Is Crypto Regulation Ready?

Thank you All right so The Big R Um I need to talk first of all Justin I Have to ask you about bring it on Uh you know we don’t we haven’t had many Guests who have been here who have been Directly affected by the FTX right uh The FDX as I call it no yep I’d say the Uh the big Scarlet f Anyway we were a lead investor to FTX we Invested 278 million dollars which is a Lot of money in absolute terms but is a Very very small percentage of our Portfolio yeah thankfully we had no Exposure to the ftt Token we kept no Funds on FTX for us this is a learning Experience and ever since the word I Could go on but I’ll be honest my boss Co-founder Matt Wong of Paradigm did an Excellent much more eloquent tweet Thread about what we’re learning as a Firm after this and I would all Encourage you to look to that For us we look at this as why more than Ever we think we do need regulation Right that part of what happened here is That once again something is blown up Offshore but the risk comes back to America and American investors that’s Why you want to find a way to let this Industry grow here in the states and now Perhaps opens us up to the major Conversation we can talk about yeah yeah

For sure but also just kudos for coming Because we’ve we’ve had a lot of people Drop who were affected and didn’t want To come here and didn’t want to talk About it right well I mean that’s the Thing right we did a big event yesterday In DC not to cross advertise we called It hands on web 3 we brought 10 of our Portfolio companies uh coinbase uniswap Royal we also invited Circle and stellar And filecoin which weren’t even in our Portfolio moonpay as well and an artist An FTR it’s called creature world and we Had scheduled this for months beforehand And the week uh that FTX blew up I Pulled our portfolio and I said do you Guys still want to do this and I thought The answer was yes but they said more Than ever we believe in this Tech if we Were to reschedule that suggests we Actually don’t agree that this is really Important this is the best time to Educate people right and we got over a Hundred people from government to come And see this and I’ll never forget that One skeptic looking at you not to play Favorites Royal seeing how it works said I get it now so I’m trying to use the Old JFK quote that like the Chinese Character for crisis is one removed from Opportunity right this is probably the Best time now to educate people about Crypto and say how much bigger it is Than just any one company or even just

Token trading and I’m hopeful we’re Going to do a lot more of these as an Industry and Paradigm but education has Been like a watchword of the day a lot Of people have been talking about it and Expressing similar thoughts about that This is now an opportune time because There’s conversation and then you can Have education right but then on the Flip side you have SPF says Regulators and says I did that Personally I was a regulator He meant you no but the uh and he’s like He says they’re all bad people and They’re all doing bad things and like I Think hours later because that was a Private conversation that was reported Out right there’s no expectation of Privacy he’s talking to a reporter but The the on the other side you know he Had his public statements which were Like oh like uh I’m encouraged whatever They were obviously the fluff that he’s Been selling so but what impact is that When you’re talking about education You Full have to you first have to climb out Of this deep pit of like now everyone is Going to paint with that brush right Someone who is double talking and saying Just the most vile things you possibly Can about people who you’re hoping will Partner with you in the industry this Really goes the part point of it though Right which is for us if I were to go as

Justin Slaughter and say trust me bro This is really good it would be that Problem that’s why for us we always Focus on the tech I try to get people to Say okay you you’ve got reasonable Concern and you know what no one has Done yet is sent here you know here is a Laptop with uniswap on it have you ever Seen it before we did this for regulator Um earlier in the year who’s coming to Our office and he’s wanted for a chat And I was like actually let’s do a demo Of uniswab and metamask and I think I Wanted to openc as well And someone said on the team well Justin He’s seen this before and I was like no I don’t think so and the reason is very Simple first off there’s been a pandemic Usually when you work in the government I was at cftc in the Obama years and I Was at SEC that started Biden admin you Normally would do visits to companies or If companies come in but first off you Can’t do visits to companies during a Pandemic’s teeth just doesn’t happen Second you can’t do demos on government Computers usually because they’re Firewalls right no one in Government Can Experiment with you know most things When I was in government it’s a great Example you can’t as a government Employee have Twitter or Facebook or Anything other than LinkedIn on your Computer

You can on your government phone even Which is not a big deal for things that Are ubiquitous in your life during the Night time but for finance it’s very Hard to understand how crypto Works Unless you experiment with it and this Is why right the office of government Ethics a few months ago saying no one May own crypto and work on crypto policy As a problem right because if you don’t Understand how this works you’re going To struggle to regulate it well yeah so Catherine you have mentioned on our Preparatory calls that you you know have Had lots of conversations with Regulators and have worked with them do You does that like do you empathize with That with what Justin’s talking about And all like also how has this changed In the past week have you have you Noticed a relationship shift right so I Want to pull in a couple threads that Justin mentioned I too have spent time In the government I was a prosecutor for 10 years and feel like I’ve seen a Number of the Sam now I call them Sam Bankrupt freed but a number of those Types of personalities yeah and the Threat I want to pull on though is the The regulatory thread which is why we’re Here and the fact of the matter is had More time been spent when it should have By Regulators in the kind of earlier Days I know we’re still in the scheme of

Things in you know early days early days Had regulation been set started that had The education started at that point when It should have we would not be where we Are today we’re here today because we Have offshore activity and more and more Activities being pushed offshore so Many folks in the regulatory world at That time and we talked about this Before we’re hoping that this would all Go away And ignored it if you ignore it we don’t Give it the Bona fides if we regulate it That means we’re legitimizing it Legitimizing exactly putting the stamp Of authenticity on it we’re past that Point it’s not going away and it’s Certainly not going away even with these These recent events in these recent Events will continue to unfold I don’t Know if anybody saw the the Declaration Today by the new CEO that’s it’s an Eye-opener it’s definitely worth a good Read and you can see kind of the shell Game that was going on and a lot of that Shell game is because you have so much Of the activity that’s offshore and when I was a prosecutor when we had offshore Activity it is so much harder to look at It’s so much harder to get people back I Mean we’ll we’ll see extradition at some Point or we’ll see him make a run for it He’s the type of personality you might See a run for it I think we all saw the

Argentina Twitter thread this weekend But the important part is that Sometimes the best changes and moments Of punctuated equilibrium and I believe We’re in that moment right now it’s a Science term but it’s equally applicable Here for regulation we have needed Regulation but we need the right Regulation we need that I’ve called it The Goldilocks regulation if you do too Much you continue to push activity Offshores where it’s more dangerous for Us on many levels from a national Security standpoint to getting criminals Back standpoint but if we get the right Education the right regulation but they Have to understand how the how the Businesses work and operate which is Where you guys come in and your activity Yesterday is really important part of That but we’ve spent a lot of time Talking to members of Congress there’s Some interesting bed fellows we’ve also Talked about uh in in Congress on both Sides of the aisle but there’s a lot of Activity going on right now and I think It’s a slow process but it’s one of the Best places that we can look to get more Clarity and the right framework for Crypto on the go forward to try to avoid Your scammers and your your ftxs right But I so I’m curious about the like that This doesn’t go away and you say like Especially now but to me I’m tempted to

Feel especially if I’m putting myself in The uh in the position of someone who is Sort of like crypto reticent or whatever I’m like this is the better than ever in Terms of it going away like it seems Closer than ever to me just having to go If I now ignore it for maybe I don’t Know two more months another couple Dominoes are going to fall and then I Don’t have to worry about it anymore This is that not the case I would say One person who’s pretty smart in the Biden admin said this is the opioid view That if I can just ignore it goes away And it’s In fairness this has happened Four times three times now every four Years there’s a bubble there’s the Beginnings of Regulation a bubble burst And Regulatory energy dies this happened In 2014 when Mount gox exploded all Interest regulation went away for Several years in 17 when icos uh boomed And you saw the price of Bitcoin crossed 20 000. was the first time I started to See in DC real interest in regulating Crypto giving guidance and regulation For it when the price crashed in 18 that Went away This is an amazing story I love telling This crypto was never discussed in the Lead up to the Biden Administration Taking office it wasn’t seen as a major Issue It was surprising to everybody have to

Work on it when the by Administration Realized they needed to deal with it With the EO almost no one in the white House wanted to work on this right so Now right we can do this again we can Have it go away where people think it’s Going away do another four years Industry goes back bigger than ever and Even harder to wrap our heads around all The new areas of it or we can just Respond to it as it is which is what Everyone wants it’s very interesting in That you have a chunk of the industry That is the most I would say libertarian That doesn’t want any legislation or Regulation you also have the most Aggressive parts of the progressive wing Of the democratic party saying the same Thing and they’re both born I think out Of a misunderstanding of some part of Life either the government or crypto Yeah so this I I wanted to talk to about Catherine you mentioned Um you know the Goldilocks zone and Sarah I think this is maybe more your Area but is there proper Goldilocks zone Because a big component would be uh like Koic right and you have The the alternative will always be you Know the not to the level of kyc that Perhaps we need or would want to prevent Like anti-money laundering uses like Here in the U.S like is there ever a Steady state where you think there can

Be enough onshoring to do legitimate Business while still ensuring that those Necessary protections are in place I Think there is a path for that and I I Actually think um to give some credit to State Regulators in the U.S is utterly Annoying as it is for every exchange a Lot of the state Regulators have had to Get smart about this Um and I actually feel a little bit I Feel like we’ve rewound the clock to the 2014 Mount gox era and at the time I was A younger lawyer and was in-house at Coinbase and I remember going to all These Regulatory Conferences and trying to get them to Take me seriously and and all they Wanted to do was talk about Mount gox And it feels like oh we’re headed that Way again right now You’re right TSD on some level um but I Um as a kind of a like the good news is A lot of the state Regulators did figure It out in the wake of Mount Cox and when Companies like coinbase and circle were First going out and getting licenses and When the bit license regs were being Written Um and actually I had a pending Application for a client in Texas and I Got an email today from Texas Regulators Saying hey we want to ask some follow-up Questions in light of you know the last

Week’s worth of events and um so they’re Really on it they pay attention to the News and they’re active and and Um so I do think there is a sweet spot To find the issue I have is I don’t Think that is to continue to work Through this Patchwork of State money Transmission licensing these regulations And the these schemes were built on Remittance laws and so they’re really Good at regulating kind of the safety And soundness and safety and soundness Concerns as it relates to money transfer Systems but as everyone in this room Knows so much about crypto and crypto Assets are not just purely monetary Value and so uh I actually you know I Think they’re in a heart the state Regulators are in a hard spot when it Comes to questions like what assets Should be listed on an exchange we Regulate because on one hand they are The only Regulators actively regulating The space right now on the other hand They’re like this is not what we’re in The business of doing historically Um and so that’s why I think there’s a Huge opportunity I think there’s going To be a big hurdle to kind of get over The malc ox 2.0 as it relates to Regulatory discussions but it can be Done and I I actually do think the sort Of safety and soundness model that Exists for money transmission is exactly

What we need at some kind of federal and More Prudential level for the rest of The industry for other types of assets That are represented by blockchain-based Tokens yeah and so that complexity is I Guess why You know a lot of people argue that Gensler’s approach is not really working Because he’s trying to ill-fit it into a More simplistic category right or but What so what about let’s talk about Gensler in the context of this right Because I’ve seen you know the question I think posed I forget exactly the Article but it was essentially And I’ll ask this to you is the FTX Crash you know gensler’s fault or did it Prove he’s right I mean look I think my Argument and I love Gary I worked on Gary’s nomination we say the start the Idea that any one person is wholly Responsible for this is probably Fallacious the way I describe it is this Is the build up of 10 years of benign Neglect not just by the current Regulators as well but the previous ones Right what has not been noted enough is That the benign neglect of crypto began With Mary Jo White at the very latest if Not even before that continue with Jake Clayton and is continuing now I mean the Biggest problem is the fact that as one Person who’s very senior at the SEC put It to a co-worker of mine just so many

People in the building not just this the Chair but the staff to just want to wake Up tomorrow and have this go away Because crypto challenges a lot of very Tough questions what happens if you Create an asset and now it’s not owned By anybody how do you custody that how Do you S1 that nobody knows what happens If we tokenize everything what happens In terms of the information disparities What happens to all the incumbents that Have built their entire business model About being incumbents and rent Seekers It’s really difficult I mean the line I Actually say is that it’s bigger than Any one person it’s not just about Gary It’s not just about chair Benham it’s Not just about Janet Yellen when Something is this big and massive that’s When only Congress can actually solve it I saw there was a Washington Post op-ed Today that just basically said The Regulators need to get together and you Know start figuring out jurisdiction I I Will say well Pat last for the past in Dodd-Frank which was the last time we Did a big fin rag Bill there was a Provision to require a memorandum of Understanding between the cftc and the Federal Energy Regulatory Commission Over unmasked electricity data and how To share it it took four years to do a 30-page document jurisdictional fights Between agencies are awful yeah I’ve

Never seen anyone be good at them the Only way you ever get them resolved is Either a decade-long court fight or more Commonly Congress says here is where the Baby is going to be split we did this in Swaps swaps 90 went to the cftc then Chaired by Gary Gensler 10 went to the SEC I you know my personal view not Speaking for Paradigm is it’s probably The case that you’re going to have to Take crypto and spread it across many Different Regulators because this is so Much bigger than any one industry yeah That’s part of the burden but it also Part of getting to the right answer Ultimately because we do have multiple Regulators and they do touch the space And whether it’s crypto or Trad fi where There’s money you’re going to have People trying to come in and get it and You’re going to have the same types of Themes that we had post Dodd-Frank after Another moment of punctuated equilibrium And you’re going to have to answer the Same types of questions whether it’s Custody whether it’s liquidity whether It’s you know proof of reserves you have To answer those questions and those are Some of the areas where we don’t have The questions answered and Justin nailed It on the head there it’s because it’s Hard you have to spend some time working On that it is it is easier to go out and Go after enforcement actions like track

Down those facts those facts are out There track them down talk to people Figure it out it is definitely harder And more involved to sit down and think How does this technology work and let’s Figure out regulations that that work For the guard rails how do we Define Some of these terms which are the Foundations of getting to the right Regulation and that’s work that has Started to be to begin and we have a Number of bills in Congress but I do Think there’s going to be a need for Some congressional action to sort out Who’s on first who’s on second who’s on Third from a regulatory standpoint Because there’s just been too much Territorial infighting we’re not getting The memory memorandums of understanding And we can’t wait four years that would Be over a tiny thing I mean it’s really Amazing I found this scary thing to People is to tell them how insanely Complicated our current Financial system Is and how things don’t work very well My favorite example is this someone said Well why can’t these firms just get Registered I’m like well you can’t Voluntarily register you apply to the SEC and if they don’t fit you don’t fit Under a current box if you don’t raise Any novel questions you don’t get Registered well what happens then well You you know either you don’t work in

The U.S or you spend several years in Several tens of millions of dollars Getting the questions answered I did This for a company as a consultant Um to be a very banal digital asset BD And they took two years several million Dollars got registered have no volume Because they still can’t get their Questions answered I mean the line I Like to say is when one company can’t Figure out the rules it is in the Company when two can’t figure out the Rules it’s on the company when a whole Industry and hundreds of companies can’t Figure out what to do it probably is on The Regulators right It’s disingenuous to say come in and Talk to me but not have the rules of the Road we need those rules of the road and This is for me I mean we we do speak to The regulators and we’re trying to to Get to that point and to help figure it Out but there are a lot of players out There that are good actors that need to Have that definition they’re not trying To the narrative that’s out there from Certain portions of of members of Congress The Narrative that’s out there Of they just don’t want to be you know They just don’t want to do this they Want a skirt and they want to be Fraudsters that’s just not accurate Right that that’s it’s too All-encompassing of the entire crypto

Ecosystem it’s just not it’s not the Case yeah and I think to the comments Around educating Regulators like showing Them because because a lot of times they They also may not have in their personal Lives access to the the right tools and Devices to kind of experiment on their Own and I think that’s really critical Because The reason it’s so hard the reason it’s You know it fits one company it’s them And two but if it’s everyone is because These assets are are hybrid assets that Don’t exist prior to prior to blockchain Right they have elements of monetary Value many of them are used as part of Investment schemes many of them have Other types of commodity utility value Um and and because in one piece of Technology we have this kind of bundling Of of how we’ve previously drawn the Lines for regulations is exactly why It’s hard to fit in any one bucket but Also why it’s so important to educate The regulator so they understand that That’s what they’re dealing with when They’re figuring out what buckets to put Things in but something I’m hearing as You’re talking about that is like is There a need for something even higher Level is there need for organizational Like change in the regulator space are The old agencies no longer able to Handle kind of the complexities of the

Modern Technologies can we get another 45 minutes I mean look it’s worth noting right that Like we are blessed and cursed in this Country with a very alphabet soup of Regulators in Singapore they have one It’s monetary policy and regulation for Markets and Central Bank that’s the Mas In the UK they have three they have the FCA the bank of England and the treasury I did account of this we have like nine It’s cftc OCC FDIC Inu ncua treasury Um Cfpbs I mean it’s it’s incredible right And the last but In fairness having Worked again at both CFC and SEC it’s Been discussed for years that we need to Merge CFCs you see I will say having Worked at both there is an argument in Our current system for having many Because it allows the prevention of a Sense of like one giant regulator that Becomes a bureaucracy And it allows more access to points Therefore for the industry more ability For people as well to have additional Routes to whistleblower complaints less Risk of you know being overtaken by one Industry it’s more decentralized but it Does mean that when you have a new Category show up it breaks the whole System which I will note right part of The problem here is that even more than

Swaps this really breaks the mold for How products work which is part of why We’ve had so much trouble fitting it Into our current regime and it’s Supposed to create the having multiple Regulators you have Niche Specialties But then where does crypto sit right so You know there’s also talk of should There be a regulator just for crypto I Think let’s start with what we’ve got Right That’s another adding another 25 years And long term I’m not even sure that That’s sensible again because it’s such A hybrid technology you know that like Arguably there are far more legal issues Involved with like intellectual property Rights as we’ve seen nfts evolve in the Last year or 18 months And I don’t think any money transmission Regulator or Securities or Commodities Regulator really probably has the right Expertise to regulate nfts or IP issues At least as it relates to nfts and so I Think Um I’ve heard the yeah should there be Like a crypto specific regulator and I Think that the reality is we need to Just get better at it figuring out which Crypto like when we say crypto maybe It’s maybe it’s a terminology thing that We need to come up with subsets of Crypto right and based on what subset or Subtype of of asset it is that’s how you

Think about the regulatory landscape for It yeah I mean we call this TC sessions Crypto we’re contributing to the Monolith like it doesn’t help Necessarily but uh we’ll try to do Better If you come up with some nomenclature Let me know and I’ll join I I use crypto Too so it’s um you know not something That I think we’ve figured out yet even As an industry yeah yeah so we have seen A wave you mentioned some op-eds like We’ve seen a wave of that kind of follow This right Um Armstrong had a a piece the other day Where he was basically reiterating like Um the enforcement action does not cut It as a as a means of Regulation right And then um avino had one today kosla Who’s saying chaos keeps the incumbents Protected was I think the main takeaway There which you also there was the let Crypto burn in financial times as well Right and then there was also the Washington Post saying Regulators get Together I mean It’s so funny a week ago I would have Thought we would have a big rush tip Action because everyone would realize There is now clearly a need for Something and you do see pockets of the Hill realizing something needs to be Done but I really didn’t anticipate some Of the people who were most anti-crypto

To be the ones most opposed to new Regulations I think that’s going to slow Things down in a way that I’m not I’m they have made a bet on what Happens to crypto that maybe they maybe It pays off but I think they may regret As well in a year or two But so my main takeaway there is just I I see a lot of like uh interest right And there’s a lot of Um demand especially from the industry Side but the and the education is a good Part about like how to to make it Functional like once you get there but The part that I don’t see necessarily Yet is the incentive part where do you See the big incentive at least on the Regulator side especially now there’s a Lot of like I need to save face I need To step away from this I had Conversations with SBF hang on my face Whatever I think a lot of it is the Sense first off the fear it would go Overseas people are very nervous about China dominating this space before even The last week There’s increased fear of That we heard I think from uh some was Actually from my other co-founder Frederism 95 of trading volumes are Abroad now so there that may increase You know further there’s that it’s also Just fear I would say that The bet that this would go away failed Several times

Maybe it works this time but you know Sometimes past is precedent I think There is an argument for a lot of people That if you just got it a little bit Better you’re harm reducing which is Supposed to be one of the main goals of Government yeah You asked incentive I think flip it a Little bit you you are having Because we don’t have some of these Guard rails in place so I mean we’re Going to have a congressional hearing Coming up to look at the FTX debacle so You’ll get pressure on The Regulators From Congress through hearings through You know public opinion through Consumers and investors that got hurt in In this scenario and in others and again That’s true whether it’s Trad Phi or Crypto but so you will get that so maybe Incentive isn’t the the correct way to Look at it for The Regulators but it’s Kind of that pressure to hey you can’t Just let it burn you can’t just ignore This you have to pay attention you have To you have to put the work in yeah Because there’s stealth harm so that’s The avoiding the felt harm part and then There’s not missing out on International Opportunities is the positive anything To add no I agree with all of that and I Think um I guess I think this is Catherine what you were saying but sort Of

Um my initial reaction is well I think On some level there is some incentive to Save face like if there’s egg on the Face there’s some desire to clean it up If you want to continue to have a career In policy so I think on some level that Is an incentive okay all right well that Brings us to time but thanks very much It went by very quickly and as Justin Said we probably couldn’t talk for Another 45 minutes but we’ll save that For another event so thanks a lot [Applause]

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