BBW25 - Day 1 - Navigating Policy & Regulation in Blockchain

All right. Uh good afternoon everyone. Uh thanks for joining us. We are going to talk about regulatory and legislative developments in the crypto space. And uh just do we we're just going to do a quick round of introductions.

Uh as Ian already said, I'm Marcus V. I'm a partner. I'm the national leader for crypto blockchain for the accounting firm Grant Thornton. And uh pleasure to be here. I'll be your moderator.

Hi everybody. Joe Chola, founder president of Bit AML. We provide regulatory compliance consulting services to the crypto space. I'm also the executive director of the California Blockchain Advocacy Coalition, a 501c6 Trade Association representing the interests of the crypto and broader web 3 community before the California Legislature, California Governor's Office and various state regulatory agencies.

Great. Nice to meet everyone. My name is Josh Dems. I am head of America's for Figment. Figment is a staking services company um headquartered in Canada, but we do a lot of work here in the US.

I'm based in Boston, so it's nice to have an event like this in our backyard, which is fantastic. Um I've spent a lot of time working in the space in both in the Boston area with Fidelity and State Street Prior. Um and kind of full circle now bringing staking services to larger institutions, having the regulatory clarity um that they've got over the last year and really excited to talk to you all more about that today. Hi everyone, my name is Wasimi Mad. I'm co-founder of a company called Vault 12 and we handle uh crypto inheritance.

Um a few years ago we issued tokens and since then we've been encumbered by the lack of regulations here in the US and the lack of regulations in the UK and the ridiculous regulations that now exist in Europe. And so I spent a lot of time um commenting on bills uh briefing briefing staffers, working with the digital chamber, uh working with other lobby groups. So, uh lot lot to say on this subject.

Hello everybody. My name is Christopher Clich. I am a senior director of operations and policy at the digital chamber. We are the largest and first trade association for the industry. We represent around 160 companies to advocate and educate on their behalf largely to the federal government but increasingly at the state level and internationally.

and I lead our national security policy.

All right, so without further ado, let's get started. Uh we have prepared a couple of questions and uh we have about 30 minutes. Um uh we don't we don't have room for Q&A. So if you have any questions, please approach us um after the the sessions. We all be hanging around.

So let's let's get started. So we recently have seen the first uh piece of crypto legislation signed into law, the Genius Act. Um, as as stable coins continue to grow and gain prominence and more adoption, I just wanted to start with that topic. So, uh, Josh, uh, I'd like to start with you. Can you talk about the, um, some of the details of the Genius Act and what it means, uh, for the industry?

Yeah. So, even even just to zoom out one one step further and talk about how the Genius Act fits within the overall framework that the this current administration is is pushing, at least from an from an agenda and policy perspective on crypto assets. There was kind of three main things or four main things that that um they're trying to accomplish. The first is, you know, come up with a regulatory framework for stable coins. This exists in some way, shape or form in Europe, exists in some way, shape or form in Hong Kong.

Um, and this is really, you know, shaping this was was something that was was critical to um the first term or or I guess the second term of of of this Trump presidency. Um, so that is kind of goal number one is come up with a national framework for being able to issue and and list a stable coin. Um the second was really you know keep stable coins um be allow stable coins to be issued by private entities and keep them out of of this sort of surveillance style what we call central bank digital currency. So those were kind of like the two um stablecoin related goals of this legis this this current Congress and the current executive branch. And then on top of that is come up with a market structure bill which is really like at the heart of it determining what the SEC has oversight over versus what the CFTC does, what constitutes a security versus a commodity and all the downstream implications from there.

Um and I guess the last is really just you know coming up with a way for the US to to hold a strategic crypto reserve. Genius Act is the first law that we have in the United States um around cryptocurrencies period and it allows non-bank issuers as well as bank issuers um to issue their own form of money to issue to issue a a dollarized version um on a blockchain and you know it it it sort of prescribes how um how this how they want to see this done. There are reserve limitation or there are reserve requirements so you know how much can be held in short-term treasuries, how much can be held in cash um behind the actual issuance of the of the token. Um but really like this is you know opens the door for um companies like Circle um to you know be able to list USDC and other and other firms to be able to interact with USDC as a payment mechanism um under the law of the United States. So that's a ma major uh step forward in terms of a polic achievement under under this administration.

For us at Figment, we're a producer of blocks. We're, you know, helping generate rewards for um keeping the blockchain running. And so, you know, the reason we like to see Genius, the reason stable coins matter is people are using blockchains more. Um there's more demand for block space, meaning there are fees that are being paid to the chains in order to send stable coin transactions. So ultimately this benefits the overall you know kind of cryptoeconomic system um but in a way that you know is is being done not through regulatory arbitrage but also through you know having having sound policy.

Um so we were really excited to see the Genius Act get signed into law this July. If I can just add one more thing on the requirements, right? I mean, as the accountant on the panel, um the Statenius act also comes with like uh reporting requirements, right? So, um as as many of you know, right, like most of the uh stable coin issuers outside of um New York State uh except DFS has come up with a set of uh rules and requirements for stable coin uh attestation. there's like now a monthly stable coin attestation requirement as well as an annual audit requirement that also comes with the act.

U next up just to stay with the stable coins I mean I keep reading more and more about um that like banks in particular re regional banks are feeling like the heat from stable coin issuers and they're feeling unfairly treated um about some of the u requirements they're subjected to versus uh non bank regulated non-state bank regulated uh stable coin issuers. Uh Josh, can you just uh also elaborate on that a little bit?

Yeah, so I think some of the state banks are under pressure or they're feeling competitive pressure because a company like Circle can issue a stable coin, not have the same reserve requirements as a regular bank. Um and and you know, they're basically be able to bifurcate or or sort of bypass this dual banking system, the state-by-state banking framework that we that we've set up if you um if you create a bank at a state level. So there is you know there'll probably be some changes to Genius. Um I think you know that's there there's healthy debate and I think there's also bipartisan support um to kind of you know work on some carveouts that still also protect this the state level banks but this was something that um you know they'll they'll fix over time but not something that that people have any real major opposition to.

Great. Thank you. So Josh already mentioned a little bit about the market structure bill. So just want to talk a little bit about the uh the market structure bill which is the next uh landmark legislation. Basim can you can you talk a little bit about um the uh the upcoming regulation what you see in your space?

Sure. So the market structure bill is kind of the overencompassing bill that will govern kind of how the market works, who's going to regulate it and how the market participants will uh will will interact um with with all of the rules that the regulators come up with. And so there's a couple of pieces to this. So one is what is the role of the SEC versus the CFTC. So that is being redefined.

Um and both of these regulators are getting focused on very very specific areas. So an example of that um the prior administration's SEC was very focused on um enforcement with you know lawsuits and those kinds of things. Now they're very very focused on uh not only innovation. I think all these bills you know support innovation but they're focused on fraud. So they have a very specific mandate to you know root out and find fraud which is great.

Um the CFTC is going to have uh you know jurisdiction over another range of of uh commodities and will have to work hand inand with the SEC. there's sort of stipulations around how the SEC communicates with the CFTC to make sure that nothing gets you know falls through the cracks. Other parts of the market structure bill involve um how companies who issue tokens which may you know in the past have been considered securities how they can transition to a different model where the token is being used inside the network. So in a very decentralized way. Um so these are these are some of the kinds of things that are coming along.

The status of it is that uh the house has passed a version of the of the clarity act. Um and then there's a version from the senate but there's quite a lot of work that needs to happen over the next couple of months. And so it's heading to you know get signed by the end of the year. So that that's kind of the timeline of the market structure bill. like the actual law getting signed.

Um, but if I may, there are some other layers that certainly this administration has been from a strategic perspective putting into all of the legislation. So, there's overarching bills, a lot of what's in the Genius Act, you know, is is referred to in the market structure bill. Um there's also uh guidelines like safe harbor that are being pursued which is something that's coming from the SEC. So the idea is is that all of these bills all of these laws and then the rules underneath um are led so that if one of them is like rescended by a future you know future administration um there's still protection for the overall market. I think this is a very a very good thing.

It means that things will take a little longer to get Originally clarity act was supposed to be signed by August 1st and then it was September 30th but I think third time lucky I think we're on track for for you know post Thanksgiving. The other thing to note just in this area of regulations the the laws are the laws but the rules are what the regulators will give to the market and the rules also have to be formulated and obviously everyone is beavering away. The SEC is super busy doing that right now. I know because I've been talking to them. Um, some of those rules um may have some kind of like 90day consultation period.

Some of them which are kind of a lower level, maybe it's better to call it guidance can just be issued communicated to the market and they they go into effect you know kind of straight away. So after the law's signed, there's going to be a period of time before all of the rules are in place and we actually have uh like a a way to participate in the market and be very very clear about how things work. So we're not done December 30th, but it's coming and you know it hasn't been coming for many years and now there's tremendous momentum here. And the best thing about the market structure bill is it's going to usher in an era of consumer crypto which is the biggest I think opportunity especially here in here in Massachusetts with all the financial services companies here.

I I can add a little bit of color because we're in the weeds on on these issues helping to develop the the policy and the laws. We're working directly with Congress and the senators and their staff and the congressman and their staff to help flesh out the details of what will go into these bills based on our members interests and input. And then as you mentioned after a bill is passed we are working with the regulators to help flesh out what those rules are responding to the requests for comment from Treasury from Fininsen from SEC and TFTC for example to help define how those laws are actually implemented in practice. And so that's a long much more convoluted process than the average um crypto or blockchain adherent would maybe realize, but it's a long uh ugly process sometimes and that's what we do to help advocate on behalf of our members to make sure that the industry can thrive in the US.

Thank you.

Yes, I want to add similarly in California we're going through mentioned rule making um working with our regulators. So in California we passed DEFAL digital financial assets law. comprehensive regulatory framework for crypto including uh oversight of stable coin issuers and that was signed back in 2023 preenius. Um so we're we're grappling with what that might look like. There's language already uh in Genius that would put in preeemption for state level and so uh there's a feeling in California that we work so hard to build this infrastructure and staffing and now we're sort of going are we going to oversee or what's that going to look like?

Is there going to be licensing maybe but but maybe some of the aspects of the rule making won't go through. So right now going through the rule making process for defile which goes live uh July 1st of next year. So that's regulating crypto exchanges trading platforms but also the stable coin issuers that chapter 6 of assembly bill 39 which would oversee stable coin issuers is kind of in flux at the moment. And so through the rulemaking process there's been several uh notice of of uh public engagement and uh one has dealt with stable coin stable coin topics. So uh we're sort of dear in the headlights in California and I think that brings up a broader issue of what that might look like at the state levels when we have preeemption and as I understand it and clarity at least one of the recent versions I saw there was preeemption in that as well.

So what does that mean for all the state regulators that are counting on uh their ability to continue to oversee uh various aspects of the crypto marketplace?

Yeah, I mean it's it's it's interesting, right? I've been I've been involved with crypto for 10 years now, 10 11 years. And I mean at the beginning it was like the wild west, right? I mean um most of the entrepreneurs uh considered themselves and may still consider themselves to be uh running a technology firm, right? I mean my my background is banking and and risk uh banking risk, credit risk management, right?

I always said, "Look, this is this looks to me like a broker dealer, like a bank." And I was always expecting 10 years down the road, uh, crypto companies will have like some kind of a banking or broker dealer license. And, you know, um, then 2022 happened, came around, and and everybody was crying foul and looking for, you know, um, being rescued, being bailed out, and where where's the where's the federal regulator, right? You can't have it both ways. I mean, I'm a proponent of of um you know regulation but it needs to be sensible right it needs to protect the users specifically um you know individuals uh um consumers uh but it also needs to give the flexibility for companies to grow and explore and expand.

So, it's it's glad to see after 10 years of, you know, back and forth, maybe, maybe not, that we finally see some traction. And I think we're going to talk a little bit more. It's it has to be bipartisan, right? It cannot be a partisan issue. Crypto is not a national, it's not a political thing.

It's international. It's a techn it's a technology that we all want to benefit and harvest and and and see the best use of it. So next up um want to talk a little bit about the u SEC's recent uh take on on staking right. So the SEC has declared certain staking services as as not a security offering and Josh I know Figment is is is is dealing with that on the forefront. Can you tell the audience um a little bit more you know what is staking and how does it impact the the recent um you know thought process at the SC?

How how does it impact the the industry?

Yeah. So so basically staking is a a consensus mechanism that non Bitcoin effectively protocols operate on top of which requires participants to lock their tokens without transferring the the custody of them into a validator. Um The validator then is responsible for securing the blockchain, for basically voting and attesting to transactions happening on the blockchain. And in return for providing that service, for locking up your tokens, you earn a reward. And that reward is usually in two components.

One is new inflation. So the the new issuance of tokens on the blockchain and the second is in the form of transaction fees. So fees that users are paying to each other um to transact on chain. We did not have clarity in the United States on whether or not staking um you know the the using or holding Ethereum or Salana or any of these tokens that have staking embedded within their their operating um with it within their consensus mechanism whether or not that constituted the creation of a security right you're earning rewards by validating a blockchain network we were you know us and our competitors and pretty much everybody had gotten legal opinion that stated staking does not it's a technology service. Uh but there was nothing really at the highest level of of government.

Um and so on May 29th we actually received notice from the SEC or not notice but we received non-binding um guidance that basically stated staking does not constitute the offering of a security when it's offered you know kind of in the way that we do and and most of our competitors offer it. Um which was huge news for us. It just gave us like a a sigh of relief um because you know it gave legitimacy to what we were doing. It it it and and the rules looked exactly as as we had you know thought that they would be designed. Again it's non-binding guidance.

So if there were to be a new SEC that were to come in under a new administration that could potentially go away. Um but that was a really good step in the right direction. The second thing is um about a month and a half later the SEC followed up with guidance around liquid staking tokens. So when we talked about what staking is, a liquid staking token is a representation of a staked position, but it's liquid. It's tokenized.

So my staked Ethereum is can can become tokenized. I can deposit my Ethereum in a protocol called Lido and receive ST or staked ETH back. Um, but I can trade that. I can transact that as I which I can't do when my Ethereum is locked. the SEC came out and said LSTs, liquid state tokens, also don't constitute the creation of a security um in in July guidance.

So um I I think like I mean very similar to you see I've been in lock step with the crypto task force over the last couple of months. Um, I think it's just it's again it's just a signal if anything it's it's it's symbolic but that this SEC is willing to engage, willing to have the conversation, willing to be educated. We've done teachings, they've said, "Hey, just come in and tell us how these things work." Um, we'll bring our, you know, people from our engineering team or our or our compliance team or whoever to come in and and just engage. I think that sort of engagement is leading to good decisions.

though it's not law. Um at least rules that that operators like us can can abide by. So um yeah, we think the next thing that will happen from here on out is and the whole reason we want the SEC um you know kind of be in favor of of staking as a technology service not constitute the offering of a security is so that the ETFs um like the Salana impending Salana ETFs and the existing Ethereum ETFs in the United States which have you know almost 20 billion dollars of assets in them can stake those assets because say they can't because there wasn't this type of clarity around whether or not the the act of staking created a security or not.

Thank you. Just just one more more point. You mentioned you got a legal letter, right? U I think as as before the shift in the uh stance by the SEC, I think law firms were less and less willing to issue a legal legal letter, right? Because I I mean as an accountant, right, I I deal with it.

I mean, I would be the one who says, "Hey, you have a legal letter, legal opinion that says it's not a securities offering." Um, and law firms, uh, like accounting firms have been, you know, holding back. So, look, this is becoming too risky. It's becoming too hot a topic. So, it's good to see that we're finally making making progress here.

So, next up, we already talked a little bit about the u the state level. Um, so I'd like to hear a little bit more how the federal initiatives uh impact um the state level and and if you can also talk a little bit what we mentioned about the the bipartisan and blue versus red states a little bit if if if you can. Yeah, and I think, you know, I talked about preeemption before and I think that's a concern for the states having having their, you know, sort of orbit of of regulatory oversight and what does that look like in response and I think that there's a lot of a lot of wait and see on that as far as bipartisanship. Um, you know, I've met with some of the other uh chapters or other groups of different states, both, you know, red and blue and I guess purple, we can throw that in the mix. Uh, and and we agree we want to make this bipartisan or nonpartisan at all.

Um, and so, you know, I've met with some of the other blue state uh leadership and and how can we elevate the voices of folks that are out there that have been enthusiastic about crypto and it just so happens they're Democrats. You know, how do we make sure that they don't we don't lose them in the process and at the same time, you know, as an extension of that, how do we bring on board uh more Democrats and more folks on the liberal side of the aisle that do support crypto and and what does that look like so it doesn't become about one particular elected official or one particular political party. Um, and different ways of of achieving that. Right? In California, we talk about the balance between protecting consumers and being pro- innovation, right?

We have Silicon Valley and and uh we sort of fancy ourselves being ahead of the curve on protecting consumers. Um both noble pursuits that I don't think are are mutually exclusive, right? So, so using that and then maybe if we talk to to some folks from Texas, we might get a different opinion about, you know, sort of the the swashbuckling entrepreneur and and uh you know, how can we uh how can we mine more crypto and and things like that. So, it's about appealing to the the constituency and finding uh what what resonates in terms of messaging. Um, real quick, since it was mentioned before, we're talking about staking.

Uh, so following that, a lot of the states rescended their cease and desist uh against staking rewards. California was not one of those states. Uh, there's still an active cease and desist that that targeted Coinbase, although it's widely viewed as a blanket uh across the board. So, uh, Commissioner Moseni said he'll he'll reconsider that uh, in a recent conversation with me. So, hopefully he'll follow up and take a look at that.

But it just sort of shows that it's not sort of one to one, right? The federal government does something and the states go, "Oh, that sounds good to me." Um there's still going to be a back and forth and a little bit of a tugof-war going on.

Great. Thank you. Um so kind like to to round it up. I want to get back to the federal level. Uh Chris, can can you talk a little bit more or you know take a look at the uh crystal ball and see what you think we will see in the near future as other fed federal regulation or initiatives that that will give us regulatory?

Sure. Yeah. So right now the administration's three main priorities are developing the rules and regulations that will flow out of the Genius Act that was passed at the end of July, developing the market structure legislation that we've talked about that has to go through a process which I can break down a little bit more and then also the strategic Bitcoin reserve act. Those are the three main priorities that the administration has and is leaning in too hard. The process having the market structure bill passed.

As I mentioned before, it's much more complex than just uh you know throwing some words on a paper and having a vote at some time over the next few months. Right now, we have new language that has come out of the Senate Banking Committee that we and others have um helped to shape by providing input into what we think um ought to be in the bill. That will be marked up, which is really sort of a public opportunity where the the Senate Banking Committee comes together to edit and and debate the bill inside the committee. The Senate Agriculture Committee is doing the same thing. They're probably a month or so behind give or take.

So, we're waiting for language to draft language to come from the Senate Agriculture Committee for their portions of the bill. the industry will comment on it, provide some feedback, and there will be a markup on that bill in the Senate Agriculture Committee sometime probably in um end of October, potentially November, ideally with a vote before Congress goes out of session for the end of the year. That's that's probably the best case scenario. And the like I said, the administration is leaning very hard on Congress to get something done. But you just never know.

I This I say this um in a loving way. I I cut my teeth in DC working in the Senate, but Congress is sort of like a cat with a a laser pointer and and again I don't mean that to um uh yeah to to to demean them, but they are end up being focused on whatever is in front page of the news. So if there is, you know, an attack, there's a war, something like that, attention can shift very quickly and momentum can stall very quickly. And so the to act is the push now to try to get something completed as soon as possible.

Great. Thank you. And just I guess a last question like re real quick uh just a sentence or two I just want to ask the panelist um what they think we will see in the next five years near ne near-term midterm from a regulatory development. Christie you want to start? I think uh if we do have the market structure bill passed over the next several months, real world assets and and asset tokenization has uh many companies are already jumping in even without full clarity because they see the writing on the wall and the opportunity is just massive massive um from a a financial um perspective and and efficiencies perspective.

So I think that focus will shift there and the focus is never far from the national security issues as well. That is an underlying and continual concern that will won't go away regardless of what is passed and and when it's passed.

Uh sure I think uh market structure bill getting signed means huge wave of momentum for consumer crypto financial services. Every bank will offer exposure to crypto and then exposure services like insurance, inheritance, etc. And uh hopefully we'll see the end of um our reliance on software wallets and not ridiculous hardware wallets and we'll just deal with all of that on devices like this uh which is which is strong enough to hold my passport. So it should be strong enough to hold my crypto.

Yeah, I'm with you. I I really believe in this idea of a super app where you can, you know, have access to your banking, your crypto, your your commodities, your stocks. Um you can anybody anywhere at any time without any sort of you know intervention or anyone in between. Um I think that's like if we land the market structure bill um and we do it right I think we'll have this this sort of concept in the US. Um the last thing I'll say is I want to own Bitcoin and I want to own Salana and Ethereum and be able to stake those two in my retirement account.

That's a lofty goal but

fantastic. What do I see in crystal ball? I think the turf war is going to ramp up between the states um and the federal government, not just with genius, but presuming that clarity moves forward in some form or fashion. Um I think the issue of preeemption uh is going to remain and I think you're going to see the states uh sort of push back. A lot of that obviously driven by politics.

Um and so we'll see that how that shakes out. This the state regulators aren't going away. There's not going to be a spirit of Halloween banner across the uh the state regulatory agency offices. It's just going to be a matter of of who's going to oversee what and and how they complement or or don't complement each other.

All right. Thank you very much. Appreciate your Thank you.