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- [00:01]
A
Hi everyone, and welcome to Dex in the City, where the wallets are cold and the takes are hot. Before we get going, 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 unchanged crypto.com before we continue, here's a word from
- [00:21]
B
our spot introducing nexo, the premier digital wealth platform. Receive interest on your digital assets. Borrow against them without selling. Trade a variety of cryptocurrencies all in one platform now available in the U.S. get started today at Nexo.com Unchained 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 meats crypto breakdowns, make sure to subscribe to Bits and BIPS 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 Bitsandbu I'm your host, V. Lee.
- [01:09]
A
I'm here with my co host Jesse Brooks. And joining us today is Ryan Miller, a partner at Morrison and Forester. And Ryan, why don't you give us just like a minute of your background and then we can kind of jump right to it.
- [01:24]
C
Sure. Thanks, V. Thanks, Jesse.
- [01:26]
A
Hi.
- [01:27]
C
Happy to be on the podcast. So I'm in New York at MOFO in our financial services group and my practice is largely trading in markets. And so I've worked with over the years, exchanges, brokers, traders, hedge funds, banks, anyone trading anything, whether it's crypto, prediction markets, commodities and derivatives, securities. Years ago I worked at the cftc, which some people find interesting. I was on the staff there during Dodd Frank and also was chairman or was counsel to the chairman at the time, Gary Gensler. Went to Sullivan Cromwell, New York for many years and did the commodities and derivatives practice there. Went in house for a while where I was general counsel of FTX us which some people find interesting. And now I'm at mofo.
- [02:14]
D
You know, whenever anyone has a CFTC question, you're one of the top people we call you and Catherine essentially. So since Catherine can't today, we thought who else should come on?
- [02:23]
A
I know you're my go to also on all things cftc. And and so that actually is one of the reasons we wanted to have you on today because it feels like there's just so, there's been so much coming out of the CFTC last few weeks. Like I really have not been able to keep up things like, you know, they're, they're moving like ahead on perks and prediction markets and all this stuff. So I thought you could start out by just kind of giving us like our rundown of everything that's been happening.
- [02:52]
C
Yeah. Let's jump into what the CFTC has been doing and just to frame it up for your audience, the CFTC had a new chairman confirmed by the Senate. I don't know if, I don't remember if it was late last year, early this year, but Michael Sellig, and he's, he's now the chairman. Historically the CFTC would have a chairman and several commissioners. Right now they have no other commissioners, they're, none have been nominated. So it's just the chairman, he's there and he's running the agency and he's, he's really, he's really put out a relatively aggressive agenda in terms of wanting to get a lot done and wanting to get a lot of news items on the tape. And he's, he's flagged a few priorities. One is cleaning up some of the traditional Dodd Frank rulemakings, which is the over the counter swaps world, not for today. But the other two is really digital assets and then prediction markets. So let's walk through some of the things that they've been doing stylistically and from a tone perspective that there is an intentional transition from regulation by enforcement to regulation by regulation. And what I've seen that mean is they're putting out guidance, they're putting out proposed rules, they're putting out advanced notices of proposed rules, meaning they're giving a signal to the market that we might do a rulemaking on prediction limits or prediction markets, for example, and give us comments on where we should go with that, where the key issues are. So one of the largest things the CFTC did, and they did this in conjunction with the SEC, was on March 17, they put out joint interpretive guidance around a token taxonomy. And what it is, I think for the first time in a real tangible way, a joint agency pronouncement on how we're going to categorize crypto tokens for regulatory purposes. We won't summarize all of it here, but, but, but the headline item is most major digital assets are now clearly in the commodity side of the regulatory categorization ledger, which is, is a level of certainty for market participants that, that lets you start to build new products, allocate capital with certainty in the United States. And you might say, well, that's been happening for years. Coinbase is not exactly a young company. But what we haven't seen in this space is a lot of the traditional financial services firms really dive in in a tangible way. So you've got the joint CFTC SEC interpretive guidance on how we're going to categorize tokens. There was a big deal. The CFTC announced an innovation task Force on March 24, and its stated purpose is to look at digital assets, AI, not surprising, and then prediction markets. It's going to be led by the Chairman's staffer, Michael Passalacqua, who joined Chairman Selig from private practice and has taken on a lot of the innovative agenda at the CFTC from the chairman staffing side. And it's, it's got a, it's got the, the members you would expect from private industry. And they're going to work with the CFTC to figure out what it needs to do from a rulemaking perspective around blockchains, digital assets and defi, if we want to call it DeFi, and then AI and then prediction markets on. Oh, go ahead.
- [05:57]
D
Can I just double click on something you said? We actually have talked about this advisory committee before and the makeup of it, because there are a lot of great people but very few women, which is something that we noticed early on. But you know, you, you, you can tell from the way you're talking about it, and also you mentioned it that the agenda is essentially like a mile wide. Right. Crypto is part of it. There's defi registration, prediction markets, you know, all the things you talked about. Then there's also some AI trading over. And so that's a lot of rulemaking tracks for what I envision is to be a relatively small agency. And you work there, so I'd love your thoughts on that. And my understanding is that they're a bit understaffed right now. How do you think that this is actually going to move forward and happen? Is it because they're working with this sec? Is this realistic? Like, do they have to figure out some sort of prioritization here?
- [06:51]
C
Yes, to all of those, particularly diversity amongst advisory committees. So a quick distinction. The advisory committee which you mentioned is the private industry folks now advising the agency, the task force, the cftc. Interesting. Okay, let's see. Is this a big agenda? It absolutely is. And I don't speak for the Chairman's office or the agency Obviously, but historically at the CFTC you would get four or five meaty rulemakings or proposals a year. During Dodd Frank under Chairman Gensler, you had a couple years where that rocketed up to 50 or 60 major things in a year. And the staff was going at full speed. It was really unprecedented. And I think with, with Selig's agenda, Chairman Selig's agenda, you might see a transition back into really substantive, meaty output from the Agency on a, on a really frequent basis. Do they have enough staff? They have a really talented team at the cftc. There's solid lawyers, there's solid economist. They're, they're very good at what they do. They understand these markets and they actually understand what they don't understand. And we've seen them open to briefings, inquisitive on trying to get, you know, more background on areas where they're trying to learn more, particularly on DeFi. I think the Agency is open for anyone who wants to go in and tell them how on chain markets are working. Every time we reach out, there's this, come in, tell us what you want us to know, and we're happy to hear about it. But the Agency always has a funding issue. It's funded by Congress, it's not funded by fees. And their staffing is limited by that budget. They can't spend more than their budget. So every year there's this debate, does CFTC have enough money? Should it have more? Should it switch to a fee model so that it can hire more staffers? The SEC is multiples in terms of staff numbers bigger than the cftc. And the derivatives markets, if you look at notionals are, are as big as the equities markets and you can measure it many different ways, but they're, they're, they're clearly one of our largest global markets. So the CF up for the task, could they use more people? Of course. Are the people there very good? Yes, they are.
- [08:56]
A
They also recently announced like a joint harmonization effort with the sec, which I thought was really interesting. Right. So like I think the idea behind that is like where there can be coordinated rulemaking, like where their jurisdiction overlaps or there's something that they co regulate. They're going to work together to do that. And we actually just at Veda, we just submitted a proposal jointly to both of them relating to custody standards. Because the SEC's qualified custody requirements and safeguarding objectives are actually very similar to the CFTC's requirements around segregation of customer property. So it would, it would be cool to see joint rulemaking on something like that or like other things that people have submitted.
- [09:44]
C
It's a, it's an MOU memorandum of understanding which the agencies have done over the years many different times. They did it on derivatives go back to the early 80s. They did it on treasury futures or financial futures products. And, and it, it's a big deal and it's a signal to the market that these, these folks are going to work together. Some of the biggest pain points over the years are dual registered entities. So think of like a registered investment advisor that's also a commodity trading advisor. This is pretty much every hedge fund and asset manager and they're regulated for the same thing, but it's not the same examination program, examination cycle, set of reports you're filing. So a lot of pain points to solve there. There's some products that, that even Congress has told the agencies to regulate together. Security futures is a big one and translate that out a bit. It's really perpetuals on equities. Once you've got the CFTC comfortable with, with how they want to see perpetuals offered in the United States, people are not going to just do crypto or oil or interest rates. They're going to go well how do we do perpetuals on Tesla and Apple and pick your underlying equity. And so for years there's been a regulatory regime where you offer securities futures under this dual register type of exchange. It was, it was so either hard or burdensome or not commercially feasible that there are zero of this product off of the United States. And that's, that's not sustainable. There will be perpetuals on equities in the global, on chain derivatives market and the US is going to have to have a parallel product. And so I think that's another area where, so derivatives on, yeah, let's follow that.
- [11:20]
D
I mean we've all worked in government and seen how hard it is for agencies to collaborate together and figure out exactly how to work together. And to me this is a really important signal. So many portfolio companies that I engage with and I'm sure both of y' all engage with, you know, are trying to sort of work and build in both spaces because as we've seen in the past 10 years, it's very difficult to separate crypto cleanly into securities and commodities. And as, you know, tokenization expands and like, you know, Robinhood was on our pod talking about the L1 that it wants to create and a lot of, you know, companies are trying to enable a one stop shop for everything you want to trade Essentially, and I don't know how you do that unless you have some sort of harmonization between the CFTC and the SEC at the very least. So to me that is like a great narrative here because for so long, you know, it was. Do we want the SEC to regulate? No. Oh, we want the CFTC to regulate. Well, let's go back to the sec. But if we can figure out a way to do it jointly, it's, it's very encouraging, especially considering how Congress is having a difficult time working together at all.
- [12:28]
A
Yeah, I think like, like another area I can think of too is with prediction markets. Right. There are certain kinds of bets that probably are under SEC jurisdiction. Right. Like bets that have to do with like transaction. Yeah. Or like, or public company like earnings and things like that. Right, like those. There are certain kinds of options relating to that sort of information that arguably is under SEC jurisdiction. And so that's an example of like you could have a platform that's offering different products that could either be regulated by one or the other. So coordination I think makes a lot of sense there.
- [13:05]
C
Right. The SEC has this mandate for customer protection, of course, but a disclosure based regime around capital formation. And so if I want to take a view on the performance of a company but unrelated to their capital structure, the SEC doesn't have a clean hook into that. How many cars is Tesla going to sell this year that's not an equities product and I'll argue that with anyone. But is there an interest in the SEC about making sure there's full disclosure and not misstatements around those types of measurements? I think there very much is, particularly under customer protection mandate. At the same time, I don't think it's an equities product. So they probably need to issue some joint guidance around how we can list these products, what types of information needs to be available for users to be able to engage in them and then the third rail. I know we're going to talk more about this. Which market participants and persons should not be trading certain products based on your status as either, you know, an insider or something else. And I think we've got anti fraud laws that give us a framework for how to think about that today. But it's, it's an area where like explicit guidance is, is probably welcomed by some parts of the market.
- [14:21]
A
Yeah.
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C
Corporate compliance.
- [14:23]
A
Yeah, yeah. And like members of Congress have I think introduced at least one bill. Right. To ban federal officials from participating in these markets. And then you're starting to see a lot of states come out with laws like banning certain people from participating in these markets. Like what do you, what do you think of all that action?
- [14:43]
C
I think it's, I mean it's, it's evidence of a trend that will continue, meaning that there, there's going to be frameworks around who is not, not appropriate to participate in certain contracts and markets. We already have a ban on using. Like during Dodd Frank, Congress enacted a ban on misappropriating government information for trading derivatives. So if, if you're a government employee and you're trading prediction markets based on some information you've gotten from your status working in the government, if someone can demonstrate that you are not meant to trade on it expressly or impliedly, you already have a dot Frank problem. And so I think that's where you've got tools already at the agencies to give guidance on this. I understand why the legislation is out there because some of these are politically charged questions. And so that means you get bills so people can wave them around. But there's a lot of anti fraud guidance and even agency interpretations out there that would give me pause if I was trading prediction markets on some sort, sort of information I had gotten from my employer, from my job, from some program I was involved in that I signed up to be a part of because there's almost always a confidentiality agreement or something else. We're going to see this play out in cases for sure.
- [15:53]
D
Just to play a little.
- [15:54]
A
Yeah, but your view was like. Go on V. Sorry, just to follow up on that. Your, your view is like largely there already is like there are laws and regulations that cover a lot of this stuff already.
- [16:07]
C
Well, let's take one step, one step short of that, which is if you work, let's say you work at a commodities company and you learn a lot about where, where corn is going to go next week, you can't trade on that. I mean that's your company's information and there's cases around that's misappropriation of someone else's information, in that case your employer. And there's already cases that have, that have brought fines and enforcement around that. And so I think the, the parallel to get to someone who's using information they got in a confidential setting to trade prediction markets. It's, that's low hanging fruit for the cftc and you've seen cow sheep from their self regulatory status already bring some of those cases and I think that's healthy. It's a signal to the market that there will be some boundaries here.
- [16:50]
A
Yeah, I think if it Wasn't already clear. If you're like a GC at a company, you probably should be amending your insider trading policies to cover your employees participation in prediction markets. Right.
- [17:05]
C
Like a lot of like personal trading policies. Right. A lot of them have. Yeah, let's say you work at a hedge fund. A lot of those folks have personal accounts. You've got to fully disclose them. You've got to follow some guidelines. There's usually a restricted list. And another complex component of those are going to be what can our employees deal with prediction markets. I totally agree.
- [17:26]
D
Yeah, I just added it into our policies because it is so important and you never really quite know and people are sort of trading these constantly, even more so than crypto these days. So trying to stay on top of that I think is important. You know, I agree that aren't the right step forward, but new norms in my mind definitely are. And I'm not saying that they're not coming, but I think everyone who listened to the prediction markets episode knows how I feel about the national security implications of people trading on war and you know, the Israeli military officials who were arrested for trading on, you know, military strikes there. So to me it's like a larger national security question as well. But even just like focusing on the markets itself, I don't see how they can get any bigger or you know, become what we want them to be in order to enable like more financial access and more, you know, ability to trade on what you want to trade and the information that, you know, unless there's more trust. And right now there just isn't sufficient trust in my mind in these markets. And so building that in and it's probably through regulations, but it's a lot of ways through norms and standards too. And you know, I get, I give credit to the prediction market platforms that are trying to make this better. But you know, it's phase one or step one of the whole process. I mean I think the NFL came out today or yesterday saying like, hey guys, you know, we, you, we want you to be able to trade NFL like facts on prediction markets. But you need to be better at making sure that people aren't doing their version of insider trading.
- [19:06]
C
So we.
- [19:07]
A
Yeah. And like, I sort of, I hate to say it, but I actually think it might take like an enforcement action or two, like maybe in some of these more egregious cases to, to make people realize like that the CFTC and the platforms are really serious about this.
- [19:23]
C
Look, the one thing we know is there's going to be some like comically horrible fact patterns from, from the perspective of someone's going to say, I stole this information from my employer, now I'm going to trade on it. Yes, let's, let's do the enforcement there. Unfortunate for the folks engaging in that. Not thinking that that's illegal, but we'll start to get some frameworks. I've always predicted that the, the NFL will decide where these markets ultimately land, whether, you know, traditional gaming or a federally regulated CFTC market. Because the NFL is the most powerful organization in the United States, for better or worse. They, they have this probably controversial. They played every game.
- [20:00]
D
Oh, you're probably right.
- [20:02]
C
They played every game during COVID They, they, they, the NFL goes on and the NFL decides where we go as a country. And I'm, I'm fine with that. I'm a fan. But it's interesting to see them come out and support the federal markets for these products. You know, 50 state distribution is important for them. And it, it'll be interesting. It'll be interesting to see what types of products proliferate once the CFTC goes through with the rulemaking around what it expects for listing new products, because that'll be the key. What sorts of standards do they want to see on new products, what sort of notice to users and how creative can they get? So we're very early, very early in this game.
- [20:41]
D
I'm sure we'll do prediction markets on many more episodes. Fortunately, unfortunately, I feel like there's never,
- [20:47]
A
there's like not an episode where it doesn't come up because there's, there's always news, like it's always in the news.
- [20:53]
C
Well, the other thing we're seeing are, I'll call them our smarter clients. And all of our clients are geniuses, but our smarter ones, they're focused on the institutional side of prediction markets. And really, while sports has been the commercial success so far, there's a lot of optimism that there's so much more you can do about expressing opinions around economic developments and even hedging on idiosyncratic stuff with institutionalized prediction markets. So I think we're still really early even on the product innovation side. A lot of them are binaries now, but you've seen trinary. I don't know what it was. Contracts with multiple ranges of settlements, not just yes or no. And so that's where you're going to see way more innovation and probably more usefulness to. On the institutional side, which should be exciting.
- [21:38]
A
Yeah. All right, awesome. Okay, so let's move on to another Thing though that sort of blew up on X this past week, which is controversy over Canton versus pretty much like the rest of the rest of like crypto, Twitter or at least everyone who believes in public permissionless blockchains. So you know, Canton is a permissioned network built on digital assets, DAML programming language and it has like sub transaction privacy, centralized authorization and gated membership. You know, they've always positioned this as a regulatory necessity. Right. They argue that securities markets need privacy and authorization controls, therefore you need a permissioned architecture. And public chains can't work for that. They're just not going to work for institutions. But like, I don't know if you guys have actually read some of the SEC frameworks that they cite to like justify this position. So things like Reg, SC SCI and the PFMI principles. And I don't like, I don't interpret it those things to mean that like they have to build it this way. I think those things do require that unauthorized transactions can't be processed. But there's nothing in there that says that unauthorized inputs can't enter the system at all. So I actually do think Canton is making a design choice, but they're claiming that it's like required by regulation. So I'm very skeptical of that. But I think the, the deeper problem is what Alex Glukowski, I believe he's a founder of CK Sync identified at the DAS conference last week, which is that Canton actually requires issuers to retain full admin control, which means enforcement depends on the issuer like acting in good faith. Right. So it's very different from, from a public blockchain where everything is observable, the code's observable, anything can be independently verified and so on a public chain. Enforcement is guaranteed by open source code. Anyone can audit. Right. Canton's like trust, trust in the operator model is presented as a feature, but I think every investor on the other side of a trade actually should be looking at it as a risk for that reason. I don't know. What do you guys think? There's just been so much news of like you know, Visa and all of these other institutions, institutions like dtcc, people joining us, validators, a lot of institutions like JP Morgan are actually doing pretty significant transaction volume on Canton. Like do you, what do you think this is signaling and what do you think about like the public versus permissioned blockchain debate?
- [24:26]
D
It has, it has been really interesting for me over the past maybe year or so that crypto has stopped sort of seeing the government as much as the enemy. There's like coalitions within crypto that are just emerging. And we sort of talked about, it's
- [24:41]
A
like now that Gary's gone, we need a new village.
- [24:44]
D
You know, the boys are fighting or something. But the truth is, is like to me, how I, I read all this, and not to get as intricate as you, because you have read all the SEC guidance except, etc, but like, what is a blockchain? And can a permission blockchain that's built like Canton be a blockchain? Because like, privacy by permissioning is not the same thing as privacy by cryptography. Right. But I sort of think this debate takes away from the whole system that we're trying to build here. I think Canton started it. Their whole argument about me B, like, was definitely not nuanced and, and short sighted. But the truth is it's like we're gonna need all of it and all. You know, we were just talking about this complex financial system in the United States that has a variety of different markets that work together and sometimes they're difficult to work together, but we have an amazing, you know, financial market in the United States that there's a reason for that complexity with rules embedded in it. Right. And so why does it have to be one or the other? And why do we have to say you're not welcome in the crypto tent, you are welcome in the crypto tent. Like, can't we just like build together to create better financial services? From my idealistic perspective that I always try and bring, maybe it's not realistic.
- [26:02]
C
I think that's right. I'll try to follow the theme of why can't we all get along? Or is it, or at least isn't it likely that there's multiple paths that that can coexist? So I'm not shocked that V's view is that public permissionless blockchains are the arguably the way to go. Working at a project that's deployed some of the most interesting tools for public permissionless blockchains. When we think about like things that are permissionless in society, meaning like you can't control the input, but we still regulate what you do with it. Like I always go back, like air, electricity and water, they are permissionless. You can do whatever you want with those things. Some of it is illegal, some of it's not. And so that's where I think looking at public permissionless blockchains as a technology tool, you can still layer in a lot of permissioned type activity or at least governance type programs on public permissionless blockchains. The Most successful use case of blockchain so far I would argue is stablecoins. While at one layer stablecoins are very much a permissioned product, either from, you know, the sanctions enforcement and compliance perspective or from the mint redeem side. And so that's interesting on the secondary market. At the same time they're designed to be very much a permissionless product and that's why they've been so successful. I think with Canton you've got very regulated financial institutions that have so much more at stake than just what they're doing with their on chain business and exploration. And so they're not going to put the rest of their enterprise at risk, meaning their global investment bank, which is all at stake if they get caught up in an enforcement action just to try out this new distributed ledger technology. So I'm not surprised to see them. I'll view this era as really starting to build real products on sort of. Canton is not a test net, but it's a very constrained environment where they get to control everything and so they get to limit the amount of risk they're trying to take. I think you can still do that with, with appropriate building on public permissionless blockchains. And I think we'll see probably some sort of a merge of the two. Particularly if you've got a lot of financial activity on public blockchains. How does the Canton activity interact with that? It becomes a liquidity problem and a bifurcated liquidity problem if we have these two completely separated environments. So at some point we'll have cross chain building between Canton and public blockchains and we cycle back to what we've already seen happen across, you know, Ethereum and Salana for example.
- [28:32]
D
Yeah, that.
- [28:33]
A
But I mean I, I feel like that could be an issue, right? Like one of the, one of the value props of like blockchain, like capital B is the interoperability between like different blockchains, different protocols. But if you have public blockchains interacting with permission blockchains where the public side of it cannot verify things like state on the permission to side, how can you trust that? Like how, how can you have real interoperability without that verifiability and trust? I think that's a huge issue actually.
- [29:07]
C
I mean that's, that's a product design question. I mean, what, who would want you, I think you're saying, who would want to use this? Like what, what, what?
- [29:14]
A
Trust it?
- [29:15]
C
Yeah, what, what? And there's a lot of aspects of finance where you trust your counterparty and.
- [29:22]
D
Yeah,
- [29:25]
C
good questions. Yeah, you should do a podcast on that.
- [29:28]
A
Yeah, no, for sure.
- [29:31]
D
I mean, there's.
- [29:31]
A
Did you have something.
- [29:33]
D
There's a reason why institutions are building on Canton. Like, I don't see the perfection of Canton, but, you know, Goldman's on it, DTCC is on it. There's. There's a reason that they're moving there rather than permissionless blockchains right now. I don't want to speak for them, obviously, but, like, permissionless blockchains are seeing a lot of hacks and cyber issues and vulnerabilities and, you know, code exploits, etc, and it's just, it would be very hard for a regulated institution, let alone one that has billions, trillions of dollars on it, to connect to one of those right now. Like, until they, you know, get safer and mature and continue to grow up, like, I think it's going to be hard for them to say, okay, well, I'm going to take the. Because, you know, it's more transparent.
- [30:23]
A
Yeah. Yeah. All right, cool. We have one more topic we're going to cover, but before we continue, let's take a quick commercial break.
- [30:31]
B
Step into a new era of wealth. Discover Nexo, the premier digital wealth platform. Manage your crypto portfolio with confidence and control. Receive interest on your digital assets. Borrow against them without selling. Trade a wide range of cryptocurrencies all in one platform, now available in the US with 30 days of exclusive privileges for new clients. Experience wealth club premier access, enhanced interest rates, reduced borrowing costs, and crypto cashback on swaps. Get started today@nexo.com Unchained. Quick note before we continue with today's episode. Bits and Bips now has its own dedicated homes. 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 meats 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 sending searching bits and bips on YouTube, Apple Podcasts, Spotify, or wherever you listen.
- [31:48]
A
So for our last topic this episode, we wanted to cover another news story where it might not be immediately apparent why this might be relevant to crypto. Jesse, do you want to kick us off?
- [31:59]
D
Yeah, for sure. And excuse my raspy voice while I try and get through this one. But. So there was a big verdict this week against Meta and YouTube, and you might have heard about it on a bunch of different tech podcasts, et cetera. But essentially a jury found both of them negligent for designing apps that harmed a young woman and failing to warn about those harms. Okay, and this isn't just like a big tech is getting its comings, which maybe we're all sort of waiting for, because crypto could be next. The real shift here that the court ruling came out with is that courts are willing to say that the design of a product may be the harm itself. So a quick legal timeout. We've Talked about Section 230 here before for years. It's industry's favorite legal shield. It allowed social media and a lot of like online platforms to succeed. There's a lot of good about it. In plain English it essentially says post a harmful thing on your platform like white nationalist content or terrorist content or violence, you're generally not treated as the publisher of the content. So someone like Facebook couldn't be held responsible for that. That protection matters, but it's not magic, right? And this case is beginning to show its limits, particularly as social media is continuously seen as a dangerous thing. The claim here is not you hosted harmful content, but if you built a machine that predictably caused harm. And so once a court is willing to look at the product architecture as the source of harm, liability can attach to design choices. Right? So in other words, a court's going to ask is the product addictive or is it harmful by design? And this can include and was talked about in this case like various rewards for engagement, infinite scroll, gamified experience without meaningful guardrails, anything that nudge behavior and reduces friction. So I think it's pretty easy to bring that logic into crypto. Let's start with prediction markets since we've been talking about them today. If people are buying and selling contracts on things like elections, wars, geopolitical chaos, anything else, and you wrap that in a frictionless execution with trending markets, real time ads, notifications saying bet on this. An ad on TikTok that I got this morning telling me that I should go bet on things and a retail friendly ux, it starts to look less like neutral infrastructure and more like engineered wagering. And it's easier for me to even see with Pump Duck Fun. And I don't mean to pick specifically on that because there are platforms like that. Pump Fund was one of the first that Collapsed, token issuance, social virality and retail speculation sort of into one loop. And the. It's a market structure that's rewarding attention. It's just like a social media platform in many ways, even when it's extreme toxic videos. Like, there's been some bad stories on Pump five that I won't go into here because it's quite depressing. And if I were a plaintiff's lawyer, which I'm not, thank gosh for me, but, like, that's exactly where I would go. The argument actually builds itself. No longer can it be the user created it, if your design is the harm that made it viral and scalable, et cetera. And I think it can even go to defi and like, how design and structure is built around it. But the response to all this is going to be, particularly from defi, like, we're a protocol, we're not a platform. But the whole point of this verdict is that the court hears about who makes those initial design choices. Like, someone decides it should be frictionless. Someone set up the markets, someone set up the rules and the smart contracts. And so these cases in many ways are like a warning shot to every product that is monetizing engagement. It's obviously not just crypto, it's fintech, too, but crypto is in that line of fire. And, like, AI's right behind it. You know, I have to talk about AI at least once, everybody.
- [36:00]
A
Yeah. So how do you think this decision squares with the court's decision in the Risley v. Uniswap case? Right. Which also was about, like, what can a platform be liable for? Like, if there's bad stuff that happens on the platform.
- [36:16]
D
I could give my legal analysis, but the reality of it all is that those judges are thinking and talking about very different things. Like, if you were coming to me as a lawyer and advising you, I'd say, like, it's still in the decentralized corporate platform. So if you can make that argument, you're probably safe because, well, 2:30 implications are directly applying to centralized entities. But I see those two merging. And what I think is going to be really interesting is, like, this is the first, and there was a second case last week, too, of this kind recently. And there are dozens of cases that are coming up next that are going to be slightly different rulings that I think we're going to be able to learn from on, like, how far judges are willing to take this. Like, the actual, you know, award to the victims here was relatively small. I think it was a few million dollars which for these companies is nothing, unfortunately. But it's, you know, the number of cases next it could be hundreds of millions, billions of dollars depending on which judges it gets in front of. So come back to me on that one because I don't want to take it too far, but I, I think we're going to move in that direction.
- [37:29]
C
Yeah, I did not read the Meta case because you're an expert on it and I don't need to be. But where I've always wrestled with is, are we looking at consumer products like, designed for consumption and entertainment, or are we dealing with financial services or something else? And it sounds like the judge here and Meta is not a financial services product, is he saying, look, if you're putting out a, or maybe is a consumer product, is a financial services or is it a technology platform for people to do what they want with it? And I think they said, look, you design this for people to use either for entertainment or consumption or something similar. And you know, the trend of our consumer protection laws over the decades has always been around. You know, the design choices have to consider the impact on the consumer. And it's a bit paternalistic, but I don't think that trend is going to go away. And so how do we apply that to financial services? We've always done it with disclosure. Right. Risk based disclosures, product based disclosures, et cetera. There's not really been an assumption that the product itself. We could think about this from the perspective of Wall Street. Wall street has put out arguably addictive products forever. Whether it's options or different types of derivatives, they just have a lot of restrictions around how they can market to retail and the types of disclosures they need around them and even suitability requirements for being able to trade certain products. So.
- [38:58]
A
Yeah.
- [38:59]
C
Now if you're designing a platform, a technology platform, do you need to think about suitability requirements for the users in your design process? And probably you do.
- [39:08]
D
And as I don't point, I mean it's such an interesting point because like crypto is part of it. It's not just crypto, obviously, but like our financial services and our social media and our gamification are all fusing in the past like decade or so. And so what does that mean for the fusion of the laws that are associated with it as well?
- [39:29]
A
Yeah, it made me think about these
- [39:31]
C
are when I was like societal level questions that I. Yeah, and that I,
- [39:35]
D
that I think you're on the pod.
- [39:37]
C
Yeah, that's why we're on the podcast. No one's going to ask me to solve them. And the outcome will range from these things are banned to, you know, a free market. These things cannot be regulated and we're going to land somewhere in the middle. And so with, with litigation and cases, you start to figure out what that middle looks like. And I think, I don't know if, if you've got a largely retail oriented product of any type that's distributed through the phone or the Internet, you need to look at your user behavior and make tweaks to your product where you have problematic things. And maybe if some morality judgments you're making and that's uncomfortable as a business and maybe the government's supposed to make those judgments for us or you're supposed to ex users to do it themselves, but now you've got potential liability if, if, if this type of stuff happens, people get addicted to your product.
- [40:28]
A
Yeah, it made me think last d.
- [40:31]
D
I think your volume's a little off. So I will close this out so we can have the last word from our lovely guest. Thank you so much for coming on today. Our good news for today is that Katherine will also be back next week. We didn't think of anything else this morning, but we really appreciate having you on. Next up, Laura is going to be streaming about today's two big news stories on quantum breakthroughs and how they affect crypto and blockchain with Alex Pruden, co founder and CEO at Project 11 Labs and Dol Bl. Sorry, Dol, CEO of Oratomic. Stick around for the interview after this short break and thanks for being here.
- [41:13]
C
Thanks, guys.