Regulatory Landscape in Web3 - Panel - Near Day at ETHDenver 2023

Captions as YouTube publishes them, usually machine-generated, so product and people names can be misheard.

1. 0:00

   hello everyone I'm Maya shafani and I will be moderating the panel on a regulatory happenings in web3 we have some exciting topics to discuss today I'm going to go ahead and let our lovely panelists give a brief intro hi I'm B Lee I'm uh a partner in the head of regulatory and policy at Bain Capital crypto hi I'm Mark goldich I'm the general counsel of proximity labs hi I'm Sarah Brennan I'm the general counsel of Delphi research and Delphi

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   Ventures hi I'm Chris Donovan I'm the GC at the near Foundation I'm Richard I'm managing partner at fabric Ventures awesome so we have about five lawyers on stage and then Richard he's outnumbered uh so one of the first topics we wanted to talk about and hit on is a very very um controversial right now especially in web 3. so nfts exciting fun but are they a security uh so Mark and I were talking

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   about this a bit uh before we got on stage and I wanted him to kind of walk you guys through Dabber labs and the case the some of the rulings that recently happened and also maybe we could hit on some Emoji talk I've got some emojis yeah yeah so this um this is a case there was a case recently it's a putative class action which means it's not quite a class action yet it has to be certified by the court before it's

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   actually class action and this was a case that was brought by a private individual against Dapper Labs alleging that Top Shot moments are securities and that they they are unregistered Securities and and bringing um an action based on that allegation so you may have seen recently in coindesk the block and very various other crypto news outlets about this decision it was widely misrepresented that the the order

5. 1:58

   and the the court uh just decided that Topshop moments were unregistered Securities that did not happen so if you if you have um some some moments you don't have to quite worry just yet that you know you purchased some under unregistered Securities what happened there was a motion to dismiss a motion to dismiss basically um which is filed by the defendant is to basically challenge the the uh the complaint and say that the plaintiff has not brought

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   um a claim that a sufficient relief can be made for right so what happened was the judge there decided that yes the plaintiff did State a claim the plaintiff did stay enough to pass this very preliminary stage in the litigation um and what the the news outlets really really you know attached to was the fact that well in so doing the judge um said you know these look like Securities they could be Securities there's a plausible claim that their unregistered Securities

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   um so look are they going to be deemed Securities we're going to have to see what happens with that case um you know if I had to pontificate I would say it's more likely than not but right now they're not Securities this was just a motion to dismiss in a private litigation uh regarding Security's laws now Maya mentioned emojis right and maybe what one of the most fun things about this case and cases aren't always fun but this one at least had some pictures in it right

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   because the judge looked at um the you know the various Communications right um regard from Dapper Labs about the moments and you know how did it convey what these moments are did it convey it in a way that there would be an expectation of profits uh so that these could be deemed Securities um well guess what there weren't that many um at least allegations regarding what Dapper lab said regarding um these moments you know being Investments however

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   they did tweet a lot and in their tweets they used emojis and these emojis were like the rocket ship emoji right and the court um actually did a pretty thorough analysis and stating you know these rocket ship emojis these graphs that are going up they all are very indicative of um you know a communication that these are investments that will rise in value and it will profit right so this was really the first time I think that we've seen any Court you know look at emojis

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    and you know go into this great you know great length about how they can convey um something that and make it such that one prong of the Howie test could be satisfied not by words but by emojis so you know we should all be a little bit more careful I think with our emoji usage but I was going to say Mark also I think um it depends on the context obviously you know if it's related to a financial instrument or if you're talking about a product that is related to some you know

11. 5:12

    the higher yields Etc then it makes sense to opt out of using those emojis but if you're just saying a random statement that's right yeah you can still use the rocket ship completely context dependent you know people are very reactive so after this decision you know I know lawyers in the space who who looked at this and they said oh I was right I you know I told my team never to use rocket ships you know and don't use rocket ship emojis and we have a ban on

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    you know the the chart go up you know and rocket ships well I think that's a little overreaction then you know I don't think that anyone should really ban the use of any emojis um internally in any business I think it is very context specific if you were going to Tweet about this panel for instance and you had the rocket ship emoji next to it no one's going to think that you're selling a security and it's

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    okay for example hashtag use rocket ships responsibly that would be a great tweet tweet that's right um but thank you so much for laying that out for us I think uh we want to segue a little bit into a more intense topic uh Gensler uh so we're gonna have V here who used to work at the SEC talk to us a little bit about the Kraken case and um maybe we could open up the discussion to the rest of the group to discuss what happened with paxos and what you guys think that was all about

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    um but V do you want to kick it off yeah so um as you guys probably know last month the SEC sued Kraken and they entered entered into a settlement where Kraken agreed to shut down permanently it's staking as a service program and pay a fine so this is the first SEC enforcement action involving staking so here they allege that the staking service that Kraken provided to customers was a type of investment contract that should have been registered under the Securities

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    laws so I think it's important to just take a step back and recognize that there are like different types of staking right there's self-staking which is something you can do yourself by um setting up a validator locking up you know some of whatever asset you're staking whatever asset associated with the protocol that you're taking on is so that's self-staking I think that is fine there's nothing in the sec's order to suggest that that might violate the

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    Securities laws but of course staking as a service these these programs that Kraken provided and that other centralized custodial platforms provide like coinbase like binance and others it's very different well it's not very different but it's different in the sense that you know if you're a customer you're handing over your assets to this provider and they're staking it on your behalf kraken's program was you know it it was run in a particular

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    way and and there are certain features of it that the SEC pointed to to say that um in particular it's satisfied the efforts of others prong of the Howie test um for example um you know Kraken guaranteed a certain uh percentage staking reward to its customers and so in order to do that what they did was they actually carried out strategies to smooth the yield that they were offering or the staking reward that they were

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    offering as opposed to say just passing on whatever the true Network rewards of the protocol were um some other things they did were they like allowed you I believe to withdraw your stake assets at any time as opposed to say um you know your ability to to unstake your assets being dependent on you know whatever the lock up parameters of the protocol are so those are the kinds of things that the SEC cited to say actually this is very different than

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    self-staking Kraken um you know engaged in all of these entrepreneurial managerial technical efforts and that's why it satisfied Howie and so I mean I think the question is is like what can we take from this what does it mean for other staking programs that might differ right and like sir in in some of those ways um what does it mean for staking in general like what does it mean for

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    liquid staking like you know protocols like Lido Finance where you're locking up your tokens in a smart contract um and then you get like a wrapped version of it or a staked version of it but and so that you still have that liquidity and you can use it but while still earning staking rewards so there are different versions of this I think it's hard to say um what we can you know what it means

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    for the rest of sort of like the industry yeah yeah because I know that they clarified in the complaint that it's around custodial staking right they said that kraken's product appear to be more like custodial Stakes yeah where we can't necessarily say that about other other staking products out there yeah and it's not clear like how gunsler will proceed in the future with other staking yeah so yeah because even among

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    custodial staking programs there are differences too right so it's hard to know what to what to take from this one enforcement action yeah so that's super helpful and um I know that the SEC has been coming up in the news a lot lately we had the huge paxos incident also New York DFS Sarah I know we were discussing that a little bit too um do you have any take on on what happened there with busd and um well I think that uh in that case the

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    only thing that I'll say is I think that there is in my opinion a little bit of redundancy because I think DF has handled that really well they're the regulator on the scene uh they have like a permissive regime where there was like boundaries of behavior that they had allowed and so in that case they like stepped outside of it and they came in and said you don't do that and it like handled it and then what we

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    we've had we have like Regulators swarming issues a lot and I just think it does cause confusion and I just think like in terms of coherence when you look at like even like when I look at the Kraken situation if there are things that you could learn from that before you get to remedies shut it down and promise never to offer this product again like if you want to dictate Clarity to the market if there were things that they could have fixed that would have been a lot uh

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    better of a solution or something to pursue but it doesn't make me super hopeful if the remedy is shut it down forever for other people in the market right what could Kraken have done to you know could they have registered this product we don't know there's no path I heard it makes sense for their business to have you know not fought the situation given the market share so um but I do want to open up the discussion a little bit more and expand to other jurisdictions we have Chris and

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    he specializes in UK law as well and would love to hear about what's happening there I know um on a on a positive note the UK is asking for the industry to respond to a crypto consultation and they have three specific chapters in the consultation that hit on D5 and I wanted Chris to kind of talk to us about it a little bit and share um you know what he learned about it and how we could all be involved in it because I think it's actually a great

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    way for the industry to make an impact in advance versus like what's happening to us right now on on the U.S side yeah thanks Maya I mean I'll let the US folks comment on the current state of the U.S uh Market in a minute I know there's a lot of strong thoughts about that but in the UK um things definitely feel more optimistic I think there is a bit more good faith interaction from lawmakers

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    and Regulators the new prime minister Rashid sunak is quite keen on our space in general and I think he views you know that there's a lot of opportunity to encourage developers and and users of the technology to the jurisdiction so to Maya's Point um the the the treasury in the UK released a consultation a couple of weeks ago setting out proposals and plans about how they want to think about

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    regulating our space in general and you know I think it's a phased approach that they're taking so they're focusing initially on stable coins and the activities around the uh the custody and issuance of stable coins but more generally they're taking an approach where they're thinking about the regulation of activities rather than underlying assets which I think makes a lot more sense than some of the things that we're seeing in the US at the

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    moment and to Meyer's point I think one of the most significant things um about the consultation and how it's been structured is that you know the approach that they've taken is essentially look if you're doing something from a centralized perspective with digital assets it looks a lot like a Trad fire equivalent they're going to regulate that and you know I think a lot of people would think that's fair and reasonable but what the proposal also says is well look if if you're decentralized

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    we we recognize that actually that probably requires a different approach right we can't we can't force that in to the existing regime that you know presupposes centralized intermediaries that we can gatekeep and regulate and they're essentially saying look we don't know what to do so can you you as an industry can you help us out you know point is in the right direction and so to Maya's point it's a great opportunity for everyone here who you know who takes

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    this stuff seriously and wants to try and push regulation in a helpful and and you know engaged Direction um to to you know to make a contribution and so the foundation is going to be submitting a response to that consultation um lacks punk as well that I know a few of us up here are involved with are also going to do the same thing and um you know there's a really good opportunity to you know to advocate for a disclosure

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    based regime I think in particular would be a really fantastic thing to try and Achieve and I think in in the UK because there's a real desire to embrace the technology I think if you you know if we put forwards a an effective proposal there's a really good chance that it gets considered seriously and maybe even makes it into in into the law which would be a fantastic outcome yeah I actually really loved the way

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    they worded some of the questions um within the questionnaire they were asking what do you think as an industry the regulatory challenges are what do you think is the path to decentralization so they're really giving us a very big opportunity here to influence that and yeah yeah one thing I was going to add is which is a great thing to see you know they explicitly stayed in the paper that they don't want

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    to regulate developers right which again is not something that is necessarily um a view that shot in the U.S right now um and one other thing that I wanted to mention I was talking to Sarah about before we came up on the stage is um you know LAX Punk have put out an amazing regax Safe Harbor proposal and I think that's something that you know we it is very much worth putting to the UK regulators and I don't know so if you'd want to talk us through how you guys

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    thought about you know pulling that together and what inspired it to sure um so after years of talking past uh each other the industry and Regulators about what a Securities Virginia or what a workable path to issue tokens might look like a group of lawyers in Lex Punk actually got together and wrote what we'd like to see um and the paper is uh a reg CF reggae sort of mash up um that if you don't meet sort of it's It's The Safe Harbor is based on Hester

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    commissioner purse's um Safe Harbor that uh we iterated upon it but basically uh the decentralization uh decentralized enough uh tests or the gloss on Howie um what we thought that looked like and then if you wanted to do a token issuance and you had not hit the Safe Harbor you'd sort of opt into a Securities offering wrapper and it'd be an exempt reporting regime and if you did an issuance uh we go through it kind of in depth like what we'd like to see you'd get to offer to retail we talk

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    about the disclosures that we'd like to see we lock up uh insiders and like pre-existing whales like VCS so they're not dumping on retail within like a 12-month window after the issuance and then it's kind of like a ongoing uh disclosure and Reporting regime until you hit like sufficient decentralization if you don't you're kind of reporting forever and if you're in compliance you can like do another issuance there's like going to be caps of course

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    um but we tried to be very thoughtful in like what accommodations we need in existing law when we could use law that uh like and make analogies and use as much of the existing cloth of law that we can and then um only ask for accommodations when we felt was really necessary and so we sketched that kind of you know Soup To Nuts but it's only supposed to do an initial issuance and then like allow peer-to-peer trading if you're doing uh like a listed offering on a

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    centralized exchange we kind of dropped off there because that looks a lot different frankly um so you know we've been talking a lot this year about potentially uh adapting that for a UK regime and what it looks like with uh centralized exchange listing and what we'd like to see in secondary Market disclosures thank you for that background um that's super interesting and Richard do you do you feel like that would be something the UK would be open to

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    working on and participating in um I'm sure they would be in general um but I just wanted to First say like um this is probably the longest I've sat listening to lawyers without being overly tempted to interrupt them on a call or elsewhere but actually I'm feeling very comfortable in the company of so many of my parents about both of the ways maybe that's why and I am saving up for our own general counsel um so and then maybe they could be here and and the point about that is that you

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    folks are the experts specifically in the law and the regulation how it's playing out but maybe I can sort of add some color in terms of uh the opportunity that comes um as a result of this current regulatory uh landscape um so 10 years ago was when I first got involved in the space um and um pretty much the first investment I did not quite Bitcoin a couple other things um was in bitstamp and we went out there

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    to do the due diligence um they had a small army of people doing their kyc and AML in a room um and you know with lots of passports left and right on the walls and the whole thing and um we asked them kind of like well how do you know that that's actually kind of working properly as a kind of a process and they said well all of these people here we know they're all from the same Village as us so we can trust them

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    um and my point about that is that what we need here and what we're experiencing and the way in which you know compliance and regulation is unfolding is is a fundamentally different trust model we're going from that if I can call it village-based trust model to you know we could you you knew your bank manager to something that was based on centralization and and protection of privacy most of the time of data and then you identified who

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    people were and we also need we need to move to a different uh regime for this you know the decentralized world and that's non-trivial but any anytime there's something that's non-trivial there's opportunity to be found opportunity to be found like you know on the border between looking after people's privacy and ensuring that things are compliant on the border between you know delivering Financial

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    Freedom and inclusivity and making sure that we're not miss selling Financial products to people who don't understand them you know and you know and we like to say actually at fabric we we look for found vendors who are kind of on the border between relentlessness and recklessness and and obviously we've seen a little bit of recklessness in the last uh last year um and and I think you know we'll continue to there'll be opportunity at that that point for people to tap into and they've been maybe picking up on

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    some of the points about whether you regulate developers or you regular businesses and so forth one way it's been summarized I think a little bit it's a bit of a bit sound bitey is like you know don't regulate the protocols regulate the apps um and and there's also been a sort of a claim that if we want to see come to fruition this kind of global nation which is quite borderless and that we can't put

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    any of this the smarts into the protocols I'm not sure I personally actually it's the beginning of it was a long game debate I'm not sure that's true I think that's exactly where the opportunity is to build some great systems that are able to marry up the technology with indisputable facts and with however different regions and apps need to adapt to deliver compliance systems that's pretty complex but that's the opportunity for entrepreneurs I think also our industry has been you

49. 23:33

    know keeping those things in mind because some of the things Regulators think about are like privacy security and as we're building and as these young entrepreneurs are building a lot of the technology is aimed to build a secure network it's aimed to have privacy but I think there's like a disconnect in conversation often between like the regulators and the industry itself but I

50. 23:57

    I really liked your in like your input on that and there's a huge let's face it there's a huge disconnect between our industry and most of the rest of the globe still at the moment as well opportunity very true um even like the Ft in the UK which we love as a publication but they're not exactly crypto friendly right and we're trying to pitch that to them for the last five years and we need to continue they don't like our space very much but

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    there is a also quite a big geopolitical competitive element to what's going on right now as well right because a lot of different jurisdictions are just selling to get into the the pole position to attract our space in a positive way and I think the UK right now is seeing that as a really big opportunity for them and they're kind of the next Paradigm of innovation right and I I wonder like a question for Mark and Sarah would be your perspective as a U.S practitioners

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    if you feel like the current environment is is pushing a lot of projects developers out of the jurisdiction and whether that kind of it undermines the very you know the very policy objectives that this regime is is meant to be trying to achieve yes um the U.S is not fostering Innovation you know full stop um and IT projects are leaving um they're doing out of necessity no competent team that's in Defy is going to you know make their protocol

53. 25:18

    available to the US there's going to be geofencing and Geo geoblocking the us as well as sanctioned countries so it's a sad State of Affairs but it isn't reversible the way I see it reversing is by looking at the UK and and looking at the EU and seeing what they're doing they are trying to Foster Innovation they are trying to have this true come in and talk mentality and what's going to come out of that is a more hospitable jurisdiction for teams to operate in and and for projects to be

54. 25:52

    built in and it will be some time before it happens but the U.S will wake up will realize that they lost an opportunity and that point they'll probably change course but at this point in my opinion that's not the direction things are going so I mean I would I would pause at the the UK folks in the UK are not Geniuses or particularly entrepreneurial to some degree You could argue it's driven by necessity because of brexit which might have been an act of self-harm yeah

55. 26:23

    possibly yeah um and and so but then so what's going on in the US I mean why why systemically is this is this happening it's become politicized it's become politicized and um and you and and we have some very hostile Regulators that have made very clear um that they're not open to this type of Technology um and that they they don't in my opinion care about decentralization you know I do think um for us teams and and for the space in

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    general um we always should just go back to base principles and look at what is this technology what's it there for it started as dissident Tech it'll always be dissident Tech um it's a feature not a bug there are obviously mainstream um use cases there are um you know amazing things that can be done with this technology but it it started as distant Tech and you know we should always go back to decentralization they make and you know that's a really important part of the technology and we

57. 27:27

    should foster that um and that's why I'm excited about a lot of you know what's happening as a result of the hostile environment in the US and in other jurisdictions around the world because it really pushes the developers to find new Solutions right and to re-decentralize and to not re-intermediate and you know we see that today on this stage um you know panel after panel has been discussion over this new technology stack boss boss is built on you know

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    this premise that um you know users should be able to access this technology without an intermediary they should be able to run this technology locally front ends aren't really front ends they are on your computer you know you're running it locally um and I think that that is where this space is headed that's where the space should have always been headed and sometimes times it takes a hostile environment to to survive and to find the right path forward and I think that

59. 28:30

    that's where we are so when I look at the climate I see the Silver Lining being that this is what the technology is for and it it's prevailing frankly and we're doing you know our job at you know Lex Punk or in our various positions with our organizations trying our darndest to to really get through to the policy makers around the world not just the US to to understand the benefits of the technology and you know nobody asks there and and this group of lawyers to like put together reg X Soup

60. 29:01

    To Nuts like write a statue but um you know you have this great community of developers and lawyers who are working together thinking about these issues and putting together this great work product and and hopefully um you know it'll be acknowledged and adopted in some form and you know we've seen with Hester purse um and some and some other policy makers they've excited it and as an example and that's nice to see but we would really love to see it adopted we'd really love to see these

61. 29:31

    the policy statements and the different policy works that we're putting out um to be to be viewed and utilized and I think what you know UK and the EU are doing is great because they're they're actually asking for this to be done so we're happy to and Chris has been Monumental in this for Lex Punk and in connection with Lex punk I'm working on some pieces that that are directly

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    related to to that effort so um it's just it's just great to see you know when in these environments not only does the technology Thrive but I think the people do as well um I just want to wanna I wanna you know go through everybody and just see what you guys think the policy take away for the year is um we're still well in March now actually but I just want to hear from each of you's perspective on like what the focus will be for the year um can I just do one yeah really quick go ahead and comment to what Mark was

63. 30:30

    saying so all I wanted to say is you know like as an American what makes and working in this industry the thing that makes me really sad is that um I feel like the US is really squandering like its first mover Advantage which is a really huge thing when it comes to any kind of like technological innovation or just innovation in general right like you know a lot of category defining companies over the last five ten years

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    in crypto have been us-based companies like uniswap and coinbase and circle and Open Sea um and so instead of taking advantage of that and creating compliant Pathways for these kinds of companies these kinds of projects to exist I think we are seeding that to the UK and the EU and more and more countries in Asia and that's just such a shame um but my policy takeaway for the year

65. 31:32

    we'll end it on a positive note okay so no policy take away because it's not possible all right okay let's switch it up um just one phrase for the day um from your point of view it could be non-policy non-legal related it could be super fun I'm just gonna let you guys freestyle um I mean I think people should just like get more involved like that get more involved okay okay near his boss

66. 32:07

    I'm trying well we were joking about like leave the us but that's kind of dire after this panel is probably a happy hour that's my happy thought of the day yeah re-qualify in in the UK yeah um education too I think we've got to educate people more about how the technology works and why the values that you know that we think are important can be compatible with fair and proportionate regulation Richard yeah near is the boss and for those who know their Bruce Springsteen

67. 32:40

    kind of born in the Ukraine maybe can you can kind of twist it around a little bit um and uh not that we want to get into the geopolitics but I think there are a lot of um I would argue maybe Europe actually was the first to both have and then squander its first move of advantage in this space um uh you know whether it be arguably uh Bitcoin and you know many nurses oh we've Chi analysis you know near um and um but putting that to one side I think that you know we need to trust in

68. 33:12

    the power of protocols as a field of innovation but also ultimately I think we'll see that what people perceive as the kind of Achilles heel of this space will turn out to be its greatest capability um you know that of of compliance driven by the capabilities of the protocol and and made possible by the whole you know should we say you know blockchain operating system available to compose

69. 33:36

    applications including their front front ends and have that just be decentralized and and work in a compliant fashion amazing thank you all um this was a great panel really appreciate your Insight um if you guys have any questions after the panel please reach out to them thank you thank you thank you