← The Wolf Of All Streets
The Wolf Of All Streets
Ripple Case Delayed Again! Judge Denies Fast Ruling | Crypto Town Hall
01:00:07
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- [00:01]
Dave
Well, good morning everyone. Hopefully you can hear me. You never know with. With spaces. Sounds like it. I got Fred and Carla giving me the heart. So I guess you can hear me. It is Friday, May 16, 10:18am and it is time for Crypto Town Hall. There's a lot of news stories, none of which are moving the markets a whole lot. But probably the most interesting one to start with this morning is the XRP ongoing saga which caused, when it came out yesterday, I saw Nichols post where he basically said WTF is happening with XRP? And it dropped like 6 or 7%. It's now recovered most of that. But you know, I invited John Deaton up here to give us his quick take on what's going on, having been, you know, at the center of all this. So John, why don't you take it away and tell us what actually happened and does it really mean anything?
- [00:53]
John Deaton
Thanks, Dave. Yeah. So let's just recap and I've got to hop off and get back on in an interview. But let me give you my take, which is basically the SEC and Ripple was asking for like this preliminary decision by the judge that said, hey listen, the SEC has dropped its appeal on secondary sales of xrp, which only left Ripples appeal to the second Circuit on institutional sales. They said, we've settled the case, Judge. In fact, we're going to give ripple 60% of that 125 million back and Ripple's only going to have to pay 50 million and Ripple's going to drop their appeal conditioned on the fact that you, judge, drop your injunction against Ripple. So remember, the judge basically said secondary market sales of XRP are fine, but ripple violated Section 5, the securities act on these institutions, institutional sales. You know, these are to hedge funds, sophisticated investors. So the injunction really is Ripple. You're not allowed to violate the securities laws anymore. Sort of like this future injunction. So they've asked the judge to basically withdraw that. And she said, hold your horses. She said, first you're doing it wrong procedurally. But in her decision, Dave, she said what matters is the remedy, not the procedure. So if she wanted to bless it, she could have said, you know, technically you didn't do it the right way, but I'm going to agree. But instead she said, no, if I had to rule right now, I would rule against this because you haven't done the necessary work to convince me to that it's in the public's best interest to do this to, to basically rescind my injunction and give ripple a 60% reduction and really what it is, is the judge is pissed off because what the SEC has done is said judge, for after five years, psychological, we changed our mind. You know, you spent hundred, just tens of millions of dollars in SEC money in resources. Ripple spent 150 million litigating this case. Imagine the amount of hours the judge was tied up, Judge Netburn, the magistrate was tied up, her clerks. And you just want us to like, pretend it didn't happen? She said no, that you have a heavy burden to prove to me that it's in the public's best interest to do this. So as a judge kind pissed off, in my opinion, and I think that is it a big deal? It's a curveball. And anybody who tells you they saw this coming isn't true. Stuart Alderote, who I admire and like, you know, he did what he's supposed to do and say, okay, this isn't that big of a deal. We'll reconvene with the sec. But I think what the judge is making the SEC do, Dave, is they're going to have to eat some crow. They're going to have to come in and say, look, Judge, this is really in the best interest. We got digital assets wrong. You have bills passing in Congress or at least pending in Congress. You have, we really consider these assets more commodities, not securities. And it's in the public's best interest because with an injunction, if you don't remove it, it kind of puts Ripple in a disadvantage. You have banks and hedge funds that want to use this technology as payment rails moving forward. And if your injunction stands, it could, you know, put Ripple in a worse position than competitors. And, you know, we really doing a reset on digital assets. It's in the public's best interest to do this. There were no harm. You know, even the sophisticated investors who we, you said judge, violated the law. They're really not victims. You know, they, they, they made money. And so this is really about moving forward. And I think they just got to do a song and pony dance to her. And she's sending a message to them, Dave, that I'm not just going to rubber stamp what you guys did, sec, just because you changed your mind or just because there's a new SEC chair. And so I think they're going to have to put together a substantive brief that convinces her that this is in the best interest of the public and that she should lift her injunction. That's really my take.
- [05:16]
Dave
Cool. Well, thank you for jumping. I know you have to jump for, for a TV interview, probably asking the Same question. But I'm glad we were first. I appreciate your time, John.
- [05:25]
John Deaton
No, I always appreciate. I always appreciate you. There's lots of people that probably have different opinions. May. Maybe some people think that I'm wrong or that this really is a technical thing, but this is what I would say. Anyone who says, oh, they just cited the wrong rule, and all they got to do is file a new brief without doing anything except cite the right rule is wrong, because she would have said in her decision, just like she did, the remedy is what's important, not the procedure or the way you ask. So she would have said, notwithstanding that you did it wrong. Here's your relief. And if I were her, I'd be pissed off, too, because this is the SEC coming back to her saying, you know, psych, we changed our mind, Judge.
- [06:11]
Dave
If only the last administration could be held accountable for the things that they did. But that doesn't seem to be likely. It's just, we're just gonna have to move on. But, you know, it certainly it's not going to be hard. I can't imagine Chair Atkins having a substantive problem with throwing, you know, previous Gensler under the bus. He's already done it more than once and, you know, having a pretty good idea that that's what he actually thinks. I don't think that'll be problematic. But obviously there's a whole lot of staffers that are still at the SEC who worked on this stuff who, you know, you know, have some answering, have some explaining to do, as the old expression goes, but I guess we'll see.
- [06:51]
John Deaton
Dave, let me add this. I'm not saying this is the case. I'm just saying I hope it's not. I hope that politics isn't coming into play here where the judge is doesn't like the Trump meme coin and doesn't like all the stuff that's going on. And she's, you know, anti crypto. I'm not suggesting she is, but, you know, if I were a judge and the government wants to with stop what they're doing, and the other side, the company's agreeing, you know, to me, I'd be like, okay, both parties agree there really are no victims here. The only victims were the XRP holders, you know, when the lawsuit was filed because of the outrageousness of the complaint and how overbought it was. So no harm, no foul. Let's move on to the next case. She's not doing that. And that's her right to say, you know, convince me otherwise. But I just hope it's not a political thing. That's my final, you know, fear. I guess I'm sharing.
- [07:47]
Dave
Yeah, I guess a lot of us would think that. I mean, Fred, I, you know, I know you're pretty close to this. What do you think?
- [07:54]
Fred
Oh, thanks. I, I agree 100% with John on this one. I think that Ripple also needs to do a little groveling in the brief as well. I think she wants to hear from both sides, you know, because at the end of the day, Ripple was found to do some activities that were deemed illegal. So in addition to the SEC saying we were terrible in all these ways, look at all these cases we filed and dropped, look at all the ways we made mistakes. You know, Ripple will need to say, hey, guess what? All the things you found us doing that were illegal, we were sorry about that. We changed everything. And they already said they've changed everything around on their institutional side. Not going to happen again. I mean, it's, if you're a lawyer and you get something like that from a judge, it's very clear that they want you to get on all fours and start begging for them to do something. And so that's what they've got to do if they want to do it. But I think this also comes back to something that I think is, I wouldn't be too worried yet because we're only so far into the Trump administration, but if you want to be fair and clear eyed, we're getting something with crypto in the Trump administration that is exactly the same as it was, was in the Biden administration, just in a different direction. But it's, we've got certain things that are being said that want to happen in the crypto world, but nothing is getting done legislatively. And, you know, on the Biden side was trying to destroy it and we never got bad legislation, but right now we're here, we're trying to, Trump's trying to do everything for it, but we're not getting good legislation. And this Ripple case is just one example of everything else that can happen in the future if we don't have any ground rules, you know, to begin with.
- [09:42]
Dave
Yeah, I understand. I'm having, by the way, I can only see three people as speakers. I don't know who's there. Yeah, I'm trying, I'm trying to, it looks like, it looks like, you know, I tried to invite a Carlo, who I know has points on this. I'm guessing you're glitching or you're not getting in here. Looks like Gary. Okay, I Got Gary in here as a speaker, so, you know, etc. Preston, you're here. Are you a speaker? Can you hear us?
- [10:11]
Preston
Loud and clear, yeah.
- [10:12]
Dave
Okay, cool. Do you care about any of this?
- [10:17]
Preston
You know, not. Not especially.
- [10:20]
Dave
Yeah.
- [10:21]
Preston
I just. I got. I recently got made the. So I work at Arkham, and those of you who, Who. Who know Arkham, you know, will know what it does in crypto. We have both the intel platform, which, you know, we do a lot of. There's a lot of, like, Pepe and, you know, Pepe the Frog cartoons with, you know, intel platform stuff. And we also have a cryptocurrency exchange. And I recently got put in charge of the compliance department and the legal department, so I got a promotion, which is very nice, but I have been so slammed. Like, Like, I was like, oh, Ripple, they still have a lawsuit. Like, I. I did actually write for another client a couple weeks ago. You know, there's. There is interesting stuff going on on the legal side, but it's frustrating because none of it has actually advanced to legislation. It's all still proposals. So in the uk, they've got a crypto. You know, they're. They're looking to normalize, regularize crypto under the FISMA regime, and that's draft legislation that probably won't be enacted till 2027. In the US you've got the Genius act and the TBA act, both of which have been announced, and those won't be, you know, enforced until 2027. So the whole industry is kind of, like, sitting there waiting. Of course, the executive's done some stuff. They've dropped a ton of lawsuits. They haven't dropped them all. You know, I note in particular the lawsuit against Binance from the SEC is still proceeding. So it's an interesting time. And, like, directionally, things are going in the right direction, but the question is, when are we actually going to get the market structure of regulation which allows people to proceed with certainty to build crypto businesses in the United States? And we're just like, we're not there. And they said we were going to get it in 100 days. So we got a draft bill. It's been about 100 days. But what we haven't got yet is any indication as to whether Congress is actually going to be able to pull its finger out and get it enacted. So, you know, that's. That's what I'm looking at generally. But the Ripple stuff in particular, you know, obviously Trump getting elected was very, very good for them, and I'm happy For them, so, you know, we'll. But. But I haven't followed the details of that case.
- [12:21]
Dave
Yeah, I mean, I. I think that unless anyone really wants to talk. Carlo, do you care about the. The Ripple case? Before we move on to the genius act, I saw you. You flipped your hand up there. Carla, you working?
- [12:36]
Carla
I was gonna.
- [12:42]
Dave
Oh, in the glitch, you fizzled out a few times. Okay, why don't you wait a couple minutes? It looks like your connection is kind of fizzling. Amateo, you want. Can you hear us? Hello? Amateo, your hands up, Dave.
- [13:07]
Gary
I can hear you just fine. Dave. So maybe other people are having problems.
- [13:12]
Dave
Yeah, okay. Yeah, it's. It's always. It's always fun. It's always fun, but, I mean, there are a lot of topics. Yeah. By the way, Gary, for the record, you know, I saw you had your spaces last night. I was. I was on dinner cooking duty, so I couldn't join, but anytime. Any. Anytime. You have a space called let's debate an issue. Please just. Just DM me.
- [13:35]
Gary
Hey, I'm gonna start.
- [13:36]
Dave
That's my favorite hobby.
- [13:37]
Gary
I know. I'm gonna start doing these every Thursday, so bring a topic. Hit me with a topic, and then we'll set it up, and then find somebody that, like. I think this would be a really good thing to actually go through a proper debate on. Like. Like the conversation this morning on UnitedHealth. I thought that was a really good discussion of. Wow, man, you're buying UnitedHealth right now. I mean, is that a good move? Like, you really think through the. All the issues. I think that's even the xrp, like, for me, until the legal issues are resolved.
- [14:13]
Dave
Why.
- [14:13]
Gary
Why. Why do I want to stick my head in there? I mean, maybe it's a triple from here, you know, once they get that handled, but I just don't need to take all that risk.
- [14:21]
Dave
Yeah, well, we could talk about xrp, the token, but, Carlo, you're flipping your hand back up. Does that mean that you think you're. You're connected again?
- [14:30]
Carla
I hope so. I'm sorry for the connection issues. Can you hear me?
- [14:33]
Dave
Okay, that's cool. Absolutely.
- [14:36]
Gary
He's got better. Hey, he's got better. He's got better. What's it called? Swag. This cat's got some of the best T shirts in the world. I mean, seriously. But his telephone connection is marginal.
- [14:50]
Carla
All right, Gary, get me your address offline and get you a shirt. Important to talk about. Dave, that's. That's dropped in the space. If I may pivot is the recent decision from the DOJ on the Tornado Cash case and Roman Storm. For those. Yeah. For those who may not be familiar with this, I've been following this very closely as a criminal defense lawyer that's actually defending cases in, in this very issue, the DOJ issued a memo called the Blanche Memo in which they basically told prosecutors to stop using criminal statutes as a regulatory tool to prosecute cryptocurrency platforms, especially software based platforms. One of the key sections of this memo addressed a statute that the DOJ has been wielding as kind of a gotcha law when it comes to crypto crime, and that is the money transmitter statute. This is a statute that has evolved through the Bank Secrecy act and FinCEN and it criminalizes anyone who is in the quote business of being a money transmitter. And what this memo instructed prosecutors is to carefully examine these cases to determine whether they have enough evidence to prove willful violation. Because basically what the statute does and why it's a gotcha is in order to convict someone of this, they'd have to prove, and it's a very loose definition, that you're in the quote business and that you failed to obtain the proper FinCEN and or equivalent state license. So it's almost a strict liability crime. But what the memo suggested is that prosecutors need to take a step back and only go after cases that are truly in the business and that knowingly and willfully violated the statute. This has caused a number of pending cases, including Samurai Wallet and Tornado Cash to be reevaluated and the defense attorneys for both of those cases have pushed hard that DOJ should dismiss. DOJ responded yesterday as to the Tornado Cash case and said, yes, we're going to dismiss the money transmitter count, but we're going to continue to proceed on the money laundering and the sanctions violation count. This is a troubling situation for me because I think that arguably the money be connected and dependent on the money transmitter violation. And the broader question for the sector is should the DOJ continue to prosecute the software platforms for what people do with those platforms to commit crime? And this is where the hotly contested debate we're waiting on the decision on Samurai Cash as to whether the DOJ is going to fold up on that case. And it looks like Mr. Storm and Tornado Cash are going to have to proceed to trial.
- [17:59]
Preston
So this is a really, this is a really interesting one because from a legal point of view, because they haven't actually charged him with operating an unlicensed money transmitting business. Right. They've charged him with conspiracy. And there are two heads of that, of the conspiracy charge, one of which they dropped and one of which they didn't. So one of them is the B1B. Right. Which is that he conspired to operate an unlicensed money transmitting business. In order to prove that, you'd have to demonstrate that he intended to operate a money transmitting business. Right. That is, that is, without filing for the license. And so the issue with that is that it's not really clear whether the Tornado. The Tornado Cash smart contract after the 5th Circuit ruling in Van Loon in particular. Right. Which, which dealt. Which examined it in some detail. And that although it wasn't directly on point, but. And also the DOJ's Blanche memo. So with that, the. It's not entirely clear that he. That they could prove that. Right. Because he intended to operate Tornado Cash, but it's not clear that Tornado Cash actually engaged in money transmission. Right. Because of the way that the system works. So then of course there's the B1C. Right. Which is otherwise involving the transportation or transmission of funds known to the defendant to have been derived from a criminal offense. And there. It's a very different thing, right. So even if the, even if it were impossible because Tornado Cash was structurally not capable of constituting a money transmitter under the money transmitter regulations, if he intended to facilitate the transportation or transmission of funds as part of an unlicensed money transmission business because it's a conspiracy charge, even though the underlying crime was impossible for him to commit, the conspiracy can still be committed. Right? So it's this really weird thing where they're going, narrow, narrow, narrow, narrow. And this is like the absolute last crime they've got, right? Because they've. Everybody's taking a hard look at Tornado Cash and saying, well, for policy reasons, it's probably not a good idea to penalize people for posting smart contracts. And they're saying, okay, we have concrete evidence that he intended to facilitate the movement of funds that were known. Right. To be derived from a criminal offense. And I'm not. That's a really high bar, right? Like that's actual knowledge. Where he would have had to, you know, Storm would have had to know. Right. Not to suspect, not have a hunch, not, you know, you know, gee, this is a really suspicious looking transfer. He'd have to know and intend to bring about that I'm awful result. So I, I think it's a bad decision to proceed with the prosecution, but we'll see where it goes. Well, I mean, you know, from the.
- [20:32]
Dave
From the perspective of the audience, I mean, isn't the issue here that anybody who writing software that could potentially be used to obfuscate transactions would then be risking criminal prosecution? I mean, am I, am I, am I getting this wrong? Because it seems like, you know, it seems very specific. It seems like, you know, if you don't have to prove that he knew about a particular transaction. Transaction, or worked with people that said, hey, build this for us because we need this in order to be able to violate OFAC or whatever or the bank secrecy act, wouldn't it basically chill any development of privacy software? Or am I being too hysterical?
- [21:14]
Carla
No, no, that's absolutely the concern. Because we saw similar attacks. If we take, if we look back at what happened with Telegram, when you start to criminalize software in this fashion, you're opening a very dangerous door. And I love Preston's analysis. Right on point. Very slippery slope. I hate that they're playing the nuance of this as opposed to taking a broader view and simply closing this door.
- [21:46]
Dave
You've gone Mr. Robot again. But yeah, I mean, look, it's. It is. Obviously it's a big story. I mean, I always ask the question, Preston, maybe, maybe he can give me the answer. I mean, has anybody who have been a. Manufacturers of radar detectors or radar detectors or any of these things, has anybody been able to prosecute firms like that, considering that those firms, what they're used are to evade other, you know, other laws? I mean, is that sort of stuff ever happened or is this kind of a unique, Unique idea?
- [22:17]
Preston
Not in the United States. It's pretty unique. I mean, I'm trying to think of examples. I mean, there are obvious examples where you can. Like if you're. If someone is asking you to ship, to manufacture and ship M16 fire control groups to Brooklyn, maybe. Maybe you shouldn't be doing that because it's illegal to possess those in Brooklyn, for example. Or if. For example, I know that there are signal jammers, right, Are used to intercept WI fi signals. Those are illegal for most people to possess, but you can order them on Alibaba, right, And have them shipped to the U.S. so, like if you were doing that within the United States or if you're making a manifestly illegal product, right? Like if you were doing a Glock switch, so that's a full, A full auto sear for a firearm. That's the kind of thing that you're not allowed to possess, you're not allowed to manufacture without the appropriate license. And so there. Right. But what we're talking about here is like privacy software, right? And communication software. And in the United States, the general position is that if you're producing tooling for people to engage in communications which are obscured, right. Or secret or whatever else, that's a protected activity under the First Amendment. Now you can make an argument that Tornado Cash doesn't fall within that because the method, you know, the method of transaction receipts that it uses is actually designed for commercial activity. That's certainly an argument, but I'd say that that kind of persecution of a technical provider of a communication service over the Internet is something you're more likely to see in a country like Myanmar or China or Russia or frankly Europe, in the UK in relation to social media, for example. So the UK recently threatened three American companies with their American Internet forums with prison time for operating social media websites in accordance with the First Amendment. Those social media websites then turned around and blocked the entire United Kingdom and said we'd rather just block your country rather than comply with your stupid law. And, and that was the end of that. Right. So it's, it's not something we're used to seeing here in the US it's certainly something we have seen abroad. Usually you'll see like so with Monero, for example, usually what you see is that service providers and VASPs, if you can't scan a blockchain for certain transactions, if you're unable to monitor it and supervise it and say, okay, well we're looking for suspicious transactions here and we've got software which can read it, as would be the case with, for example, something like Monero, which shields their transactions or shielded transactions. On zcash, you might have a compliance problem. And so what'll happen is the enforcement mechanism that takes place is that the virtual asset service providers don't service it. Right. And so that might be the case with Tornado Cash, for example, when Tornado Cash was sanctioned. A lot of addresses that receive stuff that came through that smart contract would have been tagged by transaction monitoring systems at the big crypto exchanges and potentially leading to account freezes or account off boardings or things like that. But when you're dealing with this Frontier Tech and you're saying, okay, well, well, you've got this Frontier tech issue, the DoJ has issued a policy statement saying we're not quite sure how the laws are supposed to be applied in this case. And so we're going to recommend that you drop any investigations of this. And then You've got a U.S. attorney in New York. I suppose it's a Good thing for prosecutorial independence, right? I mean, Jay Clayton's a very serious lawyer and you know, I don't think he'd be bringing the case frivolously. I see a thumbs down. Jake Layton is a serious lawyer.
- [25:47]
Dave
So Jake, Jay Clayton started the Ripple case.
- [25:50]
Preston
He did start the Ripple case, sure.
- [25:51]
Carla
But like we do, we, we all.
- [25:53]
Dave
Have long memories here.
- [25:54]
Carla
That's true.
- [25:55]
Preston
But like he's still, like we have long memories, that's fine. But like he's still a serious lawyer. I don't think that, I don't think if he's, you know, heading up a prosecution in the Southern district of New York that it's a, like that he's doing that frivolously or because he's trying to score political points. I don't think that's how he operates. So, so from my point of view, it's, it's one of those frontier edge cases where either they've got something, some communication that was made by Roman that was really, really, really bad that we don't know about. Where, for example, you know, like, for example with the Charlie Shrem case, you know, 15 years ago where there was the, the, the, the, his, his fellow, I think Robert Fela was the, was the name of the other guy who was involved in that case, was communicating and saying, yeah, I'm helping people do this on the Silk Road. Right. So that's one of those hooks where you can go and get something and it's like, you know, it doesn't matter what asset you're using, right. You're still going to have a problem. But in this case, it's so frontier right that I think it was the right decision to back down on the B1B charge. But you know, but the fact that they're still proceeding, you know, it will chill development. It's not a good thing. And I think, you know, they'll have to be very careful about how they prosecute this case if they don't want to chill development of similar privacy tools or transaction management tools that could be very useful right to Americans in protecting our transactions from surveillance by foreign states, interference by foreign states and that sort of thing.
- [27:17]
Dave
Yeah, I mean, look, you know, on this forum, on this, on this spaces, it's going to be hard to find people who don't believe privacy is an innate right and that there should be the balance. The burden of proof should be on the government, which is why many of us thought the Patriot act was horrible at the time. Even understanding the political climate, I'd be Surprised if people disagree with that on here, but, you know, whatever. Anyway, Carlo, you're Mr. Roboto fixed, I hope.
- [27:43]
Carla
I'm sorry, it's. I'm driving, so connectivity is always a challenge. Can you hear me any better?
- [27:53]
Preston
Loud and clear.
- [27:55]
Dave
Okay.
- [28:03]
Carla
Debate. Same concerns about the chilling effect of going after software technology as opposed to bad actors. And this hopefully gets resolved. I think, I think it's going to be very fact driven. You're right, Preston. It's going to depend on what they like and whether the government can bridge this gap.
- [28:27]
Dave
Yeah, Fred?
- [28:29]
Fred
Oh, I, you know, agree with a lot of what Preston was saying, but I just had to chime in and say Jay Clayton is a giant chode and I don't think anything he does I'll ever take him seriously in my entire life. The guy's political to the core. And I'm not saying he's not smart because he is, because he's operated through that system and made hundreds of millions. But the guy's a huge putt. I think the only other thing I'll add is that we brought it up at the beginning and it's kind of weaving in and out. And maybe that's why Gary's up here, because he'll take the opposite side as a huge, big government loving guy. But until we get all this.
- [29:10]
Dave
The.
- [29:11]
Fred
Executive, let's do what we want, interpret these laws however we want, make all these crazy cases and see if we can get them approved in a court. Until we get rid of that and just have rules of the road, you know, this stuff is just going to continue and, you know, we just have to really focus on, I mean, if we think our shots now with the way Congress is and how it's maintained, you know, you got to really shoot that shot. And it's, you know, very disconcerting. We didn't get the genius act.
- [29:36]
Dave
Well, yeah, well, the genius act's going to come back. You know, they. He filed for cloture today, or cloture, however you pronounce it. Don't know, don't care. You know, the Eleanor reported. Eleanor Terror reported that there's a couple of pieces in there which are like, don't seem great, but not horrible. So we'll see what goes on. I mean, look, I had a conversation with Congressman Davidson on X this morning where it's obvious that the banking lobby is pushing and understands that if capital flows are allowed to be free. And there was an article in the Wall Street Journal that he was quoting about private banking. They assume that fractional reserve Banking, of course, requires government assistance to prop it up. If you didn't have the fdic, you wouldn't have fractional reserve banking anymore. If you didn't have that, they argue that that's a public good, which is, by the way, for those who don't understand complicated words, it's a complete load of absolute bullshit. Fractional reserve banking was necessary for those who understand financial history when capital flows were completely immobile. So if you're a small business in Dubuque, Iowa, you needed to go to your community bank, you know, if you were in to. To raise money to open your store. But today, capital flows are global and with the advent of stablecoins, which are coming, genius act or not, just a question of whether will it be regulated in a rational way. The money flows are now global and now very, very efficient. And so do you need to have your local savings and loan prop up your small business? Well, the answer is no, you don't anymore. And so this notion that you need to trap what is effectively $6 trillion in way below market interest rates in these banking institutions because of regulatory hurdles is just not necessary. I mean, just think of the size of that subsidy. Do the math on. 4% of $6 trillion is effectively the government propping up an industry. And it's a pretty substantial sum. And so you know that that's what's really at stake here. And, and it seems pretty clear they're going to lose, just like the booksellers lost out to Amazon, et cetera, et cetera. I don't really see the difference now. I'm purposely being a little bit on the confrontational side, unfortunately, in this audience. I don't know. Does anybody want to take the other side of that? That anybody else have thoughts on, on, you know, genius stable coins and, and what does it mean? I know our driver cares about this quite a bit, but I don't. I'm curious, does anybody else care?
- [32:24]
Preston
I think it's. I think it's an issue with the banks being technologically illiterate because they know that they can't move as quickly as Circle and they can't move as quickly as Tether because of their reg. Both. It's a regulatory thing, but it's also something just to do with how, how a bank interf. So I think if a bank could, If I were J.P. morgan, if I were Citigroup, I would be rushing ahead, right, to go and deploy and build a stablecoin system and make mad bank from the fact that people were just locking up dollars and leaving it and I could go do whatever I wanted to do with it on the back end, within reason, right? Dump it into Treasuries, do whatever I had to do. But the thing is they can't do. I don't, I don't think they can. Right. Because culturally if you want to get anything done at a bank, you know, you've got to have tons of meetings, you've got to get sign off from the COO and the CO sec and it takes months and it's like if.
- [33:18]
Dave
You saw my head, Presley, remember I, you might not know this, but I worked, you know, I started at Solomon Brothers but I ended up at Citigroup. So I, believe me, I know what you're talking about. It's sort of true.
- [33:31]
Preston
It's entirely true. And the fact is they're just not nimble enough. Have like if you were a bank and you wanted the idea of like Goldman doing like mobile banking was like, oh my God, like a mobile app, like isn't that unbelievable? Like that this might exist. So like the, the stuff that a startup or a smaller company with a different risk posture and just a different culture and a different way of getting things done can do instantaneously takes a bank forever. So like they, they just are not institutionally prepared to deal with finance that moves at the speed that crypto moves. Right? And so you've got new institutions that are institutionally prepared to do that. You've got startups that are prepared to do it. You've got companies like Circle, which still have a very software and user experience forward approach that are doing it very, very well. And I think the banks know that they just simply like maybe they would have to invest, they'd have to go buy one of these companies and then if they did that, it would kill it anyway. Right? Because then it would be within the same regulatory umbrella. So I suspect this is a case of the banks saying, listen, we would do it if we could, but we know how we work and as a result of that knowledge we know that we're not capable. Right? We are institutionally incapable of competing and that's why they're throwing up opposition in this.
- [34:43]
Dave
Yeah, I tend to disagree with that. I think that the banks are much better at certain technologies than you think, but really care about the float that they're earning and the captive interest that they're earning. And this, this idea and, and Carlo, I know you care about this too. That you know stablecoins not paying interest is going to somehow protect them is actually laughable. Because what you're going to end up with is everybody with a broker or a NEO bank or a fintech bank is effectively they're just going to offer say okay, stablecoins are on the back end for the payment Rails, but we're going to offer you instant transfers and sweeps to this other thing which is not called the stablecoin that does pay yield, that's effectively a, you know, a crypto enabled money market fund or a money market token. Those things are going to happen. I mean it's an absolute certainty. In fact, one of the interesting things I heard recently was I was listening to on radio, believe it or not, there's an ad for a Florida based bank and they specifically argued in their thing, well, we are not a fintech bank, we are not a NEO bank, we are a real bank. And so, you know, trying to use that as marketing, I think that's going to be hysterical in a few years anyway.
- [35:49]
John Deaton
Carla?
- [35:52]
Carla
Yeah, look, one of the things I'm really closely monitoring in this second introduction of the bill is will Tether actually have a seat at the table? Because I think they want in and I think they feel like circle has kind of frozen them out of the conversation. So I'm curious to see if Tether is going to have through Paolo and, and his massive network and opportunity. And the other thing I've been thinking about on this is, is from a practical standpoint, do stablecoins provide or give some pause to banks because it endangers their fractional reserves? In other words, if we're moving so fast with these transactions, does that inhibit their ability to keep fractional reserves on hand?
- [36:36]
Dave
I mean, I think that the answer to that question is it's not about inhibiting the ability, it's just does it inhibit the ability to have fractional reserve banking where you're paying below market interest rates? And the answer TO that is 100% yes, it will. No matter what you do, if you speed up the ability for people to make transfers. And I talk about this and people are like, well wait a minute, But Zelle and PayPal are instant. They don't understand it doesn't settle for days. And that's why they limit the amount. You know, when you have unfettered movement and the ability to move your money instantly, that change, that's a massive change. And the average human doesn't understand that. But it's, and not because of any other reason you have to be a geek to actually understand the plumbing underneath this crap. But it does matter. And a large part of crypto is based on that. Anyone who's ever tried to wire hundreds of thousands of dollars, God forbid you're trying to wire to a company that has coin or routes in your name, or crypto of any sort. It can be an adventure. We'll just leave it at that. And I know, Preston, you're probably giggling at that one because you've seen that, you know, even today, it's there.
- [37:46]
Preston
I had a. I have a. I still have a law firm. And the law firm, when you tell the banks, what do you do? And you're like, well, I. I advise companies. Well, what kind of companies? Crypto companies. They, like a bank will just wince. They'll be like, oh, my God, like, how can you advise a crypto company? Where are your fees coming from? You. You bad, bad man. So it's just it, like, yeah, literally you say anything to do.
- [38:08]
Dave
As I said, I knew you would. You would be. You would be laughing. You're on mute.
- [38:13]
Preston
Laughing my ass off.
- [38:14]
Dave
That's what I figured. Yeah. But I mean, look, it's. There's a. There's a lot going on in the world, you know. You know, and we understand this, so we all care about this. The. The other big story. And there's. And there's a big story. There's a lot of other stories. But the other story that I think is interesting is, you know, just to pivot. If there's anybody. Anybody else who cares about the genius act, you know, hear about it. But the other story that's going on is the Coinbase story. And what does that mean for KYC and aml? There's lots of takes on this. Hell, even CZ came out and talked to people about phishing and what does it mean. But it's the kind of thing that. It's not crypto. We talked about it yesterday a bit, but you're not really crypto. I mean, it's all banking organizations. And I'm curious, anyone on the panel care or think that this is going to go in an interesting direction, or is this just going to be okay? Yet another. Yet another black eye that they're going to accuse on crypto. We're just going to move on and we're not going to talk about the fundamental problem of being forced to provide personal information to unsecure. Unsecure groups, you know, groups. I said groups specifically because it includes the government. And we have had the same thing in terms of government agencies. Yeah, Carlo, Another topic you care about, I guess. Yeah.
- [39:38]
Carla
So, look, I spend a lot of Time thinking about. I spend a lot of time thinking about KYC and aml and Professor Verit goes by the block. Prof. On On X posted an interesting take on this that it's ironic that they're touting and celebrating all the KYC that's going into the stablecoin act at the same time as we've got this massive vulnerability when you're forced to KYC for a Coinbase account. Look, there are solutions to this. This ZK rollups allow you to verify your identifiers without having to actually show your identifiers. The tech exists. I don't know why we're not evolving in that direction and making it seamless to be able to verify people without having to put their stuff out there. But I think the larger conversation is that privacy is, is essentially becoming irrelevant and if we continue to rely on, on these types of requirements, we're just going to continue to expose more data to the point where it's just all going to be out there and at that point it's kind of a free for all. So yeah, there's solutions, Dave. I don't know why especially a tech forward company like Coinbase doesn't explore those solutions.
- [40:50]
Dave
Nick?
- [40:52]
Nick
Yeah, thanks for having me up, Dave. So back in a former job, I worked with a lot of of doing the marketing for a lot of, you know, privacy coins, privacy projects. And this dovetails with the KYC conversation. But the hard truth that a lot of people just don't want to know is really no one cares about privacy. Like, honestly, like the people who care about sound money, even a lot of them don't care about privacy. Privacy is the hardest sell in all of technology, hands down, because you only care until you lose it. And even then when you lose it, you, it doesn't affect you immediately. I mean, for God's sake, we had the Equifax hack, What was it, 10 years ago or. And then the AT&T hack like three years ago. And like literally everyone's everything, every Social Security number on the planet got leaked out and we still to this day, if you're going to set up a bank account, have to use your Social Security number. I was on the phone the other day with one of my banks. You know, I've got like six banks because I'm in crypto. So one of my banks, I was on the phone, I was verifying some because they messed up something and they did a voice verification. And then when the guy got on the phone, he was like, yeah, blah, blah, blah, my password, my Voice is my password. And when I got on the phone with the agent, I said, when are you guys going to phase that out? Because it's like, AI can spoof anyone's voice now. And he was like, I, you know, I don't know, what's the last four years social? And I'm like, oh, my God. So.
- [42:22]
Carla
Oh, and for Christ's sake, they still use SMS to verify people.
- [42:25]
Nick
And so people are hemming and hawing about kyc. The only people who care about KYC are the guy who got. The guy and his daughter who got beat up in France. They're the only people that care about KYC right now. Sorry.
- [42:37]
Dave
Yeah, it's. It's funny you mentioned sms. They actually think of it as an advancement in technology and to be honest, it's better than nothing. But of course, if you've been SIM swapped, it doesn't really help you a whole heap.
- [42:48]
Fred
Fred, I was just going to add on the Coinbase thing that that's more of a Coinbase problem and not as much of a. Why is KYC so bad? I mean, I'm not a big fan of kyc, but it's kind of the way it is now and it's just Coinbase deciding to outsource almost everything so they can pay pennies on the dollar to people who would be just absolutely right to get bribed to get all this information. And I'm just saying this, as somebody who sues Coinbase regularly, you don't usually hear about a lot of these things because they force every. All of their customers into arbitration, so you can't even get into court. And, you know, some of the. And then they don't let you talk about it. So I can't say all the things I've seen on Coinbase's end, but just the absolute shit show of how, like, some of it's organized in the background. Now, I'm not. I'm only saying, like, from a business perspective, the funds are always usually safe. I mean, in the way they're custodied. I mean, obviously people can scam you out of your funds on Coinbase, so I'm not saying it's a custody issue, but the way it's administered is just mind blowing to me. And I think if more people knew, they'd be a lot more worried. And that's why I think something like this happened. But my plug is, anybody who wants to sue Coinbase, shoot me a DM and I'm happy to talk to you.
- [44:09]
Nick
Yeah, so this also echoes the like another problem in crypto, which is the Oracle issue. So there's all this talk about, you know, RWAs and blah blah, blah. Well, functionally, just like a coinbase, someone has to enter in the stuff. Like, you know, Nancy sitting in an office has to put in the blah blah, blah. Whether it's the how many copper or excuse me, how many palladium bullion is being put onto, registered onto the chain link, whatever, whatever, or the kyc, there's always some, the, the wrench attack is always going to be around no matter what, as long as we are still carbon based life forms. So I mean, what does that mean for the future of KYC and security? I mean I, I could, I've been doing a lot of research this because in my actual job, job, I'm a screenwriter and I'm looking at, I'm trying to think of the problems that are going to be happening in the future that I can make cool stories about and sell the scripts and make money. But I'm looking at AI spoof. AI is generally going to render the Internet as this kind of gray goo of nothing is real and we don't know who is what and where is. What is this website and that I'm even looking at right now not being spoofed right now. That's kind of the future that we're going to. And as soon as you start to bring up this kind of thing to, to the AI proselytites, they just kind of freak out and put their fingers in the air.
- [45:35]
Dave
La la la la la.
- [45:36]
Nick
It's not going to happen. Well, AI powered hackers are going to happen. They're going to happen at scale farther than anyone can possibly imagine.
- [45:45]
Dave
This is a great conversation. And Nick, you know, I'm going to be starting a podcast. I'd love to delve into this one with you for a whole variety of reasons, but for now, DB you had your hand up as well. Maybe we should go back to crypto.
- [46:01]
DB
Thanks. So the crazy thing is we are sitting on the number one technology in the world to solve this right now. And I don't see it really being discussed too. And we need to, the topic needs to be around digital IDs. We've got the blockchain, we've got ZK technology. Why we're not pushing more for digital IDs and the technology to only show the information that is 100% necessary is beyond me. There are so many amazing use cases for this and they've been tossed around but just not pushed. And when you Go to buy something at the store and you have to show them your id. They don't need to see your. Your address. They just need to check that you're old enough maybe, or you go do whatever. They only need to see your name, not your age. There's so many applications for this, and the fact that we're not using it and pushing it to the. Just blows my mind. So that's where this discussion really should go. And I'm not talking about here, but the whole big picture discussion.
- [47:00]
Dave
No, you're right. And, and you know, we. Look, look, I, I'll admit that the notion or the concept behind things like worldcoin, for example, the concept to me is interesting, but I'll be damned if I'm not one of the last people they're going to put my eyeball on that just because I think there's just a fundamental lack of trust.
- [47:20]
Nick
There's no government. Sorry, Preston, go ahead.
- [47:22]
Preston
Yeah, so, like the world, the thing is, the primitives that you need to have robust digital identity are actually in every. They were in the Bitcoin wallet, right, to start, which is basically all you need to verify yourself as a digital signature. So, you know, you can imagine a circumstance where almost anyone, I assume everyone here has watched Star Wars. So you know how the Imperials, they're marching around the Death Star, they've got their snazzy uniforms, but they've got these metal like tubes in their uniforms. Those are called code cylinders in universe. And what they are is they're authentication devices that people carry with them everywhere. And what they can do is they can verify who they are and that verifies their permission to move around the Death Star. Right? So if you need to get into the canteen, you can get there. But like, if you want to get into Darth Vader's private swimming pool, you can't.
- [48:09]
Dave
So.
- [48:09]
Preston
That's right. So what we have with crypto is this, is this interesting way that we've actually distributed this huge, you know, as we actually are on this call, I'm sitting here making a hardware wallet in the background of doing a steel wallet. And so like, we have this PKI which has been distributed all over the world. And probably everybody who's on this call has at least one cryptocurrency wallet. It's not that much of a stretch to say, okay, well, your.eth ID or some, you know, digital, you know, some key that you have under your.eth name, some wallet which you've decided to affiliate with that you can Then use that to authenticate all kinds of things. You can use it to authenticate your identity to your bank. You can use it to identify, authenticate your identity on a zoom call with your co workers. You can use it to authenticate your identity on a phone call to your mother. So, like, at some point the problem will get bad enough that they need to say, okay, we're going to have an authentication layer which we're going to bake into everything. And we actually have these really convenient tools being the Bitcoin blockchain and the Ethereum blockchain and the Solana blockchain in particular, where you can have a central registry. You can say, listen, this is who I am. You can distribute that identity to your friends, you know, via your devices or something like that. And then anytime you talk to someone, right, and it all has to run in the background, anytime you talk to someone, that you'll just sign a message and you'll say, listen, this message, you know, it's this date, this phone call to this number signed with this private key. And the recipient will read it and they'll know that you are the one on the other end of the line. It's either you or it's someone who's gotten a hold of your hardware wallet and is masquerading as you. So it's not a perfect solution, right? But what it is, it's a solution that can rule out most of the AI shit that's going to cost absolutely nothing to proliferate. And so, you know, it's just that the solution hasn't become necessary yet. There are cases, there are instances where people have scammed companies out of 10, 20, $30 million by impersonating the CFO and then calling someone in the accounting department on a zoom call with an AI. This happened, I think, I think in China in 2024, early to 2024, where someone just said, okay, cool, I'm just going to impersonate this person. And a scammer impersonated the guy's boss and then managed to get to convince the accounting person, individual in the accounting department to wire $10 million to the scammer or something like that. So, like, we're going to need this eventually. The need isn't pressing. But like the arc, the infrastructure is there. It's just every crypto wallet that everyone already uses.
- [50:32]
Dave
I mean, it's fascinating. I apologize for the background noise. Evidently they're doing another fire alarm test in my building. It's fascinating because it is a huge total addressable market Or TAM for crypto projects to get to the real world and do it right. And it's just really a question of will we get the, you know, will there be projects that will gain that acceptance with that to get over the lack of trust that people have? Obviously CBDCs are the big, the big boogeyman that we worry about. So I'm curious. And Gary, I know you care about privacy quite a bit and you care about, you know, government stuff quite a bit. I mean, you have any thoughts on this?
- [51:12]
Gary
Well, I, I was, I was interested in the gentleman that said that I like big government because I don't think.
- [51:20]
Dave
I. I think he was joking. At least I certainly hope so.
- [51:22]
Gary
Okay.
- [51:23]
Fred
I was trolling you, Gary, to get you in.
- [51:26]
Gary
Oh, okay. Yeah, I'm not a big corporate. Like, I. My view is once you have to hire an HR department, you've lost your edge. It just seems like the whole thing goes tits up once HR gets involved. You know, the privacy. Dude, I think I agree with you guys. I, I think AML, KYC, all this stuff is that created PSD2. None of this shit, none of it's working. Excuse me?
- [51:58]
Dave
I mean, the funny thing about kyc, that people don't know. If you haven't been in the brokerage industry for a lot of years, if Bruce Fenton were up here, he'd be smiling. What about to say it stands for know your customer. And the whole reason for it was to judge the appropriateness of investments so that you didn't put, you know, 80 year old people in the same risk tolerance as 30 year old people, et cetera, et cetera. And you understood people. And that makes sense. AML is a totally different piece. That's the idea that you're going to prevent people from washing money to clean it up from illicit transactions. And the fact that we've linked the two and it's become kind of inseparable is clearly mistaken. And we're seeing the fallout from that in what's going on. I don't know if anybody else knew that, but I think it's. It's worth mentioning that point. Okay, Gary, maybe your dog has stopped. Maybe not. Okay.
- [52:58]
Gary
Sorry guys, I got a little problem I'm trying to fix.
- [53:01]
Dave
Yeah, it's okay. No worries.
- [53:03]
John Deaton
So anyway.
- [53:04]
Dave
Yeah, DB Yeah.
- [53:06]
DB
So I've got a question for, I guess you and Preston. What do you think is it going to take for us to get there? I mean, these massive data breaches are. They're a monthly or quarterly thing at the this point. What's it going to take for this to actually become a focus.
- [53:20]
Preston
People are going to have to get killed, to be blunt.
- [53:24]
Carla
That's.
- [53:25]
Preston
It's happening in Europe. They're also, you know, there was an incident with AI So I think there are two. There are two different problems, right? One of them is privacy and preserving people from, you know, having their business activities and their assets known. And that I think is, is a bigger problem in Europe than it is in the United States because the US Is more heavily surveilled and better policed. And so for that, I think people are going to have to get killed, to be blunt. And then, then they will understand. Listen, there are real world consequences for this. You know, with the, I was in the, the OMB hack back in, you know, 15 years ago because I had a security clearance, right? And so as a consequence, you know, my information was obtained by every, everyone who had a security clearance. All of our information was exfiltrated by some likely foreign agents. And that sucks because some foreign government thinks that I'm relevant for some reason because of that, right? That stinks. The Experian hack, right? We were all victims of the Experian hack. That stinks too. This crypto stuff where we're seeing people get kidnapped in France, having their fingers cut off, having them go after their children. That's a problem. On the other hand, you also have this AI stuff which. So that has been a bit of a 20. The 2024 election cycle was kind of a test bed for how AI can be used to manipulate, you know, manipulate the voting public. Now, I'm a big believer that people should be able to use it for whatever purposes they want. But you know who I think it was? Nick was referring to Dead Internet theory, where increasingly it's harder. It's harder and harder to tell whether someone who's engaging with you on, on Twitter or anything else is a bot or not, you know, because they're using AI. Similarly, there was an instant, an incident in early 24 where someone called a bunch of New Hampshire voters, thousands of them, right? The person has never been caught with a voice message saying that they were Joe Biden and telling them that they want, they needed to stay home, right? Because they shouldn't vote in the primary for various reasons. And I can't remember exactly what the reason was that they were doing that, but it was some. There were some nefarious, you know, political outcome that they were trying to bring about. And like that is something which is entirely doable if you just have a voip service. And you, you're based in China and you can. You can impersonate Joe Biden and you can run an AI instance. You can have Joe Biden personally call 200,000 voters in New Hampshire and deliver them a message. Right? Because all of that information is public. So we haven't seen is. We haven't seen threat actors utilizing those tools to a sufficient degree where it becomes a national security concern. And then you turn around, Tim Cook gets together with a couple other guys and they say, okay, here's the technical fix that we're going to implement, and it's going to use public key cryptography, and that's how we're gonna. How it's gonna fix the problem, right? So eventually one day something like this will happen, which is a big enough deal that they decide they're gonna get together and do that, and it'll probably be the government in combination of government and industry which forces it. Ideally, what they do is they then piggyback on crypto and they say, hey, the only crypto system that has ever been widely distributed anywhere at scale is really Bitcoin, Ethereum, Solana and other wallets. And really, Bitcoin and Ethereum are the number one and two. So maybe they turn around and say, this is what we're going to use as the backbone, and we're going to use that for people to upload their identities. And we're going to make it really simple. We're going to build this into every iPhone. We're going to put a hard security module in. So that way when people are calling their contacts, right, they know this person is who they say they are. Right? Because every message that they send going out is going to be signed. But. But realistically, I don't think any of that's going to change until you have something very dramatic and very, you know, very visceral, either with AI or with people getting hurt. You know, if that crypto CEO's daughter had been abducted and hadn't. That she hadn't. They hadn't fought off the attackers, I think that might have been. That might have risen to that level. But it's a tricky situation, and we're in a really weird time where something crazy is eventually going to happen as a result of all of these developments progressing forward at once. There was a video they put out a couple years ago about murder bots, Slaughterbots, where they had AI drones that were autonomously seeking out their targets. I think it was eight or nine years ago, and people watched it at the time, and they Said, well, that's preposterous. Right. And now we're seeing that with FPV drones in Ukraine. Right. And at some point a terrorist group is going to try it and then you're going to start seeing regulation and state response. So, yeah, these are really potent computing tools that anybody can use for any purpose. And we. Just because we haven't seen them used yet in an offensive fashion doesn't mean we won't. But I don't think anything's going to change until we do.
- [58:01]
Dave
Yeah, that sounds right. But it's a kind of a dark path ahead. That said, from a crypto investing point of view, it does create opportunities. I mean, there's always a flip side side to it. So any final thoughts here before we wrap on a Friday afternoon? Because we are up against time.
- [58:16]
Nick
Yeah, I just wanted to do a little chorus to the verse that Preston just wrote right there. I'm, I'm the, I'm the big government cynic. I don't think it's what's, what's the saying. One person being unalived is a tragedy. A million is a statistic. I think it's actually going to take a quote, unquote, important person meeting an uncertain demise is going to push people, push legislation forward to push adoption forward for security. And fundamentally, I think the poorest nature of security of KYC is a feature, not a bug. Because once there is a solution at scale, like what Apple had with the iPhones and they got sued, the DOJ leaned on them until they broke. So governments don't want it for private citizenry and they will stamp it out at every corner. So there can be the best. The solutions are out there, but they're not being adopted for a reason. That's, that's my take on that. So. And then the other thing about the Joe Biden spoofing thing, you know, that would. That probably cost $10,000 today. You can rent 50,000 GPUs through Flux and then mount a PSYOP campaign for a fraction of that.
- [59:33]
Dave
Yeah, it is, it is getting easy. But. Okay, people. Well, it's 11:17 now and the producers are telling me to wrap this. So I'm going to go ahead and wrap it for those who are listening. All the people up here who are donating their time, I mean, deserve a follow there. There's some really interesting voices and there's some pretty interesting investment implications of a lot of what we were talking about, although we really weren't able to get too deep in all that. So everyone have a great weekend. And we will be back again on Monday morning at 10:15 for Crypto Town Hall. Take care, everyone.