BBW22 - Day 1 - Let us tell you how regulated crypto REALLY is

[Music] let's let the panel introduce themselves just uh give a brief introduction why don't we start with Aaron here sure hi everyone Aaron colemansberger I'm a partner at Nelson Mullins in the Miami office so I flew up this morning and was greeted with a little bit of Chilly air which was somewhat welcomed um um yeah so I am a partner in the in the Miami office like I said I used to be a litigator um years ago and when I was doing that I viewed my job and my role with my clients as problem solving and I really enjoyed that um around 2014 I started getting interested in crypto and blockchain and at that point I saw a lot happening right and as a litigator you see a lot right in advance a lot of things coming at you and I didn't want to wait to help problem solve so I am now in the regulatory space so um as some people might say you know I'm not necessarily the life of the party a litigator and Regulatory attorney right some say I'm a bit of a buzz kill um but you know I really enjoy working with clients and helping get them to where they want to be also I want to give a little plug out to the women in in fintech affinity group that I co-founded with Katie Baker at Nelson Mullins so we are one of the well we are the only women in fintech affinity group in the legal space and law firms across the country so happy to be here awesome Gabby sure um hello Boston my name is Gabriella Cruz and I'm the CEO of the global DCA my background's a little bit different I focused heavily on International economic and financial sector development so I previously worked for the World Bank and the U.S government one of the cool things that I focus heavily on was the concept of self-regulation or if that's too complicated to think about it like a public-private partnership to regulate and to ensure Market integrity and consumer protection so glad to be here great Tom awesome so Tom hook as in addition to being a good friend of Ian's from college I'm also the chief compliance officer for the us at bidstamp I'm a recovering attorney some started my career as a prosecutor in Manhattan and moved into the private sector where I've been working in my specialty is anti-money laundering compliance and financial crime compliance but have been overseeing compliance programs for years now in a variety of fintech organizations this is my second crypto company I tried to step away and it pulled me back in so here I am great JD um yeah so hello everybody um yeah I'm I'm not an attorney nor do I play one on TV um I am the chief compliance officer at Robinhood they're uh crypto arm uh I had a long career in like large and small Banks um worked in crypto with Tom uh years back um and uh prior to Robin Hood just recently I was at the Federal Reserve Bank of Boston so I've you know jumped from you know large and small Bank you know traditional financial institutions I worked at PayPal um so and I've worked at large and small fintechs and uh then working at the FED um you know worked in a quasi-government agency they're not really I didn't work at the Board of Governors so I was at one of their uh I was at the bank of Boston so and now I'm in back in crypto great thanks everybody so I'll throw this out to the general group um we're at an early stage obviously of adoption regulation a massive issue and Aaron I'll take um the counter to what you said that you weren't the life of the party I would argue in the trade fine space I would agree with you but I think D5 has got a way of supercharging the whole conversation because we're still in that early phase there's still enough people who are kind of curious about it they're being pressured for lack of a better word by their overarching organizations to learn about it to uh is it a thread is it an opportunity um I would just throw this out do you would you agree with that statement that defy has basically changed the conversation in the sense that it's not the you know the boring old Financial Services rigmarole from the 70s and 80s that there is there isn't special substance within defy that actually makes it quite engaging with individuals which you guys agree with that statement I'll throw it out to anybody yeah yeah I mean from from my perspective coming into this I've worked in traditional Finance as well it's it's much more exciting here um yeah you know I think it is uh you know the topic of of this is are is there really you know essentially how regulated are we my day-to-day basis heavily regulated right um but it's exciting there's challenges that you know but there's a different flavor to them there's problem solving so you get to take a lot of that all of the learnings that came from traditional finance and put them to a new space and that's you know the frustration on some days um and the excitement on most days I would say but I think it's it's it's definitely all right I get excited by it I don't know if other people excited when I talk to them about it but um yeah yeah I mean I would agree I mean it's it's funny because I when I first stepped into the crypto space um you know it was very clear that you know the when the examiners would come in and they would look at you know your program early on they were trying to check the boxes right they were looking at everything that they needed to see and they were you know well you're not doing this not doing that and what I quickly realized was there were some things that we weren't doing that because of the technology and because of the uh the way the protocols were designed we physically couldn't we we technically could not check that box yeah so then we had to take a step back and and my team and I would look and say okay well how do we then look let's look at the Spirit of the regulation let's look at the intention of the regulation and see if we can structure our program to align to the spirit and the intention of the reg as opposed to the technical requirements of the rig and build a defensible position around that and that worked pretty well early on and I think you're you know that type of thinking and that type of mentality is gonna have to uh you know really take hold in the D5 space as we go yeah yeah just add to that that I think one of the reasons why I think it's so appealing to so many more people than traditional Financial regulation is that there is a mystery about it I used to give talks on this and I I can't begin to describe how much credibility and traction I would get in these talks when I could walk people through the dark web and I could go on to the dark web and I could purchase a bag of cocaine if I wanted to I could purchase you know um a different identity I didn't but I could and I think it blew people's minds and I think that there's that horror of mystery it's like whoa It's crypto man it's bad actors So based upon that do you think that regulation is helping the perception of crypto being for criminals right because that's that tends to be the general narrative with the mass media it's like oh my God money launderers where in actuality it's just the opposite if you're a money launderer you don't you want to stay well away from blockchain technology right do you think that the way the regulation is being doled out and Gabby I'll throw this to you because you you are literally on the front lines of this yeah do you think that regulation is helping kind of soften those hard edges around that narrative sure so I think one of the things that I'll kind of reframe a little bit the question just around the what it is that's actually happening so when we talk about like defy or travify I think the bigger narrative is the financial sector and economic Transformations that are really taking place so you're seeing a difference in the way that value is exchanged and people participate in interact with each other economically okay peer-to-peer versus through a central identity and so because of that that big transformation it means that everything gets a little bit jumbled up so that's where you see this like vuca environment this is a volatile uncertain complex and ambiguous environment but it's not unregulated it just means that the regulations in some cases need to be somewhat harmonized or aligned in order to recognize the power of blockchain technology and also from a point you know as we were talking of a concept of really applying a more principles-based approach as opposed to a rules-based approach so I think when we talk about what the role of Regulation is in terms of maturing an industry which is I think at the heart of what you're asking I think that it will require a certain degree of reflection and almost reimagination of what it means to regulate in this environment in a way that is better tailored and suited to some of the unique aspects or contexts of this transformative technology and of this economic and financial sector transformation yeah thank you for that oh and I was going to say Aaron coming from the legal front lines yeah and I just you know when we're talking about perception I think it's also important to take a look at the The Regulators and where they're coming from right so if we take a giant step back and we look at the purpose of the regulators and their Mantra is safety and soundness right they're there to protect and ensure that our financial markets operate accordingly and properly so with the introduction of this technology and cryptocurrency and all these new ideas and these new products I think that must have been and it probably still is very very scary so so whereas I think you know Regulators may get a bad reputation for for resisting too much I think that we're past the resistance stage I think we're even past the analysis paralysis where everybody is all sitting around saying what do we do what do we do and now we're seeing Regulators getting more Innovative taking comments right and taking them and putting turning them into action yeah yeah great points it's all around I was just going to say just to add on that I think where you're seeing that you know proactively is on the state level you're seeing a lot of state regulations come out specific to crypto um and I think you know to my point earlier and you know and Gabby's point there is a lot of Regulation Define regulation a lot from the state level so a lot of the folks that we're dealing with on a day-to-day basis are the state Regulators who are becoming more sophisticated in knowledge about the types of controls that they would expect and from I think the perception standpoint I mean bad news gets headlines right um you hear about the problems and the faults and that's what grabs the headlines but it was the same in traditional Finance right Madoff Bank of America like there's a lot of that always took the headlines too this is just the headlines with something that a lot of people also don't understand yeah yeah and Tom that's a great point I know on our prep call you brought up that state kind of Patchwork and I think Gus brought it up on one of the prior sessions that the the state regulations are a huge factor and I think that gets overlooked because you're focused on the international play I mean it's a 24 7 365 Marketplace borderless Universal I mean it's completely different animal but going to what you said Aaron about the complexity of the technology so I think all of us have seen the struggle that some Regulators have in grasping the fundamentals of blockchain Technology but when you add on top of that um the merch uh forts um I could go down the list of of these events that are unique to decentralized finance and I think it's going to put a lot of pressure on Regulators to really up their game in the education area um Gabby I was wondering if you think education in this space is going at the expected Pace or could it could it speed up so that Regulators aren't blindsided by what the hell is emerge what does this mean what's proof of work versus proof of stake how do you see that playing out as one of the leading organizations in responsibility for Education yeah so you know again I think yes you're seeing Regulators all over the world all at the same time trying to Grapple with the fact that this is truly a transformation which means that at the core you know if we pattern after other major economic or financial sector Transformations that we've seen so this is where let's say the fall of the Berlin Wall people moving away from um you know communism and command control economies towards Capital Market systems or Democratic systems um or you know trying to stand up and transform an economy from being very strictly based on like one form of economic vertical towards a broader more Diversified economy education is always at a Cornerstone okay and that is education that would be drawing in universities third party tuition providers so that you have effective and adequate professionals who have the skills in order to meet the needs of marketing government okay you also have a need to help Regulators build capacity so that they understand some of this space and we can go into this I think you know in later questions but when you have these types of Transformations one of the most effective tools to be able to allow for that transformation to take place but also to kind of complement some of what you would see from a former regulatory position is to have an element of self-regulation or industry stewardship that actually helps to fill the Gap and to support some of the regulatory coverage that you would want to see in order to ensure that you have the consumer protection and Market integrity and it's through that partnership that you're able to kind of jump this kind of like ravineer Gap you know between what was which was what we existed in prior to 2013 where you had all traditional finance and sort of the where we're going in terms of our like Global digital future and so I think that that's really the piece that like when I look at this it is education as a Cornerstone but the other piece that is in addition to that is capacity building building out things like the checklist that you were talking about where half of it may not work no now you have to reimagine how you will still provide that level of regulatory coverage with maybe a different checklist or maybe no checklist maybe you're looking at it from a very principles-based perspective until such time as that technology and that component of the industry matures yeah I'll throw this next question out to the gentleman representing the exchanges and whatnot and just to stipulate this as no reflection of their companies I'm not saying their companies engage in this activity this is just an observation but I would point out that regulatory Arbitrage is a huge huge issue I call it infrastructure light so I'm Consulting with the government of Vanuatu and bringing decentralized Finance to them completely isolated chain of islands in the South Pacific they're being de-risked by their counterparties in New Zealand and Australia so really Defy is their only option to really push forward to possibly get up to Global North economic standards but this this idea of infrastructure light all you need is a smartphone and a Wi-Fi connection right well starlink and project Kuiper Amazon's project Kuiper and Elon musk's startling is beaming Wi-Fi into the most remote areas of the world so the fact that you have this infrastructure light you have smartphones you have companies like Digicel Distributing free and low-cost cell phones this is a huge I I don't think we've ever seen this level of regulatory Arbitrage do you see that as a competitive Advantage for your competitors that are necessary are decentralized exchanges that are operating outside of kind of tier one regulatory regimes is that an unfair advantage that they have I mean I would argue that it is but have you seen that impact your businesses locally I mean I think I I think in our careers uh I've you know especially earlier on you know stepping into this space uh there was lots of conversations of why do we have to do X so and so and so and so don't do acts and there was a business disadvantage and there probably in very many places there still is a business Advanced disadvantage I think what we're starting to see is the chickens are coming home to roost um some of the names that you're seeing in news and it again it goes back to the bad the bad news gets the Press but you're starting to see some of the uh the the fruits of the ill labors I don't know I don't know what what I was going for there but the rotten fruit is starting to show up yes um so I I think yes there's still the ability to regulatory Arbitrage throughout the globe because this is you know there's no borders here right um but I think you're seeing that less and less as Regulators are becoming more Savvy um and I think consumers are becoming more Savvy too with the risks that come with some of these unregulated jurisdictions and as folks start to pay the price for that they start to look for a more trusted regulated transparent organization right and I think we're starting to see too um you know at least I've Just Seen I'm seeing it more so now in the space than I did before is more and more law enforcement agencies are starting to move beyond their borders um and you're starting to see more criminal cases coming out and more enforcement coming out on some of these exchanges or or platforms or companies that had operated in this kind of you know regulatory Arbitrage space and it's it's becoming I mean I I don't know anybody who works at one of those companies but I would imagine that it would it starts to become a question on whether or not it's a viable business option as we move forward because it's just you know the the long armor of the law as they say is starting to become very long yeah um and the second you step into if you're on a plane and you step into a a country that has these laws um they can arrest you at the gate yeah right so it's like at what point is the is this become worth it right right so that's the big question right great points can I just to kind of add on that too like I think you're going to see for a while almost like a very broad scatter plot graph that kind of gradually Narrows down until you have a higher degree of like Global harmonization and jurisdictional Arbitrage only works to the advantage of firms to a certain point because once you start operating in 20 and 50 in 100 different countries then the cost advantage of having to navigate that from a legal perspective from an accounting perspective so I always kind of feel like well these are growing pains that you will of course see and over time countries will work to try to harmonize it you know and to create a higher degree of consistency and comparability with regards to their legal and Regulatory Frameworks we can facilitate that as you are as an advisor to Vanuatu as we are as an mou partner or memorandum of understanding partner with our colleagues in Nigeria and India and you know 15 other countries but the idea is that you start to like help people understand how to come to like a happy medium yeah or a higher degree of consistency and then that reduces the opportunities for jurisdictional Arbitrage and it also helps those companies that are truly resilient globally competitive and in it for the long run to be able to operate their business more seamlessly across borders so you know for those that are truly like standing up like our friends on stage here like high quality Global firms then yeah that's that's the long game and that's the broader game plan yeah Aaron I'm curious about your perspective from the legal angle I guess um does your firm operate internationally as well as domestically domestically domestically okay but you I would argue that you you are impacted by this right because certain counterparties could be offshore that's right right we see a lot of clients coming in from Latin America from Europe and and looking to get into the the U.S market and looking to see how they collaborate and you know it's all about collaboration at this point right so like we are seeing a lot more agencies collaborating with domestically and internationally and the US is really leveraging some of their relationships internationally to get all this collaboration um happening and for purposes of enforcement but also just for information sharing right sure absolutely absolutely and just one follow-on question related to that so my background is compliance and there was always somewhat of a wedge between the compliance operations and the legal operations within financial institutions is because everybody's kind of experienced this experiencing this growth at the same time and there's still a significant amount of confusion are you seeing those bridges being mended between compliance and legal is there more kind of communication within and I know you work at a law firm but I I'm thinking you may have some insight into that um yes generally yes I mean yeah I I do see that that there is a bit more of um collaboration and more bridges between legal and compliance I certainly am working a lot with a lot of compliance teams right um and they're definitely less like on both ends everybody is less hesitant sure great and that brings me to one of my favorite topics self-regulatory organizations that's your favorite favorite I'm a loser I could never get a date in college because I want to talk about compliance I'm kidding um but I know that the global DCA is really making a push yeah in that area how long until we see something like a finra or a sifma in the digital asset space in your estimation okay so I'm also going to change this question a little bit and I will say that um I actually think you know what's needed is a more like modern philosophy around self-regulation really for this space um you know you need something that is global flexible responsive and is able to provide in a timely manner um perspective to people like these two gentlemen so that they feel comfortable and confident about building and staying here in the United States um you know right now we have lots of Chief compliance officers and legal officers who are chewing Tums every United you know trying to figure out like how they're going to you know work through a lot of um a patchwork of legal and Regulatory and sometimes overlapping or sometimes contradicting um rules and regulations and I think that when you look at this um typically the timelines that you asked how long until there's a self-regulatory model um so typically it's a three to five year build um in appropriate economic political social contexts with highly qualified technical expertise I would say that we are on a timeline for of about two to three years outside of that and we're already about one year in and the rationale behind that is that this industry is just moving so fast and there is such a demand for that level of clarity today um and it's more than just about industry stewardship and Leadership it's also about actually protecting consumers and actually enhancing Market Integrity because right now if you have Regulators that are fighting or you have you know confusion in the market let's think about what your ultimate impact of every legal and Regulatory framework should be which is the people who will potentially be harmed if you fail right and so in that respect I think um there's no time like the present um to be building and that includes a self-regulatory organizations and I think building that so that it is done intelligently and that it is done from a point of precision-based Regulation that leverages some of the natural aspects of blockchain technology that gear towards transparency and accountability um you know and allows people to through a principles-based regime be able to understand what they can and cannot do but the nature of a digital asset is and isn't and provides you know greater information to Consumers so that they feel comfortable engaging in this space I think that ultimately is you know the timeline that we're on two to three years and what ideally it would look like in the end right and that really would change the whole conversation I mean registration Series 7 series 24 I'm not saying that you would have those kind of certifications but it really would change the conversation I think go far to further legitimize the space well I think too like it's not just about I always tell people I'm like the SRO itself that's not the thing that you're doing it is all of this part like have you ever heard someone say it's not the destination it's the journey it's kind of the same thing with self-regulation you're bringing people on a journey of understanding what the rules are the standards and guidance providing individuals Education and Training so that they can stand up a department for compliance or legal or so forth and then helping those firms to build systems that systems policies processes procedures that are compliant with those rules and requirements so that ultimately those three lines of Defense very naturally lend themselves towards consumer protection and so then when you look at what it would be like to go in and to do maybe I'm just going to say quote-unquote inspection it is not necessarily at the same level it's not a gotcha moment it's your self-regulatory entity is your partner in building right the first time so preventative versus reactionary and anticipatory versus like remediating which we don't seem to be getting right now I mean I could go on for a long time about this but Anchorage and them being hammered about their BSA program after they were fully vetted by the OCC or you know coinbase voluntarily releasing the staff accounting bulletin and seeing uh you know a rush on their marketplace where they had to shut down for two hours because people were freaked out that they were going to lose all their assets if there was a bankruptcy come to find out no they weren't obligated by law to file the sap or to answer to the sav-121 they did it voluntarily but they took they went the extra mile and that's that that's this kind of two-tier treatment of Trad Phi institutions in D5 but um I was going to say what this has me kind of thinking about and I'm I 100 agree I I think what's interesting is if you think about the lifetime of crypto currency like business been around for 11 years yeah and that's like old right [Music] you know traditional Finance different animal right so yeah you have people who have grown up are comfortable with right use all of the products have used them for most of their life In traditional Finance it is inherent in them or more intuitive to build controls and understand how to test and and apply different standards to those yeah we're working in a in a field in an industry that changes day to day yeah and so it's like hitting a moving Target but you're also introducing people into that space who maybe haven't used it on a day-to-day basis right and so there's a there's a learning curve of product learning curve that changes on a day-to-day basis and so that's where the speed of an SRO and that journey of bringing everyone to that similar level of understanding to apply similar standards create Clarity Clarity creates confidence right and All Ships rise on that side right everybody gets confidence more consumers come businesses do well well and I think it there's also you know having that Freedom right to say to a governing body um hey this area is not we know it's not up to par we want to bring it up to par we'd love to have a conversation with you right about getting it up to par that's difficult when you are having that conversation and you're crossing your fingers that that same governing body is not going to now play and I got you a moment and now do a two-year look back right and you're like I knew it was wrong I'm trying to fix it I need your help to fix it come to Jesus like yeah so it's it's having that in uh that ability to identify um areas that you know you want to improve having that collaborative conversation and being able to come to a mutual agreement on the path forward and I think having that type of environment would be phenomenal yeah yeah and and to that and in you know I'm seeing more Regulators looking forward and welcoming those conversations so it's not it's not an environment anymore where you know we're we're shaking and we're scared and maybe rocking in fetal position when when the when the Regulators get a call from us right so so they're welcoming the dialogue they're welcoming the conversation because everybody is having the same like Collective goal but it's the trust right because now now the institution or the or the company now because because I've heard from many Regulators that say yes come and talk to us yeah and now but now I'm on the other end going uh you sure third rail you can do that yeah because you know it's so now there's there's a lot of work on the regulatory bodies too to now build that trust back up and that's that's that's a tough job no doubt no doubt I think I was just going to add just along those lines I'm certainly seeing with State Regulators again you know who are going through examinations we'll go through multi-state exams yes and some of these Regulators won't regulate but we'll have crypto specific meetings and they'll ask to join because they know it's important for them to understand right they're taking that time out of their day to sit and learn from us and that builds that trust yeah you know that down the road when their state does regulate it and we are licensed by that state we're going to have a really thoughtful educated conversation about absolutely great absolutely and with that um I'd like to thank the panel I was so honored to be able to moderate this you guys are awesome thank you for the honor and uh that's it thanks again for having me [Music]