Hey, hey, hey.
Hey, hey, we're about to start the show.
Welcome to Crypto and America Live, the only show bringing you candid conversations on the biggest news stories, legal issues, and policy developments shaping the crypto world every Friday afternoon.
Happy Friday.
Happy Friday. Hey guys. Yeah, busy week. Busy week. Always a busy week.
Hopefully.
Good news, maybe. I'm not sure. I'm still optimistic. Are you guys optimistic? What's the pulse check here?
Optimistic on what?
And what's happening on that bill? That bill we're trying to pass. Yeah.
Oh, yeah.
That big. Yeah, it's an interesting one. We'll definitely talk about it.
I think I'm feeling pretty good, too.
Yeah, we'll talk about it. So, I guess we should start with the headlines, which is we're going to start with BitMEX shutting down in September after nearly 12 years in operation. It's a big story.
Yeah. I mean, for BitMEX itself, for context, I mean, you kind of think of like the crypto world as before BitMEX and then after BitMEX. I don't know if Gerald agrees with that, but essentially like the exchange kind of invented the perpetual swap and essentially changed how markets traded after that, right? But you know, as more and more companies picked up like perps as we like to call them, it kind of maybe lagged behind on that front and others like took maybe the front footing on this. They also were the ones who started the ability to allow traders to borrow up to 100 times their collateral and leverage their positions, which is just like complete DGEN energy in my opinion. So the technology survived but maybe their business model did not. And also as a part of that announcement too on the tail of that, there was a proposed class action lawsuit that someone alleged forced liquidations of over 300 Bitcoin from BitMEX. And then the plaintiffs in the case obviously want other people to come forward but ultimately a judge needs to rule whether or not the lawsuit can proceed as a class action case. So TBD on that front. But yeah, I guess good night BitMEX.
Yeah, I think I mean it was a good run. Frontier like pioneering stuff in the space. I think we're entering this, you know, brave new regulated world that, you know, we talk about a lot on the show and I don't know if they were necessarily ready for that. And, you know, we'll see the unwinding, but yeah, sad to see a pioneer go obviously like, you know, I was talking to a friend about this yesterday. Maybe everybody doesn't need to be trading 100x, you know, margin perpetual futures like, you know, maybe everyone doesn't need a grenade launcher in their garage. But yeah, it's, you know, a good run for that company and then we'll see what the unwinding process is like. That's one of the things that I think we've seen whether it's like I know they're not declaring bankruptcy. I don't know if they'll go into chapter 11, like that kind of thing, but we've seen, you know, how long FTX takes to unwind or how long some of these other, you know, kind of things actually take to process. And so, you know, unfortunate to see them go and then we'll see where it goes from here.
Yeah, I think that's a good segue into the next one. Speaking of FTX, right, Ellie?
Yes. Well, the SEC is settling with Coinbase over Gensler's lost text. That happened a little while ago. I remember when Coinbase brought the FOIA lawsuit. But the SEC has agreed to settle with them over those missing text messages of Gary Gensler's went missing mysteriously. They were going to pay out $150,000 and agree to strengthen their record retention policies as well. But yeah, for context, the text messages that were deleted were from a period between October 18th, 2022 and then September of 2023. And then in July 2023, they reported the phone was not backed up for like nearly 12 months, blah blah blah. But the reason I said reminds me of FTX is because like that period covers the FTX collapse, fallout, and then also scrutiny around like the meme stock scandal, which was like a big controversy at the time involving like regulatory trading halts and allegations of short selling and all these other things. So, like not the best time to have your text messages deleted, but I'm not going to say too much because I also don't want to get sued in reverse. But you guys can read between the lines on that front.
Yeah, I think yeah. So clearly nothing was going on in that period. You know you want to try to give the benefit of the doubt here where there's information lost or whatever like you know people have doc retention policies. I think like it would be kind of ironic if the industry's document retention policies were stronger than the SEC's at that time. But it's not great. It's not great. You know, I hope that also like 150k as a settlement for one of the most impactful regulatory periods in the history of our industry is not ideal. But yeah, I'm wondering how they came to that amount. It didn't seem necessarily like nothing, but it's also not a lot in the grand scheme of like what it actually implied. You know what I mean?
Yeah. So, the House narrowly passed the Stop Insider Trading Act this week, which was Brian Stile's legislation to restrict lawmakers from purchasing new stocks. And yeah, that was quite interesting to see who did vote for it and who didn't vote for it, including Nancy Pelosi.
Yeah, saw that. Good initiative. I think we'll see. We're going to get into ethics and a bunch of other stuff, you know, throughout the show. So, I think like great to see, you know, House Member Stile, you know, Rep. Stile like putting this forward. Great to see the progress, but I think, yeah, obviously you want to make sure that, you know, people are not capitalizing on the information. And we've talked at length before on the show about the definition of insider trading and like, you know, what Congress members should or shouldn't be doing, but you know, we'll see how that plays out.
Nancy Pelosi also voted against this, right?
Yep. There we go.
Checks out. I know Ellie wrote in the show notes that her staff says she doesn't trade personally, but her husband Paul does, right? So yeah, which is under the Stock Act of 2012 that allows you know members' spouses to do it essentially.
Well no, she doesn't disclose even though that is part of the Stock Act of 2020. Members are supposed to disclose financial transactions made by their spouses but she apparently does not. So.
Well I know there's tickers you can trade alongside her. You can definitely follow the portfolio and I think he'd be up significantly if you follow that guy on Twitter. He is up like anywhere from like 20 to 40% on the year sometimes. It's actually pretty wild and it's interesting because like when they file that they're like you know buying or selling it's like delayed and yet he is still up on the delayed tracking. So not financial advice but go check it out. Yeah.
Yeah. And finally, the Digital Chamber has become the first trade association to sue the state of Illinois over its digital asset tax. We've talked about that here on the show before. They're filing a lawsuit basically seeking to block it, have it not go into effect in January. They are the first trade association to do so. I believe Kalshi filed something a couple weeks back relating to its prediction market tax, but this is the first legal action we're seeing on the crypto tax front. And we've talked about this. It levies a believe it's a 0.2% tax on businesses that deal in digital assets. And they're essentially saying it's just not a fair comparison, right? Because there's no tax for any traditional business using any traditional assets. But when it comes to putting things on blockchain, Chicago has decided to levy a tax on businesses that deal with that. So yeah, Digital Chamber coming out suing the state of Illinois.
Yeah. And so I know we have to we're very excited to have Commissioner Peirce on to talk about vaults. So I know we want to move this quickly. I will just say, you know, thank you to the Chamber for having folks out at the, you know, Embassy of Japan earlier this week. I know they're doing a lot of international work, but I did have the opportunity to catch up with Jonathan who's their counsel who filed this on their behalf. I think one of the interesting things that was not apparent to me at the time that I think is going to be a big outcome of where this lawsuit ends up and also where this legislation ends up is they obviously filed it kind of like midnight hour and then went out of session. So we always knew that there was going to be a litigative solution or some kind of litigation around this. One of the interesting things that he pointed out to me that I thought was kind of maybe lost in the discussion is it stacks. So every time you transfer assets to a brokerage account or you do another kind of transfer maybe into like USDC from stable coins, you could essentially you're talking about like BIPS, but you're talking about bips on like trillions of dollars in value. And so if you stack the percentage on every one of those transactions when you're talking about razor thin margins for commodities trading, which is what crypto essentially is, you could have a very serious kind of tax outcome on what is a very high amount of volume. And so I'm excited that they put that forward. I think we'll obviously have to see how it plays out in court, but the way they filed it was problematic because obviously like there wasn't an opportunity to re-legislate this. So, it was always going to be litigation and then there's a huge sort of downstream impact on the industry based on the kinds of activity that they're including in this bill. So, good for the Chamber. Shout out Jonathan for getting that done and then, you know, we'll see how it goes.
Yes. Well, crypto vaults have become one of DeFi's fastest growing products, allowing users to pool their crypto and automatically put it to work to earn rewards. The SEC Commissioner Hester Peirce, who heads the agency's crypto task force, warns that some vaults and on-chain lending strategies could trigger federal securities laws depending on how they are structured and managed. She joins us now. Commissioner Peirce, welcome back.
Good to see you all. How are you?
Good. Thanks for coming on.
Third time's the charm.
Commissioner, there's lots of eyes on your statement from Wednesday. Commissioner, what are you seeing in the market right now that prompted you to issue that statement?
Yeah, and I should start out, of course, by telling you that my views are my own views as a commissioner, not necessarily those of the SEC or my fellow commissioners. I mean, vaults are not new and on-chain lending is not new, but I think that there's quite a bit of activity there. And I want people to really be grappling with the fact that some of what's out there at least rhymes with what we see in some securities type arrangements. And so people really need to assess what they're doing, what you know people who are involved in making these services available need to be thinking about whether there's any touch point there for the securities laws. And this is something that I had really hoped that we would do under Chairman Gensler. I thought there were moments where we could have provided some guidance to people and I think this is a moment where I see some activity going on and I thought hey it might be worth really telling people here are some things you should think about now let's talk about your particular facts and circumstances and hear from you what your legal analysis is that got you comfortable with offering these products or that makes you think maybe you do need to come in and register. And so that's really what the point of the statement was.
Yeah. And for context maybe at a high level like vaults pool user assets and put them to work to generate yields. So what specific features of that model could trigger federal securities laws and how important is that human management in the equation here?
Yeah. Well, there are a lot of different I mean vault is sort of a term that can be used to describe a lot of different things. You did a good job defining it there, but there really is a spectrum of types of vaults out there. And so, and same with lending. There's a spectrum of what these things look like. But I mean, you could run into problems under the Howey test, the famed Howey test, under the Reves analysis, under the Investment Advisers Act, which is you know the act that governs people who charge to manage other people's money basically, and the Investment Company Act. And so there are different potential places where people could trip up.
So, Commissioner, just like elaborating on that point a little bit, I think one of the challenges the industry has had with the vaults as an overall structure is what we do in the legal space a lot is best summarized as like not my problem. Like that's a kind of a fundamental underpinning of the way a lot of these relationships work. So when you're talking about whether it's, you know, registering as like an RIA or, you know, whether you're dealing with like FINRA or the SEC, are you concerned most about like the activity of the curators? So the people actually designing these investment strategies or is there a permissionless element to the software itself where you say look the fact that you're gathering these pools of assets maybe isn't necessarily your problem but the people who are running these sort of pooled obviously they're not necessarily pooled funds but they you know your guidance tends to point out that they may look like pooled funds. Who exactly do you think should be sort of responsible to consumers and investors from a like disclosure and decision-making process when we're looking at something like vaults?
Again, it can depend because even the titles like curator can mean different things in different arrangements. I'm not trying to get to a place where someone who's writing code for a vault or for on-chain lending has to register for simply writing that code. That's not where I'm trying to go. But if you have someone who is involved in sort of managing other people's assets in some level so allocating to different strategies for example taking an active role in that there's a potential again it does depend and you could have a fund I mean this could just be an on-chain fund and funds tend to have to either register or there has to be an exemption from registration. Each of these areas of the law is pretty well, it's complicated, but it also has a history. And so, you've got to see where do you fit within the history of what people have done under each one of these acts. You know, they're investment companies. There are different kinds of investment companies. There's a unit investment trust. That's something that people ought to consider. So it just really does require you sitting down looking at what services you are actually providing. How actively are you involved in managing other people's money? Obviously, if you're taking custody of people's money, that's something that, you know, is likely to be a touch point. But a lot of in a lot of these instances, custody isn't really the issue. It's just that there may be someone who's actively involved in managing or in issuing something that is a note under the Reves test which looks at whether something is a note and a note can be a kind of security.
Yeah, it sounds like there's a lot of facts and circumstances that factor into this. But does the SEC expect to issue more formal guidance on vaults and on-chain lending in the future?
Well, we've had some great meetings with people who are involved in this space, and I really encourage people to come in and now that they've kind of seen where I'm coming from and sort of thinking about potential touch points, I hope they'll really actively engage with us and think about where they fit in this if they fit in the securities laws at all. It's not a good strategy just to point to everyone else in the space and say, 'Well, we're different and we're doing things differently, so we're fine and really this is about someone else.' Just have a serious conversation with your lawyers and we welcome the discussion with us to really think through the issues. As everyone probably listening to this show knows, I'm not looking for ways to pull people into the regulatory regime that don't belong in the regulatory regime. I'm not looking to expand the SEC's jurisdiction beyond where it should be. And I'm certainly not looking to put developers in a position where they don't feel comfortable writing code because they fear they're going to be pulled in. But at the same time, the securities laws are what they are. And so we have to take them as they are and we have to you know we are willing to work with people using the flexibility that's in the statute to if there need to be exemptions from particular requirements. We are happy to work with people on that. But I think it's just better to do that at the front end so that you know everyone makes sure that they're covering their bases. We don't want to live in a world where if you do something on chain, you get a different set of rules simply because you've decided to do it on chain. That I think could lead to some pretty bad regulatory arbitrage.
Following up on that, the Clarity Act is facing more hurdles in the Senate this week. We got the release of the text on Wednesday and we're hearing increasingly, or at least I am, about what companies are planning to do if the bill doesn't pass. And many in the industry are saying, 'Well, we're going to look to the SEC. We're going to look to CFTC for that guidance, for that rulemaking.' How quickly can the SEC provide that formal guidance? And I guess at which point do you decide to move forward without Congress? Because we've seen so many deadlines that seem to they keep kind of blowing through them. So, at what point do you guys kind of say, 'Okay, we're going to take the reins and actually, you know, put some stuff out here.'
Well, I remain confident that Clarity is going to pass. I know how difficult it is to write regulations in this space and as you know as sticky as regulations are in terms of once you adopt one it can be hard to get rid of it that's more true for legislation and so the stakes are very high and the work that Congress has to do is really hard and so it's not surprising that it takes a long time. We are certainly prepared to use the authority that we have. We've been using it to date. We will continue to use it. I think you'll see activity from us even if Clarity doesn't pass. Obviously, if Clarity passes, we have a ton of rulemaking to do and so there's going to be a lot of work there. But we do plan to use our existing authority even if Clarity doesn't pass. And we do believe time is of the essence. So I we'll be working quickly on that I hope. You know my time at the agency is pretty short. So a lot of this work is going to fall to colleagues at the agency but people are really well positioned excited and enthusiastic about doing work in this space.
Yeah. Maybe to wrap things up here. Commissioner Peirce, I know you're leaving the SEC to take on a new role at Regent University this fall. When will your last day at the agency actually be?
Oh, I haven't determined that yet. So, that's still working on figuring that out. You know, the issues here are pretty exciting and interesting and I love working with the people here and people on the outside as well. And so it's a job I'll miss and so I'm not racing to get out the door.
I was going to say I don't think anybody wants to see you leave, commissioner. So you probably have a go.
Believe me, there are people they tell me every day they can't wait to see me go. So no, there'll be people applauding my departure for sure.
Commissioner, obviously we're incredibly grateful for your time both at the agency and joining us today. If I could ask one other question before we let you go about vaults specifically, I'm very curious. How does the agency view the difference between like a traditional sort of DeFi liquidity pool and the notion of something that's like curated and is part of like a vault strategy? Like can you just for maybe our audience kind of explain a bit about the difference between like a traditional DeFi pool which we've seen for years and have been part of liquidity for the industry and all that versus something that's more curated that prompted you to put this guidance out.
Yeah. And as an initial matter, I should say I'm very enthusiastic about the potential for this new technology to be the basis for products and services that are cheaper, more bespoke, so they're more suited to a particular investor's needs. And flexible. And so I think there's a lot of promise here. It's just that what we've seen is like with one of the traditional DeFi pools, it is a smart contract mediating a transaction, right? It's mediating activity. There's not an intermediary in there. The smart contract is what the smart contract is. Everyone can see that going into a transaction. They know exactly what to expect. You know, presuming you can read the code, right? You can look at it. It's there, right? It's open source for everyone to see. But when you start doing some of the vault activities that I've seen, you really are adding into that element a third party. And that's where I think the regulation may have something to say. When you have a third party involved in deciding how different assets are being allocated and invested, that's really a situation where you have to start asking, do the securities laws apply?
Commissioner, before we let you go, I know we've asked you a few follow-up questions here, but I wanted to ask you, given that you have been at the SEC for over eight years, give or take, has everything panned out the way you want it to ultimately.
Think back over all the years. Yeah, I was going to say like are you happy with the way things are ending on your departure? And if not, like what do you hope ultimately like carries on and actually gets completed once?
Well, certainly I'm happier about where we are now than where we were a couple years ago, right? We're at least in a world where regulators and legislators are trying to work with the industry to figure out what rules make sense, how can we do this in a way that makes sense. You know, as someone who has been here a long time and I've seen how the industry has developed in response to regulation and I think we would be in so much of a better place. I think we would have things actually built now that we don't because people have been responding to regulation and what's the response to regulation? Well, it's typically, hey, if I build something that is not really intended to last, it's just intended, you know, to be sort of a flash in the pan, it's less likely to attract regulatory scrutiny. And that is really a shame, right? Because people have not poured their money, time, and talent into things that are built on shore, are really going to last, are really meeting a need of people out there. And that I do believe is partly a function of regulation. So now we're in a better place. We're in a healthier place where regulators want to work with people and I hope that is a moment that people will seize. I would love to see some settling of the regulatory issues so that people really can get down to the business of building. And that is something I'll be watching on the outside and cheering everyone on the outside to do. Build products and services people want and need.
Awesome. Well, damn, Commissioner Peirce, thank you so much for coming on and hopefully we have you on again before you move on to the next job and maybe even then. Thank you.
Well, thanks so much. Love your show. Have a good rest of the day.
Thank you. Thank you, Commissioner.
All right. Next up, let's bring in Sylvia Ferretto, the GC at Mysten Labs, which is the company behind the Sui Network. Sylvia, welcome to the show.
Hey, thank you for having me. It's good to be here.
Thanks. Yeah, thanks for being here. I was sent the piece that you put out earlier this month on why the ICE and OKX deal matters. And I want to start with that and then we could ask you some follow-up questions maybe related to what Commissioner Peirce was talking about. But essentially, you argued that the ICE and OKX deal matters.
But essentially, you argued that the ICE and OKX deal matters.
OKX partnership is different from prior tokenization announcements. So maybe at a high level, what makes this deal different and why do you see it as like a meaningful milestone rather than just maybe another headline in the news?
Yeah, and there have been a lot of headlines in this space. You know, there have been a lot of projects and players dabbling in tokenized equities lately. But what I think makes this deal stand out is that, you know, unlike some of the projects that we've seen in a lot of the headlines that you noted is that ICE is not, you know, a scrappy fintech trying to prove a concept. It's the entity that owns the exchange that had to file the actual SEC rule change that makes any of this legally possible in the first place. And it's choosing to put that standing into a 50/50 co-owned entity with a crypto exchange that already has 120 million crypto users. So, I think that that pairing including the DTC plumbing underneath it is what's genuinely sort of the unusual part here.
Regulators and, you know, traditional finance more broadly have to actually reckon with what it means when you have an incumbent itself deciding that a crypto-native platform is worth real joint ownership rather than just, you know, a licensing deal or a partnership which you're seeing a lot of as well. So I think what you have here is really one of the world's largest financial market operators saying that blockchain belongs in mainstream market infrastructure and they want to help drive that process which I think is very meaningful.
Yeah. Sylvia, there's a lot of bottlenecks today for tokenization before it kind of comes mainstream, right? Had someone on the show recently, Tom Sha, who was the former chief innovation officer at Swift, and he was saying that the biggest bottleneck, you know, it's not necessarily the, you know, infrastructure or sort of like the regulations, which, you know, will likely become clear whether clarity passes or not. The SEC will is taking a big initiative on tokenization, but what do you see as sort of the biggest bottleneck to institutional adoption? Tom mentioned trust. That was probably one of the biggest ones, but from where you sit in your GC position, what are you seeing?
Yeah, I think adoption is really the big issue and the article I wrote mentions that that's really the open question, right? I think that what you see with institutions though is that they're starting to like dip their toe in the water. You know, DTC even just had sort of their trial test trades that they released the results of in July. And there you saw, you know, institutions participating. And so I think that what they're trying to just sort of identify is how will this actually be useful for me? Like what is it that I'm doing today that requires blockchain technology or the efficiencies that the promises hold? And so, you know, even with the test trades, you're seeing they were testing, you know, collateral pledges, security lendings, treasury repo, and obviously delivery versus payment atomic settlement. You know, that can be very useful. But I think that institutions right now are trying to answer that same question, too. You know, they're saying, do I need to be participating in this? Like, where will those efficiencies be for me? And so I think institutions are probably going to be the ones that are more likely to find product market fit with tokenized equities or tokenized securities rather than probably your retail sort of day-to-day user.
Yeah. Sylvia, I want to ask you about how this impacts like other jurisdictions. So, one of the things that people who come on the show and talk about tokenized equities repeat is that a big unlock here is international access to American equity markets for international users. And we know OKX is like a very global exchange. They have a presence in a lot of different countries. They're now, as you mentioned, like partnering with ICE. How do you as somebody operating in, you know, the in-house legal space approach the sort of multi-jurisdiction or like international scope of what we're seeing start to happen in tokenization and the broadening of liquidity in these markets?
Yeah, I think that's one of the primary appeals, right, of tokenization is that it's allowing folks across borders to access financial products that they, you know, traditionally couldn't. And I would say though that, you know, it's sort of cautionary because a lot of times what you're seeing is access to US products being provided abroad but it's not really that like direct access, right? It's structured so it's like a synthetic wrapper and so what you're holding isn't really representative of the share itself, it's really just a claim against whoever that issuer is. And I think you're seeing that a lot with this pre-IPO boom too where a lot of folks abroad are accessing shares or pre-IPO shares of companies that'll be listed in the US but you're seeing that even issuers themselves are sometimes saying, wait, we had nothing to do with this and then the prices swing. So it's definitely something that could use some refining but it's something that is what makes tokenized equities very appealing.
Yeah, I also wanted to bring up something that we were talking about with Commissioner Peirce on the front of like crypto vaults, on-chain lending products, etc. How some of them could fall under certain securities laws depending on how they're structured. Like what is your reaction there? And does that ultimately align with how legal teams have been thinking about these products maybe from like a blockchain perspective and working with like ecosystem projects.
Absolutely. I mean, we even just discussed this internally the other day where folks were saying, 'Oh, this new piece has come out from the SEC. Is this different from sort of how we had envisioned them to come out or where we thought this was going?' And I think absolutely not. I think that Commissioner Peirce and the SEC have been very clear that, you know, just because you bring something on chain, it doesn't change sort of the fundamental nature of what it is. And so if you have a vault or a lending protocol that's really being controlled and run and managed by a single central party that's able to not only own the smart contracts and be able to pull the plug but really dictate sort of the terms of the products that are offered, then you really have to think about is that something that falls into the sort of securities remit or is that truly sort of a decentralized permissionless construct.
And then what do you think builders would take from this comment slash, you know, it's not formal guidance, right? But Commissioner Peirce is obviously the head of the crypto task force. She matters a lot to the securities industry but also the crypto industry. Do they pause development until there's more clarity or they kind of continue to build in the way that they've been doing? I guess a lot of it hinges on this potential legislation that we're facing down right now but what do you think that reaction on the ground, I guess, from some of these builders that maybe you're hearing from.
Yeah. I mean, I don't think that this announcement really changes much in terms of, you know, if you're a builder, sort of how you're proceeding. And this is also why it's so important that there is legislation that passes and there is clear guidance because in the absence of that builders are going to build and just sort of, especially in this sort of regulatory environment, they're going to want to continue to innovate and build and grow their products with as much sort of confidence as they can that they are not doing something that runs afoul of the laws. But I think that their main sort of MO at this point is probably build and refine. Refine when there is something clear that comes out and I think that is honestly what a lot of builders are waiting for.
Yeah. So, I want to ask you about just again going back to as in-house counsel kind of some of the issues that we think about when you talk about like the permissionless sort of DeFi space and what we've been doing in that space for the last like two years. I know Miss has incubated a lot of interesting things in that space whether it was like Walrus or anything else. There we had like the DAT summer last year, there's like ETFs coming online. How do you think about the transition as somebody in your spot from sort of the, I don't think it's like the DeFi ethos, but like the more of like what we've been doing for the last few years going into this like traditional environment, right? Like obviously you wrote about ICE and OKX and we're seeing a lot of institutional partnerships these days. How does that affect what you're doing day-to-day and how your team thinks about what we should do next? Like what's sort of the future here that you see?
Absolutely. Yeah. No, I love that the institutions are waking up to crypto and embracing it. And I think that it really does change sort of how you think about, especially things like DeFi, right? I think what you're seeing a lot is this concept of like permissioned DeFi or permission chains and venues where institutions are going to feel more comfortable that they're able to sort of satisfy their existing compliance obligations while still being able to dabble in the blockchain space.
