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- [00:01]
A
This episode is brought to you by Indeed. Stop waiting around for the perfect candidate. Instead, use Indeed Sponsored Jobs to find the right people with the right skills fast. It's a simple way to make sure your listing is the first candidate. C According to Indeed data, Sponsored Jobs have four times more applicants than non sponsored jobs. So go build your dream team today with Indeed. Get a $75 sponsored job credit@ Indeed.com podcast. Terms and conditions apply.
- [00:28]
B
Hi all and welcome to Decks in the City, where the wallets are cold and the takes are hot. First we have Jesse Web3 prosecutor turned Web3 protector at Rivet Capital. And we have V from the SEC to Web3 and I'm your host, KK Catherine Fluitt in Tradfi and conversant in Deep Tech over at starkware. Before we get going, as always, remember, we're lawyers, but we're not your lawyers. Nothing you hear on Decks in the City is legal or financial advice, and it doesn't create an attorney client relationship. For the fine print, check unchained crypto.com we're going to get into an especially spicy episode today in one minute after we hear a word from our sponsors.
- [01:09]
C
Quick note before we get into today's episode, Bits and Bits now has its dedicated feed. We're spinning up from the Unchained feed and moving to a new podcast and YouTube channel. So if you want to keep up with our weekly live streams and macro meets crypto breakdowns, make sure to subscribe to Bits and Bits directly. We won't publish there until March, but subscribe today so you can be ready for launch. Be sure to subscribe to the new feeds@unchained crypto.com bitsandbps
- [01:36]
B
okay, so as always in crypto there has been a slew of regulatory activity and it raises some questions. One of the questions that I've been getting is obviously Jesse, V and I all spend some time in Washington trying to get clarity or crypto market structure legislation passed, and one of the questions has been, what's going on? There's obviously distractions in Washington. Where are we? And it raises the broader question of, okay, what happens if we don't get clarity? What happens if we don't get crypto market structure legislation? And we're already seeing what is going to happen if we don't get that legislation. And what I'm talking about is the SEC last week submitted commission level interpretive guidance to the White House on how federal securities laws could be applied to crypto. And translating that into basic English is everyone thinks they Sent effectively a token taxonomy to the White House. And there's a very important explanatory distinction to this. This guidance differs from staff letter level guidance, like no action letters, because that applies to a particular officer division and can be more easily revoked. And then there's also formal rulemaking. So this is kind of in the middle. It's not publicly available, what they sent, but it will likely become publicly available eventually. It's not binding law, but it's very influential. And, you know, basically what this says to the market is if you follow this, you'll receive deference from the sec. The SEC won't come after you. I think that this is exciting, that they're making progress on a token taxonomy. And again, I want to reiterate that this is the kind of action that we're going to see in the absence of legislation. So I'm going to pass it actually to be. Because I know that one of the things that the three of us were talking about is, and, and you've mentioned this in the past, is that absent the, the, the misery of the Gensler regime, we may have seen a situation where the SEC just moved to create rules and everyone went along with it. But where are we now if we don't get clarity. And we have no audio on these? So, Jesse, jump in.
- [03:47]
D
Yeah, I, I want to feel positive, start this gloomy day optimistic because taxonomies are useful. And you're right, it's commission level interpretation. It seems like. So it's not just like a random statement from anybody. It's not even the division level staff guidance, which is useful but not as powerful. But I guess I just keep thinking back to when far too many people, in my opinion, in the crypto industry celebrated the overturning of Chevron, which gave agencies deference. And I have always said that that was a mistake. And I was not cheering it along. Not because agencies are always right, they're not. I think we've all seen that. But because deference was the architecture that let regulators build frameworks within their expertise and that courts would actually respect. And this taxonomy is a perfect example in my mind, because it's useful. I'm not dismissing it, but we all were cheering because the SEC was defanged. But now we want the SEC to have those things back and be able to put out rules and think things through. And I mean, we're all sort of seeing that Congress is incapable of passing clarity and maybe other things as of late. And so we need to rely on these rules and, you know, as operators which we all sort of work within that space or help them, you know, they need to be able to build off something. That's what we have all been screaming into the ether for so long. Like, help tell us how to follow the law. And if they build on this and then the next sec, whatever party it is, thinks a different structure is better, then where are we?
- [05:30]
E
Yeah, I turned my mute off. I think, like, what you're starting to see, like, across the different agencies that touch crypto is just everyone is sort of preparing for a world where clarity just never passes. Right. So I think you're gonna see a big uptick. I mean, I think you already are seeing a big uptick in like the sec, the cftc, treasury, just like putting out rulemakings and more guidance and maybe more no action letters. Right. Like, Chair Selig made like two pretty big announcements in the last few weeks that they're going to do rulemaking on both perps and prediction markets, which are like two huge, like, growing areas of crypto. The SEC is doing this taxonomy thing. I, you know, there's this innovation exemption they've been teasing for a while. Like, I think that's going to be a big deal. So. So I think there's going to be an interesting question of, you know, how much authority do they already have under existing laws? Like, what can they do anyway in the absence of some new legislation, like clarity. Right. I think for the sec, the question is probably a little easier. Like Congress gave them jurisdiction over anything having to do with securities and the capital markets, right? So it doesn't matter if it's like a tokenized security or not. And it doesn't matter if, like, you know, it's like chain link, right. Could be like the equivalent of like some sort of price feed in the traditional securities market. Right. Like, these things can be on chain, but if they touch the capital markets, the SEC can still pass rules for them. I think with the cftc, it's a little less clear, Right? Like, it's not like there's something in the existing Commodities and Exchange act that says you get jurisdiction over spot commodities markets or spot crypto markets in this case. Right. So I think there, there could be more of a challenge, like if the CFTC starts to exert its jurisdiction over different parts of crypto. Like, I could, I could see tradfi or like traditional commodities market participants saying, you can't, you don't have jurisdiction over that. Or you could see on the other side, like crypto market participants refusing to abide by that. And saying you don't have authority to regulate us. Like Congress never gave you that authority. So I think for the CFTC it might be a little harder. But for the sec, it's pretty clear their jurisdiction is pretty wide, you know, and like process tokenized equities are going to be coming time. So there's a lot that they can do.
- [08:12]
B
It's so true. And I always like to refer to that tactic that you just referred to as the come at me bro tactic, where it's like, I don't think you have jurisdiction. Go ahead and sue me, I'll fight you. I mean, certain companies use the come at me bro tactic during the Gensler administration and it actually worked out for them.
- [08:28]
D
It's, well, this is a women's pod. Like we got three liters. Maybe it's like come at me bra or something like that. I don't know. I mean, a process question for you guys. Like, you know, we've seen rulemaking, we've seen statements by selling out of the cftc. Why is Atkins here or the SEC and Atkins sending this to the White House? And why is that process happening that way? Is this a political move? Is this like, hey, don't worry about clarity because we got it covered. How do we think about that in the realm of how this should normally work?
- [09:05]
B
V, do you want to jump in or I can take that.
- [09:07]
E
I actually, I don't know the answer to that.
- [09:08]
D
I either.
- [09:10]
E
Yeah, I wonder if it's like, like they're actually required by law to give certain notices to like some part of the White House that they're going to engage in some sort of process, like a rulemaking process. I'm actually not sure about that.
- [09:28]
D
It does seem odd. Yeah, because, and, and I don't know either, but it does seem odd to me because so much about rulemaking and process is about giving the public the opportunity to respond and assess, etc, and this is being built for crypto industry to be able to, you know, either say whether it works for them or not say whether it works for them, or just know what might be coming down the road if clarity doesn't work. So it just seems like a different process than I've seen, although I'm not sure what's appropriate here.
- [10:00]
B
So my take on this, and the only reason I know this is I actually did research prior to this pod. So I will say this is a fairly esoteric question, even amongst lawyers with experience with SEC procedure. We'll get someone from the SEC to answer this and opine on this. As well is this is usually a normal procedural step, meaning it goes to the White House. It needs to undergo review by the Office of Information and Regulatory affairs, which is part of the White House's Office of Management and Budget. And that's an interagency process step, which from my understanding, is basically a little bit of a check the box unless it's something offensive or objectionable to the White House. Obviously, anything advancing crypto clarity is not going to be objectionable to this White House. And then once interagency Reviews complete, the SEC's commissioners have to vote on the guidance to kind of cement it. And that's the difference between commission level guidance versus staff level guidance. However, what's confusing to me is commission level guidance does not require a commission vote and is genuinely, you know, like, viewed as more enforceable. So that Delta is a little bit confusing. I think either way, there is something to be said about the fact that it's going to the White House for that interagency review offers it even more credibility to some degree, even if that credibility isn't legal per se. Like, because a lot of navigating regulatory strategy in crypto, part of it, a big part of it is the law, of course, but part of it is assessing enforcement risk, which is. Which is very amorphous at times. So this all goes towards broader enforcement risk and the ability to navigate the gray in absence of a law. Yeah.
- [11:41]
E
You know, if you guys recall, like, when SAB121, the accounting guidance was put out, one of the challenges to it, like, later on was that they did not submit it to the OMB for review. And that was seen as like, a procedural error which threatened its, like, viability. Right. So this could just be them making sure that they're following the right process so it can't get attacked later.
- [12:06]
D
Yep.
- [12:06]
B
And, you know, just as a refresher, I did want to revisit. One quick thing is Jesse mentioned Chevron deference. Like, in a very, very, very basic sense, that meant judges, not agencies, get the final word on what the law means. So there's certain things that need to happen now to make sure that the agencies have the ability, or as, as Chair Atkins keeps saying, future proof. A lot of this guidance, and, you know, these steps are probably part of it.
- [12:36]
D
The argument for Chevron, which I think is important to raise here, is that agencies are supposed to hire the experts and. And judges are overwhelmed. So if an agency like the Environmental Protection Administration or the SEC or the cftc, they decide based on their expertise in financial markets, or environment assessment or whatever it is that this rule should be promulgated, then it can be challenged. People have every right to go to court and challenge it. But judges who. I mean, I think I've clerked for a judge. I think maybe you guys have. You know, a lot of times it's clerks that are either out of law school or aren't an expert in this topic, because you can't be an expert on everything. So the concept is you should give deference to the agencies when you're making a ruling from the bench. The argument against Chevron is that, you know, people in agencies aren't elected. Neither are judges most of the time, except some local state elections for judicial appointmentship. So I have always sort of felt like after operating in the courts for so long, and no shade to judges, judges have a really hard job, but they can't be experts on everything. Plus, courts are already super freaking busy. And so for them to have to deal with every single rule and think through, does this make sense in financial markets? Oh, I don't even know what crypto is. I mean, if you look at, like, we have all been in this ecosystem and space of, like, knowing every detail about financial markets, knowing every detail about crypto, knowing what Howie is. How many judges in America, like, know offhand what Howie is? And honestly, they can't know that and every other law. So I guess I just keep coming back to, like, did we really screw ourselves over here? The good news is that, you know, this happened. What? Chevron was overturned last year or so, and there's no real evidence that judges are fully changing how they look at administrative rules and decisions. So maybe it's not going to change anything. But the narrative from above is agencies don't deserve the same deference they have
- [14:41]
B
always historically, which crypto loves.
- [14:44]
D
Yeah, it's.
- [14:45]
B
And hates, depending on the power of the agency. I want to move on because I feel like we're getting very nerdy here. And I love it because we love it, but there's a lot of wood to chop. So one thing I will say is there's. It's always a sign of a good lawyer if they don't always know the answer. Okay. So, like, I always tell people, if your lawyer says, I don't know, I need to look into that and get back to you. Like, that's actually a good lawyer, because the worst lawyer pretends that they know everything, much like the worst judges or the worst agencies. So I want to move on to the next topic, but I also wanted to Throw out one really other important development that pairs with the SEC development. So speaking of the CFTC giving guidance, SEC giving guidance, the Fed, the OCC and the fdic. That's a lot of acronyms. Those are the banking regulators. We're actually going to talk banking a little later in the episode. They also came out and advised that tokenized securities will receive the same capital treatment as traditional securities, whether issued on permissioned or permissionless chains. I could not let this go without commenting briefly on it. I think what's really important is that they're answering a different question from the one that the SEC previously addressed when they said a tokenized security is a security. They're answering the question of okay, we've established that a tokenized security is a security. The next question is how does this affect the banking regulations? Meaning how much capital does a bank need to hold against tokenized securities? Huge, huge bullish unlock for crypto. This actually removed a barrier that previously existed for banks because banks previously were afraid that if they touched tokenized securities they would be penalized with heavier capital requirements. And the banking regulators just came out and said nope, you're good. And I will also say it's a huge win for permissionless chains because it legitimizes public chain usage for institutional use. So if I were Canton or or some of the very specific private chains for institutional use, I would have been very unhappy about this announcement. Like not a great development, but great for all other chains. So huge had to throw that out there. So I will move on to something much more interesting and spicy and I'm hoping we'll get Jesse's ex prosecutorial take on this. But a couple major things happened on the criminal front. A one of our favorite people got arrested.
- [17:13]
D
Oh yes. Let's do a grifter update as a palate cleanser for banking regulations. So a few episodes I went on a good little rant about the son of a government contractor who essentially got in a fight online in like some sort of competition or who has hard magic. Oh my God, I can't believe that was a thing. He got in a fight with Zach XBT and Zach XBT who we've talked about many times on this pod who roots out bad activity on chain essentially and talks about it and provides some sunlight to blockchain sometimes. He discovered that this person took a lot of money from the Marshalls and their cryptocurrency and that person was alleged to be the son of a government contractor. Now it's no longer allegations because he got got Found on a Beach in St. Martin. So essentially a person by the name of John Lick Deguita, who Zach XBT thought was the bad guy already, is the son of a government contractor who was in charge of pretty much holding all the crypto that's, you know, not the basic Bitcoin ethereum, but more like the secondary tokens. But for the Marshalls, this is going
- [18:28]
B
to be an awkward Thanksgiving.
- [18:30]
D
Sorry, I couldn't resist. People have been on the hunt to find this guy. It turns out that the US was working with the French SWAT team, essentially as we can think of them, to lo locate this guy sitting on a beach, maybe drinking a little like ice drink, who knows. And he was found and arrested in St. Martin's which is a French, you know, Commonwealth. I don't know exactly what it is, but it's under French control.
- [18:56]
B
So it actually has a French side and a Dutch side.
- [19:01]
D
Maybe we should go there and visit and sit on the beach. Just research. So I mean, when they arrested him, they found a briefcase full of cash, right? And a bunch of USB drives. And essentially he's like dead to rights based on what they found. It also came out that in the midst of him trying to escape capture, he sent like all these taunts to Zach XBT to be like, you won't be able to arrest me, blah, blah, blah. So Zach XPT is now coming out and essentially saying, now who has the last laugh? But it's a story that sort of reminds us that crypto. We talk about these decentralized platforms all the time. We talk about this technology for some reason, we're still talking about the Howie test and how it applies. But there is so much happening outside of that space too, that is linked to traditional criminal syndicates, that's linked to idiots who are the son of rich people stealing money and who it's linked to. People not really knowing what country to run to if they want to escape arrest.
- [20:07]
B
I can't even unpack this. Like I wonder how much what are non extradition countries is Googled? Like, frankly, we should get some data on that.
- [20:16]
D
Also do a search warrant on his phone and find out which he googled.
- [20:21]
B
One of the themes of this pod is occasionally criminals can be stupid. I think I would put that in this bucket. Speaking of not stupid criminals, there's one other piece that we wanted to mention because it would. We would be remiss in not mentioning it, considering this just hit yesterday. But the DOJ intends to go ahead and retry Roman Storm. As we all know, he's a co founder of Tornado Cash. He went to trial over the summer and he was convicted of one out of, I believe three counts. So he was convicted of conspiracy to operate an unlicensed money transmitting business, which is a criminal violation. Like if you are supposed to register as an MSB and you do not, that is a criminal violation, which is quite unique because most registration violations are often not criminal, especially outside of the United States. They're civil war, meaning you can just pay a fine, you're not going to go to jail. This is criminal. Okay. But on the other two counts, money laundering and sanctions, he was not declared not guilty by the jury. The jury deadlocked, which means they can't agree they needed a unanimous version, unanimous verdict. And on certain charges, prosecutors have the discretion to try a defendant again on unresolved counts. And this is really interesting because the majority of the time, depending on the offense, prosecutors often choose not to retry a defendant when a jury deadlocks. And in many cases, judges even frown upon retrial under certain circumstances. So I would say, like, there was definitely an element of disappointment, surprise in certain pockets of crypto. But I also think this is controversial, but DOJ is making a very specific point in saying that they want to try this. Strategically, I think we can all assume, or this is my assumption. My tea is that DOJ doesn't like to try cases that can't win. So I think if they're moving to retry Roman Storm, it's because they think that they can win this. Like they think that there was only a small amount of jury that was holding out, or there are certain circumstances that have changed public, public opinion, who knows? But obviously we'll be watching this trial with great interest and providing commentary along
- [22:43]
D
the way, just as someone that has retried cases and talks just to give a little sense about the process. So essentially what happens is the jury comes back in federal court, it needs to be unanimous for guilty or acquittal. And as you mentioned, it can be guilty, one charge, acquittal, the other charges, or they can say guilty, one charge, and we just can't decide about the other ones. And I think we'll talk about this case case ad nauseum over the next year. So I don't want to get into the details here, but essentially after a hung jury, whether it's one count hung or all the counts hung, the DOJ is given a certain amount of time to decide if they want to retry it. Now, after an acquittal, the both parties after an acquittal a conviction or a hung jury, both parties can decide if they want to go talk to the jury. Usually it's not in the DOJ's best interest to do that and sometimes on the defense interest either, depending on appeals, depending on whether they try and retry some stuff, because some of that can be evidence, obviously. And so in this case, what probably happened is that they had a sense that either it was one holdout, which they could have gotten from the notes that were sent out, which might say, like we don't know how to determine how this one factor, etc. And then the DOJ or you know, the DOJ can decide like we want to try it a little bit differently because we think this issue wasn't pushed hard enough. And you know, it's going to be interesting now because the MSB charge is out, right? So that is done. That's being appealed for the conviction. So this case is not going to be about money transmission in the same way, which was a lot of the debate. Right. At least externally and some in court as well. And so it took some of the air out of the arguments associated with the other charges, money laundering and sanctions evasions, et cetera. So it'll be interesting to see how the DOJ and the defense change, Change their tactic here.
- [24:35]
B
100 a lot to watch. A lot to A lot is riding on this, frankly. So we'll definitely be watching this. So we have another really interesting topic. We are going to talk all about crypto banks and I'll just tee this up by saying 11 companies filed for or received OCC National Trust Bank Charters approvals in 83 days. Which is crazy. Town V is going to tell us more right after the break when we hear from our sponsors.
- [25:05]
C
Quick note before we continue with today's episode. Bits and BIPS now has its own dedicated home. We're spinning off from Unchained and launching a standalone podcast and YouTube channel focused on the Fed macro AI and how it all collides with crypto. If you want to keep up with our weekly live streams and Macro meets Crypto breakdowns, make sure you're following Bits and bips directly. We won't start publishing until March, but getting set up now means you'll be ready on day one. You can find the new Bits and Bips channels at unchained crypto.com bitsandbips. You can also find us by searching Bits and Bips on YouTube, Apple Podcasts, Spotify or wherever you listen.
- [25:44]
B
And we're back. So as I mentioned, lots of chatter about crypto companies trying to become banks, getting banking accounts, getting Fed Rails. So, V, tell us more about this. Tell us about the distinction between all of these developments.
- [26:01]
E
Yeah, so I think this, you know, this was in the news this week because Kraken got a, like they're called, they call it a skinny, like Fed Master account. And I'll explain what that is in a second. But like, the context to this, right, is that for like four years, it was basically impossible under the Biden administration to get an OCC charter. If you want it to be like a crypto bank, there was really just one, my former employer. And they got it literally a day before the head of the OCC stepped down and leadership changed and.
- [26:41]
B
Sorry to interrupt. I just want to explain. OCC is Office of the Comptroller of Currency and. And OCC is the primary bank regulator. Please continue.
- [26:49]
E
Yes, yeah. The other bank regulators are the Fed and the fdic. So for four years there was nothing. And then of course, with the new administration. Right, and end to choke point 2.0 and all of that, a slew of companies have applied for this charter to become some form of a crypto bank. And I think there are a lot of reasons that they're doing it. But what has been really interesting is that last, I think it was last year, the Fed announced that it was considering giving out a version of Fed Master account. They call it like the skinny master account. And so we were sort of expecting that one of these banks could potentially get it and maybe sometime soon. And so that happened last week. So Kraken was the first crypto company or crypto bank to get this Fed master account. It's a skinny version of it. And I have to start with a small disclosure. Veda, the company that I'm GC for, is Kraken's vault provider for their defi earn product. But I am not being biased when I say that this is actually like, it's genuinely historic. The Federal Reserve bank of Kansas City approved this master account for Kraken Financial, which is Kraken's Wyoming Chartered Bank. First crypto company to get one. And shout out to Ben Gray, their amazing chief legal officer. I mean, I know from personal experience how much work it is to get something like this. Like, at my last job, we obtained both our BIT license in New York and major payment institution license in Singapore while I was there. And it's something that, like, the company had been working on for years before I even joined. So kudos to the team at Kraken for being first to get this, this. So I think there were a lot of questions about, you know, what Fed master, why did it take so long? Apparently it took them like five and a half years to get it. What are the catches? And especially interesting for me, like what does it mean for Defi? So a Fed Reserve Master account is basically like, you can think of it as the plumbing of the US financial system. So if you have one, you can hold reserves directly at the Fed and you can settle dollar transactions on Fed Wire, which is the Fed's real time gross settlement network. And it moves like trillions of dollars every day. So most people have probably never thought about this because if you're a bank, it just kind of comes with the charter. You get a master account and you're in the system. But if you're not a bank, right, if you're a crypto exchange or a fintech or a payments company, or if you're one of the few federally regulated crypto banks out there, direct access has never been automatic, right? You have to go through a correspondent bank where you have to wire money to that bank, which then settles it on fedwire on your behalf. So there's just like a lot more friction, there's delays, there's fees, there's counterparty risk, that sort of thing. So having a master account and getting that direct access where you don't need to use a middleman, you're settling in central bank money, not in private bank money. And that's a fundamentally different and much, much better thing. So I think there's one important nuance that I mentioned earlier, which is that this is not a full Fed master account, it's a skinny master account, quote unquote. And this was something that the Fed Governor Christopher Waller floated last year. So it's basically like a limited version of the full Fed Master account. And it's designed for companies that are not like full on banks like Fintechs and other novel institutions. And the limitations actually are pretty significant. Right. So Kraken will not be able to access the Fed's discount window, meaning they don't get emergency loans, they can't earn interest on reserves. And it's structured, it's actually structured as a one year pilot program, not a, not a permanent approval. So the specific risk restrictions that the Kansas City Fed impose are actually being kept confidential, which is a little weird and I think kind of controversial, honestly. But again, getting direct access is still a big deal. I, I did want to touch on why it took so long. So Kraken filed their Application.
- [31:05]
B
I want to interrupt before you get there because I want to just underscore what you said about how historic this is. I want to say that I have no ties to Kraken, although I also really like Ben. He's brilliant and a good dude. But this is a huge deal because it gives them a major bridge between TRADFI and crypto. It gives them regulatory credibility from the Fed, which has so far been unprecedented in this context for crypto. And as you mentioned, faster and cheaper access to fiat. Huge deal for Kraken, huge deal for crypto. This is another massive institutional unlock. And these things keep happening. Boom, boom, boom, boom in the middle of a bear market, which I feel like we need to focus on that, that. Please go on. Why did this take so long?
- [31:50]
D
Totally, I guess. Sorry, V. All I was going to add to that is like, it's really interesting to look at other countries because banks are pissed and I think we should talk about why the banks are pissed in a moment. But other countries have been, you know, allowing access to similar sort of master account structures to non banks for a while. I think the UK has like a few hundred EMIs, like electronic money institutions that have similar access. I don't know the specifics of the comparison of it to the Skinny Master, but you know, the banks, obviously the banking system here is different than it is in the uk, but there are other countries that are also doing this and also like a lot of the banks arguments, which I think we really should go through a little bit, are falling a little bit flat because of that. Although they do have something when it comes to the process.
- [32:42]
B
So V, tell us, why did you
- [32:43]
D
want to take so long?
- [32:44]
B
And then we'll get, we'll get to why the banks are furious about this.
- [32:48]
E
Yeah, yeah, Jesse, you should touch on that. Yeah, yeah. So Kraken originally filed their application in October 2020. So it took five and a half years, like I said. And I, I think like, you can't really talk about this approval without also mentioning what happened with Custodia Bank. Right. So Custodia is another Wyoming chartered, what's called a special purpose depository institution. So they have the same state charter model as Kraken Financial and they actually filed their application the exact same month with the same Kansas City Fed. But what happened with Custodia was that in early 2023, under the Biden administration, the Kansas City Fed denied their application and Custodia didn't just like, you know, go quietly in the night. They sued and they sued pretty loudly and they eventually lost. So, you know, I, I don't know the reasons why Kraken has gotten this and Custodia hasn't. And maybe Custodia and others will soon, hopefully, like, who knows? But I can't help but wonder whether it was because Custodia litigated against the Kansas City Fed when it was denied. Right. So, yes, we're under a different administration and different leadership now. But like, maybe the memories of staff, you know, may be long. And I think the other, the other factor could be that, you know, Kraken is supposedly going to become a public company sometime soon, which means just a lot more public scrutiny. They're also just, you know, they're a major company, a major crypto company, whereas Custodia is still kind of small and I think regarded as a little bit more of a scrappier player. So maybe the Fed thought it was just less risky to go, like, you know, do this experiment with a company like Kraken versus some of the others. But, you know, I do hope, like I said, I hope that we will see more of these skinny Fed master accounts granted to other companies soon.
- [34:47]
B
Yeah, Kraken filed for a confidential IPO in the fall. So I think that's a big part of it. The other thing I wanted to know is that we're not just talking about the skinny master accounts. We're seeing, seeing a slew of other filings. Like we're, I think it was just last week, 0hash applied for a national trust charter. Revolut filed for a US bank charter. These are all different things. I want to be clear. This is not all the same thing, but what we're seeing is just a massive amount of activity where crypto companies, crypto native companies are seeking some degree of approval and authorization from the traditional trad banking regulators. And unlike the past five years, we're actually seeing the regulators grant this. Which brings us to the. The T here, which the banks are furious. Obviously, the banks are furious at stable coins. You know, back off from my yield bra, okay? And the banks are furious that crypto native companies are effectively encroaching in many ways, like with faster, more efficient, cheaper mechanisms to do their jobs for them. So what is happening is, you know, I also want to add, in December, I was joking, like, you get a, you get a charter. You get a charter. You get a charter. In December, the OCC granted five companies conditional approvals simultaneously, like conditional bank charter approvals. And that was what kind of opened a lot of the floodgates. Now we're Seeing the Bank Policy Institute, which is an industry group representing 40 major US banks, including all the big guys, they have said they are seriously considering suing the fcc. Basically saying like this is not cool, like your approach to crypto related charters is out of control. Likely the arguments would say that the FCC is overstepped its bounds or aren't following appropriate procedure in granting these charters. But that will be really interesting to see, see what happens. Like this is a little bit of a mess.
- [36:49]
D
Yeah, let's examine the bank's arguments with like a bit of an unbiased eye here because I think it's worth at least trying to steel man them a little bit and see if they challenge because it's very easy to say oh, they just don't want competition or banks are the worst because banks are sort of the works. So I get it. But you know, their first argument essentially about the competition, about Kraken not being ready, I think is defied by the five year examination by all the work that a lot of crypto companies have done to show that they are worthy. And a lot of that probably stems from the fact that the banking system has been the de facto regulator of crypto access to the economy. Because if you, you needed a bank to move dollars, right, and maybe that's going to change now and it will at least begin to change with Kraken. So let's just push that one to the side because it does seem to be based on competition. But there are, there is another argument that I think is worth discussing and that is essentially related to process. So the banks are arguing that the comment period associated with the Skinny Master account closed just weeks before this approval for Kraken. And that means that people didn't have a full time to assess potentially all the comments. They didn't take the industry thoughts into account when they did this. And obviously Kraken has been trying to get this for many years. So did anything about this comment process actually make a difference? So they're going to have maybe a nugget of challenge there. There's also like, you know, when you get this kind of access, it's essentially a compliance character reference for, for Kraken coming from the Fed. Right. It's saying they have good enough protections in here. And then when the Fed granted this, they said we're going to put in specific restrictions on Kraken because it's different and because it's trying this experiment, experimental, new step. However, the Fed did not reveal what those restrictions were. And so anybody is going to have A very difficult time trying to understand why the Fed thought that this was safe enough. Not saying it is or it isn't. It's just banks and other players really should be fully aware of why this decision was made and how it was made.
- [38:58]
B
Yeah, and you know, you make a great point in that. Look, I think it's very easy for crypto to say like, screw you, banks, like it's a free market. But some of the objections that the banks have, and this goes to the charters, but also the yield is that crypto companies should not be allowed to take shortcuts when they're engaging in regulated centralized activities. And that does resonate with me because what I don't want to see, and obviously this is a dramatically different situation, but I don't want to see what we saw in 2122 where you had CEFI centralized financial services using crypto as an excuse to avoid regulation. Because if you're a centralized entity engaging in traditional financial services activities like there, there are reasons for this regulation. There, there are many reasons for certain oversights and capital requirements. A lot of the history of both US and global regulation is actually reactive as opposed to proactive. Where there was a crash, there was an incident, and certain laws were put into place to avoid that ever happening again. And those laws may be paternalistic, maybe appropriate, were put into place to avoid retail bearing the brunt of the crash or the issues that resulted as, you know, as a result of the volatility. And again, some people in crypto are like, back off, free market paternalistic. But the other side of the coin is, look, retail needs to be protected to a certain degree. And this is just how our system works. And if someone's taking a shortcut that doesn't make sense if they're engaged in the same or materially similar activities. I can see why that's a really legitimate complaint. I don't know. Support banks.
- [40:47]
D
Right?
- [40:51]
B
Look, I, I think we could talk about banks all the. And the last thing I'll say on the banks is I have always said like, I'm old enough to remember Occupy Wall Street. Like, does anyone else remember Occupy Wall Street?
- [41:03]
D
It wasn't that long ago. Oh, I was in San Francisco, which had like the biggest sit in for like weeks and weeks on March 3rd.
- [41:12]
B
I am actually. Okay, so it was actually a really long time ago, guys. It was 2011. That is a long time ago. So for all of our 25 year old listeners, like they, they probably, I mean they were in high school. Okay, so the thing that I Always say is there was a time when everybody hated banks so much, hated Wall street so much. I really wonder what crypto would have been like, like, if we could have passed some amazing, like, legislation in 2011 as an alternative.
- [41:43]
D
Oh, my God. Was satoshi part of that movement? Had to have been. Was he or she camping out on the street doing Occupy Wall Street? I mean, you might have just connected some dots here for our Twitter investigators.
- [41:58]
B
Satoshi researchers, have you pulled this thread? Okay, so, no, I mean, I don't
- [42:03]
E
think it was a coincidence, right, that, like, bitcoin came out the same year as the 2008 financial crisis, like, around the same time.
- [42:11]
B
Well, and there's a lot of laws, like, in particular, I'm referring to, you know, Section 5:30, the communication decency act and others that protect the Internet because everybody supported and loved the Internet. Like, all legislators were like, this is a good thing. We should make it good for them. Crypto has never had that benefit. Like, crypto's never had an environment where legislators are like, let's make legislation better for crypto. We're seeing that now from the Trump administration, but we're not seeing that across the board. Imagine if we had that environment, like Occupy Master Accounts.
- [42:43]
D
That's gonna be the new master counts for everyone.
- [42:49]
B
Okay, so I want to move on. We are. We do not have an AI corner this week, although there's so much.
- [42:55]
D
I tried to make it happen, but we went a different direction.
- [42:59]
B
There's a lot about AI, like, AI agents are mining, are going rogue and mining crypto.
- [43:05]
D
Oh, my God. Did you see the Meta glasses story?
- [43:09]
B
No.
- [43:10]
D
Oh, everyone needs to go read this. So essentially Meta has these glasses, right, that are AI enabled for you to do a bunch of different things. I don't know if you guys have ever tried them or use them. Not for me, but other people seem to like them. And if you go to sf, it's going to be like the time I lived there with everyone wearing Google glasses. But essentially it came out that there were people in certain African countries revealing what they saw, saw on other people's metaglasses. And they had been hired by Meta to review, supposedly for security and to help train. But essentially they were reporting that they were seeing people go to the bathroom, they were seeing people have sex and do a bunch of other things that we shouldn't talk about on this pod. Everyone must go read the story because it is mind blowing. And also just should remind everybody, read the terms and service terms of everything before you agree to things, before you show them your entire life before you wear glasses you think are protected and get naked in front of them. Just be smarter.
- [44:20]
B
Trust, but verify and never trust.
- [44:23]
D
No, don't trust. Never trust. Don't trust AI, just verify.
- [44:29]
B
Trust the chain. Don't trust the robots.
- [44:32]
D
Okay, yeah, don't trust big tech. That was an aside, but I needed everybody to know about this story.
- [44:37]
B
Yeah. So our. Our last topic. I want to turn it back to Jesse to tell us about some crazy stuff coming out of the global conflict we've been experiencing lately.
- [44:49]
D
Yeah. Less of a story to joke about and more one that should put everyone on their front foot is as we know, the Iran war is still happening. We're in week two. There's devastating human toll. I know a lot of people here and on this pod have been personally affected by it as well. So many people are covering that. I want to talk about cyber though, because cyber war isn't coming. It's in our building already this week, or maybe last week, it was determined that an Iranian intelligence group called seed worm, I don't know who comes up with these, was just found inside. Inside of a US bank. It had been there waiting for the airstrikes to happen, building a back door so that they could get in. Seed worm was also found inside a US Airport just before you guys fly anywhere, which we all do a lot. And as well as a defense contractor. And seed worm is just one of many of these players. Reuters came out that the entire U. S. Financial services industry is on heightened alert. Jamie Dimon, KK's favorite person, said pretty much out loud this week that cyber attacks are rising and is the highest risk that banks face right now. And in the midst of all this, three drones hit AWS data centers in the Gulf. And that was the first time in history, as far as I know, that a military strike has taken down cloud infrastructure tied to America. And with this, banks went offline. Supposedly some exchanges went online. I don't know if you guys noticed, but I couldn't access anthropic for a long time, which was devastating for me in the morning. And, you know, we all talk about the data centers, you know, we all talk about the cloud in the ether, but it's all in a place that can be bombed. And we just need to think about that as we build out infrastructure. And the thing that's really pissing me off right now is that cisa, which is the agency whose entire job is to protect American financial infrastructure, not to throw another acronym out there, but it is made and tailored to do just this and stop these kinds of attacks. Has lost about a third of its employees since January of this year. And its temporary director, you're going to like this one, is out because he puts sensitive documents into a public version of ChatGPT. So that is who is protecting us during an active cyber conflict, or not protecting us while Iran is trying to attack us and our systems. And crypto is not safe. I know I haven't talked about crypto intrusions yet, but it's not safe because Iran has learned from North Korea and is in fact getting trained, supposedly by North Korea on how to run the exact same playbook. So fake job offers, phishing emails, social engineering, their way inside of companies. And the night the bombs dropped, Iran's largest crypto exchange crash, a project development team from a defi company, they got drafted into the Iranian military. And now the, the, you know, project doesn't exist anymore. So the risk has been there for years and the war is just turning up the pressure and the velocity and everyone should know. And I saw this in my prior life doing national security cases like Iran doesn't just hack and then run away. They get it and they sit tight and they wait. And they have been waiting and some of the data they're using right now was taken like a year, two years ago, and they're just waiting. And something that should scare us all is that Handala, which is one of Iran's most active hacktivist group, like everyone knows that who studies the region. They've been very quiet since January. And it's sort of like when your dog's quiet in the other room and you know, it maybe starts making a throw up noise or it starts barking. Like when someone is quiet, they are preparing. And that's particularly how Iran operates. So banks are running wardrobes. Reuters is covering what banks are doing. Jamie Dimon is thinking about it. Crypto needs to too, because you shouldn't be panicking, but you need to prepare. And if that's like the one thing I can give you from today, because we built a digital economy, now we just have to remember to defend it like one. We cannot be complacent because regulation seems okay or whatever. We are not safe from these external forces and we just need to be really, really careful and take seriously the money that we touch for our customers 100%.
- [49:05]
B
And also, guys, read your AI policy, like, be smart about this. Your data is not necessarily secret. Depending on what version you're using. Some of these enterprise versions also at risk if you don't have an AI policy. I would suggest you raise this with your legal Be smart about emerging tech. Right? We're in crypto. We need to know this. I will also shout out that these Iranian groups have crazy, crazy names. Jesse. Like there's also charming kitten, like Mint, Sandstorm, Karma. Like, I mean, I could go on and on. So the names are. Are quite like sometimes you have to laugh if you don't want to cry in these situations. And oh, static kitten. That's another word for seed worm. I mean, I. So points for creativity, I guess. On that dark note, I want to wrap up as usual with our crypto good news. And this week's good news is definitely non traditional good news in that it's. It's not good news. I just want to note that Sunday, you guys was International Women's Day.
- [50:12]
E
Woo.
- [50:13]
B
And ironically, it was also the shortest day.
- [50:17]
D
Only gave us 23 hours, but it's
- [50:19]
B
better than nothing when we were all most tired. Okay, like just so. So I want to take this week's good news to shout out my amazing co hosts. I want to reiterate something I said in the first couple episodes. One of the main drivers for this pod was amplifying female voices and an absence of crypto podcasts featuring women. There are many of us here. Like, this industry is not just crypto bros. Everyone in this industry knows that. I like days like International Women's Day because I think it just hopefully allows everyone to take a breath and think about how all kinds of diversity and differences in every possible facet of our lives, not just gender, enhance this ecosystem and bring different perspectives to the table and make us all better for it. So obviously it's just something to be noted and celebrated. Cheers to that. I wish we had fake cocktails today, guys, but I'm gonna cheers with my usual fridge cigarette. Still waiting for Diet Coke to sponsor
- [51:27]
D
this podcast, but holy at everything you just said.
- [51:34]
B
Okay, so that's it for today, this week of Decks in the City and we will see you next week.