Disclosures and Regulatory Framework for WEB3 Companies | KBW2023

hi good afternoon everyone um since the introductions have been done I'm going to jump right into the questions uh so Yami and Alejandro this is for both of you how do you describe disclosure in the context of web3 companies and how do you feel that regulatory framework should be driven to enable this sort of disclosure which will lead to retail and investor protections I guess I'll I'll start with one um I mean I don't think the definition of disclosure should necessarily change just because we're talking about web 3 companies I mean disclosure is really having to share everything that's material for an investor to make a sound decision about buying a financial product in this case uh I mean it's something that we obviously obviously see in uh in the Securities Law space um now the the the problem is that obviously the old Securities laws and the the regimes that exist right now in terms of disclosure uh requirements they're they're tailored to like traditional companies and there's definitely things that are different in the in the crypto space that I think Regulators just need to start adjusting for um I think the the best way to probably approach it I would say is to just either study the space quite well and try to like issue regulations and guidance that is actually quite tailored to the space or otherwise allow for more self-regulatory organiz ations and efforts to kind of play that role and and and bring a more sound like framework for for the space there are some existing regulation regulations out there that have already taken a a particular approach I really like MAA in in in the EU in particular and I actually think that the the rest of the world and Regulators should be looking toward Mika to learn learn a a little bit about what they did uh because I think it's a very like good starting point for tailoring regulation to the space um well first thank you for for fact block for organizing this and the team at hash for sponsoring and meta for for moderating um before you jump in maybe a little bit of background um so I'm part of circle we are a web3 infrastructure company and we're known for a couple of things um web3 services but probably more well known on the stable coin s we're the issuer of usdc but what does that mean in terms of the disclosure part um there are many stable coins out there but not all stable coins are created equal we have taken a particular approach in how we structure our stable coins and how we think of our asset management and how we disclose how we manage that asset so as an example um when we take Fiat majority of those go into a reserve fund that is managed by Black Rock it's an SEC register fund it's got a ticker you can see what's in it down to the individual serial number of the treasuries you can see that on a on a you know live basis and the remaining are in cash deposits at a bank every month we do an attestation um that's done by our um auditor deoe um to attest that the number of tokens out there matches um the reserves that are held um um for the customers um in Fiat and then of course once a year we go through an audit so that's sort of one framework in in terms of how we're thinking of disclosure and a lot of The Regulators that we're speaking with all around the world are taking that and embedding that into how at least in the case of stable coin should be structured that there is a clear um outline in terms of what you're holding they're generally high quality liquid assets so you're holding things like treasury bills and not um some undisclosed loans or other type of assets and then there is a ATT testation at least on a monthly level to show you know by a thirdparty auditor what what that looks like and does it line up and I think part of what we're struggling with as an industry um is the fact that um this is relatively new right we are a relatively new industry and many haven't gone through that process of thinking about what are the responsibilities that we have to as you know whether it's issuers or exchanges to our customers and to the end user and this is a space I think we're going to see a lot of developments in so I and I think you have covered part of the answer here but both both of you have played very different roles in the trade F industry before moving to the web 3 so how has your U individual experiences in the traditional Finance sector shaped your understanding of how regulation should be drafted for the web 3 world and um i' add on to that that you know there's been um the initial Theory espoused for web3 companies has often been of a more trustless permissionless system so how do you integrate regulatory framework with that sort of uh trustless system that that blockchain seeks to achieve yeah um well I think I mean from from from what one learns being in trafi and being obviously a lawyer that focuses on this space Focus like I mean that was my that was my job I mean um I I think I think there's a lot to learn from what has been done and I think that's what the web three World sometimes just doesn't realize I mean some of the regimes that have been built over years and years of experience are actually highly relevant to web3 so it's natural for Regulators to be looking at some of those regimes and seeing how they apply them uh to to the the the current regimes there there are very important lessons as well historically to be learned as to what the effect of Regulation was in situations that were actually very similar to the ones that we have right now in crypto I mean if you look uh at for example the US prior to uh the Great Depression prior to that 19 29 crash I mean what was going on in the stock market was actually remarkably similar to what we have in crypto today you had like rampant speculation you had these St stock pools and investment pools that were like these whales essentially manipulating the market doing pumps and dumps you had a bunch of like Securities that were worthless being issued without any sort of like real companies behind them real assets behind them doing effectively what we now consider in crypto a rockpool um and and you had also marketing tactics that that increased fomo in people to go into these Securities and then essentially like abuse the public right so I think people understand in crypto that we've already seen this and we've gone through this and we've issued regulations that actually brought the confidence back into the market and allowed the economy in the US and this is probably similar story in many other countries to then just get that confidence back into the stock market and let it grow so there's a lot there that I think uh we have to learn and there's a lot of things that will actually also work for this space but I think to your point of having this you know highly decentralized space that is supposed to be trustless I mean I think we also have to be realistic I don't think the governments are going to allow this to be that Utopia that like the crypto world really envisions it to be so we have to work within the bounds of what's realistic and what what Regulators are going to be worrying about so you have to just find a happy medium and that's why I do think that tailoring to a certain degree to allow some of these things to work to allow for decentralization and for Dows to exist uh the way that they do like there there's definitely things that will need to change in disclosure but it regulation is going to happen and it's actually not a bad thing for the space I think right now we need regulatory set certainty and we need certain structures to allow the the the industry to really mature well I think uh building on that um the first rule of Regulation is wear a suit so uh maybe I've I've done that part of uh of of the structure um but in all honesty um touching on some of the points you mentioned what we are seeing in the the problems of the digital asset in the crypto space are not new they have been around since the 1920s 1930s when Securities were originally created um the approach to for most Regulators tend to be same risk same policy same uh policy outcome and that's a very sensible mode I think on the one hand you have the traditional Finance folks say this is the same business we apply the exact same rules and we'll apply them as is on the other side are probably more crypto focused firms digital asset firms as we need totally new rules and my take is that the answer is probably somewhere in the middle that to some extent you will probably take the pieces within traditional finance that are very very relevant things like Market conduct um of front and running your customer unfair Trade Practices these are things that we all agree as what's needed for a fair market um and an appropriate market for all of us as an ecosystem as issuers as protocol owners um as um users and Traders and as businesses to be able to succeed on the other hand we do all recognize that the technology is a little different so some of the things in the traditional world doesn't apply as well um things like a broker dealer right if you're on chain who's the broker who's the dealer um how does that work um are you an exchange well it depends on what exact activity are you doing are you just matching orders or are you running a central order book these are things that we have to sort out but I don't think it's it's one or the other and what we're seeing is that depending on the jurisdictions they're coming out with slightly different Frameworks of how that what that looks like um and and we can talk a little bit more like you know what's going on in Singapore in Hong Kong and in Korea and in the US and in Europe and how they're thinking through these pieces of where their Baseline is and what framework they're thinking through to create that middle ground um in that in that spectrum of traditional finance and virtual asset Finance sure um yam I have another question for you on this um the digital asset industry is even over the years is still considered in a fairly nassen stage the kind of ups and downs that we are seeing is uh not uncommon to any new technology or any new business that comes about so from your perspective what are some of the challenges that a company can face from a disclosure perspective in this early stages of development well first of all it's trying to figure out what your business model is I I think um like any sort of startup ecosystem many firms probably start with an idea and then you have to iterate and iterate and iterate and um I think being very clear and upfront first with your investors whether that is through a token offering or through um raising funds with the VC you have to be very clear what is your business model where are you trying to go where where you trying to go and then as that evolve um make sure you update that framework and be very um you know clear with your investors and then also with the public once you start launching in some way even in form you have users and that means you have responsibilities right and and again in this in this ecosystem there are a lots of Bad actors that you've talked about they're rug pools um and I think the the difference between the ones that are uh going to last you know sort of um a a a short-term gain or the ones that going to last for a while or the ones that have in place and have a maturity to think about what role do they play in the ecosystem and how they support um the broad e ecosystem and investors um Alejandro I think uh let's talk a little bit about Moon Che you are developing an AI power disclosure system so as a former lawyer in the trade fire industry what are some of the common legal challenges that potentially web3 Founders can face and what would your advice be in terms of uh issuers or founders with limited Capital who kind of Overlook the importance that legal advice and disclosures can have in the initial stages of their business yeah um I mean I'll have to qualify this and I mentioned this earlier this is not legal advice uh I have to say that but you know um okay so look I'm I'm I'm I'm a founder and I've been a Founder uh for some time and and and I I understand I understand where where like young Founders come from and how it's actually difficult and it's expensive and and so you you don't is sort of like the last thing that comes to your mind and some of them actually don't even know what they don't know and I think that's part of the problem and and so a certain degree of gu fighting finding that that that that certain degree of guidance is actually really difficult but if I were to actually just recommend to Founders what to kind of focus on at an early stage is essentially what yumy like said you you have to be aware that you have an impact on people and and that they deserve to know what it is that you're doing so the the the I I I I look at this from a a pure place of transparency sometimes where if you actually are transparent as a as a project or a Founder you are already a good way there into satisfying a lot of the concerns that Regulators have then the rest is like topping that up with like the paperwork and little things that will happen but you will develop a lot of Goodwill with regulator if you actually are just sharing information and you're very transparent about what you do this means you know sharing everything that you think could affect like for example the price of your token um not being deceiving with your marketing not omitting information that you think is extremely important for people to make that decision just be open uh about what you do and I think that's sort of like the best kind of like basic advice that I can give to early stage uh founders I think the other thing is trying to find obviously tools and and help somehow I mean this is something that can get pretty difficult to navigate I think legal issues are are are complicated and that's why people tend to avoid them um I would say try to find tools I mean I'm I'm not just Shilling here my my own project but try to find different tools that will help you and and then also try to find As you move forward a lawyer I would say earlier than you thought you needed a lawyer and and I I I actually I'm very much not a lawyer but a lawyer at the same time and but that's actually very sound advice and I think if you're getting to like a certain growth level a certain investment level you actually need to do that and it's going to save you a lot of money and pain down the line so I would say that you can't just uh you know sh sh away from that type of responsibility that you're going to have I want to add to that I I think you know building ay is really really special and and you're doing so many things at once and part of being the the head of the company the founders of the company is to figure out what you don't know right you have a vision of what you want to build is usually a really good one and and it's our it's human nature to find people to agree with you and to keep going forward and part of being in the at least in the Silicon Valley ecosystem where I started my career is to find mentors find VCS find investors that add that strategic value to help at least give you a sense of the the things that are hanging out there you don't have you don't necessarily have to like Focus all attention in the problems but at least know what those could be and how to build your company in such a way where okay like at a certain point you're going to you're going to hit you know a particular snag or you might have more at risk than you thought and and is really protecting your investment protecting your time protecting your employees protecting your shareholder so think about it in that way um and again find those right VCS the right Partners the right um advisors and mentors because that's going to make you stronger and and able to go faster into a long one right thank you um aleandra I would like to discuss a little more about the moon Che because you're building an AI powered disclosure platform how do you think this is going to help early stage Founders in uh achiev aing a sort of uh disclosure level where regulations don't yet exist yeah and I actually you know when you mentioned meta that you were asking that question I actually thought that it's kind of better to go and and talk first about the benefit of of of disclosure even for Founders uh because I think uh you know a lot of simply because it has a connection to regulation I think just it scares people a little bit um but the reality is that that Founders that are smart just like you mentioned should also be looking to share more information because there's actually benefits that come from that that are very well kind of documented through time I think for example like closing that informational asymmetry that exists between your company and the public just reduces the gaps where people can actually speculate and essentially increase the volatility of your token for example um it also allows you to attract a different type of like uh you know different different types of in investment there's a lot of like investors out there today that are getting a lot more strict about how you are and how transparent you are and and they have they have certain things that you that you have to meet before they actually invest that that's also what we're trying to do in Moon Che somehow because we're trying to make the crypto space Also more palatable to the traditional like investor world but they obviously have requirements that are a lot higher than a lot of like the the early stage investors that are now in the crypto space so so that it will allow you to attract like new type of capital as well that you you're you're not kind of used to having at the same time I think it's just it's just good practice to be transparent because I think you're you're overall the value of your uh company is going to increase even though you think that it might take a make you might you might have to make a big effort to actually get there overall it's good like I mentioned it reduces also like you don't have that Target on your back as well from regulators because you're you're trying to do the right thing and that's a lot of what they care about Regulators are willing to get into a conversation with you before taking action if you're taking steps that are the right steps to go forward so I think it's really important to to do it first of all now Moon you know the problem that we had is like how do we make it easy for these early stage projects as well to be able to write that level of disclosure and and and what is that level of disclosure as you sort of asked so uh first I think we took an approach that was very kind of all-encompassing when it came to disclosure as a as a Securities lawyer I had I had worked I had the privilege to work in in in many many crossb uh types of transactions IPOs in different countries and I I one one thing that I learned from that experience was that there's still like the overlap in terms of what The Regulators globally want you to like want you to do in terms of disclos closure it's very very significant and then the rest like there's small difference that you kind of just can can patch up so but what we decided is like let's go the conservative way try to include as much as possible into the standard because ultimately it's up to you what you want to share or not precisely because there's no regulation but what we were trying to do is sort of like take what something that is normally very expensive and time time consuming to to do and and it requires the involvement of lawyers to try to guide you with AI to become like transparent and have really full-blown disclosures in all areas that not only we see Regulators paying attention to but also in discussions with industry experts we've decided that those are areas that should be included in disclosure and in fact Regulators should be looking into Solutions like these to kind of guide themselves as to perhaps what should be part of their disclosure standard so but the I is incredibly helpful because it essentially replaces the the initial job of a lawyer of asking you the right questions teasing out information from you and then delivering disclosure in a way that is written very similar to what you would like find in a in a in a in an actual traditional for example perspective disclosure so it's it's very helpful it's very helpful for Founders that for example will have us they'll think well I can't I can't speak English well I can't write disclosure well now you don't have an excuse because like the the AI will translate even complex Concepts in blockchain into plain English disclosure that allows you to become transparent and share all that stuff with with with the public right and I think um uh do you believe that this would also help companies that operate in multiple jurisdictions as very often web3 companies do to approach disclosures and Regulatory Frameworks that can be fairly fragmented from one jurisdiction to another as it stands today yeah I mean I I I do think so I think all all of the regulations that are coming out right now globally all have disclosure as one of the main tenants of the regulation so no there's there's this is never going to hurt you in that sense you're always going to have a leg up no no matter where you're operating but like as you as you also mentioned I mean we're in a world and in a crypto world where the borders all of a sudden are getting raised and and and and that's problematic from a from a from a compliance perspective um now you will still need eventually to mature to the level especially as the regulations do come out in different countries to pay attention to exactly what's happening in a particular country that you're operating in or that you're being traded in right you're listed in a particular exchange you're going to have to pay attention to those markets to see how you patch up that Gap that perhaps is left from you being transparent already to the the quirks and nuances of what that that particular regulator wanted you to do now like there's ways of doing that too and I mean in in our platform we're we're we're we're the plan is to build that we're doing it first for ma but but after other regulations are coming out that are more certain we're also going to allow you to kind of go through that same path to be able to become compliant on different in different countries now it's it's it's it's work right you still have to do the work but but you can't avoid it at this point because regulation is coming and there's no way to avoid that Yami on stable coins do you see a different in uh difference in approach towards adoption of stable coins by regulators and Retail customers when you compare Asia and the West yeah um it's a great question the use of stable coin actually has a greater product Market fit in Asia than it is probably in the US and potentially even in Europe um on the kind of crypto side most mostly stable quter use as a store value in between trading um different positions but as we move from the speculative phase of of crypto to a utility phase what I expect to see is some of the more real use cases that for that to take hold and some of those were talked about in the previous panel around crossborder so I'll give you three examples one is um crossb trade and there um as most of the economies all the economies in Asia has a higher um traded GDP ratio than the equivalent in the US which is only 10% pretty closed economy or in Europe when you remove intra European trade because they're on the same currency Union right if you're selling something from France to Germany it's straightforward one you know it's Euro if you're selling from New York to Florida same you know currency US dollar that's not true in Asia the businesses that are built here for example you may be running a store online in Korea your customer is in Japan and you're taking Yen and you're paying your vendors in Vietnamese Dong or in taibat all of this means that the business is carrying that fix cost and that settlement time in between getting the payment and paying their vendors related to that is um trade financing the ADB the Asian development bank has estimated that around 510 billion dollars of trade did not happen because the firms are unable to secure financing in the form of insurance um letters of credit or loans these are Goods that never got made services that never got provided cuz the companies couldn't carry the cost right for those of you who run a regular business you know that when you're selling Goods you don't get paid until your good arrives at the port on the other side of the world that means you're providing a credit in in that period of time and you're fronting that production cost all of that I think there's an opportunity for um for stable coins and for to actually support the lending of and then thirdly is remittances um and there um the the World Bank has estimated that for an average $200 remittance the cost is around 5.9% uh that's a really expensive cost to move money between you and your families and this tend to hit usually the most vulnerable and the working class of each of our societies so how do we solve some of these problems I think specifically in Asia you know through the use of stable coin is really unique and I think I expect to see greater adoption especially in this crossb use cases that's very interesting and I think uh the difference in currencies between the countries is what is going to drive that adoption even more yeah um so in terms of what Circle plans to do for the future what is the kind of role that you envision Circle playing in the broader Financial ecosystem because we are seeing a lot of institutional interest also in uh cryptocurrencies and in stable coins so where does Circle fit into that entire developing uh system that we are seeing now um so as I mentioned at the very beginning um cirle is really a web three infrastructure company and it's not only financial services focused I think primarily there's usdc uh we also have a Euro coin um that's the stable coin part of the business that's the movement of money on the internet digital dollars online we now have this other part of the business which are web3 services and these are some of the things that again the previous panel had talked about there are companies in the web 2 space that want to move into web 3 but they don't know how you it's hard to program on blockchain it's hard to make the disclosures to the end users is really hard to figure out the the security and privacy so what we're doing there is we're launching a a series of um web3 as a service so similar to AWS or gcp Google Cloud platform where a traditional business can say develop a programmable wallet as part of their offering wh label it put their name on it and there it's not just Financial Services these are this could be a digital wallet company this could also be a regular retailer that wants to do for example loyalty programs right how do you handle loyalty and collection of stamps right as you go from store to store how do you do cross retail Partnerships gaming is another um all of the web 3 side the entry point is the wallet because that's what you need to be able to hold certain tokens then there's a next part smart contracts how do you build in a ways to make these wallets interoperable and able to do things automatically in between different machines and different platforms and then third um we have something that's coming out called um pbms purpose B money is how do you tie logic around the movement of value things like e-commerce where you know the money moves with the goods but the the seller doesn't doesn't get a chance to unwrap that until the goods are arriv arrived you know with the buyer and it's checked against and then you unwrap that and the value is delivered so things like that that I think will be really interesting to see as we move into the the utility phase of crypto so I our time's up but I'm going to ask one last question to both of you uh where do you see the web3 community growing forward and and could you tell us some of the essential things that you think are um going to be necessary for the mass adoption of a decentralized internet sure I I'll I'll take this one first I think I mean because that that kind of Dove Tails nicely with what yumy was uh saying about Circle I mean I actually think that one of them is infrastructure I think um you know finally we're seeing that the crypto space has realized that they need to take a step back and sort of build the basic blocks of the infrastructure side for things to actually be better uh that because that also I think leads to some of the lack of security as well on the technology side that we've seen that has become a pretty serious problem in the space so that's one of them I actually think that the other one is uh obviously transparency I think the space just needs to begin to Embrace Transparency and that should be coupled really with some degree of regulatory certainty so that is two and the third one which maybe some people will think that it's small I don't particularly think it is I think it's working on the user experience I mean the ux in in web 3 is just simply awful and until like the web 3 space realizes that there's been you know many many years of studies in ux in web 2 and look at how they actually do that they're not going to really have mass adoption proper yeah um there's a really good chart from um a16z on the state of crypto uh if you haven't seen it you should you should go find it and it shows the number of Internet users from 1990 through 2019 so roughly 20 years uh and the same name around um number of eth wallets ethereum Wallets on monthly transacting and and um annual transacting and there's a correlation in terms of the trend we're in the early days of the internet right we're in the new version of the internet and we're in the very very early days to get to mass adoption three things needs to be true first is we need more developers people probably sitting in a room that are builders that know how to build on web 3 second related to the question on uh the point you made on ux these are web services that makes it easier for people to incorporate web3 technology into existing stack and make the take the best of web 2 which is the ux experience and bring that to the web three world and then third coming back to what we talked about regulatory Clarity when you have regulatory Clarity not only are companies here could could exist but also for the large institutions they are able to then come on board because they know what they're holding they they don't run the risk a foul of their regulators and their shareholders so that Clarity provides that platform for them and and we didn't cordinate on this by the way thank you thank you Yami thank you Alejandro that was a very informative discussion I'm sure our audience greatly benefited from it great thank you thank you MAA thank you for having us than thank you ladies and gentlemen want give a big round of applause for those two great speakers and also our mod