In short
Podcast Summary: Raoul Pal: The Journey Man - Episode on Crypto's Regulatory Outlook
Podcast Description In "The Journeyman," Raoul Pal discusses the rapidly evolving world of macroeconomics, cryptocurrency, and technology. He engages with leading experts to uncover significant trends, investment opportunities, and the societal impact of the "Exponential Age."
Episode Overview
Episode Title
Crypto's Regulatory Outlook Guest: Georgia Quinn, General Counsel at Anchorage Host: Ash Bennington Focus: The current regulatory environment for cryptocurrency, particularly in light of recent enforcement actions and the implications of various agencies' positions on digital assets.
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Key Topics Discussed
- Current State of Crypto Regulation
- Federal Banking Issues: Discussion on the regulatory actions against major players in the crypto space, including Coinbase's SEC Wells notice and ongoing investigations into Binance by the CFTC.
- Regulatory Framework: The complexity of having multiple regulatory agencies (SEC, CFTC, and banks) overseeing different aspects of the financial system creates confusion regarding which entity should regulate cryptocurrencies.
- Regulatory Enforcement vs. Rulemaking
- Regulation Through Enforcement: Quinn highlights the drawbacks of regulatory actions that lack transparency and public input. Enforcements do not provide clear guidelines or rules for compliance, leading to uncertainty in the market.
- Importance of Transparent Rulemaking: Advocates for the traditional notice and comment process which allows stakeholders to provide input on new regulations, making it a more collaborative effort.
- Challenges for Crypto Entities
- Lack of Clarity: Many companies in the crypto space aim to comply with the law but face difficulties due to outdated regulations that do not accommodate digital assets.
- Political Accountability: Regulatory agencies operate with a degree of independence but often lack the accountability that Congress faces, exacerbating the disconnect in regulatory approaches.
- Potential Implications for the Industry
- Wells Notice for Coinbase: Quinn expresses skepticism regarding the SEC’s actions against Coinbase, noting that the company operates transparently and has made relevant disclosures.
- Classification of Digital Assets: There is an ongoing debate about whether digital assets should be classified as securities or commodities, with significant implications for the trading and regulation of these assets.
- Future Outlook
- Legislation Potential: Quinn suggests there is bipartisan support for developing clearer regulations but notes that the recent FTX collapse has stalled progress.
- Expectations: Short-term enforcement actions may dominate, but a push for legislative clarity could unfold in the next six months, offering a potential path forward for the industry.
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Key Takeaways
- Need for Clarity: A clear regulatory framework is crucial for the growth and stability of the crypto market.
- Regulatory Competition: Agencies are not coordinating effectively, leading to potentially contradictory regulations that complicate compliance for crypto firms.
- Impact of Enforcement Actions: The regulatory environment can stifle innovation and push the industry offshore, leading to a loss of American competitiveness.
- Consumer Protection: Strong regulatory frameworks can enhance consumer protection while allowing for innovation in the crypto space.
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Conclusion Georgia Quinn emphasizes the importance of collaborative regulatory efforts to ensure the U.S. remains a leader in the evolving landscape of digital assets. She advocates for clear guidelines that foster innovation while protecting consumers, highlighting the potential risks of enforcement actions without clear rules. The episode concludes with a call for action to improve communication and understanding between regulators and the crypto industry.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Transcript
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1:29What's the current state of play in crypto as the perception of the so-called Operation Chokepoint 2.0 grows? Welcome to the Cryptoverse. I'm Ash Bennington. Today, I'm joined by Georgia Quinn, General Counsel at Anchorage Digital to help make sense of everything that's happening in the crypto space. Georgia, welcome back. You're one of our favorite guests. Thank you so much for having me. It's really good to be here again. Georgia, where do we start? What's happening? What's going on? Obviously, a lot of news in the space. Yeah, I mean, you had to go there with the title. I didn't know that was happening.
2:01We can start with the issues that we're having in the federal banking system. But the world is our oyster, really. So let's talk about this. Obviously, issues in the banking system. We get Coinbase having a Wells notice served on them by SEC. see lots of alleged investigation happening over at finance a CFTC suit being filed publicly. How do you contextualize this? What's the big picture? Well, I mean, we did have we were forewarned. You know, all of the agencies did say that they were intending to bring several actions this year. Also, we saw them ramping up in their hiring of enforcement personnel.
2:43So it wasn't a a big surprise. But, you know, I've said it actually on our last encounter, I mentioned the issue I take with, you know, these investigations and claims against Coinbase because, you know, everything that they do is very open and notorious. Everything has to be filed in a 10K, 10Q, 8K, whatever type of filing they're doing. And the SEC has full transparency. I really don't know what they need a wells for, frankly. But, you know, they know these types of activities in the line of business that this institution is engaged in. And to now bring these actions seems kind of a day late and a dollar short.
3:28Yeah, and as Brian Armstrong pointed out, not just the Qs and Ks, but also the S1, when they filed to go public, disclosing what the core of their business model is. But I want to just talk about what's happening here. I want people, particularly people who come to us with an engineering background from the computer science side, to try and understand the context of what this is about, of what's happening right now in terms of these regulatory actions. What do they mean? How do they work? Why do they exist? And what is the potential implication? Yeah, that's a lot to unpack, but let's start at the beginning.
3:58So we have in our country, we have delegated the regulation of different financial services to a multitude of different regulatory agencies. So we have the CFTC for commodities. We have the SEC for securities. We have a trio of banking regulators for federal banks. And then we have a multitude of state regulators for all of the state banks. And all of these institutions provide a bevy of services that often interact with one another. And so first and foremost, we have crypto, which is a big old problem, right? Because we don't know which product and which regulator should apply to this asset. And so we've got some jockeying here between the different regulatory agencies about which one is actually going to regulate it.
4:42And we have a lot of uncertainty from both the participant, like me, and frankly, the regulators themselves about which rules are applying at which time and what type of framework should be applied. And so this is creating an issue. And now things are coming to a head because we have a huge regulatory push where not a lot's been able to happen in Congress, right? So we haven't been able to have a lot of clear regulation push forward. So the agencies are trying to do it themselves. And, you know, unfortunately, in many ways, they're doing it through enforcement actions, which are less helpful than the actual promulgation of regulations.
5:28Because when you have to go through the Administrative Procedures Act, which regulatory agencies are bound by, you have to do a notice and comment period. And that is when you draft a proposed rule, you submit it to the public. There is a period of time where stakeholders and other agencies can give comment and feedback and be thoughtful about these rules. And then it's the responsibility of that agency to take in all of that comment and feedback and digest it and then put it into the final rule. And that is actually a lovely, beautiful process. Frankly, that is why I, one of the reasons I got into the law in the first place is because I love that collaborative effort to make good sound regulation.
6:13But instead, when you do it by enforcement, you don't get any sort of notice, you know, other stakeholder feedback, comment, whatever. And also, and this is the worst part, you don't get any transparency into what the actual rule should be, frankly. What you get generally is a settlement that says neither of the parties admit or deny, so automatically not helpful. And then they agree to give some money and not do some things in the future and whatever. Let me just see if I can zoom out a little bit to just try and describe some of this for people who don't have business and legal backgrounds, especially here.
6:52So first, you start out with this idea of the law. Laws are made by the Congress in this country. The laws get ratified. After that process, you have these independent agencies, most of which, I believe, are in the executive branch. They're independent. They operate independently of the executive branch. I think the three regulatory agencies for banking that you mentioned earlier are OCC, Treasury, the Fed, and FDIC. Those are the three principal federal regulatory agencies of banking, and then there are a lot at the state level as well. But this idea of enforcement, regulation by enforcement, the idea is instead of having formal rules be made that are published, they tell you where the line is.
7:32In the case of regulatory by enforcement, not a term of art, but just a framework, a casual, colloquial way of describing this, that essentially means when people step over the line, you tell them, hey, you've stepped over the line. But if the line is not clearly defined by rulemaking, it's a little bit more challenging. And that seems to be essentially the situation where we find ourselves right now. Is that roughly the case or roughly your view? You just put a little bow on it. That was great. So the idea here is that there hasn't been the clarity that people in this space want. Now, Gary Gensler has said publicly, hey, listen, if you want to register, come on in.
8:04We're waiting for you. Folks on the crypto side, there really is no process to do that. We have federal regulatory apparatus and laws in this country that are 90 years old or thereabouts on the security side. Tell us a little bit about the challenges that that presents for good actors who want to abide by the law, the rules and regulations, but just aren't able to because they don't feel that they have enough clarity. Yeah, I mean, when we talk about, you know, the open invitation to come in and register and let's do things, you know, we'll find the framework, let's do things together hand in hand.
8:41Let's just look to how many registrations have been provided. I believe that number is zero. That is exactly right. Ding, ding. And so it cannot be that no one in this industry wants to play by the rules or do things the right way. That just cannot be the case. Frankly, I know it's not the case because I'm one of those people with a pending application. So, yeah, that is not, is probably not a valid option, at least at this point. And so that is a little disingenuous, I would say. And then, you know, you're spot on with the reg by enforcement piece because we're not getting any of that clarity.
9:23And we're totally gridlocked in Congress, so we're not getting, you know, actually legislative action where, you know, and we should point this out, too, about the difference between the regulatory agencies and Congress. Congress is held accountable, you know. every so many years you have to be elected by your constituents, right? Versus regulatory agencies, they do not have that same accountability. While yes, they often fall under the, you know, executive branch, they are to a certain degree independent and you have people there that that's their whole job, right? And we elected that as a country because we wanted to have subject matter experts.
10:05We were like, whoa, these topics, these matters, they take some really smart people. And so we need to make sure that we have very top minds, you know, performing these actions. But what it doesn't mean and what it shouldn't mean is that they are insulated completely from political will and any sort of accountability. And that's, I think, what's happening now. Well, let me ask you this. Obviously, at these federal regulatory agencies, you have the career staffers and you have political appointees who run them to what extent are these agencies independent in terms of the general direction that policy gets at in other words are we seeing the will of the biden administration uh being promulgated by uh sec or cftc or is this something that's happening independently to me this is this is coming from the white house
10:59so that means that a political determination in your view has been made to step up enforcement. Correct. And it's not being made through the proper ACA procedures, right? So we're not getting, we're getting a lot of guidance. We're getting a lot of guidance, which again, doesn't have to go through rule and comment. It just, you can, you can promulgate it and it's immediately effective. And they, you know, the agencies will say, oh, it's not binding, but why else would you promulgate it? What else is the purpose of its existence? And so we get a lot of guidance coming from the agencies that hasn't gone through appropriate approval channels.
11:39And then we get settlements and enforcements. So let's talk about what's currently on the table right now. What are the open actions and what are your expectations for the way it's going to develop? So like about the certain cases and controversies that are outstanding right now? Sure. Let's start there. So, you know, I really can't speak to a lot of this just because I don't have that information. I have feelings about it, though. And, you know, I think we have the... I shared with you how I feel about the Quoing Base Wells Notice. I just find it inconsistent. Let's just describe what that is, what's been publicly made available, and what your interpretation of that is.
12:30Sure. Sure. So, I mean, we don't really know that much, right? We know that they've been served with a Wells Notice, which is a precursor to an enforcement action. Wells Notice means you have to provide a bunch of information within a certain period of time. And, you know, I mean, there have been rare instances where it hasn't proceeded enforcement, but not really. And so we're all, you know, kind of like gearing up and anticipating what this action is going to be and what, activity or product or service. I'm racking my brain here. I don't know which one it's going to be. Multiples? I don't know with respect to their business.
13:06Well, we have a little bit of information in this, a little bit of insight because Brian Armstrong tweeted about it and they provided a statement on their website talking about SEC making the claim that certain of their products are in fact securities in the view of SEC. Talk a little bit about what that means and how significant it is. Sure. And we can talk about, you know, my guesstimations of which of those products he's talking about. But yes, so to the extent a product is deemed to be a security, it means that in order to be sold, it has to be registered pursuant to the 33 Act. And that's, you know, that's like your typical public stock.
13:50And you would do an IPO process, you would file what's called an S1, it would have all of these multitude of disclosures that you have to make a lot of attachments that you have to file as exhibits. And do not forget, Coinbase did this. And then, you know, once you do your IPO, and you conduct your initial offering, then that company has to make ongoing disclosures on various forms, in order to maintain its stature as a public company and to be, you know, continue to be traded on a national securities exchange. And so if we were to deem secure digital assets to be securities, you know, right now, none of them have gone through an IPO process.
14:29So none of them would be, have been issued properly. So basically what happens if you have an unregistered security, first of all, the the issuer who's responsible for selling that security would be liable and they would have, there would be recourse against that individual. And also with respect to each of the securities sold, the purchasers would have rescission rights, which would mean they would be able to get their money back for the securities that they purchased. And there would be a big old mess if those were subsequently sold down a chain of title and we would have to go and like, it would be a mess basically because you would have people then claiming that they had the rescission rights and the original purchasers would say they did and it's all that always turns into a big old mess and much less of a mess than it would be now because generally those types of assets are you know when you've had an unregistered securities offering like they're generally not freely traded the way that we have you know digital assets traded now and so um anyway that is a parade of horribles that if we're going to actually deem this we need to really think about what would happen there.
15:36The other thing that would happen if we deemed all of these to be securities, they could only be traded on a national securities exchange, because that's how securities work. They're only allowed to be traded on a national securities exchange or an ATS. So this would be like NASDAQ or New York Stock Exchange, and ATS, of course, is alternative trading system that is also registered with SEC as a mechanism for trading securities. Correct. But in order to be on NASDAQ or the New York Stock Exchange, there are very, very heightened requirements that public companies must meet. So there are a lot of public companies that don't even meet the high bar of being on the New York Stock Exchange or NASDAQ.
16:20And so these types of assets would never meet those requirements. So immediately there would to be no liquidity for these assets. And even to the extent they were traded on an ATS, an ATS has a very limited scope in the types of assets that it can trade and the types of clients that it can have. So all of the big retail trading that's currently taking place in digital assets goes away. So those are just some mechanical problems with deeming these assets to be securities, unless we create another framework for them that is regulated and has the same kind of controls like market manipulation and insider trading and proper custody.
17:00If we have a framework that can be put into place that would allow them to exist, but in a regulated way, that would work. But just using today's infrastructure and regulatory framework and calling these assets securities just means they are useless and whatever trillion dollar industry goes to zero. That's a very sobering statement.
17:28Good morning.
17:33Okay, so it seems like the challenge that you're describing here, and you tell me if this is a misinterpretation, is that you have this sort of neither fish nor foul digital asset category class, 90-year-old securities regulations that clearly did not anticipate Bitcoin and Ethereum and all the other coins that we have today, and no sort of mechanism for finding a way to merge them together. And tell me if you think this is a fair statement. There had been for many years now regulatory forbearance from these independent regulatory agencies that regulate the securities world around digital assets.
18:05And it seems as though we're coming to a period where that forbearance period has come to an end. And now we have this challenge of seeing this absence of specific regulatory frameworks for digital assets and the sort of very blunt tool of enforcement colliding in this moment and we see what we get right now, which is all of the fear, uncertainty, and doubt that we have in this space. Yeah, I mean, that is a perfect assessment of what we're facing right now. And look, it's not all the regulator's fault, right? Like we've had some major calamities and frankly disasters in this space and in this industry.
18:45And there's a lot of reaction taking place. And so a lot of people are just trying to do what they can because it's really hard to do nothing. And so just some of those things are not effective and not the best long-term solution. Sometimes it's best to actually take a step back and do an analysis and make a determination of what we could have done to prevent something and then thoughtfully pass some rules. But I understand that people also just want to react and punish people. You're talking obviously about the notable failures that we've seen in the space, FTX being the largest but by no means the only.
19:27This is a response from what I understand, at least in your view, against that, presumably because people, individuals, retail investors lost money as a consequence. Exactly. And I think, I mean, look, not just that, right? But a lot of legislators took a lot of those retail investors' money for their campaigns. So people feel, like slight it, like people feel responsible. People, it's a much more personal thing, even than like the financial crisis, because it wasn't so personal. This is very, very unique to an experience that these people in government had. And it wasn't just legislators. There were many visits to, you know, regulatory agencies and people's, you know, credibility careers.
20:17You know, it's all kind of culminating into this reaction. Yeah. So let's talk about something you mentioned earlier, which is your guesstimate of which products might be considered securities. Yeah, I mean, I'm no rocket scientist here, but obviously it's going to be some of the assets that are listed on the exchange. They've already said as much, even though they took no action. So we talked about this at our last meeting about the Waleed case and how that handful of digital assets that the SEC deemed to be securities, but they took no action about the lack of registration for those offerings or the fact that they're traded on non-regulated exchanges.
20:59So that was a little inconsistent. So obviously some trading assets. And then there's going to be the staking. Staking is a hot topic right now. Has staking made Ethereum more likely to be considered a security under the framework of the Howey test? So my interpretation is less likely to be a security, and I will tell you why. By the way, we should say what this is for folks who may not know. Oh, yeah. Yes. So the Howey test is a court case decided a few decades after, I think, in the 1950s, about orange groves to decide what is and is not a security. And the principal tenets of the Howey test, for those who don't know, is that it involves an investment of money in a common enterprise with the expectation of profit to be derived largely from the efforts of others.
21:52That's the traditional definition of what makes a security here in the United States. Exactly. Oh, my God, you're better than my securities professor. Okay, so that's the framework or the test. And the reason why when you can stake Ethereum, it actually is less likely to meet that test is because now you as a participant in the network are providing your own efforts because you're validating transactions. You are participating yourself. The network is getting better, getting stronger because of your efforts, not the efforts of others. And that goes for all staking in general, for all assets that have the staking as an option.
22:35And so I think that, you know, I understand the other arguments, but I think that that is at least one kind of chip at that analysis, and people should be thinking about that. So you spend a lot of time focused on Washington and what's happening there. Is there, in your view, the potential to get a legislative solution to this problem? In other words, for Congress to act and develop a framework that clarifies some of these core challenges that you've described here today.
23:11You know, there has to be, right? Like, this is our, and this is the same thing I said last time I was here. Well, at least I'm consistent. I think that there is building bipartisan support. It's hard. We got really set back by FTX, frankly. I mean, they really just burned a big swath in Congress, and we're going to have to work hard to get people back to the table, and that stinks. But this has to be the way we have to, and this has to be the way, and these regulatory agencies need to get back to traditional rulemaking, where we have the notice and comment process. One of the things that you said that surprised me was this idea of cryptocurrencies going to zero.
24:00Do you think that that's a real possibility? I know when you're talking about this, you're talking about this as a US person, as someone who is the general counsel of a regulated entity in the space. But is there just not so much international support outside the US for this, that no matter what securities laws are enacted here and what enforcement actions we see, that there's some bid for these assets. I mean, I was really shocked when you said zero. Yeah. I mean, I like to say things to get a rise out of you. So that was good. Mission accomplished. Yeah. No, that's the other part of this puzzle is there is a huge demand abroad.
24:38And the more difficult we make operating in a knowable, safe, regulated way in the U.S., the more we're going to push these assets offshore where we don't have oversight. We don't have Bank C4C Act. We don't have transaction monitoring or KYC requirements. And if our citizens do ever get exposed to those assets, they will have no recourse. And that is kind of the chicken egg of this whole thing. Yeah, and it's a pretty considerable swath of the American public between one in five people, one in five adult Americans, and one in six. That's a pretty sizable constituency. For sure. And it is just going to continue to grow.
25:21So there's that. Hey, we talked a little bit about what was happening over at Coinbase, but less about what's happening with the CFTC suit against Binance right now. That's something the complaint is now public. I'm sure you've read that. Give us your sense on what's happening with Binance. Yeah, I mean, I don't want to go in too detailed with this, but I think this is what we're seeing when, I mean, I've always kind of admired this, like, oh, we're not in any jurisdiction, so we don't have to abide by any rules. But that's actually not the way it works. So the way the law works is wherever you are serving clients, those are the rules that you have to abide by.
26:04And so that's why I think for so long, you know, they attempted to make the claim that they weren't serving U.S. individuals or institutions. Ergo, they wouldn't be subject to things like the CFTC. But if you're actually going to implement that in like a, you know, cyber sort of environment, you have to have some really strict controls, right? Because people are sneaky and they will find your services if they want your services. And so if you're not putting really top-level controls in to make sure you're excluding certain jurisdictions, you're going to be serving those. I mean, the allegations from CFTC, if I understood them correctly, aren't merely that their controls were too porous, but that in the view of CFTC, and correct me if this is incorrect, that Binance attempted to facilitate and foster evasion of their geofencing through VPNs and other electronic means.
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26:57That is the exact claim. I don't want to like point fingers. I don't have facts on the ground and this will all be meted out in a court of competent jurisdiction. So that is a claim. But, you know, the way claims are written, right? Claims don't have to have necessarily justification. This is the claim. Then we have discovery. Then we'll decide who wins in a court of law. So, you know, I can't I'm not going to sit here and back up, you know, some claim that I don't have any evidence. In the benefit of the doubt, I'm saying even if you had the very best of intentions, that is a very difficult thing to do.
27:34And so if you don't have that level, then you can see where things could go wrong quickly. Yeah. Another interesting aspect of this, and I have the documents open in front of me. I'm looking at this as paragraph two of the CFTC complaint, essentially saying, and I'll just read this. Binance, under Zhao's direction and control, with Lim's willful and substantial assistance, has solicited and accepted orders, accepted property to margin, and operated a facility for the trading of futures, options, swaps, and leveraged retail commodity transactions involving digital assets that are commodities involving Bitcoin, Ethereum, and Litecoin for persons in the United States.
28:18Obviously, there's a lot there that's interesting, precisely to your point, this notion that they are US persons who are being provided these services. But second, this idea that Bitcoin, Ethereum, and Litecoin are specifically called out as commodities by a CFTC attorney in this complaint, pretty striking because it seems to contradict, at least seems to me, to contradict SEC's assertion that some of these products are in fact securities. So that's my favorite part of the whole complaint. And I have already cut that out and, and, you know, slacked it to my entire company on the day this came out.
28:55So yes, well done. No, it's wonderful, and it draws the line in the sand, and it finally gets us where we need to be, where we can have a real, legitimate discourse about who is the appropriate regulatory agency for these assets. How does this work in Washington for people who aren't lawyers, for people who don't have the background with the regulatory frameworks? Because it seems when you have two independent agencies making essentially contradictory claims. I think people wonder, how does that process work? Is there a conversation between these regulators? How does this work? And is there a unified plan from the executive branch to attempt to rationalize ultimately these different claims and enforcement actions?
29:37So here is a little secret. Washington is more Veep than House of Cards. So nobody's talking to anybody. and people are just doing willy-nilly. I mean, it's not really that bad, but there is not as much coordination as you would hope for, frankly. And especially in these matters lately, it's whatever coordination there was before, there's a lot less. So the implication there, Georgia, is that this isn't part of a grand strategy. This is just a kind of a regulatory competition? Yeah, it's more of like a horse race. Yeah. We've got some questions coming in. There's obviously a lot to talk about here.
30:22I know our audience is very curious to understand this. The first question comes to us from Roger Bowes. And the question is, does Georgia have any comment on the Web3 Foundation self-declaring that Polkadot has morphed into software, i.e. not a security? And I guess implicit in that question is, what are your views about what you believe regulators will think of such a claim? So I think that it's time. You know, it's time somebody made this claim. I think it's definitely within the realm of possibility. And, I mean, we used to have, you know, department heads at the SEC saying that this was a possibility.
31:04And then, you know, people kind of backtracked on that. But I think that it is a great claim. And I think that, again, we need to have some clarity here. And so let's, I think that they should, you know, brief it up and submit it forth. Here's a question from Maziel Medecova. I'm sorry if I butchered that. Can you talk, share some comments around the classification of crypto as a commodity by CFTC? Well, you've already talked a little bit about that. But do you believe that these are, in fact, commodities? I think the more appropriate regulatory agency would be commodities. And especially because the spot market doesn't need the same level of regulation, I don't believe, as the securities market, simply because of the transparency that the blockchain already provides.
31:49Do I think that it needs to have no regulation? That is not what I'm saying. But something a little lighter than a national securities exchange, right? Because as I mentioned before, these types of assets are never going to meet that standard of a national securities exchange. Also, and it's like deja vu, man. But last time I was here, I also noted that I think ultimately when this industry really matures, it will be more like Forex, at least for the big asset winners. And Forex is also within the ambit of the CFTC. Here's some great questions from Ralph Humphrey. These are obviously very sophisticated questions, and they touch on some points we discussed a bit earlier.
32:28Which prong or prongs of the Howey test tends to take crypto out of the security bucket? Let's start with that one first. In other words, I think what he's asking is which of the Howey test prongs, the four that we discussed earlier, do you believe are not met by digital assets and therefore make cryptocurrencies not securities? All right. So what do we have? Investment of money. That one's really hard. Expectation of profit. So expectation of profit is interesting because it depends on the token, right? And it depends on the use case. And if you're actually using a token for some good or service that it's providing, like file storage or something, you're actually trying to consume something rather than invest in something.
33:19So I think that's when you have to get facts and circumstances about kind of what utility the token actually has, if any. And then upon the efforts of others, I think again, oh, and then as aggregated, right? Aggregated. Okay, aggregated. This is common enterprise. Yes, sorry. Aggregated is common enterprise. And this, I think, is another failing point because this requires there to be some form of centralized organization, some form of thinking, feeling body. And frankly, this is what would allow the filing of a registration statement, right? Like if you didn't have this like nexus, this functioning thing, who would file the S1?
34:03Who would sign the registration statement? There's nobody there to do it because it's this disaggregated group of participants that don't know one another and don't have any real communication except through the network. So in the beginning, and this is why, you know, Polkadot's making this argument. In the beginning, when you're first building a network, like obviously you have to have the developers and we have to all come together on what the functionality and the way that the ecosystem is gonna work. And probably you're holding a large majority of the tokens yourself that are gonna be distributed out to the participants in the network.
34:36And so that's when you have this like aggregated joint effort of people or organizations. And that initially is really hard to overcome. And that's frankly what, well, I could go on, I can do that, but I'm not going to. So that is really hard to overcome until the network reaches some level of maturity where it actually can be decentralized and you can then make the claim. And so that's why it would be nice if we had kind of a bifurcated regime, which allowed a network to operate under, very strict supervision and requirements of the founding organization or builders or developers or whatever you wanna call them.
35:19And then once they reach that level of disintermediation, then they could flip into a different regulatory regime, which wouldn't require that same kind of disclosure and things. Because, again, disclosure takes on a less important role in that point. It's frankly transparent and it's visible and digestible to just the average everyday person. You don't need a regime to mandate it. And then the last one is the one I got to about the efforts of others. And so if you have staking, I do think that you're not relying on the efforts of others in that program. That is you staking those assets to validate transactions.
36:01And even if it's not you personally validating the transaction, you hire Blockdaemon or some third party, it's like I hired a guy to mow my lawn. I still mowed my lawn. I just happened to hire somebody to do it for me. So let's talk a little bit about the individual assets. First, let's start with Bitcoin. There's long been a sense that Bitcoin is distinct from other digital assets. Even comments by SEC have suggested that. What's your expectation about this distinction between Bitcoin and other digital assets? It's just because it's been here longer and it's been able to get to that, you know, disintermediated, decentralized sort of position longer.
36:38It's just...
36:42And secondly, this idea of decentralization. There were comments by a former SEC official, a phrase that's gotten a great deal of attention around Ethereum, this notion of, quote, sufficiently decentralized, close quote. Tell us a little bit about what that means, why that was such an important statement, and if it is still operative. Sadly, it looks like the current administration is shutting that down, but it made a lot of sense to me. And it's basically what I've just been saying here, that when you initially develop a protocol, it by its nature cannot be decentralized because you have to have somebody to think of it and make it.
37:22But once you have written the code and it's operating in the wild and you're no longer controlling it, you have no controlling stake in it, then it is decentralized because there's no, again, who will file the S1? There's no person controlling it. There's no person that can provide those disclosures. Moreover, the disclosures that are required by a publicly traded company they don't apply to decentralized protocols. Those questions make no sense. By the way, if you're interested in learning more about that, it's still on the SEC website. It was William Hinman, who was director of SEC's division of corporate finance back in October of 2020, which is just an eternity ago, of course.
38:03Those were the days, man. Halcyon days. They sure were. This is another follow-up question from Ralph Humphrey, a really interesting one, and one that I don't know the answer to. Ralph asks, also, what is the test or tests to deem instruments to be commodities? Oh, shoot. I don't know the test. Sorry, God, Humphrey, man, he's a smart guy. I don't know, but it's something with, like, the ubiquity of the asset, right? So that, like, my gold, like, I can have an ounce of gold and it will work anywhere. It will always be worth an ounce of gold. Like, that's its thing. This is, like, fun technology.
38:42It's like, and also it's a list. There's a list of assets and like onions or potatoes are specifically carved out from that list. It's like agricultural products except for onions or something. I can't remember. It's very nuanced. But yeah, I apologize. It's written down somewhere. We can find it. We'll follow up. Well, it makes me feel much better about not knowing it myself. Oh, yeah, sure. We're totally cool. but we're still smart, don't worry, Ash, we're good. But it is interesting this idea of it's a list sort of implies that it can't be derived from first principles. If the answer is you're on the list or you're not, it's very difficult then to derive a principle by which other digital assets could theoretically be deemed to be commodities.
39:30Yes, but you know, you gotta figure stuff out. And there are characteristics that you can look at to these assets and you can look at other similarly situated assets or products, and you can bucket them accordingly. But yeah, we're trying to put something in a category that does not exist right now. We know this. It's got characteristics of some, characteristics of another. And we need to just make an informed guess about which thing it should be. And frankly, the sooner the better, because the uncertainty is actually the worst thing for it. Here's a question about categories. It seems to be a portfolio allocation question.
40:07Even though crypto is classified as a commodity, would you trade it as a commodity or as tech when allocating it in your portfolio? That's such a great question. I'm so glad I'm not a registered investment advisor. And this is not investment advice. And past performance does not reflect future performance. Also not legal advice. Definitely not legal advice, guys. You do not want to take legal advice from me.
40:36So, boy, I don't know how I would do that. I mean, I have it in, just personally, in my portfolio, I probably allocate it more like a commodity, I would think. But that's probably not the way you should do it, because I think it definitely should be allocated like tech. But now I got to go rebalance. So what's going on right now at Anchorage? How are you guys digesting this? How are you positioning yourselves? How does this change the strategy, if at all, going forward? So I think what it does for us is it really requires us to focus our strategy and really determine who our client base is and what are their needs going to be going forward.
41:19So obviously we have these new proposed rules for registered investment advisors. That's a huge client base for us. And, you know, just ensuring that we meet all of those requirements and can adequately provide the services that they need. And so that's been something. I mean, we should talk about that a little bit because that has some very important implications for the crypto space. So let's talk about that. And also another point that we haven't touched on is the qualified custodian component of this, which would seem to be a favorable tailwind for Anchorage. Obviously, some comments by SEC implying that qualified custodians are not something you can take for granted, even if you are working with a large nationally recognized exchange on the crypto side.
42:04Talk about what a qualified custodian it is, what role it serves, and why it's important to the industry. Sure. So for registered investment advisors, which are investment firms that are, they have a certain amount of assets under management, and they are required to be registered with the SEC, they are required to hold client assets with what's called a qualified custodian. And a qualified custodian is a capital Q, capital C defined term in the statute. And one of the things that allows you to be one is to be a national bank. And so that is one of the reasons why we sought out as Anchorage Digital to be a federally chartered bank, because we knew that our clients would need to have this type of custody.
42:48This is the OCC charter as compared to a state charter. Correct. So it doesn't say state bank. It says national bank. So that's why we went the national route. But it does say there's some other language which doesn't necessarily exclude state banks, but it's not so black and white. And you have to do an analysis. And now with the new requirements under this proposed regulation, you will have to meet some other requirements that it may be difficult for a state bank to meet. But I'm not going to opine to that. That's what the state banks are going to be figuring out. Fortunately, we as a national bank still meet the requirements and we're going to keep moving forward.
43:28But with respect to being a registered investment advisor, you have to use this qualified custodian concept. Now, before the proposed rule, I mean, I thought it was pretty clear, but it wasn't necessarily clear that if you were custodying digital assets, which may or may not be securities, did you have to use a qualified custodian? And so one of the things that's like broad stroke that this new proposed rule does is it says all assets. Not even just securities, all assets that you custody for your clients have to be held in a qualified custodian. And so that's going to be a little weird. I think I expect some comment letters about that because I don't know how I'm going to put my pork bellies in a qualified custodian.
44:15But that's, you know, if you read it, black letter, white paper, that is what that rule is requiring. So it's kind of a, again, a kind of a jurisdictional scoping kind of issue there. And how does that affect the strategy at Anchorage and what you guys are thinking about your business going forward? Oh, man, we just we keep going down the road. OK, we are on the path and that path is going to lead us to the mass adoption of digital assets in globally. And that path right now means doing our best to serve these registered investment advisors. And the other two things that the proposed rule brings up is that if you custody your assets on an exchange, you pre-fund your trades or you have your assets sitting on that exchange, that is not qualified custody.
45:06So we're working to develop a network that can sit underneath those exchanges so that they will always be in qualified custody. They just may need to move in settlement pursuant to instructions provided by that exchange. And then the other thing that the proposed rule made clear was that self-custody is not appropriate for a registered investment advisor. So no MetaMask, no NOSIS wallet, those things are not going to work. So you need to move those assets into a qualified custodian. Now, here's a question from Sean C. There are now 41 digital asset fund products listed in Canada, primarily on the Toronto Stock Exchange.
45:47I did the first Bitcoin and Ether funds. Well, let's just address that specifically. This idea that Canada has managed to list products, ETFs, spot on Bitcoin and, I believe, Ether. Obviously, a major divergence here in North America. Talk a little bit about that in your view. I think it's great. And I'm jealous. And we should be doing that. And Commissioner Peirce has written, you know, letter and paper upon paper upon paper and statement upon statement and given speech upon speech about how it's just not appropriate here. And there's a double standard. And we should be allowing these types of products to be accessed by our citizens.
46:26Georgia, one of the things that I ask the finance folks on this show is often what are your gauges on your dashboard that you're going to be watching in terms of price? Slightly different context, slightly different connotation here. But what are you going to be looking for going forward to get a sentiment indicator on what's happening in the industry that might allow folks in the space to get some insight onto what may happen next? Okay, well, like, I'm not talking about like price of Bitcoin, right? Because during all of this hoopla and these bank collapses and all of this, we saw Bitcoin either hold fast or, you know, increase in value.
47:00So that, you know, that's not what I'm looking at. That's not my indicator. but I am looking at the regulatory landscape and I'm looking not just at the U S but I'm looking abroad and I'm looking for what I call pockets of clarity, right? Where can I see a little place where somebody is trying to carve out a path for legal crypto engagement? And that is, I will look there and I will invest there and I will find, you know, time and resources to spend time there. But, um, that's, that's really kind of how I look at, how I invest not only like my personal finances, which aren't much, but also like my resources and my time and the resources of our company.
47:44And so that's really what I look for. And there are some in the US, right? Like we've like, sadly, even though, you know, with respect to like the joint statement and kind of the tack that the federal banking regulators are taking right now towards crypto, we have found our little niche, our little space with our federally chartered trusts. And that has worked because that is our little zone of clarity. Yeah, finally, what are your expectations about what we're going to see happen in the next three, six, and 12 months? Obviously, there's a lot going on. It's difficult to predict. But what does your instinct tell you is going to happen next?
48:21Yeah, so, you know, just hold on for some more bad news probably in the next three months. Like, this is a cycle. Every agency is going to get their enforcement actions out there and make sure that everybody knows they're tough on crypto. But I think in the next six months, we could potentially see some legislation. Again, probably not going to pass. But what does it do? It gets something in the zeitgeist where people can understand what might be a path forward. And we can start talking about that and working on that. And then, you know, then we start moving into election cycle. And I don't even know.
48:55I don't even know what's going to happen. Has crypto become officially now a partisan issue? Historically, it hadn't been. There were divisions within each party between sort of the institutionalists on the one hand and maybe the younger folks on the other who were a little bit more forward thinking. But it certainly seems to become increasingly partisan in 2023. You know, I would say it was very partisan in 2018. But I and then we kind of took a swing towards like the middle ground. And then now we've probably swung the pendulum back a little more partisan. But I don't know. I feel like there are definitely people on both sides of the aisle that understand the importance of the asset class and are trying to do something about it.
49:39And I think one thing we've seen with this whole kind of banking shut out. I don't, it's, you used a term at the beginning of this and, you know, I don't want to use that expression necessarily. What did I say? CP. You said it, not me. I said so called. Oh, that's totally different. Totally different. So called by somebody else that wasn't me. So, yeah, that whole movement has been very problematic. But I think when you go so far, right, when that's just obviously out of line, both sides of the aisle have to come together and say, okay, we got to stop this. Like, this is not acceptable because it could just be them the next time, right?
50:27It could just as easily be like morning after pills or gun manufacturers. Right. Georgia, when I'm talking to an Ivy League trained lawyer with your experience, I'm going to hedge every bet. Okay. Okay, sure, noted. Great conversation. I mean, this has really been, you're so clear about when you speak. Many lawyers we have on the show, I've had just experience in life, I'll say not withstanding section three, seven of this, you really come out and say it, what you're thinking, and it's really greatly appreciated. I admire that about you. A terrific conversation. Final thoughts, key takeaways that you'd like to leave us with.
51:10Yeah, I mean, a lot of our discussions kind of sadly formed around this like bipartisan, you know, or lack of bipartisanness of the asset class. And come on, man, we need this more than ever. And if, you know, we want this to succeed in the United States, which I do because I live here. um and I also think we're pretty great um not in not in a lot of things but some things and we just need to come together and realize that this doesn't have the same like boundaries or um issues that maybe even traditional finance had and this is an opportunity to kind of tabula rasa and build something that doesn't see you know color or race or gender or um you know like like affluence or anything.
51:59Like it's tech. It doesn't care about that stuff. And if we could really try to, you know, take that message to your congressman, take that message to your local, you know, regulator, then it might help. Yeah, I mean, it almost seems as though there are two possibilities here. If there is, you know, sort of an intense crackdown on it, either crypto gets decimated or it moves offshore and the U.S. loses its traditional global competitiveness. And neither of those are acceptable to me. Neither of those work. And for the reasons we talked about. When it goes offshore, it does not mean that United States people won't be harmed by it.
52:41And it also means that the United States will lose out on all of that technology, commercial viability, productivity, GDP, national security, frankly. because if we have more institutions engaging in this asset that are subject to the Bank Secrecy Act and required to do transaction monitoring and file SARs and know their customers, we will have a better understanding of the participants in that ecosystem and be able to track and monitor and trace and make sure that people are doing what they're supposed to be doing. Yeah, so well said. Such a great point to end on. Georgia, thank you so much for joining us.
53:13Always enjoy having you on the show. Thank you so much. Always love being here. Thanks for watching, everybody.
53:26you
From the publisher
Georgia Quinn, General Counsel at Anchorage, joins Real Vision's Ash Bennington for an overview of the current regulatory environment for crypto.
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