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- [00:00]
Jesse
So now it appears to be trying a different angle. It's whether the government not can stop the publishing of code, but control who uses it, which is probably even more burdensome, right? Because they're saying, let's use the same export laws to control access to something that has been published under the First Amendment and that has not really been decided. But to be honest, it hasn't been decided because it doesn't have anything to do with export law. They're trying to control who gets to log in and use something. And for crypto, that's really everything. So the winners and losers are being chosen without a process or a real law that applies to this. And you know me, like, national security is something I care a lot about. But we can't just say national security, close our eyes to reasoning. We need to have a real understanding of what's happening here. Because we can't say to everybody, build your life. You know, using these financial Rails and crypto, using stablecoins. We can't say to them, use Claude. It will make you more productive if at a second all this stuff can be cut off just because of national security or export laws like that. It just doesn't make sense to me. And I'm honestly a little bit shocked that the crypto industry isn't more up in arms about this because this is our fight. Like, let's go.
- [01:24]
KK Catherine
Hi all, 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. As always, check unchained crypto.com. we are so excited to be here with you this week. A great episode as always. And it will begin right after we hear from our sponsors.
- [01:49]
Sponsor Announcer
This episode is brought to you by Kape, America's privacy first mobile carrier. Same premium service you'd expect from any other carrier, but designed so your number, your location and your data actually stay yours. Get 33% off. Six months at Cape Co Unchained.
- [02:11]
KK Catherine
And we're back. So first we have Jesse, Web3 prosecutor turned Web3 protector at Rivet Capital and V from the SEC to Web3. And I'm your host, KK Catherine, fluent in tradfi and conversant in deep tech. So today we are going to jump right in with something that feels very tradfi, not very crypto at all, but it's actually a super big deal. So last week, the besties SEC and CFTC issued a joint request for public comment. And remember, that means basically market participants now have an opportunity to kind of make their voice heard. We get 90 days to weigh in on working to further harmonize regulatory frameworks applicable to portfolio margining across a bunch of different assets, securities and commodities. I'm going to explain what that means in one second. But this is actually kind of the nerdy regulatory thing that often escapes notice. People don't really understand it at first glance, so there's not a lot of discussion, but it's a very big deal. So we've discussed in the past that basically securities and derivatives and you know, derivatives can be commodities, they can be securities are regulated somewhat separately. So what does that mean? It means that basically when traders trade all of these assets, they often have to post more collateral than necessary because of risk exposure across both markets. And traders hate that. It's like anyone, you don't want to have your money situation sit somewhere when it could be put to use earning somewhere else. So these agencies appropriately want to see if closer alignment could mitigate that and just increase overall market efficiency. So there is a little bit of really interesting background here. They signed a memorandum of understanding back in March to kind of modernize margin rules. And in mid June they released formal joint request for comment on harmonizing derivatives product definitions with this kind of margining as a priority area focus. But before someone says, oh, the agencies are going nuts again, like, there's been obviously a lot of criticism levied at the CFTC in particular. I also want to point out that the agencies actually issued a joint request for comment on this back in 2020 and there were a ton of comments, but it didn't ultimately result in anything. So this is actually fantastic that the agencies are, are picking this back up to kind of get something done. And it's super important now because clearing mandates for U.S. treasury securities and futures are supposed to take effect by the end of 2026, which will push tons of volume through central clearinghouses and change all of the margin requirements. And again, I'm going to translate here like water clearing mandates, a big chunk of the US treasury market has not historically been required to go through some central clearing. But regulators decided a while back that that was unacceptable given kind of the systemic risk of the U.S. treasury market. So the SEC adopted new rules mandating that most treasury trades have to go through these clearinghouses. So boo centralization. We're not going to get into that topic now before I turn it over. To Jesse and V for any questions and comments, particularly V from the SEC perspective, like, why do we care about this? Why are we talking about this on a crypto podcast? This sounds very tradfi. Sounds very nerdy. Despite my best efforts at translating all of this, this is not crypto specific, but this has real implications in particular for the growing crypto derivatives market, particularly given recent product approvals. We're talking perps, perpetual futures, and there's enormous tension right now as to whether the current, current laws basically appropriately address crypto derivatives. And this kind of harmonization will have to think about that. So sometimes you need to look at the nerdy rulemaking because that's going to be a lot more impactful than all the stuff that you see teased on crypto Twitter. So this is actually the beginning of a significant unlock, particularly for kind of the institutional traders. So that was a lot. Ladies, did I even make sense?
- [06:27]
V
Yes, that was really good explanation. Thank you.
- [06:30]
Jesse
So I, you know, one, one question
- [06:34]
V
I had or like one thing this made me think of is, you know, one of the things we talk a lot about on the show is this idea that, you know, there will be platforms in the future that will be able to offer just like basically every kind of product in tokenized form. I wonder if like the, this kind of harmonization is sort of looking forward to that, right? Where regardless if something is a security or a derivative or some other type of asset, if it's in digital asset form, if it's tokenized, it could be trading in the same venues, in the same markets, off of the same platforms. And so like, you know, like, is that sort of what they're thinking about, thinking ahead when they're.
- [07:16]
Jesse
And to layer onto that. One thing I was thinking about is like in light of close clarity, whether passes or not, like how clarity is trying to ensure that both the SEC and CFTC have different mandates when it comes to digital assets. The fact that the two agencies are trying to move forward together, at least in certain components, potentially could help that mandate of trying to work under both agencies. So I think that that is all a really good perspective. And you know, kk, you started out by calling them besties. They're definitely besties right now. But they're all have been frenemies. So I wonder how. Just enemies. Just, you're right, enemies.
- [08:00]
KK Catherine
No, we have to call them frenemies because they've always like pretended to be friends and even sometimes they pretend to coordinate. But as we've said on this podcast before, I think all three of US have had experience, experience where we know the financial regulators are not communicating with each other at all. And right now, they are besties. They're clearly communicating, they're working together. And I actually love that. I think that that creates a lot of efficiencies in the broader market structure. And, you know, I think you. You raise a great point vis a vis tokenization. V what people sometimes forget is that if someone tokenizes a Treasury bond, and we've seen, you know, an enormous, like, tokenized Treasuries were one of the first kind of big tokenized asset when everyone started arb ing the treasury market back in 2023. You know, that's how Ondo first got traction. If you recall, that's how Maple Finance, my old company, got some traction as well. Like, of course, that asset, that tokenized asset still has the same regulatory treatment as the underlying asset itself. So, you know, I talked about the clearing mandate for U.S. treasuries. That applies to tokenized U.S. treasuries, too. So this is highly relevant for crypto. And drive by, I have a question
- [09:14]
Jesse
about how this all works and my understanding, just to make sure that we're not too like unicorns and rainbows about this, because to me, the reason that there are a lot of comments and people inputting here is because this is a big deal, but also it creates a lot of risk.
- [09:33]
V
Right.
- [09:33]
Jesse
And my memory from around Covid time was that there were a lot of treasury issues, which is sort of like the easiest one because netting didn't work out properly. And the margin issue was a really big one that impacted a lot of people and markets. And obviously, Covid is a unique time, but I do wonder if, like, if they, you know, these agencies can't get Treasuries right all the time, how are they gonna get crypto? Very, very complicated products that don't always equal out, like a Treasury would. Correct.
- [10:11]
KK Catherine
100%. It's almost like adding an additional layer of complexity on top of something that hasn't been figured out in the first place. Yeah.
- [10:19]
Jesse
Or like 30 million layers of complexity.
- [10:21]
KK Catherine
Yeah. Which is daunting to say the least. But again, I'm encouraged by the fact that this was an important thing for the regulators to assess. It didn't go anywhere in 2020. They're picking it back up. And I hate when you hear about laws or rules of regulation that they didn't happen because they lost traction. I mean, best example, the elimination of Daylight Savings time. Okay. A lot of people don't realize that a lot of Legislators support the elimination of silly Daylight Savings time, but it just never has gotten any traction. Like there has actually been bills proposed. This is what I'm talking about. But when it comes to crypto specific
- [11:01]
Jesse
rulemaking, that is a good example. I don't know if it'd be the best example of important laws that didn't get passed. But I like the vibe.
- [11:10]
KK Catherine
You've triggered me.
- [11:11]
Jesse
You've triggered me. I really dislike daylight actually. Like, do we actually not like it? It's a no, gang.
- [11:18]
KK Catherine
I really don't like it. Sorry. You know what? We can agree to disagree, Jesse. Okay. Okay. Well, before Jesse and I get into a fight without. Real interesting topic. And this is something that I think we've talked about a little bit, but not enough. So V, tell us more about ordering power and, and sanctioning power, how that's sanctioning power.
- [11:47]
V
Yeah, these are like two things that I had never really thought about together. But there were two stories that came out like this week or recently and, and I wanted to sort of make a connection here because I think it's super interesting. The first is a news report from TRM Labs looking at how Iranian actors continue to use stablecoins and other on chain infrastructure despite sanctions. And then the second is a really fascinating academic paper called Ordering Power is Sanctioning Power. And like I said, at first they seem totally unrelated, but I actually think they're talking about the same thing in, in some ways. So my first reaction when I saw the TRM report was, okay, fine. I mean, I think we all knew that, right? That these bad actors are, are using blockchain and crypto to, to conduct illicit activity. But you know, we also know that stablecoin issuers can freeze wallets. Right? So like what, what's like the big deal here? But that's what where this paper comes in, right? So the authors are a group of researchers from various universities in China and they point out something that is obvious but sort of profound, actually, and that's that a stablecoin freeze is not actually a freeze until the freeze transaction gets included in a block. So if you Compare that to TradFi, right. If a bank wanted to freeze an account, I mean, it basically happens immediately. It's the end of the story from the customer's perspective. The bank controls the ledger, so it can just stop the movement of funds. But on a blockchain, the freeze itself is a transaction just like any other transaction. It has to be submitted, it has to compete for block space. It has to be ordered by builders and validators and sequencers or whoever controls ordering in whatever system. And in that window, the sanctioned actor may be able to see the freeze coming and try to move the funds first.
- [13:55]
KK Catherine
Right?
- [13:55]
V
So the paper's bigger point isn't just that sanctions can be evaded, it's in this way, like, I mean, we already knew that sanctions could be evaded in other ways. The more interesting point is that sanctions enforcement then sort of becomes a market structure problem, right? So I've written and talked a lot about MEV and transaction ordering in the context of trading, right? So things like front running and sandwich attacks and priority fees and execution quality. But this paper is saying that transaction ordering can also affect law enforcement. If the freeze transaction loses the raise to a transfer transaction, then the legal authority to freeze just doesn't work. Right? So another way to put this in very simple terms is that a stablecoin freeze can itself be front run. And so, I mean, just think about that, right? It's like the most crypto thing ever.
- [14:50]
Jesse
This just like it blew my mind in maybe the wrong ways, you know, and sometimes we all get stuck in our assumptions and preconceptions. And I am definitely one of those. You know, I obviously have fought illicit finance in blockchain for many, many years now. And it's something that's near and dear to my heart. And a good narrative and one that I believed in and I still think is true, is that the freezing, the automatic risk management component, particularly of stablecoins, is an important one that we can put forward to regulators and people who are writing clarity and genius, etc for why this technology is better or at least as good. But I think the argument could be better in some ways than existing, you know, financial rails. But the problem is that that is potentially based on a somewhat flawed assumption according to this paper. Paper, and that scares me because sometimes you just look at these academic papers and you read the abstract and you're like, interesting and maybe you read parts of it or maybe you forget about it. The facts in here that I haven't personally verified, but like, some of the stats are pretty scary to me. You know, in our, like, agreement here about stablecoins, we've largely privatized stable sanction enforcement, which is not like unusual. We do that with banks as well. But you know, Tether and Circle are doing a lot of our freezing when it comes to stable coins. Right. And some of the paper is saying that a lot of the freeze transactions ran out of gas.
- [16:35]
V
Yeah.
- [16:36]
Jesse
So they just didn't work. That a lot of Them don't have anything to do with SDN and are privately put out there, which is not unusual. But it was something like 94% of on chain stable sanctions are issue driven compliance actions, which that's a high number. Right. And that this one was crazy to me that in eight years there's just nine freeze circumstances that actually were able to stop the money midway or a significant portion of the money. I mean there's just like endless. One of these, like 7% of the sanction addresses had a zero balance by the time the freeze hit. Now the freeze has stopped a lot of money, millions in bad actor funds and that has hopefully stopped bad activity. But the fact that there's so much that has not been achieved with these freezing powers that we were so excited about is something I'm still coping with.
- [17:39]
V
And is it because the issuers just aren't acting fast enough because they have like a process they have to go through?
- [17:44]
KK Catherine
Right.
- [17:44]
V
This has been like really controversial with respect to some of the hacks that have happened and circle either, you know, declining to act at all or if they do, they have to like maybe sometimes wait for a court order or whatever their policy is. And that can take a while. Like what is the reason they're not freezing these things in time?
- [18:01]
KK Catherine
No, it's that execution order is controlled by kind of a separate, separate market driven layer. So that's the gap. It's not necessarily their own processes, it's how blockchains fundamentally work. And you know, I'm hearing this and I think it's really interesting to call this out in a way. But I also think it's important to say like this paper, I don't want this conflated with MEV separately. And as I think everyone's familiar or actually we shouldn't assume our listeners are familiar. But MEV stands for Maximal Extractable Value. It's a known concept in blockchains referring to often profit that miners or validators can extract by choosing how to order transactions. But not always profit. There's a multitude of reasons and ways that go to transaction ordering. And I always think our good friend Rebecca Redig has written a lot of really interesting scholarship on MEB and really compellingly defended it as a concept. And it's Rebecca's birthday today, so I felt like I needed to shout her out. But I don't want to conflate MEV as a concept with this kind of, I believe the paper refers to it as sanctions mev. This inherently is a problem, but a benefit with everything on Chain, like speed hurts transactions on chain, but it helps transactions on chain. Like the fact that bad actors can move funds so quickly, like that has created a lot of issues with theft and with the facilitation of the movement of dirty money. But it also, you know, in, in that is inherently one of the major points of appeal of transactions on chain.
- [19:47]
V
Yeah, it's, I mean like so many things in crypto, it's a trade off. Right.
- [19:52]
Jesse
So like we have a constitution and due process for a reason. Right. So there is, you know, this rush to be like, well, we should be freezing faster. We got to stop illicit funds. Right. And you know, I'm in that camp. But also we have a constitution and we have due process. So how do we balance the speed of increasing tech with our constitution written a long time ago, obviously. And crypto is not the first technology that has dealt with this, but it's one that's having to deal with it at a different stage speed. And that is like a real struggle here. And so the paper itself, I, I don't think it's been peer reviewed. It's one paper, but it's worth taking a look at because for someone like me that has talked a lot about stablecoin freezes it. It should make you think about all the options out there.
- [20:46]
KK Catherine
Yeah, a thousand, A thousand percent. And it also. So as you guys know, I'm an example. Centralized exchange, CLO and centralized exchanges, you know, they're not stablecoin issuers, but. And TradFi, they grapple with this kind of conceptual issue a lot. Meaning, I remember we had multiple scenarios or you know, every centralized exchange has multiple scenarios where maybe you suspect wrongdoing. Your legal obligation is fulfilled by filing a suspicious activity report as money service business. So you file the sar, you let you know that's kind of, you're fulfilling your obligation. Like, I think something sketchy is going on. It is not appropriate for any type of entity to be an investigator. Like that could be very easily. Like, you could say, oh, this is sketchy, I'm going to freeze your account. And it could turn out later that actually nothing wrong was going on. And what right do you have to freeze someone's funds? You're not law enforcement. So the, this is, there's a mechanism to respond to these things that is easily executable in the money service business context. But it doesn't always ultimately result in catching the bad guy, you know, as quick and as fast as we would all like it to be. Just I, I think like that.
- [22:04]
V
So another Issue that I've talked about and written about in the past is the third party doctrine, which is, I mean it's a little more nuanced than this, but the basic idea is that in certain situations private act have an obligation to assist law enforcement basically. Right. And so I wonder if this is sort of a preview of law enforcement putting pressure on different actors within crypto to assist them to stop illicit activity. Right. Obviously right now it's, it's really just stablecoin issuers. But the reality is that there are a lot of different, you know, actors in the stack that should be credibly neutral. And I hope we do, you know, try to preserve that as much as we can. There are a lot of different actors in crypto market structure that could potentially be quote unquote deputized. But I, but I think we have to be very careful there. Right. The third party doctrine, like you can't expand it too much because they think that would raise all sorts of constitutional issues. And if anything, the Supreme Court has probably headed in the direction of narrowing it. Right. Because like as Jesse said, the more technology advances, the more possible it's going to be to force private actors to do things that could help law enforcement. And we always, I think, have to push back on that. We have to resist that temptation.
- [23:26]
Jesse
And you see it happening, the expansion of third party doctrine with AI, I mean like we talk about it on this show before, but your logs that and prompts that you put into chat GPT, are you putting them in understanding that they were going to be handed over without a warrant to the police. And we are increasingly seeing that bite propagate through case law.
- [23:49]
KK Catherine
Yep, yep. And the third party doctrine, it's important to note that this actually comes from the fourth Amendment. And as a reminder, that's the unreasonable search and seizure amendment. Okay. It requires law enforcement to get a warrant. I mean a little civics lesson leading up to America's 250th birthday party rate. So the third party doctrine, it makes sense conceptually, but it also has been read in a multitude of contexts. It says that when you voluntarily share information with a third party, you lose any reasonable expectation of privacy in that info, even if you only shared it for a limited person purpose.
- [24:28]
Jesse
Because the fourth amendment was written for search and seizure. So if you're handing things over, then it's not a search and seizure, but what does it mean to hand things over? And as we know, like email is like maybe we don't all know, but you need a warrant to get the contents of people's emails, even though it's in Gmail or whatever that you've shared it. So where's the line there? This question has been perpetually an issue for tech and, and we're just seeing it continue in the crypto, AI and other tech spaces.
- [25:00]
V
Yeah, I could talk about third party doctrine.
- [25:02]
Jesse
I love this one.
- [25:04]
KK Catherine
We're like, oh my God, the Supreme
- [25:05]
Jesse
Court in the fourth Amendment.
- [25:07]
KK Catherine
Like, you know, like, welcome to Nerd Hour. Come on.
- [25:10]
Jesse
It's very relevant to crypto, though.
- [25:12]
KK Catherine
It's incredibly. And look, I think sometimes when there's really complicated concepts, I find this way. I find this definitely with derivatives. If you explain the history behind the concept and why it was created in the first place, it makes sense to people from a more like fundamental human perspective. So I, you know, we had to throw in the fourth Amendment throwback.
- [25:34]
Jesse
But on this note, show title be welcome to Nerd Hour.
- [25:40]
KK Catherine
Should we rename the show, like maybe? Okay, you know, that's okay. The nerds win in the end. Okay. Like, we've all seen that as grownups.
- [25:48]
Sponsor Announcer
Hello.
- [25:49]
KK Catherine
Well, this conversation of the fourth Amendment and search and seizure, it couldn't lead us more perfectly into our next topic. But before we get to that topic, another break to hear from our generous sponsors that make this show possible.
- [26:04]
Sponsor Announcer
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- [27:00]
KK Catherine
And we're back. So the three of us were just over here getting excited about the fourth Amendment. And before we just lose all of our listeners, I'm going to lead us into Jesse talking about a topic that's actually highly relevant to that conversation. AI in the courtroom. And if I were you, I would pay attention to this because this is actually going to impact everyone and their use of AI so jazzy Tell us more.
- [27:21]
Jesse
Yeah, so this isn't really an AI story to me. It's more like a software control story. And so I want to talk about a few things that happened this week, but start with something that was a little bit under the radar, but I think it's really important for crypto to understand. So as we all know, and we all love history, we know that maybe it doesn't repeat, it rhymes. Like, I didn't come up with that phrase, but it's a good one. And it's no different in dc, where we've seen every few years, Washington is discovering a new technology that it wants to turn into a choke point. A word that we all know really, really well. So in 1990s, it was encryption. We've all studied that. Then it was personal gps, which I had sort of forgotten about. But then when I was thinking about this segment, went back and looked at, which was sort of a crazy time a few years ago, was blockchain. Maybe it still is blockchain a little bit, but now it's really frontier. AI chip discovery, et cetera. And just like with these other technologies. So government isn't just asking, like, what the software does, it's asking and trying to control who gets access to it. And we saw that happen with Fable, and we're seeing it happen with chat GPT 5.6, just to make sure I have the model done correctly that's somehow called Terra, Luna, and Soul. I don't know if you guys are aware of that, but not the best. Not the best collections. They're going after the, like, space and the planets. You know, they're trying to come up with better names, and maybe those would be better names if they. If Tara and Luna weren't associated with. Wait a minute.
- [28:59]
KK Catherine
Did no one in the naming like room raise that issue?
- [29:04]
Jesse
I find that really hard to believe. We're in a crypto bubble. Just remember that. Like, I know, I know we want AI to pay attention to us, but
- [29:14]
KK Catherine
I know Sam Altman, like, is in crypto, Right?
- [29:18]
V
My first job in crypto was at World Coin. Did like.
- [29:22]
KK Catherine
I find it hard to be a rule that if the company blew up and caused a massive financial crisis in any industry, it should not be used. Does the name for any model number, particularly technology. Sorry, Jesse, I think we had to interrupt because we're so horrified by that.
- [29:36]
Jesse
I honestly realized that maybe this whole segment should be about that because it's so odd. But whatever, okay, Fable, Mythos gets shut off. As we all know, we still don't have access to them. It's a restricted list of access, just like it is for 5.6. So whatever we're calling it. So there has been a lawsuit filed this week by a company called Legion. It's a legal tech startup. They are freaking pissed because they have engineers in Canada that were building their whole product and shifted it to Fable, and now they can't build their product anymore. So Legion is suing the government, saying a very similar thing to what we said in Tornado Cash when the sanctions, that sanctions case came out, which is what is the authority. How are you using sanction and export laws here? Just to take us back a little bit into the legal mumbo jumbo. So export law is, is very like boring in until you really understand it. But it comes down to classifications, right? It's controlling what leaves the country, weapons, chips, some code, as we've realized, all sorted into classifications that have like ECCN and then a number, okay? And it's important what classification something is given because those are the rules associated with it. There used to be a classification that covered AI model rates, model weights, but that was rescinded in 2025. So there's nothing associated with that. Right? So Commerce is restricting Fable, the US Government's restricting Fable, but not saying what classification is and not giving a real explanation, as we know, Right? And even if they did, and even if they could say this fits into the model weights, there's an argument here that this doesn't even fit in export law because no one received the weight, source code, training data, etc. Of Fable. They just logged in and typed things in and got output. Right? So in this argument, and I'm saying what I think Legion is saying, but they're not putting it out there in this way. The government's not regulating code. We're sort of beyond that. It's regulating who gets to log in and access the code. And that is what is scary to me because we log into everything. And especially in the crypto world, this is scary because software can be so many things that run crypto, not just the front end that we talk about a lot that we switch switched off the RPC endpoint, a bridge, a Stablecoin rail, the GitHub repos that we're using, wallets, blah, blah, blah, blah, blah. And governments are beginning to see that, right? Because you don't need to think about a protocol if you can touch the access layer. And this brings us back to our good friend Bernstein. I know we're talking about case law a lot today. But you may all have memorized Bernstein, because it's the ninth Circuit case that gave us the concept, not quite, but sort of, of Coda's speech. Right? This was in 1990. A grad student wants to publish his own encryption code into the world, but the government says no because encryption was seen as a form of a weapon because it could make, you know, 3D printed guns, etc. He sued, the courts agreed with him against the government saying writing and publishing code is, can be covered under the First Amendment. There are caveats, but let's just stick it there for now. And that is what allows us to do open source protocols, running a node, publishing a smart contract. It is critical to crypto. Right. Backbone of what we argued in Tornado Cash, especially in the sanctions context. So Bernstein, though, is about whether government can control encryption by calling code a weapon. And the government law. So now it appears, appears to be trying a different angle. It's whether the government not can stop the publishing of code, but control who uses it, which is probably even more burdensome. Right, because they're saying let's use the same export laws to control access to something that has been published under the First Amendment. Right. And that has not really been decided. But to be honest, it hasn't been decided because it doesn't have anything to do with export law. Right. They're trying to control who gets to log in and use something. And for crypto, that's really everything and for everything. So the winners and losers are being chosen without a process or a real law that applies to this. And you know me like, national security is something I care a lot about, but we can't just say national security close our eyes to reasoning. We need to have a real understanding of what's happening here because we can't say to everybody, build your life, you know, using these financial Rails and crypto using stablecoins. We can't say to them, use quad. It will make you more productive if at a second all this stuff can be cut off just because of national security or export laws like that. It just doesn't make sense to me. And I'm honestly a little bit shocked that the crypto industry isn't more up in arms about this because this is our fight. Like, let's go.
- [34:56]
Sponsor Announcer
Yeah,
- [34:59]
KK Catherine
I think you're absolutely right, Jesse. I love your passion as usual. The way that I think about these issues though is I think sometimes crypto gets lost in what they care about at any given time. And I think it's also like one of the biggest weaknesses of us on an industry wide perspective. And we said this before on the podcast, I'm going to say it again, is crypto tends to be in its own little crypto world. I mean, I know many, many crypto people that pride themselves on only socializing with other crypto people. I mean, there have been bitcoin themed weddings where all of the attendees also love bitcoin.
- [35:37]
Jesse
And look, you have a bitcoin themed wedding.
- [35:40]
KK Catherine
No, I did not. I mean, we've been over this.
- [35:42]
Jesse
My husband doesn't even like crypto. It's, it's, it's.
- [35:45]
KK Catherine
Don't even get me started.
- [35:46]
Jesse
Why is he so quiet? Did she have a bitcoin themed. I'm not gonna name who like got
- [35:52]
KK Catherine
bitcoin themed wedding, but it happens. So like crypto people socialize with other crypto people. Crypto people talk with other crypto people. You need, I think the whole industry sometimes needs to zoom out and think about like it's, it's like the first topic we talked about. A lot of people probably looked at that and thought, well, this isn't relevant to me. Like this isn't relevant to crypto, but it's highly relevant to crypto traders. And look, if you're touching perps, you're probably gonna have to think about this. This happens a lot. So I think your topic, like there hasn't been enough focus on it because people need to like zoom out more and think about how these issues are going to be pervasive in the longer term, especially as crypto increasingly kind of, you know, gets folded into other industries and other aspects of daily life.
- [36:39]
Jesse
Yeah. And like, I guess this also comes back to our reliance on AI which, you know, Claude is my best friend lately, but are always to be honest because right now the government controls and centralized entities like anthropic control our access. And then we also have the other layer which I briefly mentioned last segment. But more and more ChatGPT chats and prompts are being used in litigation against defendants. There were a few examples this week. I think it was about the Palisades fire, about people putting in prompts, talking about how they, you know, might have been involved and it being evidence associated with what they are doing in their criminal behavior.
- [37:24]
KK Catherine
Would someone be blamed for a fire if it was lit by my cigarette? Like, you know, those questions.
- [37:30]
Jesse
And we talked about this when there was the shooting, shooting case and there was evidence that people, the perpetrators had put information into chat GPT saying like, how do I do this? And the, you know, LLM did Not tell them, don't freaking do this. So we are both using AI to be our partner and collaborator or co conspirator. We're also relying on it to build our systems and our products. But at the same time, we're allowing centralized choke points, whether it be government or private sector, to tell us what we're allowed to do with it. And that comes back to the essence of why we all believe in crypto.
- [38:11]
KK Catherine
Yes. And the other thing is, I think we all remember. I've recalled so many instances historically before the invention of AI, where people were convicted partially on the basis of Google searches. So this is like that times 10. Because look, there's been multiple murder cases where the evidence is entered into the courtroom of, you know, the husband killed his wife and he's Googling like, what poison doesn't have a. You know, I mean, come on.
- [38:38]
Jesse
No, I mean, I had, I remember distinctly a child sexual abuse case where we found YouTube searches. Like, we weren't sure if that. The, the kids were really, really young. We couldn't really tell if we could prove the case. And then we had Google searches of how do I hide sexual abuse of children, essentially? I mean, like, and how do I groom. And at the. I mean, if you're searching that on Google and we're able to get access to it, I mean, it was through a search warrant, we got access to it. So that's a little bit different. Right.
- [39:15]
KK Catherine
Or the Fourth Amendment. Yeah, the Fourth Amendment.
- [39:17]
Jesse
Back to all again. Yeah, but, and, and it is, it is evidence. I mean, like, if you are, that's your intent. Right, but I don't know if people look at their chat like people, people
- [39:29]
V
think of like their chats with AI, like, they think of it as if it's private. They don't.
- [39:36]
KK Catherine
They don't.
- [39:37]
V
I don't think people look at it the same way as like a Google search.
- [39:40]
KK Catherine
Right.
- [39:40]
V
Like, they, I mean, like, I know people who use Chat GPT for like therapy and they're talking. I mean, they will say things to chat that they won't even tell their therapist.
- [39:50]
KK Catherine
You know what I mean?
- [39:52]
V
You mean Jesse, myself. Just kidding. No, but I need, I think people need to realize that it's actually not
- [39:59]
Jesse
as private as medical diagnosis.
- [40:02]
KK Catherine
Like, I know people that put detailed personal medical history. I mean, I fed a lab report once into Chat GPT and was like, explain this to me in plain language. It's actually a really effective way of doing that. Like, look, if you don't care if anyone wants to. I mean, maybe people don't care if, like their shoulder X ray, everyone's aware of it. But I think it is an important lesson that this is technology at its core. It's not private. Like nothing you put in the computer is private, full stop. And this also goes to our GC spirit. One of the things that I'm sure all three of us has done is taken a look at all of the employee agreements and policies and procedures. Pretty much every standard employee handbook and agreement across the board in any company worth its salt is going to have language in there which says you have no expectation of privacy if you're using company devices. And that is by design, so that the company can get access to information, not necessarily about the employee in a creepy sense, but the company needs to be able to respond to, for example, subpoenas. And they can't do that if there's private stuff on the devices. So there's no private stuff on your company devices.
- [41:12]
V
And every GC knows this, right? Like you tell all of your employees, be careful what you say in Slack via email, whatever. Just assume that everything is discoverable or admissible in court.
- [41:25]
KK Catherine
So just always contemporaneous communications are often the often almost that and marketing are frequently used in a very persuasive manner to, you know, move against crypto companies or should say, historically, we haven't had any enforcement in a while. Oh my gosh. Okay. On the topic of enforcement, I have to be honest, our last topic. We'll keep this brief because I don't think the three of us even really want to talk about it, but we, we felt like we needed to give our readers, our listeners, our viewers, a clarity update. So as a refresher, clarity, the comprehensive Crypto Market structure bill, which we are all hoping for and praying for. Like, please give us clarity, please. And I don't even want to say hoping and praying. I think all three of us have been working towards clarity with engaging with policymakers on clarity. Well, it's hit a little bit of a, of a roadblock. I, I don't even want to say it's a roadblock, but. Okay, so here's the update, right? We had this, this really promising traction back in. Was it May or June? I think. Oh, it's May. May. The Senate Banking Committee formally advanced the Clarity act in a markup vote with, with Democrats joining the vote. So it moved forward. Okay. But there were still a lot of steps to go. And at the, at the time, we cited three potential roadblocks once it. One, it was because a bunch of people Wanted an ethics provision inserted in it. Two law enforcement groups and labor organizations and others all said, look, this doesn't do enough to prevent illicit finance. And three, there was some uncertainty as as to whether the yield compromise specific to stablecoins would hold up. Okay, well, here's the problem.
- [43:16]
Jesse
We now have. Fourth, there's been.
- [43:18]
KK Catherine
There's been no progress since then, okay? Like, it was placed on the Senate legislative calendar as of early June, but being placed on the calendar is different than a floor vote. So. So we need a Senate floor vote, and we're waiting on a Senate floor vote. And even if we get a Senate floor vote, then the bill needs to be, like, squared with the House version, okay? It needs to survive reconciliation. And there's a bunch more little steps that we're not going to go into. So I'm just going to ask the two of you. I have, as you know, I've always been the Debbie Downer of this bill. Now I. I'm desperate. I want it so badly, but I've always been very bearish on passage. I'm even more bearish now because midterms and summer recess. What are you two thinking? Please tell me you disagree with me.
- [44:07]
Jesse
I think you missed the fourth roadblock, which is a completely new one and that we couldn't have possibly anticipated or maybe we should have with how this administration has been lately. So what we didn't expect is that there would be this huge other new hurdle that has been created and in my mind is an unforced error because we, just like the crypto industry, should not live in a bubble. The congressional process for passing clarity does not live in a bubble. There are a lot of bills to be passed, and there was a bipartisan bill that was passed that had to do with housing and, you know, alleviating a lot of housing cost concerns. We won't get into that side. But part of that bill was a ban on cbdc, something that pretty much is all around agreed upon. Not that there has been a recent threat to that there will be a CBDC in the United States, but as we all know, you never know.
- [45:08]
KK Catherine
So it's good central bank digital currency.
- [45:11]
Jesse
So that bill passed in a bipartisan way with the CBDC ban in it, but our president is refusing to sign it because of voting, a voting bill that he wants to get passed. And I don't think we need to go into it, but it's a very controversial bill. And the way that he is refusing to sign this important housing bill in view of a bill that nobody really thinks can get passed. Like a lot of Republicans don't support it. The voting one is putting a lot of tension into the conversation that Republicans and Democrats collaborating with the administration to get Clarity pass. So that all sounds really complicated and the truth is it is really complicated, but is that it's this huge shaped wrinkle of the entire administration right now coming to Congress and like pushing forward this bill that has nothing to do with Clarity. Who knows if that'll get passed because there's not really much support on it. So it's been a bit of a dramatic hill few weeks.
- [46:18]
KK Catherine
So dramatic and so discouraging. I. I maintain that I really hope this still happens. We're still working to make it happen. Crypto needs this kind of legislation for a multitude of reasons that we will definitely talk about on future episodes. We're also going to dig in on to CBDCS at some point in future episodes because I was actually talking to a TRADFI friend this week and he was like, why doesn't the US like CBDCs? And I realized a lot of people do not actually understand the distinction between central bank digital currencies and stables and crypto assets. So I'm going to put a pin in that for the future because we're running short on time. We want to bring everyone home with this week's crypto good news. It is not about dinosaurs or dogs, so I'm very disappointed. But it's really cool or important, I should say. So V, tell us about this week's crypto good news.
- [47:12]
V
Okay, so I guess this is a good segue into what we just talked about because, like, meanwhile, in Europe, yesterday marked the end of ma's transition period. So MA is Europe's like, landmark, pretty comprehensive crypto bill.
- [47:29]
KK Catherine
So I should note one European.
- [47:32]
V
Yeah, exactly. Except one very notable thing about it is that it does not include defi. Right. Like in the US we ended up trying to include defi regulation in Clarity sort of. Towards the end, Mika decided they needed more time to study it, which I think a lot of us agree was the right approach. We have not taken that approach. Anyway, so Micah has been under a transition period. So it doesn't mean that, like, Micah just started yesterday that actually Mika actually like went into effect a while ago. But yesterday was the deadline for crypto firms that were operating under old national licensing regimes to either have a MICA license or to stop serving EU customers. So the reason we think this is actually good news is, you know, even though not every company is thrilled about MICA the background before MICA was that Europe had a patchwork of crypto rules, right? So if you wanted to operate across Europe, you were dealing with like 27 different approaches, and Mika replaced that with a single licensing framework, right? So if you're authorized in one member state, you can generally passport your services across the eu. So, like, that should sound familiar, right? So look, I think, you know, everyone agrees that MICA is not perfect, but still potentially good news because I would take the position that predictable rules are sometimes better than perfect ones because companies can adapt to regulation, but it's much harder to build a business under uncertainty. So, as KK said, and sorry, Jesse, no puppies or dinosaurs this week, but a major jurisdiction like the EU finally having a clear, albeit imperfect, regulatory regime is a win, and hopefully the US can follow their lead.
- [49:25]
KK Catherine
So that's the case. Yes, we can't let the perfect be the enemy of the good here, okay? Like, if we want crypto to scale, we need common sense regulation. And the one caveat to the good news, but maybe this is a good and bad thing, is we've seen little to no MICA enforcement whatsoever. And I'm talking about member states, you know, instituting enforcement actions against crypto companies. Now, there's certainly exceptions, but we're not, we. We never saw a flood of it, for example. So it will be very interesting to see if we now start seeing more activity overseas, especially as compared to the very quiet U.S. enforcement environment. I am all for enforcement against bad actors doing bad things in crypto, like get them out, buy, okay, because make it better for the rest of us. But, you know, as long as that enforcement is well placed and appropriate. So on that note, hopefully next week we'll have some dinos, tbd. You'll have to stay tuned to see. We'll see you next week on Decks in the City.
- [50:44]
Jesse
Sam, It.