Pro Crypto: A Deep Dive on the State of DeFi (Special Episode Unlocked)

29:19It's that they're regulating by enforcement. Instead of putting out a clear rule that has a consistent view and is a clear guideline for the industry, they're just suing different people in the industry and kind of like making it up as they go. That's really what it seems like. So in our case, we've said that that pattern of regulating by enforcement violates the Administrative Procedures Act, which is a statute that talks about how regulators are required to regulate in the United States. So we've brought that claim and we also brought a claim seeking a declaration from the court that a free airdrop is not a securities transaction.

29:55And that's based on specific facts of our co-plaintiff doing a free airdrop of their BEBA tokens, which entitle the holder of the token to an exclusive bag and a discount on that bag. So we presented the court with those facts and asked the court to make the declaration that free airdrops are not securities transactions. That's one of our pre-enforcement challenges against the SEC. By the way, I should just say, because it's breaking news here today, I've got a screen I'm looking at right now. Crypto.com has filed suit against the SEC to protect the future of crypto in the U.S. That's their headline, of course.

30:29And this is after being served a Wells notice by the SEC, which is a notice of intended future litigation, I believe. I'm not a lawyer, by the way, I should say, as we have this conversation. So I'm well over my skis here very often when we have these conversations. But it's interesting because obviously these are incredibly important issues for the industry, particularly for large protocols, as well as large corporations here in the United States and abroad who may want to be involved or to touch the crypto that we're talking about. Very, very important issue. Miller, go ahead. I think you wanted to jump in.

31:03Yeah, I think the fundamental problem with the SEC's approach over the last decade is the consistent refusal to allow for the industry to be regulated under their framework while claiming jurisdiction over it. What I mean by that is that the SEC is demanding compliance with a regulatory framework that they know cannot work for the people they're suing. And they know this because they've acknowledged it. I think the best example being the custody of digital asset, quote unquote, securities. The SEC knows that it is impossible for a potential registrant, a potential regulated actor under the SEC's authority to custody digital assets, any blockchain based asset in compliance with their existing rules.

32:00So on the one end, they're suing you to comply with a framework that is not workable. And that's why the SEC's remedies generally end with companies shutting down. That is a completely unacceptable regulatory approach and I think has made this question about the status, potential security status of an asset existential in a way that never needed to happen. It shouldn't be that one can't issue a security and trade a security on a blockchain because the SEC doesn't like blockchains for some reason. This shouldn't be a charged issue. There should be a path to compliance for whatever one's trying to do, be it in the SEC's jurisdiction, the CFTC's, or whoever else's.

32:55And so I think that is the fundamental issue that Congress is now going to have to address because the SEC has remained committed to that enforcing an unworkable regime, which is not sustainable. Yeah, and one of the challenges here is that this is very much an issue of global competitiveness for the United States. The United States has done very well with Web1 and Web2, creating some of the largest companies in the history of the world right here in the United States. And the question is, are we going to be a world leader, I think, for many people in the U.S. who think about these global competitiveness issues?

33:31Which, Mona, you're doing a lot of this development, I believe, in Switzerland. Lots of development happening right now in Zug and in Crypto Valley. Talk a little bit as a practitioner, as someone who's not located in the U.S., what your perspective is on this issue. I mean, we've branched out from just Switzerland. Actually, we're present in a lot of countries on the avant-garde finance side with various subsidiaries. But we are not involved in the U.S. and we don't plan to be anytime soon. We found ADGM in Abu Dhabi very forthcoming. We've found, you know, we're working very closely with them.

34:09But, yeah, we're sticking to where we can get clarity. And I think a lot of project founders will agree with me, you know, it gives a much easier, it's much easier to do business when you have a clear framework and guideline around, you know, how something, you know, how they view something. think. And I think as both Amanda Miller alluded to, I think the problem in the US is there are just no clear guidelines, but there is enforcement. And that is a very scary situation. That plus the fact that I think, I don't know the stats, but I think it's something like 99.5 % of, you know, your chance of winning in court against the SEC is really low.

34:57And so most people just settle, not because they necessarily think they were wrong, but just to get rid of the problem. So it's almost becoming a little bit of a money, you know, it feels a little bit like a money-making business, the SEC, rather than what it was originally set out to do, which was protect the end consumers. We don't really believe they're doing this to make money. I mean, that's not the ultimate objective, right? I mean, there are, you can see, articulated on the floor of the House and the Senate, these real substantive objectives, objections and concerns about digital assets.

35:30In some cases, yes. In some cases, yeah. But there's a lot of, like Amanda alluded to, there's a lot of inconsistencies. It's almost like that you cannot even understand, you cannot get a clear line of how the SEC views something from them, yet they're always willing to enforce. Yet every single company I know of in the U.S. has consistently asked for clarity and tried to do the right thing. But those propositions aren't logically exclusive. In other words, there can be true substantive objections from many members of Congress, as well as not having a clear path to a safe harbor clause to regulatory certainty.

36:15I just think like when you have alternatives where, you know, it's easier, it's clearer, you have more clarity. founders and businesses will go there. So I think it just really compromises the US's position as a potential leader in this space. And I think that's the key thing there. I think nearly everyone in the crypto space would agree with you on that, Mona, that the idea that clarity and safe harbor definitely creates more opportunity for development. And as you say, this goes offshore. And as an American, that I find to be concerning because this could be a global competitive issue for us if we believe that these are the rails that the next generation of the U.S.

36:58financial system and indeed the global financial system are going to be built on? Well, I mean, I think that ship has already sailed to a large degree. There are some examples, but there's very few Web3 companies that set up HQ in the U.S. today. And unfortunately, the ones that have been penalized for it. So it's a double-edged sword, really. The ones who have tried to put faith in their sort of government, their regulator, et cetera, have somehow been penalized for it. So it's a very scary jurisdiction to do business in. Well, the United States has lost global competitiveness in several industries and then regained it in the future, which brings us rather nicely to this question of where we sit right now here in October of 2024, some 30 days or so before a major presidential election, country very much evenly divided and sort of divided, balkanized almost into highly hostile camps.

37:58We have Vice President Harris and President Trump, who have very, former President Trump, I should say, who have very different views of the future of cryptocurrency. Former President Trump has dramatically embraced the crypto and digital asset ethos in the last, I'll call it six months or so here. So this is an interesting time because we could have new leadership in many of these regulatory roles here in the United States. I don't like to talk about politics on this show again, because the country is so evenly divided, and I'm sure our viewers and listeners are as well. But Miller, what do you think about the current space of where we are today and what might be happening when we might be having these huge changes to regulatory policy here between now and, say, February?

38:42I completely agree that we stand on the precipice of a totally changed environment for crypto and digital asset industry in the United States. I think that it will really come down to your point, personnel being policy. I think who these candidates or whoever wins the election decides to appoint to regulatory agencies is going to be the decisive question for the digital asset industry in the United States. I think that it's hard to tell the actual policy of either candidate at the moment with respect to digital assets, because there's been a lot of high level discussion and not much detailed policy work yet.

39:28And so I think that is why the appointments or nominations of whoever the president-elect is will be the thing I'll be watching most carefully. I do think that it's only uphill from here. I think we've taken quite a beating over the last four years from this administration. And regardless of who wins the election, there will be a more open-minded approach to the industry in the United States. So I'm very hopeful. I think that next year is going to be a decisive year as far as legislation and regulation are concerned for this industry. It's high time that we get that done. And I think 2025 is the year to do it.

40:16So I'm very optimistic, regardless of the outcome of the election. I think it's hard to prognosticate where we stand today because we don't know who nominees will be. And that will be the deciding question. Well, Miller, there's an interesting prediction that no matter who wins the election in the US, we're going to see a more favorable environment for digital assets and crypto. Yes, it can't get any worse than it's been under the Biden administration, in my opinion. I think that the current administration has really taken an all-of-government approach to try and squelch this industry in the United States.

40:57They've done that without congressional authorization and by running roughshod overdue process rights for the last four years, in my opinion. And I think I'm very eager for that to end. Miller, if it's one thing I've learned in my decades on this planet. It's that things can always get worse. Don't say that, Ash. Come on. It's Tuesday morning. Amanda, let me ask you this. It's sort of the, to just talk a little bit about the structure of government and the points that Miller made. In theory, we all learn in our grammar school textbooks that Congress makes laws and then courts adjudicate them. But there's this open question about the role of federal, particularly executive agencies.

41:39If you're not a lawyer, Google the phrase major questions doctrine. How fast or how substantial, how material would a shift be in policy and in enforcement actions if we were to see a change in administration? Or I should say a change in party. We're going to see a change in administration in January. Yeah, I mean, I think we're already seeing the beginnings of a shift in administrative power. generally. There have been a series of Supreme Court cases, or we are now in a new term, in the last term, that etched away at administrative power. And the biggest one that people may have heard of is Loper Bright, which overturned what's called the Chevron Doctrine.

42:19And under the Chevron Doctrine, agencies were entitled to deference, meaning their interpretations of the statute that was in front of the court would be deferred to by the court. And Loperbright overturned that doctrine. And the result of that now is agencies will not get deference over statutory interpretations. So what that means for us in the industry is if the SEC interprets a statute to give themselves a lot more authority and they ask the court for deference to that view, the court doesn't have to give it to them. The court will interpret the statute, and probably we're talking about the securities laws.

42:59The court will interpret the securities laws to, in whatever way the judge feels is the right interpretation rather than deferring to the agency's view. And that represents a decline in agency power. And there's other cases like the Jarkisi case, the corner post case that I will not bore you with the details of, but the umbrella takeaway there is agency power is on the decline. This Supreme Court definitely wants to curtail agency power. So no matter who is heading up these agencies in the next administration, I think that there is going to be a shift back to the courts interpreting statutes that are important and a shift away from agencies just being able to finalize rules without worrying about them being challenged or taking expansive views of their own authority.

43:51So to me, I share Miller's view that optimistically, the environment will get better. It will be clearer. There will be more guidance either from courts or from agencies in the future. Well, let me ask you this, because this is sort of a paradox. If you see this shift in agency power, meaning a decline in agency power based on the interpretations of the Supreme Court, if we did get a more pro-crypto regime in the White House, would it then be possible that it would be slower to undo some of the policy actions that have been taken by agencies in the past? so i think um i i see where you're going with it and it's definitely possible that if an agency let's say under a very pro crypto president if an agency was trying to implement new policy that was good for crypto uh would they get deference and i i think that what would most likely happen practically in that situation is no one's going to or fewer people will challenge the agency's new take right if there's a new rule that's actually helpful to the industry i don't think the industry is going to challenge it in the same way that it would if the rule was not helpful to the industry.

45:04So then we're not asking a court to defer to an agency in a court case. So I think practically speaking, we'll see fewer enforcement challenges, which is great for the industry. And if we do see rulemaking, it will hopefully be taking into account industries, support, industry feedback. There will be like round, you know, regulators used to do round tables and invite you to come talk to them before they finalize rules. I think we'll see more of that. So hopefully there will just be a less adversarial environment in general under a more pro-crypto president. All right, let's switch gears here away from some of the wonkery, which I find super interesting, and talk a little bit about the market for digital assets right now, particularly in the DeFi space.

45:50Mona, talk a little bit about your perspective on where we are here coming up to the end of 2024. It's been a little bit of a mixed bag for performance in DeFi, I would say mostly lower. How do you see that? How do you view that? And what do you think is going to happen next? Yeah, it's been really interesting because it feels like we're sort of mid-cycle bull market at the moment. But I don't know if you're able to pull up the chart that I shared with you before the call. But what's really interesting is that it feels like to a lot of projects in DeFi that were in the midst of a bear market, because really there's very few assets that are rallying and outperforming.

46:26And there are some assets that have barely, you know, barely moved from their lows since we started the bull market. But it's a very interesting time, because I think for the last few months, you know, if you took the top 10 tokens on Ethereum by market cap and liquidity. They have basically underperformed ETH. And just in the last few weeks, we've started to see those tokens really start to outperform again and break out. It's really interesting if you look at the historical performance, we've analyzed that a lot at Amengard as part of the research we do for our funds. but you know that that outperformance has been as high as 50 60 percent in the last year of sort of top 10 coins on on ethereum versus over ethereum but if you if you that that performance was completely given away in the last few months and has just started to come back so to me it feels like we're you know coming out of what might have felt to some as a as a sort of a boring, dark period where nothing's really happening.

47:39And I think that the next few months into the year end will be a lot more positive, especially as we push through the U.S. election. Not because I have any high hopes for the U.S. election, but really just because I think it removes an uncertainty. And generally, people like to not buy the market until the U.S. election is over, even regardless of what the result is. um so um but i yeah definitely i'm not in a really bullish kind of um uh phase there um but yeah i think that that's one interesting theme i think uh another one is i sort of alluded to at the beginning of the call is i think there is huge opportunity from for mna from a street from a strategic perspective um enzyme uh finance has been pursuing that as a strategy uh you may have seen that we acquired Miso Finance a few weeks ago, which was another, which was a covered call, a DeFi protocol that specializes in structured products and covered calls on chain.

48:37And that is hopefully the first of many M &A opportunities that we're pursuing. Similarly, we saw three projects come together to form the, I think it was ASI, an alliance. They merged three tokens together to form an alliance and that seems to have been received by the market really well. I think that's just the tip of the iceberg. I think there's a lot more to come in this space. And I think that will be the theme of the next sort of 12 to 18 months. Well, this is fascinating to me, and I'm always interested. I think you described it as something of a dark period. But it's interesting to know what's happening behind the scenes in the dark periods because people, retail investors, particularly folks who are trading on momentum, tend to disregard different sectors of the market during that period.

49:29And it's really interesting to have someone on to talk about what's happening behind the scenes. You mentioned that many of those DeFi protocols have underperformed Ethereum. Ethereum has dramatically underperformed Bitcoin during a similar period. It has been, quite frankly, a tough time. But what's happening behind the scenes. You mentioned this idea of acquisitions taking place, consolidations in the space. What else is happening during this period of, I guess, relative quiet, you could say, from the outside world? Yeah. If you follow social media a little bit, you'll have seen in the last few weeks, so many VCs tweeting about how boring the space is and how there's nothing new, nothing innovative they've seen in months and blah, blah, blah, blah, blah, like wine, wine, wine.

50:11For me, that's an incredibly bullish sign. It means that they're underinvested. They have a lot of capital deployed. And as soon as it starts to move, they'll start deploying it again. So I think there is a lot of interesting stuff to see, but they're thinking about it more versus what previous bull markets look like. And I think this bull market will look very different to past ones, partly because of the M &A theme, but partly because I think the investor base to a large degree is maturing and not willing to just buy into any random, you know, token generation event, a crazy valuation, pre-revenue, pre-product, et cetera.

50:54But also, you know, people are starting to look at protocols based on actual investment metrics, you know, or, you know, to see if it makes sense to be buying a token at a certain price. I think previously, the space was very much just jumping at any opportunity in a bull market. So Mona, during this period of maybe we should say social media grumbling and complaining, what are some of those interesting things that you see that you've identified? Interesting trends, interesting technologies, interesting potential applications that you see potentially coming online in, let's say, the next 12 to 18 months?

51:34It's not necessarily anything new, although there are some interesting things. I alluded to, you know, Nuggets, Nuggets.life, which is a self-sovereign ID platform, which is starting to gain quite a bit of traction. I alluded to, you know, kind of these toolings that will kind of make DeFi much easier to use. But I also think there's just a lot of projects or tokens that are overlooked, you know, for various reasons, either because they're not listed on big exchanges, or because maybe they're not in, you know, in front of the VC, you know, they're not able to connect to the VC community for whatever reason that is, maybe proximity or, you know, personality or just not able to get in touch with the right people.

52:20And as a result, these tokens are the technology behind these tokens or projects. And often the product market fit behind them is very strong, but not reflected in the token price. And if you look at them versus their comps or versus their comparables, you're like screaming, like, this is an insane opportunity. And that's certainly how we're looking at it. And I think any smart, mature crypto investor would be looking at it. One of the things you mentioned there, Mona, that was interesting to me and something that's been very much challenged for the DeFi space in the past has been this ease of use, usability question.

52:58The UI UX of the DeFi space has always been a challenge for broadening adoption and broadening support. Talk a little bit about what the state of play is in that. Do you see new technologies coming along to make this easier for adoption? Yeah, they're not necessarily new technologies. It's actually just we're finally at a stage now where we can start to put, But, you know, in the past, when we talk about composability, we've talked about DeFi on DeFi composability. But now I'm really starting to think about, you know, how does the KYC layer become composable with DeFi apps? How does the, you know, legal document signing become composable with DeFi apps?

53:40How do we, you know, how do we, this is now the next level. This is the, for me, the last step, which could still take two, three years to get right. But, you know, this is the last step for this really to becoming super easy to use. Yeah, really interesting. Gosh, this show has absolutely flown by. I can't believe we've gone through the better part of an hour already. A great conversation here today. I wanted to give everyone a chance to give final thoughts and key takeaways from this conversation. Let's go in the same order we started with. Miller, first to you, final thoughts, key takeaways that you'd like to leave us with.

54:15Final thoughts, key takeaways. I always feel more optimistic after talking to Mauna and makes me more passionate about advocating on behalf of the space. I reiterate that I think we are at the end of the beginning and I think it's all uphill from here, notwithstanding your cynicism, Ash. And I'm looking forward to the next two years, which I think will be very exciting, not just on the policy side, but more importantly on the development side. Miller, if you want to see cynicism, next time you come back, We're going to talk about OFAC compliance and censorship resistance and credible neutrality and how those two are going to collide.

54:53All righty. Well, I look forward to it. Amanda, over to you. Final thoughts, key takeaways. So I agree with everything Miller said, and I would just say if what we spoke about today resonated, if you want to get more involved, if you want to talk to your representative about crypto, we really encourage that. We'll help you do it. Please reach out. You know, we are here to represent the industry and represent the DeFi community. So to the extent that we can be helpful to an individual project or to an individual DeFi user, we're happy to do that. So I'm always looking for more ways that we can help the community.

55:31Mona, we'll give you the last word. Close this out. Yeah, OK, since we're doing shout outs, I'll just reiterate my kind of, you know, strong conviction that the next few months will be largely about consolidation and M &A in this space. and you know if any projects or founders are looking for an exit or want to discuss you know possible opportunities or options I'm you know very interested in that in that area and would would love to sort of just yeah brainstorm about that irrespective of it's enzyme related or not but I think it's just a fascinating fascinating you know stage that we're about to enter into Very interesting.

56:16Very interesting and optimistic note to end this conversation on. Mona, Amanda, Miller, thanks so much for joining us. Thank you. Thanks for having me. That's it for now. Andreas is speaking right now with Jacob Shapiro on Real Vision. That conversation will be published later in the day. Thanks for watching. Thanks for listening. See you soon, everybody. picture yourself on a beach retired early and enjoying financial freedom if this is your dream then now's the time to level up your investing game and real vision can help you we arm you with the knowledge the tools and the network to succeed on your financial journey on your own terms take control of your future and visit realvision.com forward slash free that's real vision.com forward slash free.

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