Are the US Crypto Cops Coming for Onchain Finance? | Rashan Colbert - dYdX Trading | Caitlin Long

today Michelle you are a seasoned DC veteran you've worked for a few different agencies I'm curious who you think the US crypto cops are and what types of concerns they have for the crypto ecosystem yeah there's a real alphabet soup of uh of agencies that are interested in the ecosystem um if we look at The Regulators I'm sure all of you have read about the SEC and the cftc and kind of duking it out for jurisdiction relating to different matters um and also bringing um Enforcement cases um with their regulatory authorities but you've also got treasury their office of foreign asset control or ofac and finsen who supervises um financial institutions including some crypto companies for anti-money laundering and financial crime regulation um and so you've got a lot of regulators with their hands in the pot um I will leave it to Caitlyn to talk a little bit more about ALS Al the Federal Reserve and the banking agencies who of late um have been um putting their hands into things I guess is the way I'll put it uh and uh one important thing to think about is that um you know we use the words cops you also do have the law enforcement um agencies and the prosecutors who are looking at the system but they're not really looking at the system for purposes of trying to um strangle the technology they're looking at it uh from the perspective of where is elicit Finance happening um if it's at a crypto company or being done with crypto then their attention is going to turn in that direction um but generally they are enforcing the criminal violations on the books the things that they are you know I think the both the regulators and law enforcement are focused on um is a LIF Finance specifically terrorist financing um anything to do with sanctions evasion particularly um anything that would uh facilitate North Korea being able to get their hands on funds um for purposes of their missiles programs um and then with the market Regulators obviously they're very interested particularly in the aftermath of um FTX in consumer protection protection against fraud um and fair playing field with the markets that makes sense Caitlyn as someone at a bank you probably interact with Regulators almost more than anyone else in the crypto ecosystem so I'm curious what you think their mindset is as they approach crypto they familiar with it are there a lot of questions you have to you know answer for them um and do you think that they're really focused on Ci or is there kind of a more I don't know mix of defi in there as well uh well The Regulators are definitely more focused on CI and uh if you look at the actions that were taken in the SEC realm they went they went hardest against coinbase and in the banking realm they went hardest against us well it's because we were the easiest to get in some ways right because I think both coinbase and and in in in the SEC realm and us in the banking realm were really almost begging tell us how to get regulated and we were the most proximate and we got skewered the hardest by the uh by the aggressive enforcement um but I I think uh they they are watching defi you asked the question do they know the technology certain ones do this is where the arrogance of the of the Washington regulator is absolutely misplaced because the state Regulators in my opinion in my experience have more understanding of this than the federal Regulators when you have a federal regulator who doesn't even know what an API is making decisions about this technology there's a Chasm of of of a knowledge Gap what's been most frustrating in your opinion I don't know if there have been any roadblocks that you've come across oh the most frustrating by far is the politicization of it and the unwillingness to follow the law which is ultimately why this industry keeps winning in court because The Regulators have gone so far outside the boundary of the letter of the law and that is why the courts are striking them down but it is unfortunate that we do have to go to court um and for those of you who are not familiar with what the state of Wyoming did the state of Wyoming met with the FED more than a hundred times to work on this Charter get ready for the applicants coming there were Kraken was the first to get a charter in Wyoming there are four of us it it has stopped since obviously they denied us and we're now waiting um to for for the answer in the in the lawsuit but uh this this was not done in a vacuum it's not like Wyoming tried to do something without fed knowledge and not just knowledge participation there were the the FED marked up the the the charter statute when it was in the draft form it marked up the rule rules and regulations it marked up the supervisory exam manual and then when when the the four of us applied all of a sudden it was a massive rug pull and that came from the political side that's that's the thing that's been the most frustrating is uh is is how the the folks on the ground in many cases were very excited about this because it was something new and different and exciting and here you had somebody who was actually trying to get regulated and trying to work with the regulators and then and then it was the the DC folks who came over the top and pulled the rug on the state the state uh filed a an amicus brief um talking about overwhelming bias and animus that was very strong language uh uh because the state got got got screwed as much as the individual applicants did as well yeah so I'm hearing politics was definitely a big part of what was frustrating and ran I know we've talked about education already but I'm curious what you think The Regulators are viewing on chain Finance like what are the different flavors that they're interpreting in it as and and also like what's the biggest misunderstanding they have about onchain Finance yeah well um I think onchain Finance is uh a very broad term that encompasses a lot of different things right I think at a high level the movement and tracking of value across a blockchain is going to be onchain Finance right so that means there are tokens moving across these layers so that can be you know native digital tokens Bitcoin eth Etc um that can be stable coins meant to ATT track a specific um fiat currency or the value of something else and there's now increasingly real world assets also onchain right so onchain Finance can enom encapsulate uh all of these different things if I'm having a conversation about onchain Finance it probably means defi right defi also has several different flavors you know if you will so from decentralized exchanges like dydx um or Unis swap to um you know lending protocols maker a etc um and um then also gaming Insurance you know whatever there's um Financial Services those can also be on chain now right using these protocols to communicate so what I think The Regulators misunderstand it's actually hard to tell in some cases seems like they understand very very well what onchain Finance is um and it's hard to kind of figure out what their motives might be so in thinking about ahead to this panel I had dinner with a regulator last night and I asked her this question I said you know what do people seem to misunderstand about onchain Finance you know what's going on what's the disconnect and it really seems to come down to a lack of understanding or Clarity of the idea that Builders working in Defi and across crypto are really trying to create products that that serve people well just like in any other entrepreneurial space you know in defi Builders are trying to make something that is faster cheaper more secure just better for users obviously it's a process to get there so we actually have you know the come to fruition the things that We're Dreaming of but that is what people are doing and so it seems like there is an inherent cynicism in some people's minds whether that is possible or whether that's what people are really trying to do but there's some sort of disconnect there that makes sense and even though there are misunderstandings or to your point they understand some but don't get the full picture I'm curious how as at a project you guys are adjusting to what The Regulators are doing since they're moving forward anyways with some of these regulatory proposals yeah I honestly um we're not um you know structuring our thing to evade the law which I think is also a misconception you know it's like okay if they're using crypto and there's all these other ways to move ones and zeros across the internet then they must be doing it to evade the law and that's not the case you know I think that say dydx our product isn't available to us customers right but that's not because of crypto necessarily it's because of the specific type of derivative product that we offer there isn't a regulatory Pathway to offer it at the moment but because there is this extremely um I don't know toxic environment we have to be spend a lot of time resources in making sure that we do everything we possibly can to ensure that a technology does get into hands of us users because that could be a death sentence and Michelle you have a lot of portfolio companies I'm curious about the kinds of conversations you're having with them about what regulation means and maybe if they need to make adjustments like where those adjustments are yeah I really try to get involved and talk to the um portfolio companies early on while before launch while they're still developing their products so that they can you know think about how they want to build the business um in order to figure out you know what their cost benefit analysis is going to be based on any regulatory requirements that there may be um so what I would say to you know early Builders at least um you know you need to think about budgeting for um legal expenses or earlier than maybe you would have had to in the past because there is so much regulatory activity so that you can get good guidance um I know a lot of you um may have you know all of your budget employing Builders which is exactly what you should be doing and and your go to market people um and maybe not have inside counsil but there are lots of experts um out there um serving as outside counsel uh that can help you kind of make decisions about how you want to develop the product and if you're already up in going um and say want to Pivot what you're doing or you want to say hey we hadn't really thought about um you know what's happening in the regulatory space what can we do can we engage with the regulator or do we need to build a compliance Pro program that does XYZ or gosh I hadn't really thought about North Korea and sanctions like maybe I need to you know I don't need a compliance Department because I'm not a financial institution but maybe I need to go talk to the blockchain analytics companies who can do screening um for sanctioned addresses Etc so I think there's a lot proactively that companies can be doing and that's what um I talked to them about and as you mentioned um thankfully I don't think it's you know hair on fire or Somebody's knocking in its problem most of the time it's really just adding that as a part of your business process and your thought process um as you're building from what all three of you have said so far it seems like a lot of what's happening is on the regulator level but not necessarily what's happening with Congress so I'm curious for each of your takes about what the role of Congress is in providing Clarity or what kinds of questions need to be answered in order to help onchain Finance Thrive yeah well I I think you know that's really how I spend a lot of my time because obviously The Regulators do have theoretically a set of guidelines that there need to follow and so it seems that in some cases right we dealing with new technological paradigms and new types of products like there really does need to be additional law right so we do need Congress to act I I'd argue that we're kind of already in AAR they should have acted in the in the past but we are where we are now and so I think that it's critical that people like us and people like the folks here are spending time educating legislators talking to policy makers because like Congress has a real role to play there are real questions at stake here and and the only way we can really answer them is kind of by looking you know proactively forward it's interesting because uh the stable coin bill is winding its way through who knows if it will actually come through or not but it's coming closer than anything that we've seen so far coming out of Congress and it apparently is going to be up or down march 22nd so it'll either happen or not um and I saw an interesting thing uh Jay Powell commented on it um and it got picked up in Politico that it's very close so if Jay Powell's saying something like that um you should assume it's true uh that's consistent with what we've heard uh but um Richie Torres from the Bronx had a very interesting comment that said I don't understand I'm paraphrasing here I don't understand why Congress defers to the federal agencies so much and we're the ones in charge of writing legislation why is it that we're deferring to the federal agencies so much and that speaks volumes about the problem in my humble opinion because the complexity of Regulation is so high and the number of gotas especially in in banking but in financial services broadly that The Regulators can come after you with um is so great that Congress can't possibly keep the keep track of all of those things and so what has happened is that the whale swallowed the swallowed the whale right Congress is supposed to be writing the laws but the agencies have have ratcheted up the complexity so much that the agencies are the only ones who know how the puzzle pieces fit together and they're the ones de facto writing the laws it's upside down and I'm so glad that Richie Torres said that because it's right so for those of you who don't know Richie Torres he's a democratic member of Congress out of New York and he's quite young so Michelle I'm just curious if you think there's like a generational divide in Congress in terms of understanding or a partisan one in terms of how they're viewing crypto and their willingness to engage with the industry in these issues yeah I think that there are some very powerful and outspoken folks in Congress um that really perhaps do not see the Practical use cases and the breath of what this technology can do um and are have a one- track mind about how they think things should go and so what what I would encourage all of you to do um is to really engage um with whether it's Congress people or senators in your District even the local legislators um you need to speak with your feet with your pocketbooks and they need examples of what you're building like they want to hear about the people that you're employing in their districts um what you're building um because it's so diverse and there are all sorts of interesting things that they can't even comprehend end they're just looking at you know exchanges and transfer of value and oh scary North Korea and don't realize that the vast majority of what's being built out there um on blockchains um you know has nothing to do with that and is interesting and important for America to stay ahead both economically and from a national security perspective um and T telling your story to them um and voting um based on these opinions that people are taking in Congress is really important right now so it sounds like all three of you agree that we need legislation I'm curious what you think has stopped it to date like what have been the roadblocks along the way that have really prevented us from making any progress there Elizabeth Warren Elizabeth Warren many people but if you look at I mean look at Congress in general and all the other things have nothing nothing to do with crypto and blockchain they can't pass anything so you know it's not surprising I don't think that it's specific unfortunately um to crypto at least here in the US why do you think they can't pass anything like what what do you think is the cause behind that is it the divided Congress or it's just yeah it's a divided Congress the the the process is broken um it it literally is the old absolute power corrupts absolutely one of the the observations is that the chair so it the president of the Senate and the Speaker of the House who controls the agenda has set it up so that they control pretty much everything okay so if you don't have for example in the Senate Schumer on board nothing happens uh it didn't use to be that way so in some ways it's a microcosm of the decentralization problem that we're all trying to solve way too much power in centralized entities the same things happened in Congress and uh you know I that part unfortunately I don't know how how to fix because what politician will ever give up power um once they've once they've attained it it's a rare you know what George Washington did in in saying look somebody else has to take this on this is not about me after being the first president of the United States um that was a powerful thing and but but I think in politics that seems unfortunately to be rare most people would rather acquire power than give it up yeah I think you know it's hard to really identify exactly what the the issue is right it's seems um there's lots of issues and so you know my background is working on Capitol Hill I worked for seven years for M for United States Senate and you know so I saw even through that time things change right I think the the basic structure of the ban roll system is to like have a lot of ideas coming out of the house and then the Senate is the cold saucer to cool it down and slow things down so that we end up having legislation that theoretically really is well thought out and fits what people really want and what will work for the American people many things have distorted that process over time from the the way that elections work and who ends up becoming our Representatives right the money that's involved in that process to the I as a former staffer I think staffers should be paid more money and then we don't you know they could stay in Capitol Hill longer but the reality is a lot of the expertise is outside right and so then you have regulatory capture which I'm sure a lot of people are here familiar with the idea of where you know incumbents are able to have a disproportionate impact on legislation that gets passed so you have this kind of Perfect Storm of all the these things happening and then we do have larger cultural division which is also at a high point right now and so it's just like it's very difficult to get anything substantive through when they're always rushing and panicking over funding the government well they try to do it in these Omnibus bills and from what I've understood that if the stable coin Bill happens it's going to be in an Omnibus Bill oh yeah and as a result it's not going to be really put out for public comment it's the lobbyists of the industry who want the regulation who are making it happen and essentially getting it done and those of us who are going to have to live under the regime are not not going to have a a time to comment on it from from what I gather so that's the thing that's unfortunate um and and and in the defi Community one one of the interesting problems is that during the Trump Administration there was an Omnibus Bill that included the corporate transparency act that's causing problems for a lot of defi projects because corporations and llc's you have to report the ultimate beneficial owner to finson and uh and and one of the challenges is in a defi world you might not know the ultimate beneficial owner of your of everybody in your pro project and that might not necessarily mean you're breaking the law in fact I suspect in most cases it does not mean you're breaking the law but it just means that you can't comply with that well the corporate transparency Act was jammed into an Omnibus National Defense ndaa National Defense authorization act that's when everything seems to get done right now is it gets jammed into these Omnibus bills trump vetoed it and Congress overrode it because oh of course we have to F fund the military right what was in there was this massive change in privacy impacting um u in a privacy impacting way that I don't think a lot of folks understood and it does have a big impact on defi so um in Colorado for example Spork Dow is registered as a um as a co-op uh and in Wyoming we have the Dow LLC law in Wyoming that is covered by the corporate transparency act stay tuned might not the Wyoming is going to be doing something I think that might break that open but um it it's this is the point these big things happened and nobody had a chance to comment on them because they got jammed through in the Omnibus Bill and I am afraid that that's going to happen with the stable coin bill in a few weeks it's a double-edged sword and it is an election year Michelle so I'm curious what you think the potential outcomes of this election this fall could have on the impact of the regul like the regulation one and two the lawmaking scene as the other yeah certainly if we have a change in um Administration then I think we're clearly going to see um a change as we have anytime that there's a change Administration to turnover of the heads of the Regulatory Agencies because those are um you know political appointees from the president confirmed by the the Senate um that could very much change the way the um regulatory agencies are deciding to prioritize their um their resources um the taxs that they want to take as far as let's you know look at this and put out more guidance or let's continue on the path of well we'll just go after um people in court and um you know let it sort out there so I think that um the election potentially um could greatly change how things are going to be handled but we have to remember that because some legislation and bills that we've tried to put forward are really important too that even if we don't have a change of administration having turnover within um uh Congress is really important because potentially um that could affect whether some of the legislation that industry wants and that we'll give more clarity will actually get through and you know I don't want to leave it seems like we're you know dooming and glooming here but I will say this is the first time that we've ever seen any crypto bill um move out of committee so this year we had two bills that moved out of the house Financial Services committee um I'm very optimistic that going forward after the election that there will be sufficient change here or there to stir things up um and um get some some needed Clarity in the regulatory space moving how do you think Congress is trying to reign in Regulators if at all or enable them and on the flip side what are the tools that the public can use to fight back against what's been going on as well go ahead yeah I I'm not um as was articulated earlier I'm really not sure that Congress is doing that much to rid and Regulators there are definitely people I guess let me rephrase in the House Majority right now there have been actions and there have been uh statements that people really are tired of the kind of additional power grab that The Regulators are are kind of taking I think recently we saw the vote also out of Committee of u a bill that would revoke um something that's kind of like a regulation Sab 121 specifically that um is just not great for crypto I won't go into the de deals there details there but um there are actions being taken to kind of check them a little bit I think it will take more will take a bipartisan effort to really reign in the regulators and intentionally right now or especially right now with um The Regulators being led by folks appointed by democratic presidents and Democratic party if they're in the majority in the Senate it makes it kind of hard to check their own folks but it's necessary yeah and what about the courts well stay tuned I'll tell you soon uh the custodia case it is public information um is now what's called fully briefed uh and it will either be decided on some judgement or um after trial and the trial date is scheduled April 8th so it's coming up uh pretty soon across the board this industry has had success in the courts uh predominantly against the SEC uh the Texas blockchain commission suing the um eia the Energy Information agency this past week and winning um we just keep winning and and I I I got to highlight I I've only met John Deon once he's here I don't know he's here today John if you are make noise he's here he came to eth Denver um I helped make sure that he got to come here he's running against Senator Warren and the reason that I bring him up is because he gathered 880,000 people xrp owners to agree to intervene in the Ripple case but here's the thing that even I didn't understand as somebody who was who was trained as an attorney those 880,000 people agreed to become defendants against the SEC they agreed to be sued by the US government and they won okay that guy is here and he's running for Senate against Elizabeth Warren go stop by his booth and meet him I look forward to shaking his hand if anybody's here from the Deton campaign please please uh wave they must be at their Booth I know we're getting close to time so I'd love to do a quick round robin of what you see the landscape looking like in five years on the legislative and the regulatory side I think we're going to see leg ation that gives us a a frame a legal framework for the markets um it's going to take some time but because I think that there's some um real brain power and a lot of money that's being um put into um into this uh process I I really do think that within 5 years we will have some um useful regulation I think that um we're also going to from a number of these court cases both court cases that are um criminal in nature and some of them that are regulatory action I think that that that is going to um give I think developers and business owners um hopefully more clarity about the rules of the road and um I think that we're also going to see that all of you are going to be Building Technology that's actually going to address some of these legitimate policy concerns um that underly um you know what Congress and what The Regulators are supposed to be um concerned about out and I'm very excited about that how about you Caitlyn yeah I do believe that we will have more regulation more clarity uh and for better for worse uh in the stable coin world if it if it if indeed the stable coin Bill does pass everybody's going to have to become Banks and as somebody all the stable coin issuers and as somebody who's dealt with that holy cow again I said that before the chasm is wide the information Gap app is stunning and those of us who have tried to help fix it have been skewered let's see if that changes once Congress does enact it yeah I I think um in short things will look better right do you think we'll have some sort of regulatory Clarity there will be legislation that's passed and at least in the short term as long as the markets are going up that also improves sentiment which sounds ridiculous but it's true and so conversations are just easier to kind of approach and and to talk uh get people to listen and so I think I'm optimistic and bu markets help yes well thank you all we are out of time and I appreciate everyone here in the audience please help me thanking our panelists today thank you so we're going to take a 10-minute break uh we'll be back here at 1:55 uh if you