Building in Times of Regulatory Uncertainty | ETHDenver 2023

financing and then I start following terrorist money around the world and that led me to the Department of Justice in about 2012 and I got into Bitcoin at that time and I helped to build out some of the early crypto investigative initiatives and strategies at the doj and um following that I went off to business school and then went to uh co-lead kpmg's crypto Asset Services practice where we did broad Consulting to crypto native companies and financial institutions that were Building Products in the space my name is Lillian fonte I am the CEO and founder of cat Labs which is a startup that builds tools to fight crypto crime in my previous life I was a special agent with Department of Justice I I led one of the biggest task forces in the federal government that focuses exclusively on cryptocurrency-enabled crimes for almost a decade so I was responsible for a lot of the the crypto takedowns that have happened in the past few years the recent one being the hydro Market that was taken down a few months ago it was responsible for about 80 percent of all cryptocurrency dark web transactions and also was a huge money laundering platform for cyber criminals awesome it seems like over the last half year if it wasn't a bankruptcy uh it was some headline from Regulators I think everyone's a little worried usually crypto overestimates regulation maybe this time uh the worry is Justified so just to jump in I think it'd be helpful based on your guys's background you know reaching back to your past lives uh what is what are The Regulators thinking you know it's this big scary crypto do they actually understand it um you know just be curious to get kind of your past Insider View and to maybe pass forward that they have things they're doing now are they actually educated then kind of background like that yeah so I think it's you know it's definitely hard to tell exactly what they're thinking I think the the best clue we have is the you know their public statements enforcement actions that we're seeing coming down and I think the reason we're seeing so many things happening at once which is what really is everyone you know kind of up in arms here I think is you know we came we're just coming out of a really crazy year uh last year right so much happened obviously concluding in the FTX inclusion near the end of the year that I think The Regulators are taking action to let the American public and let the policy makers know that they're not totally asleep at the wheel you know they feel like there has to be something done and so they're taking action I think unfortunately a lot of that doesn't come with a enough clear sort of guidance as to what they are thinking what their underlying rationalities and so I think it's our job to kind of let them know where we're coming from as a community um what we're building what the use cases are Etc to try and hopefully make an impact on their thinking I think from uh the criminal side at the doj and it's it's been um several years since I worked there and Lily could probably speak more about this but what I found over the years is initially the view was that crypto was only used for illicit trafficking illicit financing But as time went on and there was more legitimate economic activity across the crypto ecosystem uh coupled with the realization that the government could have insight into all of the flows of funds and make uh legal seizures of illicit money much easier than they could in the Fiat World there was definitely a push to understand how to operate within the crypto ecosystem and um upskill the workforce on investigating the new economic criminal activity yeah and I think uh from law enforcement perspective uh in the past few years I think because crypto made it so easy to monetize a lot of a lot of crimes to include hacks scams and fraud uh the the volume the sheer volume of crimes that are coming in uh has just exploded uh because of that so I think the government is definitely overwhelmed by that but at the same time they are building several task forces to to be able to address the influx of crime that's coming in and also purchasing tools from the private sector so that also gives us you know an opportunity to service that market and to make sure that government is essentially able to address the influx of crime that comes in just from how easily crypto made it to monetize different types of crime yeah maybe a follow-up question for uh Patrick and Lily just like you know the chain analysis do they report they estimate how much crime is facilitating crypto like what's kind of your guys's mental model for like is that accurate is it not accurate or like if you have a number you know how much crime is you know committed with crypto either criminals using stable coins or stealing crypto I'd be curious if you guys have any thoughts around that yeah it's it's just if you look at the chinalysis report I think they said 20 billion dollars last year uh was elicit use of crypto but the problem is is uh their report is based on inputs from on-chain data right which a lot of the crime happens uh off chain first so like cash businesses or cash real estate listed businesses like drug trafficking for example usually starts with cash and then goes into crypto to facilitate the money laundering Trail which crypto has made it a lot easier to launder money and cheaper and faster and to generally to to transfer value across borders right so a lot of traditional criminal organizations like drug traffickers terrorist organizations cyber criminals are now using crypto to launder money even though you a lot of these transactions you can't see on chains so I think the number is a lot higher than what she analysis uh is portraying because of that and I saw this you know firsthand when I was at doj I was you know one of the first people that did some undercover money laundering operations with crypto uh so I've seen in the past couple of years uh an explosion of traditional criminal organizations using crypto especially stable coins to transfer value across borders so I think that's not really reflected in the number uh but you know I would still say it's probably under two percent of all of crypto use would be illicit illicit type crypto use yeah and I think that's very uh similar to what takes place in the Fiat world I think it's under five percent of fiatr translation transactions are illicit so kind of the crypto ecosystem seems to mirror that level of illicit activity in the uh through the rails there nice to meet Rashawn I ask you you know you hear all these headlines Elizabeth Warren soon going after uh Mev Searchers you know there's all these bills out here what is what from your perspective is actually going to get done you know in the next year maybe a couple years like are there any bills or Frameworks or certain areas even that you think they'll actually get something done and you know good or bad at least you have some guideline or some framework to operate within uh and then I don't know if you have a view on like do you think things like uh companies moving overseas like economic activity moving somewhere else because there's so much uncertainty like increases political uh movement forward or you know how do they kind of think about that yeah so it's hard to tell what's gonna happen first I think what everyone talks about in Capitol Hill and Washington is the quote-unquote low-hanging fruit of um getting stable coins Done Right building out a framework and building a regulatory structure that people can move forward and obviously it's a critical part of the crypto sort of ecosystem right and so that's a logical First Step but I think that um we saw a push last year in the house Financial Services committee they almost got an agreement on stable coins but they were two people the the chair and the ranking member from opposite parties yeah they were so close and couldn't get it done so that's not a great sign that there's a ton of um shared ground for folks to get something done quickly I think that in the wake of FTX there's a real push to get something done around centralized actors and making sure to bring some sort of transparency and accountability there that people feel doesn't exist now that could get done but what that looks like is hard to see and I think one of the big things to do is make sure that D5 protocols aren't locked up sort of in the exact same way you know and sort of overlooked the Nuance there it's interesting yeah I think one of the other Trends recently too is you know crypto has its roots in this sort of decentralized everything but I think everyone's a little bit worried and so maybe people are like well what can we do to kind of help these guys either get educated maybe it's tools so to be kind of interested in your own views maybe start with Lily just like what what are you kind of building and how does it help the government and why is it important or you know does it go with philosophy of crypto like things like that how does it kind of feed into both those angles yeah so at cat Labs we're building uh two types of tools one is uh reactive tools so reactive meaning after the crime happens we help governments uh with the investigation uh and specifically in recovering cryptocurrency assets from Criminal devices like phones computers and other digital evidence so we automate that very manual and arduous process that requires a great deal of expertise and experience uh and then also we're building proactive security tools right to prevent a lot of the digital asset theft from happening in the first place right so uh preventing investors from losing money that also eases the burden on the government to address these kinds of crimes yeah I'd like to Echo Lily's comments there so I really think that um the government having the right tools to have insight into the ecosystem is very important that's why I'm very excited about what Lily's building at cat Labs we're an investor in her company um but security across the board is very important and it goes hand in hand with regulation so when you see uh the hacks like the the Lazarus group from North Korea hacking Harmony protocol the Ronin Network and taking all of that money uh that gets that does not it's not a good look for the ecosystem it gets the attention of The Regulators um and one when there's issues like that more strict regulation is bound to come down the pipeline to uh stop uh sanctioned countries from getting uh money and also to protect investors so at rw3 I focus a lot on exploring security companies and there's a lot of uh new startups coming up to to make the audit system better there's different tools across the board and platforms to secure smart crowd contracts and um and that's uh I think going to be one of the most important things for uh the ecosystem to do so Regulators can get comfortable with how we operate as an ecosystem here and mayor Sean obviously you guys are building the ecosystem you have an actual product out there it happens to be maybe in a kind of test your space around derivatives but like what do you guys kind of do to to interact with Regulators how are you thinking about being proactive and working together with them and like maybe that sheds light that there's any developers out here how you know kind of a framework they could work under and some things you guys have done that have been positive I'll be interested in that yeah so I I think regarding how we're communicating with policy makers you know there there's a saying a kind of trite saying in the policy space if you're not at the table you're on the menu right and so it's important for us to be a part of the conversation and do whatever we can to make sure that we are present and obviously that's a focus or a real value that the leadership of my company Sees at dydx and so that's why I've been brought on the last couple of months to make sure that we have a voice in Washington but not just for our company but for D5 and also for crypto in general I think that we haven't been a part of that conversation to the extent that we need to be and so I think um you know this is a little bit of just a message you know I think you know you don't have to be a policy professional to make you know an effective appeals to policy makers I think you know Congress ultimately the answer to their their constituents and people it's easy to kind of get lose and you know the idea of how much we really have an impact and if everybody does write in call in it does make a difference ultimately you know policy makers members of Congress want to get real they want to be able to maintain their influence and they're going to do that by appealing to what people desire calling calling my congressman right after this but you know when you're sitting on a table even though you're there do you feel like they're trying to put you on the menu or is it like a positive receptive conversation maybe it varies by subject but yeah I think you know so any any quote unquote given policy conversation or table has several different stakeholders around it so there's going to be people who are a foreign idea and against an idea along with the policy makers themselves and so if we take ourselves out of the conversation the people who are you know advocating for the things that we don't want their voice is gonna speak much louder than ours so I think that there are you know real adversaries in this conversation who we have to be careful of and so ultimately the policy makers will make they will write the laws and we can do our best to educate them and influence them but we can't do that if we're not showing up and then maybe Lily on your side too when you guys you're obviously selling your tools to government agencies like is there positive vibes from them are they helping you with the products are they kind of like we just need to get rid of crypto completely are they kind of like crypto's not going away so we need to understand I have the tool set to you know get people's crypto back when it does get stolen like how's the relationship worked so far whatever you can share around that would be I understand maybe there's others working with the government agencies on tools and things like that but yeah I don't think there is really a view that crypto uh needs to die or or needs to go away completely I think um I think the government is very especially the federal government is being very proactive in procuring uh tools to help them address uh the crime that's that's uh coming out of the industry uh just basically the goal is to clean up the industry right and to um and whenever Hawk scams and fraud are happening that victims are able to um you know to go somewhere to get their money back or at least to get the the crime investigated which right now is uh is is very difficult to do because a lot of these hacks and scams are under the federal threshold to investigate so if they go to the FBI and it's under a million dollars uh they usually get referred to the local police and the local police don't have as many tools and um you know budgets and experience in order to be able to address and investigate these crimes so I think bridging that Gap and and basically allowing local law enforcement and empowering local law enforcement to do these investigations is going to go go a long way in cleaning up the industry and also you know building automation tools and investigative tools for not just local but also Federal governments is is going to be a huge help I think in that regard awesome yeah I kind of alluded to this earlier just you know the trend we see is like all my buddies are moving offshore because they're concerned with the regulatory environment so I'd just be curious from all your perspectives like whether it's cross-border crimes or you know how dydx is approaching Regulators across the globe obviously these are open platforms and like Patrick maybe how you think about investing in companies in different jurisdictions and what they're providing uh to improve the ecosystem and its interactions with Regulators across the globe I someone want to take that any direction but be curious on kind of your different perspectives on those I think from an investor standpoint we look at cryptos Global right so we just inherently look at global companies to invest in um and each each country has essentially a different regulatory framework and it's really hard to keep up uh but we invest in companies that are thinking about how they're interrupting interacting with the regulators and the regulatory bodies of their jurisdictions that's very important to us we're were essentially pro-regulation it's it's obviously a good thing if it's done right and uh and I hope that there's not I hope because of the unclarity in the U.S I hope we don't see more uh regulatory Arbitrage and companies starting to build overseas because it's easier I think that'd be um just a bad thing for the United States and the crypto ecosystem in general but we uh we invest in in companies not from a regulation perspective but just to uh have a broad portfolio and there's just great companies being built all over the world we invested in a uh a company based out of Nigeria that's building a stable coin saving product um to help the citizens over there not have their wealth degraded through uh inflation so there's just a lot of use cases that exist overseas um that don't exist in the us and we're excited about all that maybe Lily just a view on like are the government agencies working together across the world how's the coordination going things like that well uh so in my experience um the best criminal use for crypto is money laundering uh in the context of transferring value across borders right so crypto crime is always going to be a global right so um I think we have to pay attention to U.S regulation because usually uh other countries generally follow historically when it comes to financial regulation so we have to really pay attention to what the US is doing with that um also it being the biggest consumer economy right so um I'm seeing also a lot of um I'm seeing a problem with State actors right using cryptocurrency to evade sanctions like North Korea and Russia and also to finance their operations right when they don't have access to the financial services so that's something that we have to kind of tackle uh together as well and that the hack risks with that are huge because of course the Russians and North Koreans love to hack D5 protocols and uh in general U.S companies so we have to really stay on top of them awesome maybe rushon closing thoughts how do you guys engage with global Regulators think about their different rules yeah I think um well you know touching on a bit the international idea you know we aim to empower more Traders with transparent Tools around the world you know but unfortunately because of these perpetuals it's like one of our main products people really love you know we can't offer that to U.S customers right and so I think there's still a lot of room for the United States to move forward on financial Innovation and so we'll be continuing to interact with policy makers and with Regulators to to hopefully help them see that perspective awesome I think that's all we all have time for thank you guys thanks for everyone for listening thank you [Music]