever refer explicitly to those areas. Do you agree with that assessment that it was meant to target those areas? And if so, why do you think the SEC wrote it in a way where those topics were not actually mentioned? Yeah, no, that's a great question.

Starting point is 00:03:45 Because it doesn't look on its face like it's targeted at defy or crypto at all. And, you know, we make it a sort of a point of policy to not psychoanalyze regulators and just sort of take them at their word. And so with this one, we're a little confused, because, you know, when you're a lawyer, you care most about the law as it's drafted. Because at the end of the day, maybe 30 years from now, after all these regulators have sort of come and gone, a judge is still going to look at the words in order to decide who's obligated by the words of the law. So we had to look at the words, and the words seem to indicate that even if you're just publishing software, if people are using it to buy and sell securities, including ones potentially on a

Starting point is 00:04:25 decentralized network, you need to register. But that would mean, it seemed like there's a whole bunch of people who would need to register because they make, say, Dex software available and some of the tokens that people trade using that software are going to be securities. And like you said, nowhere in the rulemaking is Dex mentioned, is crypto mentioned, is publishing software necessarily mentioned. It's this make available communications protocol, which is publishing software. I mean, there's no reasonable interpretation of that statement that doesn't include publishing software, but why didn't they come out and mention it? And the only other thing I'll add about that is the SEC is under a duty in its organic statute

Starting point is 00:05:06 in the congressional law that was passed back in the Great Depression that created the agency to do something called an economic analysis, an economic impact analysis for their new rules. And they did this in the rulemaking, because of course they have to. And they estimated that there were only 22 communications, protocols out there, some of which might now need to register because of the rule change, which seems to indicate that they're not thinking this applies to software development as software development, even though it's definitely drafted that way, because it would obviously be more than 22 persons. I think ostensibly, the rulemaking was targeted at things like the Bloomberg

Starting point is 00:05:42 terminal, you know, information service providers that have some sort of system that allow people to say like, ah, I like Tesla stock, I would sell around these ranges. It's not exactly like a traditional stock market where there's a bid and an ask and they're matched, but it's still obviously a tool that's used by people to trade securities. But the way they drafted it is so broad, and because we care about the law, not necessarily what people thought the law meant when they drafted it, we had to sort of file this comment and make constitutional law arguments as to why this is probably too broad. It's going to chill a lot of protected speech under the First Amendment, and it really can't go forward in this form. They have to go back and fix it. Oh, oh. So some people

Starting point is 00:06:22 were saying that this is like a stealth attack on defy and Gabriel Shapiro of Delphi Digital was saying that he thought that these rules could kill, you know, this kind of technology, these decentralized financial services. But you're saying that you think the SEC didn't actually mean to catch this in its dragnet? So again, like I can't psychoanalyze Gary Gensler or Hester Perth, although Hester Perth filed a dissent saying people should check this out. It looks kind of broad. But I can't psychoanalyze any of them, it is weird that it would be drafted in such a broad way, such that if you knew anything about crypto, and, you know, Chairman Gensler does know a lot about crypto, you wouldn't immediately think, oh, this seems to cover a lot of this stuff that

Starting point is 00:07:06 maybe the people who drafted it up in staff didn't think it was originally going to cover. And you would think you would then either go back to the staff and say, we've got to narrow it, or you would redo your economic analysis to say, okay, this is going to impact thousands of software developers, not just 22 communications protocol systems. But obviously neither of those things happened. The proposed rule got published, the proposed rule got published with its incredible breath that could cover software development. And yet the economic analysis still said only 22 persons or entities are likely to qualify. Those two things are very hard to reconcile just having a plain reading of the rule as it was drafted. So I don't know how this happened. I don't know whether

Starting point is 00:07:45 it's like, oh, well, maybe it will cover a bunch, but we'll clean that up later. And maybe we won't mind having that extra authority. I just psychoanalyzed them. I did an internal monologue. I'm not supposed to do that, but I'm just, I have no idea. Okay. So Coin Center wrote a comment letter. What did you say in that comment letter? The typical way to respond to an agency is to address the substance of the law, say from an economic policy standpoint or an innovation standpoint, like this is going to be bad for business or bad for technologists in the U.S. or things like this, or is to go at it at a process standpoint and say, you know, the Administrative Procedures Act says that you need to have a certain amount of comment time, and this was a short comment.

Starting point is 00:08:29 It was a short comment. We didn't make either of those arguments, actually. We did something a little untraditional, non-traditional for agency rulemaking. We filed a whole comment that was about constitutional law. That was about the limits that the First Amendment are freedom of speech and freedom of religion and other things, but most relevant here, freedom of speech, the limit that that amendment places on government agencies and on Congress that says you cannot regulate beyond a certain point. And this was convenient for me. I'm the director of research at CoinCenter. I write our comments

Starting point is 00:09:04 and I write our reports because I was already working on a report about the First Amendment implications of regulating activities like decentralized exchange software publication or being a minor or a staker on these networks. and we saw the SEC rulemaking and I thought like, all right, well, this report is now going to turn into a comment letter to the SEC just for convenience sake and maybe later we'll expand it to more things than just securities regulation and publish it as a report. But it was actually really fortuitous from my perspective because I'd already done a lot of research into a case that came out in 2011 called IMS Health versus Sorrel, which was about

Starting point is 00:09:40 pharmaceutical data brokers. The pharmaceutical industry wants to know whether doctors are prescribing their drugs so they can target ads at the doctors to get the doctors to prescribe their drugs more. And Vermont and a couple of other New England states tried to ban the sale of that information, whether a doctor is prescribing a drug or not. And the Supreme Court ultimately said, no, that's speech. Yes, it's commercial speech. It's a speech that's all about profit. God knows the pharmaceutical industry is all about profit. But it doesn't matter. You can't ban a certain type of content or a certain type of viewpoint, even if it's a capitalist viewpoint, even if it's like pharmaceutical companies want to have ads. And so that case is, I think, a really good

Starting point is 00:10:22 precedent to build on as far as saying, look, we can do all kinds of sensible regulation of conduct, like when someone helps someone else buy a security. We can't do that kind of permission-based regulation when it comes to just someone publishing software and tools that enable other people to trade securities or to trade assets or other things like this, because banning the publication is just like in that pharmaceutical case banning speech. And we just don't do that in the U.S. because it stifles innovation. And the cool thing about having to then extend this specifically to the Exchange Act rulemaking, this paper I was already writing, as I looked deep into all the old SEC case law. And I thought that there actually wasn't much there as far as the

Starting point is 00:11:06 intersection of the SEC's authority and the limits that the First Amendment places on that authority. But actually, there's a really big case in 1985, so it's exactly as old as me. It was called Lowe versus SEC. It was a guy who was a disgraced former investment advisor. So he previously had registered with the SEC under the Investment Advisors Act. And he did some insider trading or something. And so they revoked his registration, not allowed to be an investment advisor anymore. And what he used to be doing was direct to client. Like, I'll talk to you, Laura, you tell me what you're interested in investing in. I'll tell you if it's a good idea or not. What he continued doing after his registration was revoked is publishing a stock tip newsletter, just sort of like you can buy it on the street corner in a little magazine stand.

Starting point is 00:11:51 And the SEC brought an injunction to stop him from publishing that newsletter because they thought, you know, you're still doing investment advice. We told you you can't anymore. Supreme Court came back in that case and said, no, you can't stop someone from just publishing a newsletter. That's a protected speech activity. And so a unanimous court in 1985 said that there is a limit to the SEC's jurisdiction when it comes to people publishing dispassionate advice or tools or information. And so frankly, that's exactly what's about to happen here. If the rulemaking was to go forward and become final, you're telling people they can't publish communications protocols. You know, it's just a series of rules written in software. You could publish it like a book.

Starting point is 00:12:29 And so I think the same First Amendment limitations apply. This is incredibly fascinating. But first, let's have a quick word from the sponsors who make the show possible. And then we will talk about what might happen next. There's been a lot of buzz around getting paid in crypto. And it's easy with On Juno, the all-in-one crypto and banking app. You can set up a direct deposit and earn a portion of your paycheck in crypto. You get 10% back when you spend USDC with the On Juno card,

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Starting point is 00:14:24 crypto into a coin change high yield account to earn more over time. Your yield is paid out daily and can be withdrawn any time. Coin changes yield farming doesn't utilize lending or other risky strategies. No minimums, no obligations, just high yield. It's time for a change. Create an account today at tri-defi.c.c-c-unc to receive 40 USDC. That's tri-defi.cc slash uncc. Back to my conversation with Peter. So I have to admit that when I was first reading about this, I was very confused about how writing software could be free speech. Because to my mind, I was like, well, you're building a product. But from what you described here about like the pharmaceutical case and other things, I mean, I think I get it.

Starting point is 00:15:20 Like it's like just building on previous law. So now that you've made this case for why you think that this potentially is a violation of the Constitution, I did notice in your blog post that you said that you said, quote, we don't need to wait to sue the SEC. It can happen as soon as the rule is final. So is that what CoinCenter plans to do? So that we was intended to be the community. Yeah, the larger community of people in this space, it could be CoinCenter.

Starting point is 00:15:52 I'm not sure we would be strictly against bringing a pre-enforcement challenge, but it's not something that we're absolutely gung-ho about at the moment. Our main hope is that the SEC changes the rule before they publish it. And at the very end of our comment, we actually cite a really cool speech that I found from Commissioner Roberta Carmel, who was the first female commissioner of the SEC, actually back in the 1970s. And she wrote this great speech, or gave this speech, I suppose. there's no recording of it, sadly, where she says,

Starting point is 00:16:23 look, during my tenure, there were a lot of rules that we passed that we had to think about the First Amendment implications because we deal with speech all the time. And there were some specific examples of where we limited the breadth of our rule midstream. We were about to publish a rule, and then we were like, wait a minute, this is going to chill, protected expression. And we are generally not interested in doing that. And so that sets a great precedent, I think. And then you can fast forward all the way to today,

Starting point is 00:16:49 Commissioner Hester Perce currently at the SEC wrote her in her dissent that people who are developing these communications protocols should look hard at the rule and make sure that it doesn't impact their activities. And so I think, you know, between this 1970s statement of the limits of the SEC and the First Amendment and Hester's perspective today, I think there's a very reasonable argument that the SEC

Starting point is 00:17:16 should take a hard look at this proposed rule and narrow the category. And like we were discussing earlier, the economic analysis suggested that the category they think they want to have is only 22 persons or institutions. So I would say, great, that's probably the right category. So you need to find a way to narrow the definition so that it really only does apply to the Bloomberg terminal

Starting point is 00:17:38 and not to somebody who's just publishing software. We also, to your listeners who might be writing this software or active in the decentralized exchange community, we go through activities beyond just publishing software. You might be maintaining the website that's the front end for the smart contracts on the Ethereum blockchain or the TESO's blockchain or whatever. And that seems to be more of a centralized activity,

Starting point is 00:18:03 and of course it is, but it's still just a speech activity. And, you know, there's a lot more, I'm not just one of these like code is speech. That's the end of the conversation. There's a perfectly reasonable area of activities for the government to regulate through things like registration. Like, if I was to be a practicing lawyer, I'm trained as a lawyer, but I don't practice

Starting point is 00:18:23 because I work for a nonprofit. I don't have clients. But if I was to be a practicing lawyer, of course I have to go get barred before I'm allowed to practice my profession. And you might think, well, a lawyer's profession is all speech. How can that be permissioned if this other thing can't be permission? And the fact of the matter is it's actually discussed in this low versus SEC case, Justice White, who wrote a concurrence in the case, says, look, it's okay to regulate professional conduct. It's not okay to regulate dispassionate publication of information or tools or newsletters for that matter. And so where's that line? We're allowed to impact speech if it's incidental to my professional conduct as a lawyer.

Starting point is 00:19:04 They can tell me you can't speak in front of a judge. But they can't tell me I can't speak in front of a crowd on the street about the rights of man, about what the SEC's been doing lately. I can't stop, they can't stop me from speaking to you right now about what the SEC is doing right now, simply because I'm not, I don't happen to be barred as an attorney or something. And so this discussion is really rich in the low opinion. And it's very interesting. I think Justice White's concurrence strikes the perfect line between where it's okay to regulate with permission, professional conduct, and where you're actually regulating speech as speech.

Starting point is 00:19:37 The phrase he uses a couple times is a personal nexus between the professional and the client. And so you have to ask yourself, in most of these decentralized exchange systems, is there a personal nexus between the people who have developed the decentralized exchange tool and the people using the tool? There actually isn't, because that's the whole point of the damn thing, is that we shouldn't have to trust a personal relationship. We should be able to trust the code and the math and the effective operation of the blockchain, which is all deterministic. It's all just a computer saying, yes, the digital signature is valid, and therefore the trade goes forward. So to me, this does mean that there's this big sector. that is not going to be able to be subject to some sort of permission-based regulation. Now, you still might be able to get these people for touting securities. Like if the developer was out there also saying, like, hey, use my tool in order to sell the synthetic Tesla stock, which I know you're not allowed to buy in your home country. Well, that's a whole different case. But asking that developer to license as an exchange before they can even publish the software,

Starting point is 00:20:38 I don't think you can do that under the Constitution. Yeah, and I actually just wanted to note also, you briefly mentioned this, but SEC Commissioner Hesterperst in her dissent noted that the rulemaking was 650 pages and there were 220 separate comment requests. And then she said the commission only gave people 30 days to comment and she believed 90 days would have been more appropriate. And so, you know, it's reminiscent of what happened at the end of the Trump administration with Treasury Secretary Steve Mnuchin when he tried to push through. some rulemaking with a short comment period. One, you know, commentary that I noticed, again, by Gabriel Shapiro of Delphi Digital, he talked about how, you know, if this rulemaking did go through, then automated market makers would need to, you know, kind of comply with these different, like registration with FINRA or, you know, some of the other things that you mentioned. And then he said,

Starting point is 00:21:36 the primary purposes served by exchange regulation, such as fair access, public pricing, auditability, are already intrinsically present in AMM architecture, and thus regulation of AMMs as securities exchanges is not necessary. I think that was super interesting. What did you think of that comment? And then, like, what are the actual issues that you think the SEC should be concerned about when it comes to Defi? Yeah, I hadn't seen that before, but that's a great comment from Gabe, the reason, again, why we have something like exchange registration is because there is trust. There is, when I send an order to an exchange to buy or sell or even a non-firm trading order, which is kind of what they're trying to extend it to ostensibly with the Bloomberg terminal,

Starting point is 00:22:23 there's somebody who's going to pick that up and execute my wishes that as I express them in the order or in the communications, right? And I have to trust that person to do that faithfully. and transparently and in an auditable way, whether it's the New York Stock Exchange or the NASDAQ or the Bloomberg terminal. And all of these are proprietary business models, and they have often opaque practices, and it's perfectly reasonable to require regulation from them. And I think when people see R-SPACE, they say,

Starting point is 00:22:52 oh, well, these people are trying to replace that with software so they can avoid following the law. That's totally wrong, actually. No, we're trying to replace that with software so that the interests of the law are embodied in the code, itself. It has to be transparent now. It has to happen on an auditable blockchain. It will only go forward as a trade if the digital signatures are correct and both parties genuinely committed to the transaction in a way where they can't back out. So a lot of the safeguards

Starting point is 00:23:21 that we look for with securities regulation or exchange regulation are inherent in doing this peer-to-peer using auditable software on an auditable blockchain, whereas they are absolutely not apparent if you're using a trusted third party to do it. So regulation of the trusted third party makes total sense. Regulation of the software developer who publish the rules that are transparent and allow people to reach agreement peer to peer makes a lot less sense. So since the comment letters were sent earlier this week, now what happens? What are the next deadlines or developments that people should be on the lookout for? Oh, and one thing about Gabriel Shapiro's comments that I think is also worth mentioning here is there are two rulemakings going forward. One right now is about this

Starting point is 00:24:07 Exchange Act redefinition of exchange. There's a whole other one about being a dealer in securities where they would subject people with over $50 million in assets under management to dealer regulation, even if they're just sort of selling on their own account. And that has implications for things like, as you said, automated market makers. We haven't filed in that. And, ongoing regulatory process, the dealer one, we've just filed in the exchange one. And the deadline for that was actually last week. So sorry if your listeners haven't filed and wanted to file. So, you know, what's going to happen next? Well, both of these rulemakings, the exchange one and the dealer one, are going to ultimately end up with final rules. There's no definitive timetable for that.

Starting point is 00:24:51 That could happen tomorrow in the case of the exchange rulemaking. It could happen the day after the comment period closes for the dealer rulemaking. Or it could take much. in both cases. So, I mean, I think if it takes a long time, it makes me a little hopeful that they read our comment and they took it to heart. They're obligated by law to read our comment, but do they have to actually, you know, take it to heart? I don't know. And maybe they'll be going back and rewriting these things. If not, if the thing that gets published in the exchange rulemaking is really just what it is right now, which I think unequivocably makes it an obligation for people publishing software to register,

Starting point is 00:25:30 I think it's going to chill a huge amount of protected speech in this country. Like, you're going to be like a software developer and you're saying, well, they expect me to register. I don't know anything about this world. And I don't think I'm engaged in an activity that should require registration, but I'm scared. I don't want a lawsuit against me. I've seen lawsuits that the SEC has brought against a lot of other people that I know.

Starting point is 00:25:51 And so maybe I'll just stop working on the software library. I've got other interests I could work up here. Or maybe GitHub or the old. other websites where people publish these software tools and then the website like GitHub repubishes them. They say, wow, hey, this is a tiny fraction of our business. We're mostly interested in being a host for Linux software libraries or something like that. So we'll just drop from our platform all of the Dex software libraries. And that has massive free speech ramifications because you're basically losing this huge vital part of the internet where new tools and ideas for the future

Starting point is 00:26:24 of human interaction are being shared. And we're saying, no, we're just not going to have that anymore in this country. It's too dangerous or something like that, which is very un-American, and I would also say unconstitutional. And so there's this other case that we mention in our comment letter. It's Bonta, B-O-N-T-A. And in this case, the Supreme Court was asked, can somebody bring a challenge to a law before the person who's supposed to enforce the law has even enforced, we call it a pre-enforcement challenge, or a facial challenge, because you say, the law on its face is unconstitutional. It's not the way that they're enforcing it. It's just the law on its face. And in that case, Bonta, because it had to do with free speech, the court said, normally we have a

Starting point is 00:27:12 high bar for people to bring lawsuits pre-enforcement challenges. We want to wait until we see how the agency interprets it and brings a lawsuit. But in the First Amendment case, because there's so much protected expression, which could be chilled, people who would have spoken but decided not to speak, decided to self-center, we're going to allow pre-enforcement challenges if a substantial number of potential applications of the law are unconstitutional restrictions on speech. And in this case, if the rule was published as it is, that's a very easy bar to meet. A substantial number of applications of that standard would be barriers to protected expression. So this is what I meant by we, the community, somebody in the community, maybe coin center,

Starting point is 00:27:52 or somebody in the community could probably bring a challenge the minute the rule becomes final, assuming it's the same rule that we've seen so far. Because the court would say, look, under the standard in Bonta, pre-enforcement challenges are allowed. We can sue the SEC. We don't have to wait for the SEC to sue us. And then we just go from there. We go from the district court level to the circuit court level, maybe in a circuit where the judges care a bit more about free speech. And then all the way up to the Supreme Court, where the judges, the justices, rather,

Starting point is 00:28:22 care very deeply about free speech. I'll briefly say there's another section of our comment, which I hope everyone will read if they're interested in this, that analyzes the Supreme Court as existed in 1985 when they had the low decision, which already unanimously protected speech rights against the SEC to today with Sorrel and cases like it where they're protecting the rights of pharmaceutical data brokers. The court is extremely interested in vindicating speech rights, especially even in the more capitalistic or free market type areas where you have people making money off of speech or using speech to do things like securities trading. So I'm very optimistic that if this rule was not changed before it became final, there'd be a very promising case

Starting point is 00:29:10 to be brought against it. Obviously, this would all be worse than if they just didn't have the rulemaking because there'd be this legal chaos in the midst. But I guess that that, is the part of me that is a lawyer, even though I'm not a practicing lawyer. I kind of like chaos and the fight. All right. Well, we will have to see what happens next. But thank you so much for explaining all of this. It has been a delight to have you on Unchained. Thanks, Laura. It's been great being here, as always. Don't forget. Next up is the weekly news recap. Stick around for this week in crypto after this short break. It's becoming clear that utility is the future of NFT technology.

Starting point is 00:29:48 and no launch platform does utility better than Galaxis. Anyone with a community can now engage with, reward, and monetize their following by issuing an NFT collection with dynamic utility traits. These traits can be customized to the needs of a particular community and change over time, allowing the creator to sustain a prolonged relationship with their most valuable followers. Visit Galaxus.xyZ to learn more. Thanks for tuning in to this week's news recap. Beanstock lost $182 million to a governance exploit.

Starting point is 00:30:34 On Easter Sunday, Beanstalk, a stable coin project on Ethereum, suffered an exploit worth $182 million. Rather than a smart contract bug or theft of private keys, this was a governance attack. The Beanstock hacker was able to get away, with roughly $76 million in assets by taking out a flash loan to purchase 70% of Beanstock governance tokens, publishing and voting for a proposal that sent all Treasury funds to the attacker, and then paying back the flash loan, all in one transaction. The attack was rather sophisticated. To pull it off, the attacker took out $1 billion worth of assorted tokens on Ave and flash loans and exploited Beanstock's emergency commit function,

Starting point is 00:31:16 allowing them to immediately execute their proposal without going through the typical life cycle of a governance proposal. Both of these moves required a high level of defy knowledge and skill. In the aftermath of the hack, Beanstock's Beanstalk's Beanstap coin, which traded at $1 last week, was trading below 10 cents. According to its Twitter account, Beanstalk is offering the attacker a 10% white hat bounty. For more information and discussion on Beanstalk, check out this week's episode of The Chopping Block. where Tom Schmidt, Tarun Chitra, Haseeb Qureshi, and I go in depth on the beanstock hack and Defy Security in general. An OFAC first, a Russian miner sanctioned.

Starting point is 00:31:59 The U.S. Treasury's Office of Foreign Assets Control, for the first time, added a crypto miner to its list of sanctioned entities on Wednesday. BitRever, the Russian crypto mining firm, along with 10 subsidiaries, has now been added to OFAC's special designated nationals list. OFAC also sanctioned the publicly traded transcapital bank and 39 other individuals and entities. Treasury is also taking action against companies in Russia's virtual currency mining industry. By operating vast server farms that sell virtual currency mining capacity internationally, these companies help Russia monetize its natural resources.

Starting point is 00:32:37 Russia has a comparative advantage in crypto mining due to energy resources and a cold climate, wrote Treasury in its press release. However, mining companies rely on imported computer equipment and fiat payments, which makes them vulnerable to sanctions. The United States is committed to ensuring that no asset, no matter how complex, becomes a mechanism for the Putin regime to offset the impact of sanctions. Treasury concluded. In a statement shared with CoinDesk, BitRiver CEO Igor Runitz pushed back against the sanctions

Starting point is 00:33:09 by calling them unfair. Roonitz claims that BitRiver, whose parent company is based in Switzerland, has never provided services to Russian government institutions or sanctioned entities. The U.S., going after Russia-based miners, could have massive implications. Russia is the third largest source of mining power in the world, accounting for over 11% of hash power, according to the latest statistics out of Cambridge. Furthermore, Russia's president, Vladimir Putin, expressed interest in Russia's crypto-mine mining potential in late January.

Starting point is 00:33:43 Additionally, the news come shortly after the International Monetary Fund published a paper explaining how Russia could avoid sanctions levied in the wake of its invasion of Ukraine via crypto mining. Over time, sanctioned to countries could also allocate more resources toward evading sanctions through mining. Mining for energy-intensive blockchains like Bitcoin can allow countries to monetize energy resources, some of which cannot be exported due to sanctions. The monetization happens directly on blockchains and outside the financial system where the sanctions are implemented.

Starting point is 00:34:18 U.S.T. is now the third largest stable coin. Terra's native stablecoin U.S.T. is now the 13th largest cryptocurrency by market capitalization and third largest stable coin, narrowly climbing past Binance's BUSD this week. The news coincides with a burst in price from Terra's governance token Luna, which increased 17% between Monday and Tuesday. UST is still much smaller than Tether and USDC, which command an $82 billion and $49 billion market capitalization, respectively, compared to only $17 billion for UST. However, UST is now far and away the largest algorithmic stable coin, meaning instead of being supposedly backed one-to-one with dollar equivalent assets like USDC and USDT, UST is designed to keep its peg to the dollar through a mint and burn mechanism, that being said, one reason that UST has become so popular lately is its transformation from a purely

Starting point is 00:35:16 algorithmic stable coin to a token with some backing, as Luna Foundation Guard has purchased over $1 billion in BTC to back the UST peg in times of crisis. Furthermore, Terra is now one of the largest buyers of CVX, governance token that plays a significant role in the liquidity of stable coins on Ethereum, which should give UST more applications outside of being used on Anchor, a borrowing lending protocol offering almost 20% interest in the Terra ecosystem. For example, on Thursday, the Terra and Frax-backed four-pole yield farm went live on Phantom, bringing in over $30 million in total value locked just hours after launching. For more information on Terra, check out two recent episodes of Unchained,

Starting point is 00:36:01 with Tara co-founder Doe Kwan, who discusses LFG's decision to back UST with BTC, and then Galois Capitals Kevin Zhou, who analyzes the risks associated with UST's dependence on anchor. In related stablecoin news, Tron founder Justin Sun announced plans for a new algorithmic stablecoin, USDD for Tron, which he claims will have a $10 billion backing from assorted assets via Tron Dow. Moonbirds is mooning.

Starting point is 00:36:33 Data from CryptoSlam shows that Moonbirds, a new NFT collection, has accrued more volume in the last seven days than the following 10 collections combined, and it's not even close. The 10,000-piece collection, which launched and sold out on Saturday, has racked up over 113,000 Eth in volume in the past seven days, equating to $344 million. For context, Mutant API Club, the second largest collection by volume during the same period,

Starting point is 00:37:02 only did $64 million worth of volume. Moonbirds minted at 2.5th, and less than a week later, the floor price for the entire collection is over 30Eath, marking a quick 12x return. The hype surrounding Moonbirds seems to be derived from its team Proof Collective, founded by Kevin Rose, a partner at True Ventures. Proof's previous 1,000-piece NFT drop, which grants access to an NFT investing and collection group, currently has a floor price of 97Eth to join. According to the Moonbirds' roadmap, holding a Moonbird's NFT,

Starting point is 00:37:39 gives access to the proof discord, where exclusive moonbird-related drops, meetups, in real-life events, and, most importantly, access to upcoming proof projects will be available. The project, however, did not go off without a hitch. As reported by CoinDesk, the project faced complaints about its expensive 2.5e's mint price, along with claims of raffle manipulation and rarity sniping by developers. Coinbase NFT is here, and it's social. Coinbase's much-anticipated NFT Marketplace was beta launched this week to a select group of customers, while only a small percentage of users from the 1.5 million waitlist were granted initial access to create a profile,

Starting point is 00:38:22 buy and sell NFTs and so forth, anyone is able to check out the platform. For now, Coinbase's NFT Marketplace only supports Ethereum, but has plans to support other blockchains and fiat on-ramps, San Chan-Saxena VP of product at Coinbase, told the block. Interestingly, the exchange made the choice to embed its NFT marketplace with social media tools. However, according to CEO Brian Armstrong, these social mechanisms are far from finished products. Coinbase NFT has a social component to it. Just want to acknowledge that we need to make social more decentralized over time. We're stuck in a web 2.5 world still, moving toward Web3, he tweeted. Adding assets are decentralized and identity can be decentralized, but follow a graph,

Starting point is 00:39:08 comments and some of the post content are still centralized. Opportunities about to move more of this on-chain over time. Time for fun bits. Oops, a defy hacker pulled off a self-rug. Zed, a defy protocol running on B&B chain, was exploited on Thursday after an attacker successfully triggered a distribution vulnerability that 3xed any rewards earned from the protocol. Overall, it was a smaller hack, with the block reporting that the hacker was only able to derive $1 million in volume from the vulnerability. That being said, data from BSC scan shows that Yid's token price crashed all the way to $0 in the aftermath. Now, why is this a fun bits? Because the hacker ended up rugging themselves, according to BlockSec, a crypto security firm. BlockSec explained,

Starting point is 00:39:58 interestingly, the attacker did not transfer the obtained tokens out before self-destructing the attack contract. Probably he or she was too excited. Robin Hood's CEO wants bigger Doge blocks. Can Doge truly be the future currency of the internet and the people? Robin Hood's CEO Vlad, Tenive wondered aloud on Twitter last week. As currently constituted, according to Vlad, the answer is no, and for a familiar reason, for anyone who has been in the blockchain space for a while. Tenive believes that Doge's block size limit and transactions per second metric of 40 is holding Doge back from being a global currency. Tenove is now arguing for Dogecoin to move from a one megabyte to a one-gibyte block size

Starting point is 00:40:42 and later 10 gigabytes to compete with Visa's 65,000 transactions per second, even though it would increase hardware requirements for nodes to do so. A tradeoff that Tenove believes is fair. Tenove also pointed out that Dogecoin's inflationary supply comes to a lot. out as being less than that of the U.S. dollar. Thanks so much for joining us today. To learn more about Peter, Coin Center, and the SEC's proposed rulemaking, check out of the show notes for this episode. If you've read the Cryptopians and want to discuss it with other people who've read it,

Starting point is 00:41:13 be sure to sign it for one of the book clubs I am hosting. Five book clubs of 22 people each. One club will feature guests Griff Green, Latteras Carapet, and Christoph Yench of the Dow, and another club will feature Andrei Ternofsky of Chat Roulette. and the other three clubs will be led by me. Set your calendar for 1 p.m. Eastern on this coming Tuesday, April 26th, to buy your tickets at Bitski.com slash at Laura Shin slash created. Also, beforehand at 12 p.m.

Starting point is 00:41:43 I will be doing a Twitter space with Bitski about the book. So be sure to tune in then on Twitter at Bitski, B-I-T-S-K-I. Unchained is produced by me, Laura Shin, without from Anthony Eune, Daniel Ness, Mark Murdoch, Shashonk, and C-L-K-T-T-T-R. description. Thanks for listening.

Unchained - Why the SEC's Proposed Rules Affecting DeFi Could Violate the First Amendment - Ep.344

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