Jesse (2:58)

Got I think about this so much so I'm so glad you framed it that way. But you know, you gave a framing on what happened with the tether freeze. And you know tether has frozen before, so has Circle and lots of other entities. So that is not the new story. But it's, it is a really huge amount which I think is worth commenting on here, which is over $180 million on TRON. And what's going on with the tether freeze matters today on market structure day, but also just generally for the crypto industry because freezing is no longer an edge case. It's becoming a design assumption that's built in and it's becoming to be baked into legislation like genius. And now sections of the newest draft structure, market structure bill which we'll talk about. So in other words, issuer level control already exists. And what I think is really, really concerning and we should be talking about is that most people don't understand it. They don't understand how, when and why and who's gets to control your money. But before we get into that sort of debate, let's be really precise about what happened. So we use the words freeze, but that's very different than seizure. And I want to make sure that we don't use them interchangeably like many do because they are not the same thing. A seizure, which we're not talking about here but has happened a lot in the past is a court authorized action. So it's the government actually taking control of assets that can be subject to a seizure warrant, which is like a search warrant under the fourth amendment. But a freeze is going to be different. So that's issuer level control. Like what happened here. The funds are still unchained, but they just can't move. So it doesn't matter how many jumps you are from the tether being issued or the USDT being issued, you can still programmable be frozen in your wallet. Right? That's very new for enforcement. It's very new for issuers. So the freeze can happen after a court order. So it can be like a search or seizure warrant that says you have to freeze, but frequently it's earlier. So in response to a request from law enforcement, which sounds like what happened here because there is reporting it's tied to law enforcement sanctions, exposure or just risk analysis. So let's be clear, like banks do this too. This isn't Just crypto. What's different here is that it can be outside of the what you think to be control. I'm putting quotes up for people not watching the video. But, like, it can be outside the what you thought was the control of Tether because you're on Tron, you're like in your own wallet. You're in a different jurisdiction, but in fact, they can actually impact your funds. So now that we have the explainers out of the way, let's acknowledge why this all makes us a bit uneasy. A private company is immobilizing your money before a court has spoken, and they can do so anywhere in the world. Sort of the opposite of what we talk about in crypto and what crypto has been building. Right. Isn't that sort of the whole point of a lot of what we're building here? So I guess it. Just to get back to what you were saying, KK is like, when we ask for regulation, what trade offs are we actually making? And I'm not saying the trade offs aren't worth it. I'm saying that I don't know if people fully understand them and are considering them when we talk about how we want to build our regulation. So freezing exists because many of the worst actors in crypto will never show up in a US Courtroom. You can't reach the person, you can reach the money. I did this all the time, so I'm not hating on freezing under the right circumstances. And we did it with court permission. But, you know, we had child pornography cases where bitcoin and other sort of forms of tokens were involved that don't necessarily exist anymore, and we were able to freeze them. More importantly, it happens all the time for dprk, North Korea cases, Iranian cases, Hamas cases. That was a big part of the Hamas case I worked on. But with these new bills, issuer level freezes are moving just from practice that happens. You know, this issuer decides to do it here, and maybe not here, but rather a policy. But I want to, like, pause and take a second to give a little credit to the bills, because it's not just saying everyone has to do this, but rather the market structure draft that we got late, late last night. Why we all look exhausted or I look exhausted is that the draft doesn't invent the power. It's actually trying to discipline it a little bit, like for better or for worse, it's trying to put rules around it rather than just saying, okay, well, tether's deciding to freeze in this circumstance while circle's doing in a different circumstance, etc. But what we need to pay attention here is like what kind of control are we codifying in these bills? And maybe this part of the bill isn't getting as much attention because you know, it's not the things that we're going to talk about later like the defi portion of the bill or the stablecoin interest or many other aspects that crypto Twitter are talking about this morning and we will too because they are important. But I just don't want us all to overlook it because we as crypto users ultimately bear the consequences of how this is exercised and when. And we need to make sure we understand what the trade offs are and are we okay with them.

Host (likely Katherine KK) (8:13)

Jesse, first I need to say you look great. You do not look tired, okay? And I hate when people say you look tired. Yes, I know we work hard. Second, I want to move on, move on to crypto market structure. But before I do, I want to highlight something really important and that is the power of economic sanctions more generally. It's interesting like you know, I spent years in private practice defending offshore entities, sometimes in sanctions related allegations and in many ways OFAC has more power and you know, obviously this is up for debate than any other US regulator, including the Department of Justice, because if you have an offshore entity and they get indicted by doj, it's like, okay, fine, maybe I'm in a non extradition jurisdiction, maybe I just, you know, stop my executives from going to the United States. But OFAC and economic sanctions effectively cut off individuals or entities from anything touching the US dollar, which if you know anything about financial services and crypto to some degree still everything revolves around those wires, that process, that engagement with kind of the US dollar frankly. So the fact that tether is doing this and one of the, one of the drivers of this kind of freezer is their policy exchange to adhere to kind of sanctions. And aml, it's powerful and it means that you're always going to have projects, crypto or tradfi, where first and foremost they consider how they ensure that they don't end up on the, the wrong side of this. So that just cannot be understated. Shifting to market structure. Actually really quick, really quick departure before we get into the meat of things. We're going to have summer on later. So I think now is actually a perfect time to very briefly call out our crypto good news and then we're going to completely shift because I don't want to forget this and we're going to run out of Time at the end. So the one quick shout that I wanted to do on crypto good news before we shift to market structure is the giving block. So, guys, I don't know if you've been asked about this. It's kind of like you're a lawyer at the family reunion and everyone asks you about their will, and you're like, I have no idea what you're talking about. I have actually informally advised A number of 501C3s that have nothing to do with crypto, that want to start accepting crypto donations. And in certain cases, I have recommended that they explore the giving block. And it's super cool. It acts as a bridge between nonprofits and crypto donors. It's actually a platform. It helps established organizations accept and process crypto in a way that fits into their existing workflows. I think that's a beautiful thing. We need more things that are going to facilitate crypto and normies talking to each other and working to each other, working with each other. So quick shout out to the giving block.

Catherine KK (11:06)

Yay.

Host (likely Katherine KK) (11:07)

Woo. Okay, on to crypto market structure, which is fantastic, but also complicated, not as straightforward as crypto good news. So I want to hand this over to V, who has really been at the front lines of crypto policy on a number of fronts. But before I do, I want to remind everyone how a bill becomes a law. It's introduced, it is referred and reviewed by committees. There is a floor debate and a vote in both chambers. There is a conference committee that works out a compromise. If there's different versions, there's presidential action. We're all familiar with that. He can sign it, he can veto it, and then the law is implemented. So where are we with a markup, and what is actually a markup mean? It actually means that the bill is formally, formally debated, amended, reviewed by the committee before it can move forward in the lawmaking process. And the reason this is important is if the markup goes badly, the bill can die. The markup is also kind of, in many ways, the last chance to make and consider any changes to the bill. So the big news this week was we were supposed to have both a Financial Services committee markup and, in agriculture, two separate committee markups on January 15th. AG has punted until later in the month. Financial Services is moving forward, and now we're all looking at this revised bill. Some parts of crypto are very happy with parts of it. Other parts are very upset. One big, big point of contention is DeFi B. Tell us more.

Catherine KK (12:45)

Yeah, so I'll There's a lot of new stuff in this bill, but I wanted to focus on DEFI in particular, just because there's a lot of new stuff in that section in particular, and it's just been one of the most hotly debated parts of the bill. So I'll just start out by saying or acknowledging that Congress has a really hard job. Right. There's, I think, always this tension between what you enshrine into the statute and what you leave to regulators to deal with, or what you just like don't enforce or don't regulate at all. Right. And it's, I think it's really hard to strike the right balance, especially when you're talking about a technology that is very new and also still evolving, sometimes quickly. Right. So I think, you know, they, they have a very hard job and nowhere is that more like acute to me than in the DEFI section. So again, we've all had very limited time to review the new language, but I did want to give some initial thoughts just on what I'm seeing. So at a high level, the draft is trying to draw a bright line between decentralized protocols and infrastructure and protocols or parties where there's some sort of control over trading, execution, custody or access. And that side would potentially be regulated as brokers, exchanges, or some sort of regulated financial interaction intermediary. So all of it really comes down to this concept of control. But I think the difficulty here, and it's something that, you know, we as crypto lawyers have been thinking about for years, this concept of control is actually really hard to define. Right. So the way that the current language tries to define it is I would say like in three different ways. One is, is there discretion over trading or execution? Right. So do you route trades? Do you match counterparties? Do you dec execution timing? Do you modify prices or priority? Do you intervene in execution outside of like pre coded rules? Another way they define control is do you have unilateral authority to do things like alter issuance or distribution parameters, to change execution logic, to restrict access to the protocol? That's a really important one that we'll come back to or to pause.

Host (likely Katherine KK) (15:14)

Sorry to interrupt, but one important thing about this, and you can confirm your thoughts as you're talking about control is one of the things that I see in this bill is that they're effectively leaving this decision on control and what is defi to treasury, which is very scary to me, like.

Summer Mersinger (15:30)

Yeah. As well.

Catherine KK (15:32)

Yeah. Well, so actually I think. Jesse, do you want to talk about that later? Because I think you've been following that part of the bill a lot more closely. We should definitely come back to that because that's a really important part of it.

Host (likely Katherine KK) (15:42)

And that's obviously that concept is very offensive to me. Defi generally. Yes.

Catherine KK (15:46)

Yeah, it's, it's, it's a lot and it's concerning. But, Jesse, why don't you cover that later? I'll just like, I'll finish kind of explaining how I read how it defines control more generally. So the other thing it says is if you can do something like pause or restart trading, if you have discretion to do that, that could potentially fall under this standard of control. And then the third category is about, like, user interfaces or front ends, right? So like websites or apps that allow you to access the defi protocol. And the question is, can you restrict who can trade? Do you exercise discretion over which assets or pools or strategies that users can have access to? Can you intervene in execution? And do you route orders or somehow like, materially modify the outcome? Right, So I have a few thoughts on this. First is a substantive one, which is I'm concerned that there are a lot of ways that this control standard could be interpreted to sweep in, in my opinion, pretty much all real world defi as it exists today. And I know that's like a really spicy take, but I think the language is too broad and a lot of like, L2s. Yeah, totally. So, yeah, so I'll just, I'll give a few examples. And I think for us this will hit especially close to home because all three of us have done a lot of thinking and writing about, like, different kind of measures that defi protocols use and have been experimenting with to try to keep users safe and to respond to like, emergencies or things like that. Right? So, like, one example is asset curation. Right. So I, I mentioned some of the ways in which asset curation could be considered control and thus subject you to regulation. The reality is, is that many defi protocols decide which tokens or pools are supported to manage risk and to protect users. Right? But under this bill, that sort of discretion could be read as control over trading, even when it's transparent or rules based. And then another example that I'm sure a lot of people are familiar with, many defi protocols, I would say, I mean, I don't know if it's most of them, but many defi protocols, including a lot of the ones that like, people have been using for years and that people generally think of as like pure defi, they have some form of a kill switch that allows A centralized party or like some small number of parties on a multisig to pause the protocol to respond to security incidents like hacks or exploits.

Host (likely Katherine KK) (18:23)

Right.

Catherine KK (18:24)

So it doesn't allow you to unilaterally reroute or like withdraw funds. It just lets you pause things and sometimes just for like a defined period.

Summer Mersinger (18:33)

Right.

Catherine KK (18:33)

So under the new DEFI language, this alone could mean that they're no longer exempt and potentially have to register as a broker or something. And not to mention, I think it can be very nuanced. There are a lot of different ways that kill switches are activated or a lot of different ways that they're designed. Some DEFI protocols have kill switches that are centrally triggered, but they're subject to a time lock of 24 hours where users or token holders can vote to veto the pause. Right. So would a situation like that or a mechanism like that, would that count as unilateral control? And the same issue arises with other kinds of emergency risk controls, right? Doing things like temporarily lowering allocation caps or increasing collateral or like responding to an Oracle failure, disabling a function during an exploit. Like all of these things I think are just basic safety engineering and a lot of times they're done in ways that are transparent and pre programmed and automated. But even so, under the new language, I think all of those kinds of actions could be treated as impermissible control over trading conditions. And you know, this even applies to.

Host (likely Katherine KK) (19:48)

Things like really scary because we don't want to disincentivize projects from doing this. And I'll also raise, like we don't have time to go into this in depth, but some people miss this. Just yesterday, the U.S. fTC, Federal Trade Commission, which is often in charge of kind of consumer protection, issued a proposed complaint against the Nomad Bridge, the Nomad token bridge, late to a hack. And one of the things it said is they made a number of highly problematic kind of concerning statements in this. So I would check it out if you're not familiar, but including that the company failed to incorporate circuit breakers or kill switch, that could immediately cease the function of the bridge. Right. This is inherently contradictory. That's how that kill switch. But you can't have a kill switch.

Catherine KK (20:34)

Because you know, you know, the pros, the prosecutors in the tornado cache made the same argument. Right? Because the defense was this was like fully autonomous, like we don't have the ability to stop or block anything. And they said, well you should have built that in, right? So but this bill is saying if you build that in, you're no Longer decentralized. And so I think there are just a lot of conflicts here. Yeah, like is that what Congress is really intending to do here is to discourage things that protocols might want to implement in order to respond to emergencies and to keep users safe and that sort of thing. I think that's a really important question to address.

Jesse (21:15)

It's so hard.

Host (likely Katherine KK) (21:16)

And the other thing is, I want to be clear before Jesse weighs in, I want to be clear that I think all of us are in favor of legislation. Like my fear is that we don't have legislation and we have a different administration. So it's always a little scary for as a GC to more vocally criticize clarity and any bill because I don't want the perfect to be the enemy of the good. But a lot of the things we're saying constructively, this is why it's important to see these things during the markup period so they can be changed before they become law. Sorry, Jesse, go ahead.

Jesse (21:50)

Like, this bill is humongous and will change a lot of things. So we want to make sure people understand it and know the pros and cons and then be able to make their own decision about whether to support it or not. I guess what I was going to talk about is control. It's such a hard concept and I, I think we've all sort of put that out there as a test to think about and it makes sense legally. And it's been something that lawyers in crypto have been talking about forever as something to focus on. But perhaps that we, we've over indexed a bit on the risk associated with using the word control and the concept of it. Because in the real world, for example, sanctions and illicit finance like it often requires continuous interaction with tooling, not binary control. And yet we're looking for this answer and I don't think we're going to solve this right now on this pod, but we're looking for this answer of like, how do we have a clear decision for developers on whether they're looped in or they're not. And control seems to be a good way to do it. But the more that we build and the more that there's different types of projects doing different types of things with different incentives, it's hard to say that this line, whether it be controller anything, is the right way to go. And we have summer, so I will.

Catherine KK (23:10)

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Host (likely Katherine KK) (23:26)

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Jesse (24:01)

It's over.

Summer Mersinger (24:04)

To blow dry my hair. It's like my bane of my existence. And so I just keep going shorter and shorter, trying to save time in the morning.

Jesse (24:12)

I can't wait for the pixie hot cut.

Host (likely Katherine KK) (24:14)

It looks very chic. It looks very chic.

Summer Mersinger (24:17)

Thank you.

Host (likely Katherine KK) (24:19)

Okay. To our listeners, I'm going to pass this to V to introduce our very special guest, but we're so happy to have you.

Summer Mersinger (24:25)

Okay.

Jesse (24:25)

Yes.

Catherine KK (24:25)

Hi, Summer. Thanks so, so much for joining. So she needs no introduction, but Summer Mersinger is the CEO of the Blockchain association and a former CFTC commissioner. We're so grateful that she's taking time out of what is maybe like one of the most eventful weeks we've ever had in crypto policy to kind of just like give us an update and her outlook. And actually, Summer, I was so curious to see if you'd be like zooming in from a broom closet in the Dirksen building in between meetings or something today, but it looks like you're in an actual office, so that's, that's good. Okay. So thank you again for joining us. We don't want to take up too much of your time. I know you're really busy, but I just wanted to start off by asking, like, how you're feeling right now, especially given the midnight text that was released last night. There's a lot of new stuff in there that I think we're all still working through. But what is your general take so far on the latest draft? Do you think the markup on Thursday is really going to happen? I know the Senate Agriculture Committee has already punted on there. So what are your thoughts on everything?

Summer Mersinger (25:31)

Yeah, I think the markup will definitely happen at this point. There's the question of is it a bipartisan markup or a partisan markup? You know, the text came out as bipartisan. But what we were hearing this morning is that there were no Democrats supporting the text as of yet, but these are very fluid conversations and they are going on constantly. So I could very well see a situation where they have a markup on Thursday and they have some bipartisan support. If that happens and they get out of committee with a good bipartisan vote, I think we're on a fast track to seeing this move to the Senate floor within a month, if not less. Agriculture. I think the fact that they punted to the last week in January, that I think that was good. They really want it to be a bipartisan markup in the Agriculture Committee. They weren't there yet, and they just felt like if they had a few more weeks, they could, they could get to a good place. And I know they are talking daily, they're having negotiations on some of the last issues that are outstanding between the two sides. So it's all moving in the right direction. I always say legislation is so hard because something completely unrelated could totally throw it off track. So it's hard to predict, but things feel like they're moving in the right direction. And I feel like maybe I was more pessimistic last week and this week I've felt a lot more kind of optimistic about the potential for this to get to the Senate floor.

Catherine KK (27:19)

Okay, that. So that makes me feel better at least. So you, you've been in the room for a lot of these meetings that have taken place, including with participants from the TRADFI side. So, like, some of the big banks and organizations like sifma. Can you tell us what that's been like? And, like, how much are you talking to them directly?

Summer Mersinger (27:41)

Yeah, so I know on a lot of the DEFI stuff, they brought in the stakeholders directly. DeFi and Sifma and just said, you know, can you guys get to an agreement? And, you know, I think those conversations have generally been going well, and I think sometimes it is. You just get people in a room and they sit across from one another and it gets, you know, it gets hard to throw bombs at each other when you're sitting, you know, face to face. And so I do think that having those stakeholders in a room talking has been very beneficial. I've been spending a lot of time on the rewards issue. I would say the TRADFI has been less willing to negotiate on that. They really feel like they have the upper hand in that, you know, they can just push through an amendment and get what they want. That's been a little frustrating. But I think the. The good news is, is we. We have the White House on our side. On that issue, we have a lot of, you know, Chairman Scott and a lot of his, the members on the Republican side on, you know, on our side with the rewards issue. So I think ultimately we can get to a good place. I don't know if the text is there yet, but, you know, again, it's, it's trying to have these conversations, you know, real time, and you're working line by line and word by word, and it just takes a long time to get everybody to a good place and issue.

Host (likely Katherine KK) (29:19)

I just want to remind our listeners what Summer is referring to is the fact that a lot of the banks have been fighting, I would say, any crypto market structure, legislation more generally, but particularly this one issue where, you know, there are rewards linked to stablecoins because obviously it compromises a fundamental value proposition for their business. So just wanted to explain that really briefly on that piece, Summer. The other thing that has arisen quite dramatically out of the blue is, as I think everyone knows, just recently the President tweeted his support in cutting off credit card interest rates at 10%. This is not a crypto thing, but this would be very devastating economically for credit card issuers and cause some major market movement in tradfi. And there is a sense that banks are really exerting a lot of authority and fighting clarity. And now they have to shift their resources to fight the credit card thing. And like this to me feels very Washington chess game. Like, what is your, what is your take on that?

Jesse (30:23)

And not to mention the CCRA note notice that came out, I guess, this morning from Trump. So I'd love just all that, a response as well.

Host (likely Katherine KK) (30:32)

Don't forget to define CCRA for our list.

Summer Mersinger (30:35)

Yeah, the Credit Card Responsibility Act. It's, it's had so many names. I was working on this issue when I was in the hill in early 2000s. I mean, this is the, like, this issue comes up all the time. You see the word interchange to any financial services staff on the Hill and they, you know, want to go in a corner and hide. So there's, it's kind of a. It, this, this issue comes up all the time. You know, it's, it's never had the votes to get added to any legislations or when it's been close to having votes to get added to legislation, they've shut down the amendment process on the Senate floor. So that particular bill, and again, this would cap interchange fees on credit cards. So that particular approach, that particular bill has had many opportunities to make it to the floor, to make it to a floor vote and politically it's just not occurred. Having the president weigh in is probably definitely changing the game, changing the landscape here. I agree. The bankers have been fighting so hard on the rewards yield issue and they have activated the community banks on it too, claiming that this is going to harm community banks. Well, this is a much bigger issue for those same banks. You know, having a cap on the interchange fees. This pays for a lot of marketing material that those companies do. The, you know, when they, when they white label those cards, they get a lot of, they get a lot of revenue from those interchange fees. So this is a bigger issue for the bankers to have to focus on. And I think, you know, that was part of probably what the President was doing here is maybe reminding them, hey, you need to play ball. Because it's not just about rewards and yield. There's a lot of other things that can come up and you know, it doesn't take. You're not the fan favorite right now. Yeah, just be careful what you're putting out there and where you're, you know, pressing buttons.

Catherine KK (32:48)

Yeah, I think we're still all digesting like a lot of the new language from the draft, but it looks like where the stablecoin rewards stuff landed for now is that you can't get rewards or yield on merely holding balances, but for other kinds of activity you can. So I think some people are kind of looking at that as like a partial victory, at least for the banks. Like what are you, what are you thinking of it right now? And do you think it's close to where it's something that like BA could get behind?

Summer Mersinger (33:19)

Yeah, we've been working on this with stakeholders very closely. And this is where I'm like, we've been going word by word, line by line. The draft text that came out, it had pieces of what has been offered on the stablecoin side. There's some new language in there that's probably not palatable. But I guess the question, what we have to figure out, what we have to think about is there are the votes for an amendment that probably is a little more restrictive. Senator, also Brooks has been looking at language that would, you know, again, restrict to deposits but also include anti evasion act language and also language that would create a study on deposit flights and then allow the regulators to have a rulemaking based on whatever they find in that study. Study. That, that's a hard no for stakeholders. So I think what, what everyone is trying to decide right now is can we get somewhere that we can hold the votes, we can Prevent a amendment that's going to be worse from getting adopted in committee and try to find, you know, language that people, nobody's going to love the language. It's not going to be perfect. In fact, the fact that even the fact that we're dealing with this in market structure is frustrating because Genius was just passed in July of last year that he just started the rulemaking process. So it's kind of unfortunate that we are going back and reopening a bill that just went through pretty, you know, a pretty major negotiating process to get to where, you know, to get Genius done. So I think that's, we're kind of weighing that, like, what is the path forward here? I think the amendments that we see, the Senate Banking Committee has told their members if they want an amendment, they must file it by 5pm Those will be listed on their website. That'll give us a really good idea of, okay, where are people going on this issue, where the vote and how do we, how do we handle that kind of a next step. So it's a very kind of touch and go process.

Host (likely Katherine KK) (35:39)

Yeah.

Catherine KK (35:40)

Can we, can we shift to Defi for just a second? Which is kind of like one of the other big, very like hard fought, hotly contested issues in this bill. So there's a lot of new.

Host (likely Katherine KK) (35:50)

Before we get to Defi, which is really meaty, I just want to ask really quick summer's take on this weird ETF thing because like that's, that's, that's very. Yeah, because I want to have a meaty conversation on Defi.

Jesse (36:01)

But the other thing in the bill.

Host (likely Katherine KK) (36:02)

That a bunch of people are very upset about is it exempts crypto assets that have existing ETFs as of January 1st from certain disclosure requirements. So what is your, what is your take on that? Because I think that's really upsetting a bunch of crypto market participants.

Summer Mersinger (36:19)

Yeah, so it's, it's an interesting fix. You know, I think the idea behind it was, you know, some of these disclosures are so onerous that you're almost looking like you're, you're doing public, you know, like you're a public company and that level of disclosure and for some of these, you know, kind of more mature blockchain, you know, I think going that route was going to be really, it's going to be really tough. And when you think about these ETFs, by having those products, there's been some level of, you know, kind of the, the SEC has looked into them, they've deem these as commodities already. So these are, you know, they're, they're products on commodities and there are disclosures involved with the etf. So I think the idea was, well, if you have, if you have an ETF trading, you know, there's already disclosures there, some of the due diligence has already been done, so let's carve that group out. I think this is really interesting. This is where blockchain association can be probably most helpful in this whole process. I think there's a path forward. You know, it could be that that data is a little bit too narrow and maybe we try to expand it out a little bit. But I do think we can get members in a good place, both those who it's really important to have that ETF carve out and those who may want to use that at a later date, but wouldn't be able to do it by the, the date in the, the bill. So this is an area where we are literally getting members together. We're talking, we're going back and forth. We hope to have some sort of negotiated language that we can send up to the Senate and say this works for, for both sides.

Host (likely Katherine KK) (38:03)

Absolutely.

Catherine KK (38:04)

Yeah. So with respect to defi, I think it's very meaty, like Catherine was saying. I, we were just talking about this right before you jumped on, but it seems like the framework really revolves around this idea of control. And I sort of have a number of issues with that. But one is I think that that idea conflates the idea of decentralization and permissionlessness, which actually are not the same thing. And what it incentivizes, I think, is like, it disincentivizes protocols from implementing any kind of user or market safety measures, even if they're fully automated, that could trigger regulation. And I just, I don't know if that's what Congress intended to do. So I think as an industry, we should look at this language really carefully. But the other question I had for you especially, because, you know, you used to be a commissioner at the cftc, so I'm really curious your thoughts here. The other issue I was thinking of with respect to the new defi language is really like a process one. Like, to me it seems highly unusual for Congress to legislate with this level of technical granularity. Like, I think typically this level of like, definition and technical parameters and rules are typically left to the agencies to, to figure out through rulemaking or guidance or decisions whether to enforce against a company or not. And just in my opinion, some of the stuff in here is really technical. It's really in the weeds. And it's like, I don't know that Congress should be weighing in at that level. And certainly I think Congress should be giving us more than 24 hours to weigh in as market participants and stakeholders. So this is just a process issue. Right. So, like, I'd love your thoughts on that. Like, is this the kind of stuff that you would typically expect the CFTC and the SEC to weigh in on as opposed to Congress, like defining with like 50 different factors what control means?

Summer Mersinger (40:17)

Yeah. This has been interesting because normally you would say you want technology neutral will language so that you're not locking in any one particular technology. Let the regulators, who have a little more flexibility, decide the parameters, but don't lock it into law. But everyone is coming off of this like Gary Gensler nightmare, and they are. There's a lot of people who are so afraid to turn over details to the administrative agencies that they've really asked for, you know, very specific language in different areas where you would normally leave it to rulemaking. I don't think around that's what we're looking at with this issue. But I've seen it a lot throughout this process that people are just kind of scared of the regulators writing rules, and so they're asking Congress to be more specific. There's, you know, the defi stuff is really interesting section, the Section five, they, they got it right. It's in a good place. But they added some new Things in Section 3 around illicit finance that are not okay. And so it's, it's like whack a mole. Right. You get one. One area in a good place and then another one pops up. I think we've been on the Hill talking to senators about, you know, how do we, how do we maybe get some of these sections out, get them removed, how do we move forward with amendments on this? You know, it's. It's tough when you are up there talking to members and staff. There's just a fundamental misunderstanding of what defi is, what a protocol is, who's involved, who has. To your point, you know, what is control, what's not control? And it's really been tough to try to educate them, to fully understand it. And a lot of times what we see in the text is a reflection of that lack of understanding. You know, you can talk.

Jesse (42:17)

Yeah. Talk a little more about the specifics of what you think is maybe going too far on the defi illicit finance side of it. So it's something we've talked a lot about and I know we've all had meetings on the Hill about this topic and have had thrown out different proposals to touch base on them. Some included, some not.

Summer Mersinger (42:38)

Yeah, yeah. I mean, some of it is this idea that, you know, that you would have somebody constantly keeping up with some of the, you know, if you put something in place that you would have to constantly monitor that. And then that suddenly is like, is there control? You know, I think there's some questions around, you know, front ends, although they have a new term for that in this language. I don't have my crutch with me. Lindsay Frazier, who is amazing, who knows all this stuff much better than I do. I bring her with me everywhere I go. But it's really this. There's a lot of new definitions that do not make sense. There's some conflicting definitions in there, and it's creating kind of new requirements and responsibilities that just don't work for DeFi. And so we get rid of that section and recognize it's not going to work.

Host (likely Katherine KK) (43:39)

Well, it's important just to get out the fact that Lindsey, who recently joined BA as head of policy, was former head of policy for uniswap. So that kind of comes in handy when you've been in middle of DEFI as part of this conversation. So that's great. I'm sure she's trading on that understanding and information.

Summer Mersinger (43:56)

Absolutely.

Host (likely Katherine KK) (43:57)

So.

Catherine KK (43:57)

So, Jesse, I'd like. We were going to touch on this right before you joined Summer, but actually I would love your thoughts on this too. Jesse, do you want to, like, talk about how you think the control definition or the control standard in the new DEFI section would apply to something that in reality, almost every DEFI front end does today, even the ones that everyone considers pure defi, which is sanctioned screening. And it's usually automated, but. Yes. Can you talk about that? And then Summer, we would love your thought.

Host (likely Katherine KK) (44:29)

Jesse and I like Summer. We have a special place in our heart for programmable risk management and all these things that DEFI can and should do to make it safer. But obviously we don't want that to mean that they all of a sudden get swept into regulation.

Summer Mersinger (44:45)

Well, yeah, I did read your paper, so. Oh, listeners, we'll put it in the.

Host (likely Katherine KK) (44:52)

Show notes yet again, not afraid of self promotion. Anyway, Jesse. Sorry, go ahead.

Jesse (44:58)

Yeah, absolutely. I think that more and more projects are overlaying sanctions checks, but also just sort of like illicit finance tools that also help with cyber security. It's not just about sanctions, but it's also identifying actors that could potentially hack your Protocol.

Summer Mersinger (45:13)

Right.

Jesse (45:14)

And so we all know about chainalysis, trm, there's many others, blockade, predicate and these provide really important tools that you can frequently set it and forget it for a while, but that's not really how it works and that's not really how we encourage projects to use it because then it doesn't really help them and it doesn't really protect their users in a way that's continuous. And so the I feel like the bill tries to make this line between discretionary control and everything else, but like risk management doesn't fit cleanly into anything because in practice layering these tools on and enforcing sanctions isn't binary, just like cybersecurity protections aren't binary. To me, like the bill doesn't really resolve what continued interaction puts you over the line of why. So like let's tangible example, right. So let's talk about chain and trm. Most projects have that in some form or they use it just to stop any explicit sanction address that is listed by OFAC or other like sanctioning entity in another government. But over time overlaying that requires updating lists, tuning heuristics, responding to false positives and coordinating with counterparties. So like at what point does ongoing judgment turn rule based compliance or rule based risk management into human control? And that's what I can't quite figure out in this book.

Catherine KK (46:39)

Well, so you know what I would add to that? It's actually very ambiguous to me that even if you do sanction screening or some other compliance measure through a fully automated mechanism, you could still be exercising control.

Summer Mersinger (46:52)

Right.

Catherine KK (46:52)

Because one of the parts of the definition is it do you control access? It doesn't say whether it's automated or discretionary. Do you restrict which tokens can be allowed?

Summer Mersinger (47:03)

Right.

Catherine KK (47:04)

Do you exclude low quality collateral from your protocol? All of these things could potentially sweep you into the definition of control. But these are all things that defi protocols do every day and it shouldn't mean that they should be regulated like as brokers.

Summer Mersinger (47:19)

Right.

Catherine KK (47:19)

These are just like smart engineering.

Jesse (47:21)

Totally. And one more point, like predicate for example, that puts policies in and can change them. Do they become that for all the projects that they're working for? Like where is the line?

Host (likely Katherine KK) (47:32)

And the other thing, Summer, like I want you to opine on this. Before I knew, obviously the three of us feel very passionate about this.

Catherine KK (47:38)

We don't have any opinions.

Host (likely Katherine KK) (47:39)

You have a really unique perspective as an ex CFTC commissioner. And I have never been a regulator, but I've dealt with Regulators my entire career, especially doing white collar defense to some degree. I often say to crypto, we have to give regulators a degree of credit in terms of. There's a lot of regulators, yourself included, while you were at the commission that were highly pragmatic and reasonable in. And you know, this is true of enforcement as well. Like there is a, a spectrum. Jesse knows this DOJ in particular, they're not going to indict unless they can convict, for example. But how do you feel about this provision where there is a theoretical possibility, which is scary for crypto having been burned, of kind of this overreach?

Summer Mersinger (48:19)

Yeah. I mean, and again, this is like a demonstration of the fundamental misunderstanding of how this works. I'm sure whoever is working on this section thought that it was a set it and forget it type thing thing and that, you know, nobody ever had to go back and make sure it was still operating the way it should. And, you know, I think trying to get in front of those folks to make them understand what this means and what they've created by, with this language. So, you know, that's that piece of it, at least with the legislation, you know, going on the regulatory piece of it. It was always interesting to me. We'd bring these defi cases. I always dissented on them. And it wasn't necessarily because I was saying, oh, I think this protocol. And you know, I didn't know enough, I didn't have enough information. I couldn't have said this is absolutely decentralized. I didn't have all that information. What I knew was that they found somebody that they could go to and threaten with the lawsuit. And they did, and they never accepted. Explain to them, well, here's how you could, here are different ways you could abide by the existing regulations. And so it, to me, it was always more of a, like, there's got to be a way where again, you stay technology neutral. You don't try to get into these debates about, you know, control and, and, you know, who is, who's doing what. And just look at it more from the standpoint of, you know, how, how is somebody supposed to operate within the broader context of what's legal, what's, what's allowed under the regulations. So you don't have a future administration that just uses the, the law and the rules as a weapon against something they don't understand.

Host (likely Katherine KK) (50:09)

Absolutely. Summer, we're almost at time, so I just want to take a moment to say thank you so much for joining us. Taking the time on a really busy stretch, although we are in crypto, we always say that, like, when is there a time when we're like, oh, it's really chill.

Jesse (50:23)

This week is crazy though.

Summer Mersinger (50:26)

God's work.

Jesse (50:29)

We don't have to do that every day.

Summer Mersinger (50:32)

This is the busiest week ever.

Host (likely Katherine KK) (50:35)

Don't say that. It will get worse. Absolutely. Friday, you good fight. Thank you for your leadership at ba. BA is doing a lot of really great work on behalf of crypto in Washington Blockchain Association. Check it out, listeners, if you aren't familiar. And you know, I again, as, as Jesse said, keep doing God's work. And thank you so much for joining us.

Summer Mersinger (50:58)

Oh, thank you.

Catherine KK (50:59)

Thank you, Summer.

Summer Mersinger (51:00)

This was fun.

Host (likely Katherine KK) (51:01)

And on that note, that for this episode of Decks in the City, thanks to you, our listeners and watchers, and we'll see you next week. Have a great week.