The Power of Crypto Donations w/ Adam Nash

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1:25Adam Nash, founder of Daffy, a platform for donating crypto and other assets. Welcome to Real Vision Crypto Daily Briefing. Ash, great to be here. Thanks for having me. Well, it's great to have you. You've joined us at a very active time in the news cycle. Obviously, lots to talk about with everything happening right now between SEC, Coinbase, and Binance. But first, let's take a look at price action. Bitcoin right now trading on my screen, 26 ,382. On a trailing seven-day basis, that's off about 2%. Trailing 24 hours, we're up about 1 % right now on Bitcoin. You can see that sort of bizarre characteristic U-shaped pattern there on the screen.

2:05Obviously, a lot happening in terms of news flow driving that price action. Ethereum trading right now,$1 ,840. It's more flat than Bitcoin, but still, you see that strange pattern there with the U. So this bouncing around, kind of going back to the level we were at before the news flow started. Trailing seven-day basis, off about 1 % trailing 24-hour basis. Call it about flat. It's off about one-third of 1 % on a trailing 24-hour basis. Ethereum is right now. Adam, lots to talk about. Tremendous amount of news flow. Obviously, we've been following this very closely here at Real Vision. What's your take big picture on everything that's happening right now between SEC, Binance, and Coinbase?

2:48Well, I think probably no surprise to anyone. You know, I think people expected the SEC to act in some way, shape, or form. There have been rumblings about this for months, et cetera. And in the wake of the FTX blow up and scandal, I don't think it's surprising at all to see various regulators and agencies taking a harder look at things. But I have to say I'm disappointed. I happen to think that digital assets and the platforms for them, starting with Bitcoin and going to a number of other technologies, are really valuable. I think the industry has struggled to get clarification, both legislatively and from regulators, about what to do in order to be compliant with all the regulations that they should be compliant with.

3:34But on the positive side, maybe this action is a forcing function to get that clarity into the markets. We've seen clarity in some other countries. I'm hoping it comes to the United States as well. Yeah, let's talk a little bit about what the substance of those charges are. Obviously, neither of us are lawyers. I spent a little bit of time reading some of the documents on the SEC website, but I don't claim to have read all of those filings from beginning to end. They are quite lengthy, over 100 pages. But as I see it, it's essentially three claims that SEC is making here. First, that both Coinbase and Binance dealt in unregistered securities.

4:11I think that's probably fairly well understood, whether they're the underlying protocols that they list by name. And there's a whole list of those in the document. We can touch on that a little bit later in the show. And specifically with regard to Coinbase, their staking program. The second sort of key claim in this document, as I see it, is this idea of commingling of functions. This is kind of an interesting point. People who may not have spent time in traditional finance may not be familiar with this. But I think it's important for people to understand essentially what SEC is alleging is that Coinbase has engaged in separate functions that essentially are divided in traditional markets, acting as an exchange.

4:49I think people understand that one. As a broker and broker-dealer, broker-dealer are actually two separate functions in a traditional banking, one where you're acting on behalf of the client and one where you're acting on behalf of yourself. And as a clearinghouse or clearing agency function, this is an entity that would aid in the settlement and payment of trades, the finalization of a trade as a custody agent and serving some other functions to preserve this market separation so that you don't have a single entity providing all those. That's the second point that SEC has alleged with regard to Coinbase.

5:22And with regard to Binance, SEC has made the claim that Binance effectively has commingled funds. This is between Binance and some of the other entities that are owned by Binance, essentially operating separate funds. I believe Chair Gensler on CNBC compared this to SEC running a hedge fund on the side. Excuse me, to the NYSE running a hedge fund on the side. That's the metaphor from SEC. In other words, that it would be like the New York Stock Exchange was operating a hedge fund on their own behalf. That's kind of the core framework for how these sort of allegations unspool, at least as I see it.

6:03Do you see it differently, Adam? Well, I think that, you know, that sounds like a good summary to me. And I'll be the first to argue, you know, on one front, I'm not as familiar with the Binance situation as I might be with the Coinbase situation. As you mentioned before, I'm obviously not a lawyer, although I do teach a class on personal finance at Stanford where we do cover crypto in most years. And I am conflicted in that Coinbase Ventures is actually an investor in my current organization, etc. So I want to be careful. But I do think you're correct, at least in the basic framing. But a lot of this comes down to the heart, in my view, of this question that's been around for almost a decade of what makes something a security?

6:46When is it a commodity? Can they change status? What leads them to change status? And what's the process that regulators want these companies to go through in order to set up these separate functions, et cetera? You have to have a process where there's a known way to apply and register as those different entities to know which processes apply to the functions that you just described. And then make sure that on an ongoing basis, you have confidence that you're in compliance. And so, you know, I happen to take the point of view that, you know, from the people I know at Coinbase and watching them grow up as a company over a decade.

7:22I think the first time I met Brian Armstrong was actually back in 2012 after he'd raised his seed round. that they have made every reasonable, and in some cases, even unreasonable efforts to try and be in compliance with the laws of the United States where there was clarity and where they felt like they knew it is. The rest, like everyone else, you're basing it on legal opinion. And I think that's, I can speak for Coinbase, they've tried to hire the best legal and regulatory advisors they possibly could afford in the United States. And so, like I said, I do think that those claims are there. I don't know, I'm probably not the only one who said, you know, finally, the SEC has published a list of the coins that they think are securities.

8:06It makes me wonder why that list wasn't published before. What was so difficult about the SEC in a timely manner actually forming opinions about these different coins and chains and what they claim are securities in the market. It would have added a lot of clarity over the last five to six years if the SEC had had some process for just regularly stating what their opinion was. Yeah, interestingly, two coins conspicuously absent from that list, Bitcoin and Ethereum, although some of the charges from SEC, the civil charges from SEC include the notion of staking pools being operated by Coinbase, but Ethereum and Bitcoin not included on that list.

8:46What do you make of that? You know, I think I wouldn't pretend to be able to read the minds, etc. Like I said, it's hard not to see some political motivation behind this. But, you know, the SEC has difficult decisions to make when you try to govern by regulation instead of legislation, etc. It turns out that you have to be careful about which fights you pick and choose because it is a problem, right? You're going to have to go through a lengthy legal action. Coinbase is well capitalized, etc., has access to great legal talent. This is not an easy process for the SEC. So I have to assume that if they didn't include Bitcoin and Ethereum in these claims, that was very much on purpose and likely has to do with what challenges they want to take out of what time.

9:36I think everyone right now is acknowledging the fact that you can't take that as any form of regulatory certainty. Them not including Bitcoin and Ethereum doesn't say as much of them explicitly coming out and just saying, this is what we think Bitcoin is. This is our opinion of how Bitcoin needs to be treated. This is what we think Ethereum is. This is how we think it needs to be treated and how it fits into our existing regulations. I mean, if you look across the U.S. agencies, there's this varying level of clarity or lack of clarity based on how they approach different actions. But, you know, for example, you know, we spent some time in my current organization, separate with regulations around taxes, etc.

10:16etc. The IRS has been far more clear about how they want to see crypto treated from a tax perspective. And I think the SEC has been clear about how they want to see different coins and chains treated. And unfortunately, I think we still don't have clarity on Bitcoin and Ethereum based on these actions. Hey, since you mentioned differing treatment, different rules of the road from different federal agencies and Brian Armstrong, I wanted to read a tweet coming from Brian Armstrong, obviously the CEO of Coinbase, because I think it gives a little bit of a sense of how at least Coinbase is thinking about these charges.

10:51Quote, regarding the SEC complaint against us today, we're proud to represent the industry in court to finally get some clarity around crypto rules. Remember, and he lists four points, and I think these are interesting in terms of insights into how those guys see what's happening right now. The SEC reviewed our business and allowed us to become a public company in 2021. He's talking about the S1 filing here, essentially saying that the business model was laid out when SEC approved that listing in 2021. Number two, there is no path to, quote, come in and register, close quote. We tried repeatedly so we don't list securities.

11:28We reject the vast majority of the assets we review, essentially saying there that they review very carefully to make sure that they don't trade securities in the view of Mr. Armstrong and Coinbase. Number three, the SEC and CFTC have made conflicting statements and don't even agree on what a security is and what a commodity is. This is an important point, to your point, Adam, about this notion of conflicting views from different federal regulatory agencies. And number four, this is why the U.S. Congress is introducing new legislation to fix the situation. And the rest of the world is moving to put clear rules in place to support this technology.

12:05Number four, in a certain sense, probably the most important of those four points because it is forward-looking rather than backward-looking. Mr. Armstrong saying here, in essence, that this is a problem that Congress needs to solve. The 90-year-old securities laws that are in place now, principally the 1933 Securities Act, 1934 Securities Exchange Act that you see repeatedly referenced in the SEC documents, in the view of Mr. Armstrong, not adequate for the clarity that we need for the digital age, and believes that ultimately this is something that needs to go to Congress for a fix. Obviously, a lot of information there.

12:37Thoughts on that tweet and those points? Yeah, well, I mean, once again, not being an expert, not having reviewed every single document information, what Brian is saying looks very consistent with what he has said and what Coinbase has said in the past, which is basically they have looked for clarity on a large number of issues and been unable to get it. They have set up a process which they believed complied with all the existing regulations and also was attempting to be not just prudent, but I think according to not just the letter, but also the spirit of the law, right, in terms of reviewing coins to try and decide, having clear set rules about what they think is a security or not a security, and making efforts to not list coins that were deemed securities.

13:25And so I think they laid out their position. I mean, just as the SEC has laid out their position, this is what happens with direct legal engagement, right? Each side lays out their position. It'll argue out in court. I'm sure that a lot of evidence will come out. A lot of arguments will come out. And not only will people make their own decisions, but obviously the courts will rule on the matter in a number of different ways. And so, So, I mean, I'm very sympathetic. Obviously, like I said, I have bias. I'm very sympathetic to Brian's position and the Coinbase position. I think there's a lot of different companies and entities in the crypto space.

13:56Crypto has some flavors that are in common with financial services and some pieces of it that are more in common with open source technology and global platforms, et cetera. And so that's why it sometimes can look differently to people looking at it from those perspectives. But I think there are very few people that would look at Coinbase, the people involved, everyone from the investors to the operators and the actual actions, to not look at this and say that there was a good faith effort here to set up a high quality institution that complied with as many of the regulations as they felt that they possibly could.

14:29And so hopefully this can get resolved. I personally, I'm very pro-business. I'm pro-technology. The reason I look for this clarity is because I think that when you have good people who want to build new technology new businesses new products and services that clarity lets them build quickly it lets them run fast and it lets them innovate um but um yeah i i thought brian did a good job of staking out the position i didn't think it was inconsistent with anything they've said before and like i said i can't evaluate all the options i will say based on my own reading over the years this issue of what's a commodity and what's the security looking for clean letter something that breaks out how that would apply to crypto and when each status applies.

15:10Turns out to be very, very important in the United States, where you have different regulatory schemes and different laws set up for how you allow people to buy and trade commodities versus how you let them buy and trade securities. The tax laws are different. As you pointed out, the different layers of that financial stack in terms of responsibility are different. and I don't think it's wrong for them to ask for that clarity. I don't, you know, whether it's legislation or regulation, remember the IRS is a regulator, but they have no problem putting out an amazing amount of documentation about how to handle different situations, et cetera, from a tax perspective with a lot of clarity.

15:50And so I don't think it's unreasonable for Coinbase to ask for that clarity in the services they're trying to build. Yeah, it is interesting. Obviously, IRS has different mission tax compliance, Well, SEC has, I think, probably it's fair to say a more complicated mission. I'm just reading from their description here, right? So protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. These are things that can potentially be in conflict with each other in terms of the governing principles and obviously coming to it with a different mission than IRS. But you make some really important points there.

16:24There's a lot of information. I think it's very interesting to hear you frame this sort of distinction between thinking about cryptocurrency on the one hand as open soft software and the other hand as a potential financial instrument. That is something that is truly new under the sun in 2023 and has been for the last, I'll call it, five years or so. this framework of trying to understand how these can function simultaneously as open soft software and also as financial instruments or potential financial instruments, digital financial instruments, however we want to phrase it. I know that there's some kind of legal stickiness around figuring out what that term is.

17:00But you obviously are somebody who has a lot of insight into this. I should point out for our viewers that you have an MBA from Harvard Business School and an advanced degree in computer science from Stanford, where you currently lecture about this, as you mentioned earlier. But this is an incredibly complicated time. One more point that we didn't get a chance to touch on, the latest coming out on the Binance story, which is SEC seeking an emergency order to freeze assets over at Binance. Obviously, this is something that I guess one could see as a potential escalation in the situation there between SEC and Binance.

17:32Yeah, once again, I'm not as deep. I don't know the people involved with Binance. I'm not as much an expert in those issues as maybe other areas. But I wasn't surprised to see that, however. I mean, first of all, remember, this is in the wake of the FTX scandal and blow up. And so with all the questions about money movement there, et cetera, it's very clear that the folks at the SEC had a list of concerns and issues of what could be going on. And they have a duty to protect and to focus on U.S. investors and U.S. citizens and assets that might be tied to that. And actually, that extends to recourse, right?

18:10How do you make people whole if there were issues that need to do it? So it is an aggressive action, right? That's not an action you take lightly by any means. But I can't say it was surprising given what happened with FTX and some of the fallout there. But I thought you mentioned something very perceptive that I just want to put a note on. And actually, it reflects some notes I wrote. You know, I spent two tours at Greylock Partners as an executive in residence. And both times I ended up touching crypto in 2012 after I left LinkedIn and worked at Greylock. It was the first time I read the Bitcoin white paper.

18:49That's when I met Brian Armstrong. I started meeting different companies in the space. And then in 2017, actually, when Greylock ended up investing in Coinbase, I did some initial work. At that point, there were a lot of the ICOs were just starting and Buzzy, the initial coin offerings. And a lot of these questions came up. But, you know, you can learn a lot about organizations, about how they're founded and what their mission is, what they believe their purpose is. And that's true for companies. I think that's true for platforms. I think it's true for regulatory agencies as well, as well as branches of the government.

19:19Right. There's an ethos to it. There's a there's an origin story. There's a there's a reason for existing that even goes beyond the rights and regulations. And the SEC and Coinbase have missions and organizations that have founded on very, I think, lofty missions, but they are in conflict here, right? You know, the mission of the SEC was set up in the 1930s in the wake of the market crash, etc., protecting investors, protecting investor interests, setting up a system where the profit motive alone isn't enough to set up a financial marketplace. that there's actually rules, that there's transparency, et cetera.

19:58And Coinbase has a mission, really, because they believe in this technology, they believe in this platform, and they want to see it distributed and utilized as widely as possible, not just in the U.S., but around the world. And so I think those missions matter and are important. And so I think that one of the reasons you're seeing this conflict come up is in the end, both agencies, both groups, both organizations feel like this is an existential matter for them, that this is something that they have to engage in, that they were created to make these arguments. And so maybe in some ways it was inevitable.

20:32I do think that Congress could have added clarity here the way that some other countries have, and this all might have been executed in a much more positive dimension. I mean, like I said, I'm pro-business, pro-technology. I would have much rather seen regulators come out with a very detailed paper of, okay, here's our point of view on crypto, and here's what we think needs to happen, and here's what we think people need to organize as. This is how to think about exchanges. This is how to think about custody, all those different issues, investor rights and protections and give all the companies a certain number of days to comply with that.

21:05Could have been the way that this went down. But I mean, I spent a lot, as a founder for my organizations, I spent a lot of time thinking about these missions, et cetera, because I do believe they're long lived. I had the benefit of working for some great companies that had great missions and organizations, You know, missions that have stood the test of time. You know, my first job was at Apple. Obviously, I'm very close to companies like I spent in the early years, eBay, LinkedIn, obviously with the CEO of Wealthfront. But I will tell you, even in my current company at Daffy, we spend a lot of time thinking about our mission, about what we were formed to do and making sure we're aligned to it.

21:42So maybe this was inevitable in crypto that this kind of this debate had to happen. Maybe this legal contest was inevitable as well. But I do think that both sides are trying to live up to their ideals. And hopefully now at least we'll get some legal clarity about what's going on. I just wish it could have been done outside the courts. I wish it could have just been done in kind of a more pragmatic legislative way. Yeah. Important points there, Adam. And I think it's good to zoom the camera out a little bit here. We've talked a bit about the functional mechanics of what's happening right now, obviously because it's in the news cycle and there's a lot of news flow about this right now.

22:21But to that broader point, in terms of zooming the camera out and taking in the more big picture here, as you think about this, where do you see these events of the last week putting us in one, three, five years? What's the forward trajectory of the digital asset space with regard to what we've seen here? And what are the potential, I guess, the cone of uncertainty for how this shakes out as we move forward? Yeah, well, like I said earlier, I'm bullish conceptually about the concept of digital assets. I always have been. I mean, going back to school, even when I was in college in the 1990s, this idea that people were going to spend more and more of their time online in virtual environments and that they would be creating value.

23:02I mean, any place that humans invest time and effort is an investment of value. And so it made sense that as we invested more and more value into virtual environments, there would be virtual measures of that value, right? There would be currency. There would be assets. There would be scarcity. But there were some technical challenges with that, right? It turns out in software, fundamentally, one of the things that made software so great economically was it's so easy to copy, right? Once you write Microsoft Windows, you can copy it endlessly. And there's really no limit. practically to the number of people who can use it, et cetera.

23:40And that created economic challenges for the businesses, ironically, but also gave it economic power, right? That almost zero marginal cost. And so I'm very bullish about digital assets in general. So to me, crypto was the latest iteration of, you know, the Bitcoin white paper, et cetera, may not have solved all these fundamental problems itself. It did take a unique take on a couple of issues, but it brought it all together in a system that met the highest bar I think that exists in software is that it actually worked, right? It was put out there, people ran it, people invested value and time on it, developers, people with assets, people with compute resources, et cetera.

24:22I mean, and so I, you know, to me, the reason I've been so bullish on crypto, at least fundamentally, is because it looked like the latest iteration of this attempt to place value on digital assets and have a means for exchanging them. And so, you know, economically, what that means to me is we've seen the birth of a new asset class. I think digital assets will be one, three, five, 10, 20, 30 years. I think the percent of value that we measure as digital assets versus real world assets, this is like a giant pie chart. And that pie slide for digital assets is small, but it's growing much faster than the overall asset pool.

24:59And so I'm very bullish on that. I think that affects the way that people construct portfolios. I think that affects the the way people have to think about investing for the future. Now, whether any specific coin or blockchain itself is the end game technology or whether we'll see future iterations, there's obviously lack of clarity from a regulatory standpoint. But in general, I'm bullish on this trend. And what that means is, because I'm an optimist about technology, et cetera, I like to think that cooler heads will prevail and we'll find intellectually a way for people to productively invest in digital assets and digital asset platforms and technologies and keep pushing this technology forward to solve the problems that it has, right?