The Clarity Act, State of Crypto VC & LayerZero Launches Zero | Weekly Roundup

I think we have all sorts of enemies. Like I don't think it's over. And so just because we don't have Gary Gunar coming for us, we should still be banding together as an industry.

I think the important thing as an industry is to make sure we know what our principles are, we know what we care about, what we came here to build, and that we can stay really true to it. And then I think when you're looking at the bill and making sure that it's, you know, livable is will it let us do what we came here to do.

Nothing said on Empire is a recommendation to buy or sell any investments or products. This podcast is for informational purposes only and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Blockworks. Our hosts, guests, and the Block Works team may hold positions in the companies, funds or projects discussed.

Welcome back everyone. We have a special guest, a repeat guest, Rebecca is coming on. There is a ton of stuff to talk about regulatory regulation. So, we'll cover that. Anyways, thanks for coming on, Rebecca. It's a real treat.

Yeah, thanks for having me.

Santi, you're really in founder mode here. You got a half painted wall in the back. It seems like you're in a warehouse.

Yeah, there's a lot of echo. We have basically rental furniture, but anyway, yeah, the market's tough. What can I say? I'm not going to spend a full I'm not going to paint the wall entirely.

This is how much he could afford before the market crashed of the painting.

No, we can afford you. You know, this would have sold like a rare NFT back in the day for a couple hundred thousand bucks. So, take a screenshot and sell it in three years time when NFTs are back.

This is how I found out Santi put all of his seed round into Bitcoin back in a year ago when it was 120K.

To be fair, I did call you one day and I said, "Hey, let's short circle and you're like, "Oh boy, I've I've it would have been a great trade, but nonetheless, we're not in the business of shorting. Let's talk regulation."

Rob, you're in DC. Rebecca, you spend half of your time in DC.

Not half, but I come when I'm called on these days. There's a lot of people in DC now. I think Rob being there is actually an important thing to think about because I think we're closer to the finish line than ever.

It doesn't mean we'll necessarily get it across the line, but I meant to check the Poly Market before I got on about do you guys know on like market structure passing. I think it's like 55% right now.

So I was going to say I think I'm at I personally am at 45% which I think is high. It's probably the highest I've been on market structure passing. And I think it, you know, every day is a roller coaster on the crypto policy side of things.

And they say in DC there's no bill until there's actually a bill, right? Like a bill fails four times or something before it actually passes. But, you know, we've seen crypto market structure die many deaths. It's more like a cat. I think like it has nine lives instead of four.

I will tell you, notwithstanding the fact that the markup was off at banking in January, people are back at the table, negotiations are still going on, staffers are working harder than ever, industry is working harder than ever. I think that things are moving forward and I think that there's an appetite both from industry and from policy makers to get this across the line and you know have some commentary on that but I can also sort of walk through what's happening on the banking side and what's happening on the A side.

Rebecca I'd love to hear so I'm here all day for meetings somewhat around this around some other broader you know regulatory issues as well. And, you know, we talked about this, I think last week, maybe it was a little bit the week before, about how, you know, the the markup had come out of the banking committee and seemed like we were moving towards a markup in the ad committee and then there was the Brian tweet and that seemed to throw everything a little bit into disarray for a little bit and everybody kind of retrenched.

I I'd love to hear your conversation or your thought process around like what has transpired over the last couple weeks because I think from from my perspective it feels like there hasn't actually been a ton of movement in that period of time since the banking committee markup came out and I'm a little concerned about the timing of if we don't get this done in the next eight weeks then does this just kind of get punted for or you know the other priorities take hold. Uh and then also um you know what you think we as an industry could be doing maybe better than we've done uh to try to get this where we we want it to be because it seems like we're a lot more relative to genius as an industry we're just a lot more disagregated there seems like we're a lot less you know focused as an industry on getting you know something across the finish line.

Yeah. Uh okay I'll try to remember all different parts of that question. That was a that was a very big multi-part question.

So the first thing is yeah so right after the banking markup was off and didn't happen I think everybody tried to get some sleep for a little bit both on the staffer side and on the industry side and I think then you saw the yield meeting two weeks ago and then earlier this week. So that has sort of started re restarted things in the background on the other issues too.

And I think there is a general thought process that if the deadline for a yield agreement is end of February that industry and members need to be in agreement on all other parts of the banking side of the bill by then too. And then there's a hope to your point about the next eight weeks that there's a markup sometime in March to try to get this out of banking and then onto the Senate floor.

And I will say like you don't see the Senate staffers, you see a lot from the senators themselves, but they are working tirelessly. And I'll get more into industry at the end. But there are a lot of people in industry who are working tirelessly too.

And having been through all five times we've tried market structure. I can say it is exhausting. Uh, and it's also emotionally exhausting because there are, like you're saying, Rob, like these fits and starts and you have to think about like what can we live with and you also have to put it in the context of other large financial legislation like DoddFrank and things like that.

Like none of these bills are perfect. And so I do think for as an industry, we need to think about what can we live with versus is this bill perfect because we're not going to get it to be perfect. And I think we can agree the industry itself hasn't been perfect and hasn't worked perfectly over the last you know however many years 13 years so maybe more.

So we should not let the perfect be the enemy of the good for sure.

The a side we did see the markup. It was very partisan. It made itself the the a markup made it out of committee but in a partisan way 12 to 11 that is still being worked on too for some final tweaks as well. And I think we're going to see that progress too.

I think there has been progress on yield. There are a lot of rumors that there is close to maybe agreement on yield and maybe there's some deals around yield versus tableabling other topics and the like so that we can actually move this forward in a productive way both from the congressional industry and white house because the white house says things they care about too.

So, you know, I'm going to put I probably Poly Market's a little higher than I am, but they're usually right. So, I would say this is the closest we've been though to seeing something that could pass.

What did you make of the um so there was the meeting yesterday, I believe, uh or maybe it was two days ago at the White House. Yeah, Tuesday at the White House around trying to come to some sort of agreement with yield.

There was some representatives from the banks themselves. There was representatives from the industry around this kind of new language that would help us, you know, solve this idea that there maybe some prohibition of stable coin issuers giving yield back to back to the end customers through, you know, kind of those those intermediaries.

And that language that came out in I think it was kind of a memo that the White House put out afterwards was actually more restrictive than the original language that Coinbase did not like that was in the banking committee markup. and uh and used words like you can't give yield for even the use of stable coins which uh or purchase of stable coins which in my mind is akin to saying you can't give cash back for swiping a credit card right um and it strikes me that that language is pretty problematic for the industry.

So what did you you make of that and what that means for getting to some you know sort of middle ground?

You know, I think of all of these negotiations. I I was a litigator back in my former life and I had to negotiate settlements. And I think of this as very much like you're going to pull back to one side or the other to try to get to a place where everyone can live. Whenever I was explaining to clients what settlement means, it means what I said before, whatever you can live with.

It's not like anybody leaves a settlement perfectly happy. But I do think that there is something to be said about happiness for getting something that we can live with. it won't be perfect across the line. And um without going into too many of like the details of what the language said in the memo, it wasn't like no yield ever. It was just I think the banks are really concerned about the holding piece of it because but the new language so that's what's in the in the banking committee markup.

But the new language out of the memo on Tuesday was also no not even for using stable coins. Yes. But that's to your point on like more like swiping credit cards. I but that doesn't it doesn't talk about like marketing rewards things like that.

So I don't know I mean there there's industry in the room who cares like we we know that like Paxos was in the room Coinbase was in the room those types of players are in the room who have a big stake in this. So uh I think the White House is super motivated to get this across the line.

You saw Secretary Bessant come out earlier this week really trying to push this very very hard. So there's a I've never seen such a push from the administration itself to try to get this across the line. So I am hopeful that there will be negotiation that everyone can live with.

I think the other thing to remember is after the banking markup got pulled, you saw so many people come out in favor of the bill and trying to push it forward. So I don't know where the everyone's going to net out on this, but I think there's a lot of motivation to try to get this done even from the industry side.

Okay. Yeah. I'm hopeful that the language that came out Tuesday was a little posturing so that we go with the idea that oh, we go back to the other language that originally that Brian in Coinbase said that they didn't support because because I think that uh using language like you can't even give yield for for the use or the purchase of stable coins. Um essentially probably carves into like the loyalty business for most fintex today.

It would make it really hard for fintex to even adopt some sort of like stable coinbased loyalty program. So, at least that's that's that's my perspective. But I I don't know if there was enough definition around use though, not to over lawyer, but then you leave but then you leave it up to the SEC or the CFTC to decide like what the rulem is around I think you actually leave it up more to Treasury or the OC.

Yeah, I guess I guess that's right. Do you leave it up to Treasury or the OC on the rulem side? But um I think you'd rather have more you'd rather have the definition of more defined in law or I mean you tell me you're you're the expert.

So yes, in some way yes, I'll say two things. There are rulemakings across all of the parts of the bill that everyone should be really mindful about. Um there is a lot of highlevel guidance or structure and then everything is reduced to guidance or rulemaking.

I think on the token side uh in title one of the banking draft a lot is left to the SEC in terms of defining control uh defining entrepreneurial and managial managerial efforts things like that and then we see a lot in title three on DeFi that is left for treasury to define a lot. So you have to think both what do we want for this bill and there is a lot of rule making here and will the rulem be able to get done in this administration or are we going to have to see it in the next.

So you want enough scaffolding and structure in this bill to protect the things you care about like you talked about. Um but I think we're going to see a lot in rulemaking and people are punting so that we can get something across the line. But there will be a lot that remains to be seen.

In positive news though, if we cannot get to a definition on use, you will spend a lot more time in DC advocating for what use means. Uh, and look, the thing I think people forget in this country is that we we're you're in DC.

You are literally going to talk to people on the hill and in the agencies and say what you care about and people will listen to you. and that and I will tell you crypto has had so much access in terms of the staffers, the me members of Congress um to really push for what they want and so that's pretty unique.

You just don't get that in other countries and this industry has gotten probably more than other industries have for sure.

I was going to ask you like is the industry being too greedy? Like let's not forget that we we're in a very hostile environment and now we're have a seat at the table. And it's it's I understand why the backlash to Coinbase for instance. It's like hey guys we opened the door you came in here have a seat at the table and now you're acting like a you know you're being pretty selfish.

Uh like is the industry being too greedy and are we at risk of like shutting the door for what is a win? It's not a perfect win, but at least it's it's a good win to then set the foundation because we don't know what kind of regulatory environment we're going to be in four years or three years time from now.

Yeah, I think Rob's point is a really important one about the rule making. Like, is there enough in these bills that we can live with? And then look, the rule making process is nasty, brutish, and long, not nasty, brutish, and short. and it gives everybody another bite at the apple to help shape where things go.

So you have to look at what's in the text. Is the text itself too restrictive? You know, the use thing is is an issue, Rob, but if it is reduced to rulem, that might be something we can live with and uh you know, figure out what's next.

I I don't know if I'd say the industry is being too greedy. I understand people have thought about that and talked about that in the past, but I I think the other part of it is I don't know any other industry who went through what this industry has gone through. Not the past four years, but the past six if we're really being honest.

Things started um I I would say getting pretty rough two years before Gensler came in even on ICOs understandably. Um but we saw things like Ether Delta precede Gensler. It gave more more guidance than it did like true smackdowns and you know true regulation by enforcement.

But this industry has gone through so much more. I don't even know if we understand the full promise of what this industry can bring forward because of how hard the last six years have been. And so I think we should fight for everything we want in these bills.

Fair enough.

What are the major wins in the bill in your opinion? like if if it passes in its current form, um I think we'll have a framework for issuing tokens in the US. Uh one thing people are not talking about that everyone should keep in mind is we're going to need a corollary tax bill which people are working on behind the scenes.

That's sort of coming up to be able to issue tokens in the US. So we're going to need that to help us. But I think issuing tokens in the US is going to be something we'll see again. Um so that's a big win.

I there's a provision in title three that if we can make a couple tweaks to it will allow financial institutions to plug into permissionless DeFi by using a risk framework. That is a huge deal for me. I know we saw the Black Rockck Uniswap integration yesterday, but that's permissioned, right?

Very cool. Obviously, everyone understands that DeFi tech is great for rails, but permissionless DeFi is really we've seen gated DeFi in before. Santi and I when I was at a uh we saw an attempt at sort of permission DeFi and the gatekeepers make it hard to really bring the promise of DeFi forward. So I think if we can get FIS to be able to plug in to DeFi that's a huge win.

I think acknowledgement of self-custody is a really big win. Um there's a provision called uh the BRCA. um the regulatory the blockchain regulatory certainty act which is in title six of banking which says that non-custodial software developers are not money transmitters. So that goes to the question that we've seen in the Roman ca in the Roman storm case and in the um the samurai case and stuff like that.

So there are some winds in there. They're buried and they're not as big and splashy as yield or tokenization of real world assets but they're in there.

Can you um go ahead?

I was just going to ask you going back to the yield piece. I know it's broad and intentionally broad. If you were to wave a wand and write it in the way that you could, how would you, you know, control F replace paste your definition?

Well, we we just wouldn't we just wouldn't address the Genius Act, right? Like this is a whole different bill and we're trying to rewrite the Genius Act like that. I mean, I think that would be everybody's Does it go back to the state versus federal? Because didn't the genius had give?

No. No. I mean, I think I I think Rob is kind of right. That's in an ideal perfect world that you wouldn't be rewriting genius. I will say there are so many cooks in the kitchen on this that I generally try to stay in my lane and not opine.

I mean, I care about yield because I think it's an important and stable coins are an important part of um the ecosystem, especially the DeFi ecosystem, but there are a lot of players who are making edits and thinking hard about yield. And I really do hope we get to a good place on that because I think, you know, everybody stable coins are important and Rob talks about this all the time from the fintech perspective and changing how we do payments and stuff like that, but it's also really important to keep DeFi alive in a really important way and to continue to have ongoing stability in DeFi.

So we need to make sure that stable coins are protected in all the ways for all different parts of the ecosystem.

So that's yield and that's you know dominated the first 15 20 minutes of this podcast and I think that's dominated most of the time on the hill right now around around the bill but there are some other things that people care about and some things that people see as problematic and you a little bit about the winds. Can you maybe just for the audience talk a little bit about what those few other kind of major points of contention still are?

The biggest after yield there was this question around tokenization of securities which was section 505 in the banking draft that came out in January. People were really worried that that provision which was by the way put in very much at the last minute. Um and people had not seen it at least extensively before it came out. So it was a surprise an Easter egg as they say.

But that seemed to people a lot of people read the provision differently that seemed to curtail the SEC's ability to allow tokenized securities to take many different forms and be marketed in many different ways. Some people are like this is just a restatement of the SEC's authority. As a lawyer, I don't love restating. Like, if you're using words, you should use them to mean something. And so, if you're going to add it to a bill, I take it to mean something.

We didn't get to see any colloquy on the floor or any discussion about what members thought it meant. So, we don't have sort of legislative history around that. But, if you're going to include something in a bill, you think it means something. So I think we need to make sure that section 505 on this tokenization of securities does not cretail the SEC's ability to allow for tokenized securities to come out.

I think the other piece that is problematic or that there's problematic is too strong a word that there's still negotiation over is title three which deals with the elicit finance and DeFi. So 301 talks about controlling software developers. So if you have control over a over a smart contract protocol where are your regulatory obligations?

I think that this piece is will allow Treasury to make a lot of rules around what control means. I think that is going to require a lot a lot of work if this passes and how to think about rulemaking around that. Section 302 in the D5 bill has questions around what we do for frontends and sanctions control and whether the it gives Treasury the ability to impose KYC on DeFi front ends which you know is another hot topic.

We want to make sure that the financial institutions can plug into permissionless DeFi in a way that's not too ownorous on them. Um and we want to make sure that self-hosted wallets and financial institutions can work together like financial institutions can give access or interact with people's self-hosted wallets. So that's where section three is.

Um and section one there are some pieces is really about issuing tokens in the United States and there are questions there around this definition of common control because this as I said for title 3 there's this idea of control that goes throughout and look in the industry we've gone from something like UNIV v2 or even tornado which has no admin key totally permissionless can never be changed fully immutable to lots of different permutations of what DeFi looks like.

Some of it looks like onchain finance and there is a there's a really clear control and some of it is this hybrid where somebody holds an admin key, they're never going to use it. And so we do really need to have something there that's consistent that does not turn software developers into financial institutions subject to the bank secrecy act.

That is the most most important thing we need to be doing in this bill in addition to all the other things we talked about too.

Rob and I were at the CNBC event in New York earlier this week and um we saw Jan Carlo I think the former CFTC chairman and the current chairman he was talking about obviously the Howie test is something that the industry's talked about a lot um my understanding is that some you know this bill would kind of replace that in some way and and there's this maturity test um can you talk about that like what does that mean for crypto projects that have always been thinking about this day and night about this Howie test.

Everyone in the industry, it's a person. Yeah, I don't. Yeah, you're still going to be up thinking about the Howie test, but it's just going to be like I don't remember it like section 105 in the banking bill. Um, so the maturity test was in the house version of this in fit. There is a different question. It's much more around control in the Senate bill.

And there is rulemaking from the SEC around this question of entrepreneurial and managerial managerial efforts like when you can graduate out of being doing disclosures and things like that with the SEC and so if the bill passes you're not going to have an answer day one like oh I know I'm done. Um and so uh are moving in the are we moving in the positive direction or or not really.

Yeah, I think so. Um, I mean, as I said, I think being able to issue tokens out of the US is good. The real question is how fast can the SEC get rulemaking done around this entrepreneurial and managerial efforts?

So, you have a view on how it works. Um, you know, we have decades of case law around what that means. And I don't know if you guys remember this, but like back in 2018, 2019, what the SEC then had as Finnhub, which was where you would go in and talk about your crypto projects, and then you get a subpoena right after. Um but uh back then they put out sort of guidance around what entrepreneurial and managerial efforts look like and it was like 80 factors right 78 factors something crazy so I think rulemaking is going to be really hard around that so I don't think we're going to stop our sleepless nights around the how test yeah uh I get asked the question a lot when I'm talking to normal businesses like can they use stable today they hear about these things like contested in TV and there it leaves uncert certainty in their mind.

It's like, can I actually use a stable coin? Can I not? Regardless of whether the bill passes today or not or like, you know, this year or not, like are businesses okay to use stable coins in in their current form if you go through a Stripe or, you know, USDC?

Sorry, I I did hear everything you said, but my computer I have many tabs open. It's my fault. Um, of course you can use stable coins. I think Stripe is using stable coins. you know, they have privy and bridge and all of those things that stable coins are very integr integrated into.

So, I don't think there's a problem using like using stable coins for payments as Rob said, but there are the other permutations around them and obviously we're in the midst of figuring out what to do about yields. But yeah, I mean I mean a lot of the a lot of the activity has been on the B2B payment side.

So like a lot of the growth has come from that. So whether that again that's just a point that I think people need to hear like there's these issues around the edges that are being debated that affect certain stakeholders but businesses are using stable coins today and whether this bill passes or not that trend is going to continue to grow. Uh I think Robbie had a pretty aggressive prediction which would be to you know go into 10 what is it 10 trillion um or 100 well I said on the crypto credit card side we're going to get hundred billion dollars worth of settlement with Visa but that's really still relatively small for for Visa but I I I don't um I we need to remind everybody how bullish I am on stable coins.

So uh I think that's uh that's clear. Um no but I I listen I think on the on the stable coin side the one thing we have seen and you know obviously in the portfolio right now is there's definitely a lot of the tooling is kind of catching up to the volume right so the okay well how do I make sure that I'm doing the right transaction monitoring how do I make sure that I'm doing I understand like where if I have nested or not nested flow and like how I you know who how do I make sure that I know who that end customer is and you know what types of checks am I doing how do I pass along the right type of information that type of tooling right that you see in like traditional payment uh and banking ecosystems is catching up a little bit to a growth that had kind kind of got in front of it.

And so I think that's a topic for a lot of people, but um that that's a problem for the service providers. It's less of a problem for the businesses and and the businesses are all, you know, they should be using stable coins. It's better, it's cheaper, like go use stable coins.

And notwithstanding the notwithstanding the negotiations over yield that are going on right now, banks are getting ready to issue their own stable coins. I'm sure Rob hears about this much more than I do, but like they are all staffed up. They are getting it ready. Banks that you didn't even think would be issuing stable coins are going to be issuing.

What that means and how that looks and how they can be used is a whole different question. But uh the banks are getting ready for stable coins too. Every every bank is going to have a stable coin. everyone and all the banks, all the asset managers, we have Fidelity launch theirs, all the fintexs, we have CLOUSD like and I think I said at the beginning of the year we'll have at least 50 financial institutions or fintexs launched on stablecoin this year and that might be undershooting.

I agree actually.

Coinbase cryptobacked loans powered by Morpho empower users to borrow up to $5 million using Bitcoin or $1 million using ETH as collateral. Loans originate in seconds with no additional credit checks and competitive rates typically between 4 to 8%. Use USDC for down payments, debt refinancing, unexpected bills, and more. Repayment anytime with no fixed deadlines. Over $1 billion in loans have been opened through Coinbase to date. With the Coinbase app, you can manage cryptobacked loans with ease. To learn more, click the link in the show notes. As always, investments in blockchain technology involve risk, terms, and conditions apply.

The Blockworks Digital Asset Summit is back in New York March 24th through 26th. We'll have top speakers from leading asset managers, financial institutions, DeFi protocols, crypto companies, and policy makers all under one roof. Think Black Rockck, Coinbase, Robin Hood, and more. Follow the link in today's show notes to buy tickets and make sure to use code Empire 200 for $200 off at checkout.

Maybe you So Santi and I or Santi mentioned the CNBC event that we were at earlier this week. Um the other thing that uh chairman Mike Zelig at the CFTC talked about uh which he then launched a podcast I saw this morning on on lots u talking about is prediction markets and that's been I think that's near and dear to all three of our hearts on this uh it is on this pod and so I'd love to hear you talk a little bit about that and kind of I would say just how vocal uh chairman Celic has been about it and um asserting you know the CFTC's right to regulate these markets and you know what you think that means and um I I think some historical historically that feels also very um important to me and kind of the point we're in.

Yeah. So the other thing maybe you guys talked about this last week but because I don't remember the exact timing but you know Chair League also rolled back the event contract rule which sort of shut down or really made it very difficult for prediction markets to operate in the US the way they are. And uh I think that you're going to see that um there is going to be a big turf war between the states and the CFTC themselves.

So in the crypto.com versus Nevada case, uh the CFTC actually filed an amicus brief. Um interestingly, it was filed by former Cher and Carlos firm Wilkkey. Um and he and Cheryl are very close and worked together when they were at Wilkkey. Um but I think that we're going to see a lot of interesting things in the US for prediction markets.

I think that chair Celig as you said is I mean bullish he probably wouldn't use that word but really making sure that the CFTC can assert its jurisdiction but I think that the the craziest or the hardest line is going to be on the sports markets on these prediction markets uh versus all the other financial markets I don't think anybody really cares about right like oh uh is you know what's the percentage of market structure going to pass like the states aren't that worried about that but they are worried about these sports markets So I think some narrow stuff there.

It does strike me though when you listen to to Cher talk about it and if you listen to the odds podcast and first thing I did this morning when I woke up I woke up and I was like I can't wait to hear the CFTC chair talk about prediction markets. Yeah. Um and he he's he does not make that distinction like his perspective very much is that like these are markets.

These are markets that have specific technical ways of which they need to be regulated and the regulator should be us because we regulate markets. there was no, you know, he he he he talks about this analogy to the 1930s when um people used to gamble on like commodities and there was all there was like this kind of like business side and the and you had you know the the Chicago Mercile Exchange where like you know professionals were um hedging out risk and and using these financial markets and commodities for really professional reasons.

And then there was like bucket shops that were also where people were gambling on commodities. And and he really analogizes it to that which is that these are markets. These are markets of which we should be the regulator of. And it doesn't matter if they're if it's sports or it's politics or it's anything else.

I think that's right. And if you think about how prediction markets work versus these gambling markets, they are set up really differently. We were explaining this to our children who now are really interested in prediction markets because kids like like they've seen ads all over the place for it. um and that the way that you know gambling lines and stuff are set up versus the way these prediction markets actually function are very different technically.

So I understand why he's going to why Ters Eagle is going to make those distinction between sports markets and prediction markets versus not. And he also took some uh he also took down I don't remember the exact details around it something around the sports uh the sports market guidance that had come out from the CFTC previously. So he is definitely going all in on it.