Regulatory Landscape, Compliance, Legislation Panel

[Music] test great yes hi everyone test is everybody's mic work wonderful we're gonna kick off the panel this is a conversation about regulations and blockchain so we've got seven panelists we're gonna do a rapid-fire introduction and we're gonna dive into some topics could you please introduce yourself sure Anna bloddy CEO of everex we do payments on a Syrian blockchain I'm Kevin listen Eddie I'm the chief product officer at prime trust or a regulated financial institution with a bunch of api's to bank the blockchain hi everyone my name is Esteban I'm the CEO of trm and we help crypto projects understand their users and make sure that the people using their products are safe and trusted Katelyn long Wyoming blockchain coalition I don't know how to follow that but Jared Olson Wyoming House of Representatives and co-sponsor of all the blockchain legislation in Wyoming my name is Carolyn ohm and I'm also a politician with 79 suing the seven we structure and sell security tokens all right thank you everyone so the the buzz of the day the week the conference is new legislation in Wyoming Jared can you tell us what's going on why is it important why should we care yeah so the there's been a lot of activity in Wyoming the main activity has been our special depository institution legislation which basically creates something that hasn't been done since the late 1700s in the United States and just creating a haven of activity that's gonna occur in Wyoming for banking purposes and and I think all of you are pretty excited about that tell us what is it what's what's the problem that this legislation sauce I'm gonna pitch it yeah um so the biggest problem with banking as it stands right now is the discriminatory aspects that take place the banking industry is in large part discriminatory based on several pretenses that has to do with what type of individual you are and what type of business you are and that's been an issue in blockchain blockchain industry a gun industry on down the line but on top of that the federal regulatory agency the FDIC has been incredibly discriminatory in this regard so the special-purpose depository institution institution that Jared just spoke of completely rejects the FDIC and that's the first time that's happened I think in any state but also on top of that it's 100 percent reserved so we're kind of kicking Alexander Hamilton's gravestone a little bit with that one okay so when you say banking is discriminatory I think people have a hard time getting mortgages but I suspect that's not what you're talking about yeah so one of the biggest problems is in the discrimination aspect is the FDIC and operation choke point but it's been going on longer than operation choke point the FDIC has been discriminatory from well pretty much the outset to whom well any type of business that the whatever executive executive order has passed down as they don't they don't really like this type of organization so take for example in 2013 when an operation choke point came out the Obama administration wasn't a big fan of gun manufacturing period so the FDIC and the Department of Justice teamed up and started closing those bank accounts based on FDIC security risk the banks didn't really have a choice in closing down those those accounts because their security risk was raised insurance was raised those types of aspects so we've just decided in the state of Wyoming that if you want to bank with an organization that doesn't have to follow FDIC rules that is now a possibility so okay please there were 30 different industries that the FDIC targeted it wasn't just blockchain uh-huh it was a list of the politically-incorrect industries gaming pornography tobacco it was a who's who of politically-incorrect industries so today a crypto company can open up a bank account in Wyoming with no fear of the FDIC intervening Jarrod you're a little shaky well almost I mean the legislation has cleared both chambers of the House we're waiting on the signature from the governor but we feel very comfortable and obtaining that signature so to come in the next week and then the the rules have to be written and then as of October 1st banks will be able to apply in fact actually free range is sitting out of the audience shout out to free range they've been helping us get the legislation through they're one of the applicants and if everything goes well the new special-purpose depository institutions should be open in Wyoming by the end of March of next year it's gonna take some time okay now whose business will this impact I know we talked a little bit about the trust business will this impact payments at all no we're actually working with the current legislation okay so we're being very creative we're working with getting licensing with the state's money transmitter we're also partnering with my insurance mirror entities so the current legislation works for us I'm actually I'm gonna bring a little bit different point of view in here because there's gonna be legislation that will say yes or no to certain things we actually right now I'm able to negotiate with some of the states for example they're very friendly to us state of New Jersey for example so it's gonna be interesting how it's gonna play out you're saying that you have negotiating leverage with the states because they want your business exactly interesting how any any other perspectives on how this is gonna play out among the states I I guess my question would be and I think that's great that the states are playing ball me as a state legislator we're definitely interested in the economic diversification aspects of this but until the states have taken a taking a stance of rejecting federal oversight I don't see how they can even take that ideology into place so until they reject the fdic and set up legislation in that regards and put it in their statutes there is no state em are you gonna be advising your clients start operating out of Wyoming I think what we would say our clients a security token issue is the laws that our clients grapple with federal tax federal securities laws federal banking laws and the only way that a a state could attempt to shield one of our issue is is by defying that federal legislation but this federal legislation has very serious federal preemption and you know it's not this is one piece of it but like no we would recommend that our clients comply with federal law mm-hmm so does this mean this is more of a symbolic gesture and a Wyoming tip of the hat to the FDIC I think I think what I would say is that state legislation pushing at federal level issues is a great show me argument but any of us in the platino industry working on the hill trying to get legislative change when I came into this industry three years ago I was very much jobs axe fan I didn't think we needed to change in petrova displace I couldn't think that needed any issue at all I now come a whole 180 degrees you know there's nothing quite as humbling as being in the digital asset space and I'd also say that the heavyweight nests of the enforcement that we're seeing at a federal level really does impact innovative companies because you know I'm a tiny ten person business based in Colorado we face on two major investment banks they have 200 in-house counsel to hand stuff to if there's a regulatory issue it doesn't even touch the innovators but if you're a ten person company if you're even a thousand person company like you know people who've been speaking today when federal level legislation bites hard on those companies it's very hard for those innovators to think about anything else other than that mm-hmm all right well let's let's change gears off the wyoming legislation Kevin you're telling me that your firm operates out of Vegas can you tell me about what what it is about the vehicles that you create that make it conducive to do business in Vegas so if you look at the landscape of kind of trust regulation Vegas and South Dakota kind of lead the way and what we really liked about the Nevada banking regulations is that they're very open to innovation kind of similar to what Wyoming's doing and we had a lot of great conversations with the banking commissioners where they were very open to bringing digital assets and as a Trust Company what separates us from what people think of tradition as a bank is well we can't engage in lending we can hold other assets besides cash and including cash so we've been able to leverage the Nevada regulations to offer custody of assets for a step back tokens like true USD and a lot of the stable coins and we've been able to help a lot of these disruptive watching companies deal with money transmitter regulations and things of that nature by offering really easy to integrate api's for the engineering teams so that you can spin up a prime trust account for your end user and then prime trust actually has that account and does all of the money transmission so when we think about it in context to thing that's happened we think it's a very complimentary regulatory regime with a lot of what the other people are trying to do and what instances do you run into federal regulations that Emma just described we're not regulated by the FDIC which is one of the main reasons we said it just to do a Trust Company and not a nationally chartered bank but we do run into a lot of other federal regulation so we hold a lot of tokenized securities and we do SEC qualified custody from the broker-dealer world which has a lot of FINRA oversight and others and we're regulated by the same kind of money service business type regulations that everybody else is federally so it's for us it's it's understanding where the line is and understanding how to walk the line but with the regulator's katelyn your thoughts yeah the Trust Company model is something that Wyoming rejected because the SEC we had an extensive conversations with the SEC and the SEC doesn't consider trust companies to be qualified custodians in digital assets so that's why we have a state chartered bank that can become a custodian and the interesting thing about the state chartered bank model is that you don't need the money transmitter licenses because it's a Fed member so we've threaded some really important needles here and and went into great levels of detail I see Chris land sitting here in the audience he's the the secret sauce of Wyoming's legislative drafting who had all the conversations with the SEC and and and because we we now have the only Bank license that is able to do digital asset custody and you can avoid having to do the 52 state and territory money transmission licenses a lot of new entrants can get into digital asset custody very quickly and we have the enhanced digital asset custody regime which is designed to have a bank not a trust company a bank being qualified custodian for digital assets based on the conversations we had with the SEC I feel like my legal team would kill me if I didn't disagree onstage please we've we've had a lot of conversations with the SEC as well and we're extremely confident about our ability to custodian we have some things that are inappropriate for me to talk about in the public setting but we're extremely comfortable with with our position and we own a broker dealer as well and some of that stuff then we're very happy from a regulatory perspective so we're saying hey it's gonna be easier to custody digital assets whether it be in Wyoming or Nevada in Colorado who's asking to have digital asset custody what does this mean to end-users what does this mean to people in the audience the only people who really need digital asset custody are the institutional investors and registered investment advisors who manage more than a hundred fifty million dollars worth of assets it's not individuals like any of us who ever should do anything other than custody our own keys it's the institutions who by law have to use a third-party custodian does this mean that we're all gonna get rich because there's going to be a flood of cash going in digital assets well that's the idea there are people paying for playing for institutional investors like 401k plans but having been an ERISA fiduciary in in my prior life the fiduciary standards for being for investing in this asset class are very very high and there's a reason why the only institutional investors who have come in to digital assets like Yale and Stanford and Harvard endowment did it through a venture capital fund they don't think there are qualified custodians for digital assets that are institutional quality yet that's what fidelity is trying to build so there's this is a there's clearly a land grab happening in this in this space and they're gonna be different levels they're gonna be those that service you know the fidelity quality which is 401 K and then there are going to be those that service the family offices where maybe it's not an ERISA fiduciary standard and then there are going to be those that are that are targeting its individual retail who doesn't want a self custody there Keith something so when our partner banks were interested in digital custody we actually kind of turned the conversation around and said why did you throw custody because they were looking at crypto lending for example as a use case so we needed a stable talking so what we offered was why do digital custody because all compliance especially in the banks anywhere in the south red flags go up right away so what we offered them is a stable token that is called collateralized by USD they take custody of USD dollars and put a stable talking on the blockchain and for us that's a settlement mechanism for our payments okay so it sounds like the the overarching effort here though is to make it easier for financial institutions to hold digital assets is that is that a fair assessment that this doesn't necessarily impact the daily Hudler of any sort okay esteban oh go ahead if I can add one thing I was gonna expand that a little bit and say I think for us it's it's both digital assets and then it's also fiat currencies right so if you think about blockchain based companies it's really really difficult to get banking relationships part of this the discriminatory nature of the FDIC part of it is just the risk tolerances of various banks but when you look at kind of the banking system as a whole you really have three institutions that have stepped up for crypto early it was silver gate Bank signature banks on some of it and we saw a massive opportunity the space to say hey you know we think it's worth the risk we really want to work with a lot of these blockchain companies and prime trusts will throw its its hat in the ring as as kind of the third financial institution in the space got it Esteban what does this mean for D apps and the kind of things that people are building here at this type of hackathon yeah so I think a lot of the people here today are excited about crypto because in the same way that the Internet enabled this explosion of content like we did didn't have Instagram stories fifteen years ago we didn't have YouTube videos and medium articles we believe that this technology is going to enable an explosion of financial products and that's a bear financial products is a very different you know beast than building a video streaming platform and that's why regulation is so important and crucial to what we do as entrepreneurs in this space well trm we build software that makes it easy for entrepreneurs to understand who their users are an example of this would be a financial institution like a custodian or a brokerage an exchange they want to make sure that they're compliant and how do they how do they do that making sure that people aren't using their product or service for illegal purposes for money laundering or for you know market manipulation and doing that's kind of difficult so we have an API where you plug in we monitor your network and just let you know if we see anything suspicious and I think that type of product hasn't existed before I think that's just one of the ways that blockchain is actually going to start transforming our existing regulatory framework because of the unique properties that it has so these properties are in the apps themselves will make it easier or more difficult to identify users that we're suggesting yeah so the properties are in blockchain itself and technology new technology has like actually impacted the way that we regulate securities in the past and I think it's going to do it again so blockchain is transparent that means you can track the flow of funds it's way easier to do AML monitoring like it's way easier to track money laundering on blockchain than it is in Fiat regulators should love blockchain if you deal with AML it straight it's it's programmable so right now if you want to verify that someone is somebody there's this entire kyc AML like framework that is really cumbersome but it's it possible to actually program those those qualities about individuals onto the blockchain and now you've just you know made it so much more efficient to be making sure that someone is able trade a certain security or not so that's really interesting and then I think regulators we're dealing with a technology that makes it possible for anyone to creative to do financial engineering like in we are already seeing products that it makes it possible to create a security on the fly I think we should be building regulators should be creating legislation for a future where we have millions more securities then we have two today because the same thing that the internet did for content blocking is going to do for financial products I'd like to hear Anna's comments but before we go into that if you have questions for the panel why don't you stand over here I don't see any microphones out there so off to repeat your question into my mic so line up now if you want to ask questions we'll have about five minutes for Q&A Sasha asked you mention kyc on blockchain today that is not possible right so you talked about off chain yeah so today it today KY caml basically means they check your identity to make sure that you are who they say you are and then they look at your bank and they make sure that you don't have like illicit funds I know that's highly that's not I'm watching that's off chain but what blockchain allows is you you can actually have a wallet and I can on the blockchain right this wallet has passed kyc AML Y when that wallet goes and uses a different service why should they do the same k YC AML check that they've already done so I think the future of regulation should adapt to this world where you can program properties onto on to individuals I there's so many wallets that don't do that take madam ass I think what Esteban suggesting is that once you get on to the once you ramped up on to crypto that then you can certify that these funds are clean well it has to have the capacity of ability to do that yeah of course yeah it's the future you're talking about the future sure I mean and we're starting to see some stuff early right now so why was the Bitcoin why hasn't the Bitcoin ETF been rejected over and over again it's because the SEC says the markets are too opaque we have market manipulation we we have no idea what's going on we can use on chain data to have a more transparent idea of what's going on in the markets like we should be detecting market manipulation on blockchain we should be detecting things like money laundering on blockchain years away you're talking like artificial intelligence on blockchain no I mean we do that today erm like monitors looks at on chain data and exchange order book data and can tell you here is insider trading yes but you do that off chain you pull the data from blockchain and you do the analysis of chain sure we look at on chain data and then we you know apply a lot of machine learning and pull out patterns from it Caitlin you have a point here yeah can I just throw in there there are a couple other major regulatory changes or that that I'd like to make sure to highlight on this panel because this group is gonna be interested in knowing that you can issue security tokens whether they're in certificated form or in uncertificated form in the state of Wyoming and Jared is the one who sponsored that bill so we started talking about the financial institutions but there's something that more directly affects everybody in this room which is that you can actually in the state of Wyoming issue security tokens whether they're certificated or uncertificated Delaware in 2016 authorized uncertificated blockchain shares but the ERC 884 tokens were not actually in compliance with the law now they actually can be in the state of Wyoming what does that mean uncertificated yeah so the way securities are owned right now is we're forced into an indirect ownership regime with our securities we don't own securities in our brokerage account what we own is an IOU from our broker dealer we have a debtor-creditor relationship with our broker dealer we do not have direct property rights one of the great things about blockchain is of course you can own your assets directly but so and so that enables you then from a securities if you're buying securities issued on a blockchain they have to fall into one of two buckets either certificated where you actually in the past it was a piece of paper thanks to Jared's bill that was passed in the legislature yesterday you can now electronically on a blockchain have the same information that would have been on a stock certificate like a name and an address of the owner that is now illegal under Wyoming law and so a token can actually take the place of a piece of paper that you directly own same thing with the uncertificated shares where where the stock ledger is held off the blockchain that's what originally Delaware did because they were going after the enterprise block chains I'm part of the of the sector and Wyoming reacted to the etherium community requesting us to have a place where you could legally issue ERC 884 tokens and and so we did that I also want to throw out one other thing which is the Uniform Commercial Code and this is one of those legalese kind of things that everybody loves to ignore and just hand off to the legal and regulatory folks but Wyoming is the first state that actually clarified that you own a direct property right in your digital assets no other state has done that and I will say publicly for the first time Wyoming saved what was an attack on this industry by the incumbents which we're trying to force digital assets into an indirect ownership model where the only way you got property rights in your digital assets is if you owned them indirectly through a securities intermediary that would have been a disaster for a whole host of reasons not the least of which there is no lender of last resort in these assets and if the Broker Dealer went bust there wasn't going to be anybody to bail them out so you want a force thank you you want to force an actual one-for-one relationship on digital assets and in a Wyoming custodian and you're gonna you're gonna get that but very importantly you you have the right just with the technology you now also with the law have the right to own your assets outright Thank You Caitlin let's take a question from the audience Duke shoot it out what's more important transparency or privacy why don't we just do like a vote like left hand for transparency right hand for privacy it's an answer your question I think that's a point of debate Duke any other questions yes I think that's a good question because there's a lot of debate in the industry around that and I think the answer is it depends there are some applications where we are going to have transparency like securities on blockchain need to be transparent there's some things where privacy matters and there's certain use cases where privacy we should be solving for privacy and I think we see that with like you know Z cash and others that's a great point so depending on application Duke's saying what's a valid privacy case he's saying like when should someone use my narrow Duke I think that's a broader conversation we've got another question back here where does insurance liability stand from a regulatory standpoint when we talk about blockchain is that a fair translation any thoughts anyone want to jump into the insurance conversation yeah so great question so I think that's one of those broader applications that anybody has yet to get their arms around but there's significant interest just from what we've seen in the state of Wyoming in regards to putting their arms around it figuring out how the applicability works I had the opportunity to speak with you know every every state has an association of insurers and this is something that they're trying to figure out how that application works so you know if you know somebody in the in those Association type type gurus I would say reach out to them because they're they're reaching out right now whether you know it or not how it works long term I guess that depends on this group how do you want it to work so being worked at the AG for three years the largest insurance company in the world I can tell you right now that the first thing they're gonna look for make sure you have all the licenses in order and make sure that you're actually on the regulation side everything is okay so let's do one last question any other questions yes we got a man in the yellow shirt okay so the question I think is that the ethos of this the ethos of cryptocurrency is to get away from regulation therefore why would we want this regulated I'll take that because there are two discrete systems at play here one is the technology and the other is the law and not none of us lives in a place where there is no law unless you're on a seasteading ship or something where there is no law and so trace mayor puts this really well that the technology has to be backwards compatible with the legal system and so you want the legal system to enable the technology and you want to be in a place that the law is not going to restrict it and and and actually is going to open they the ability for innovation the one of the things Wyoming did also is pass a sandbox bill so basically anybody who's not harming consumers can come in and just do anything as long as they are complying with the you know they have to give notice to the financial regulator and they can spend two years as long as they're not harming consumers and they post a bond they can do what they want and they can extend it for an extra year and so that gives up to three years for an innovator who might run a of an existing regulation to come in and have a way to do it without the existing regulation and I will give you a little bit of a hint and it relates to the insurance question you asked earlier watch what Wyoming and Bermuda potentially do because they have reciprocal sandboxes and also have digital asset custody relationship that we're talking about doing some work with so we can do some very interesting things because we have a reciprocal sandbox and because Bermuda is one of the insurance capitals of the world they want to help Wyoming companies get their insurance and we're gonna be doing some interesting things with with Bermuda so keep an eye out for some news there if people have additional questions or would like to chat about this will all of you be available off to the side here wonderful so we'll keep the conversation going on off stage let's give a round of applause for our brilliant panel hey Sasha can I say one thing really quick yeah please all right we've got an encore ahead and what I want to put out here is we've heard about a lot of great states thinking about doing a lot of great things they're not here they're not sitting up on this stage I'm a state representative it's those Jared olds we've done it in Wyoming so if you're thinking about moving your business go to the state that's doing it it's done there in Wyoming I would like to point out I would like to point out that Colorado is well represented on the stage thank you [Applause]