Update from Washington

hi everyone this is Charles hoskinson broadcasting live from warm sunny Colorado always warm Always Sunny sometimes Colorado today is October 12 2022 and I have just returned from Washington DC wonderful trip very productive excuse me the swamps go this is a a pretty good one so some of I was there to speak at a DC fintech event put on by Chris brummer who's a professor at Georgetown School of Law and he basically invited a huge sloth of regulators from cftc the SEC Department of Justice and other places to come together and talk with industry alongside lawmakers to talk with industry about cryptocurrency regulation so we attended I spoke and then was invited to the Swiss Embassy to have dinner with the ambassador of Switzerland to the United States alongside congressman rocana and dozens of other guests and I also met while I was there with Congressman Banks his team chairman of the cftc as well as two of the other Commissioners so very eventful a lot of satellite sub meetings and cigars of course and Shelley's which is a lot of fun so I figured I'd give you guys an update on where the regulatory reality is for the cryptocurrency space and what is likely to occur moving into 2023 given that we are now getting it straight from the horse's mouth and looking at the political realities of things so for those of you who do don't pay attention or aren't from America we have an election coming up next month that midterm will result in every single congressman and woman running for re-election every two years they do this 435 seats are up about a third of the Senate is up currently it is very likely that the Republican party will retake the house and it's still an open game to see whether the Senate's going to be retaken or not but if that's the case the Republicans will have the speakership and they have made it a legislative agenda to attempt to pass some form of cryptocurrency legislation there's a bipartisan interest in this the Biden executive order recently came out last month and stuff the financial Innovation act the staff now act the digital Commodities exchange act and these other things are likely going to merge with the Biden executive order recommendations from that and then some bipartisan bill will probably be pushed through sometime next year that will cover at the very least stable coins as well as giving likely the cftc some additional powers to regulate cryptocurrencies the heart of the matter that we discussed is this notion of sufficiently decentralized and how do we get to a point where we can determine whether a cryptocurrency is a security or it's a commodity this is really the heart of the matter and unfortunately the stab now Bill and the FIA and others they tend to leave this still through regulation from enforcement which is unlikely to be successful and it changes based upon judicial wins so there's obviously a lot of conversation discussion about creating some statutory steer to help people resolve that particular issue and so on our part we've I've been working with the University of Edinburgh and are setting up the lab which will be opened November 18th at University of Edinburgh so in Scotland I'll be there that will start measuring the level of decentralization of each cryptocurrency starting with Bitcoin and working its way down the list including cardano and the goal is to create some sort of scale some sort of number perhaps normalized between zero to one with zero being Windows to Microsoft or the iPhone to Apple very centralized one being something like hey anybody can grow it it's completely open completely decentralized in that respect and then with that it could become a prosecutorial steer to at least help or organize and sift through this concept of a disclosure regime consumer protections and other considerations a lot of discussion about sros exchange level disclosures and other things so we're working on that hopefully the University of Edinburgh can build a great Coalition and get a lot of other cryptocurrency ecosystems to participate the other thing that we've been having a lot of discussions about is how do we take the disclosure regime that exchanges have which is currently proprietary fragmented and private and bring that regime into the open domain somehow many people don't know that when you go to list the cryptocurrency on a major exchange some group of people have to provide enormous amounts of documentation so in case of cardano for example I worked with for example Japanese Regulators the jfsa to help them get through numerous documents I think over 9 000 Pages over a multi-year period to get Ada liquidity on those exchanges so it doesn't particularly matter who does the disclosure in a decentralized ecosystem anybody can do it it's something called the Smart Cow effect so if one cow figures out how to open the fence all the cows get out similarly whoever figures out how to bundle information about the technical reality of the cryptocurrency facts about distribution how The cryptocurrency Works a Community member can do that a foundation could do that a private company can do that basically anybody much like anybody can write a report on gold or oil and talk about how oil works as an industry how gold works as an industry the problem with this is It's a fragmented process so what coinbase requires in Kraken requires and other regulated entities require they don't share and it doesn't end up being disclosed in a public way blockchains are the perfect disclosure mechanism it's a public bulletin board upon which when data enters it's immutable time stamped and auditable meaning everybody has access to it so these are some of the deep technicals getting the nuts and bolts of Regulation and a post Howie world of how would one think about decentralization governance disclosures consumer protections and other material concerns and the other thing is that we had some conversations about the National Security and ESG implications of the cryptocurrency and blockchain space in many cases people tend to view blockchain technology as strictly a financial asset something that somebody buys and holds or does something with but the reality is that it has profound implications for building resilient electrical grids telecommunication grids we see with World mobile for example implications with carbon monitoring any supply chain consideration voting systems health record management brokering access control as well as national identity systems none of these things have anything to do with a traditional bank or regulated financial institution so another one of the discussions that we had was saying we need to broaden the scope of discussion around cryptocurrencies so that we understand that they do more than just one thing analogously if we were to regulate the internet at the time of email there would have been very tempting to view the internet as just a giant system for email not understanding that Amazon could exist and Facebook could exist and Google could exist and so forth so these were some great conversations that we were able to have and work our way through including conversations around standards and finally American competitiveness the existence of the cryptocurrency space is creating an incentive to train hire and attract people in high value jobs like cryptography certain fields and domains of engineering which if we were to Outsource the cryptocurrency industry would result in those jobs going abroad they're high paying they're very rare and they're necessary for National Security they're necessary for Innovation and competitiveness in the 21st century so overall very productive trip the lawmakers were incredibly receptive they definitely want to get something done political reality a time of threats of nuclear war and a stock market that's down nine trillion dollars and Russia invading Ukraine and all these other things going on alongside a midterm election means it's really just not possible to get a big piece of legislation done but there is a strong desire on the legislative branch and a strong desire on the executive branch side for some sort of meeting of the minds and there are some very reasonable people that I think for the most part are actually well more willing to try to let the industry mostly self-govern As long as the industry Embraces self-regulatory organizations standards and some notion of Consumer Protections so it's good to see all that progress there's some very effective lobbying that's being done by several different organizations and a lot of money is being put into Washington and for the most part it's reasonably good there are some issues that some of the people lobbying are of course trying to now create anti-competitive regulatory Arbitrage in other words what they're trying to do is steer regulation in a direction to protect their licensed incumbent businesses and Outlaw our businesses but for the most part those people have yet to penetrate into proposed legislation and other recommendations there are a lot of open questions about the nature of proof of work so if you read the Biden executive order in particular there's a climate report an energy consumption report and there's a strong desire especially in the in the left Circles of the US government to involve the EPA and Department of energy in the mining conversation an attempt to use minors either to promote the development of alternative energies or if they can't find a way to be carbon neutral or negative to Outlaw Mining and replace it with other consensus algorithms this is an ongoing debate this is probably one of the big bipartisan a big partisan wedges I should say it is my belief it's going to take some time for that to work its way through why because energy producing states have an enormous excess of energy for example natural gas production creates flare gas and capturing that using it for mining is a profitable Endeavor and it benefits those States if there are dense mining operations other people say well we're wasting electricity why are we doing this so that's gonna that's gonna result in some tension and friction definitely there is bipartisan agreement that there needs to be some notion of consumer protection the securities disclosure regime continues to be mentioned but usually by people who are either optimistic but ill-informed or people who are cynical but in both cases it serves no policy purpose because the information asymmetries that are securities disclosure regime would resolve don't seem to be relevant to any notion of consumer protection or Market stability money any of these facts are discernible by anybody by looking at the blockchain and for the most part most cryptocurrencies follow that and also any of these cryptocurrencies if they the core entities that founded them disappear or the founders disappear in the case of Satoshi and others like Sunny with purecoin or these types of things they still exist they're still traded there's still things going on and people can do things with them so what does that mean like for example bit shares to Dan Larimer I don't believe is actively currently is still in the ecosystem I think it's still running the same for Eos and these types of things so it effectively means that you may give a disclosure regime to somebody who could die or retire and leave as a desire for Consumer Protection but then at the end of the rainbow that role is no longer held in yet the ecosystem is still ongoing and the token still has value also creates issues for self-custody it creates all kinds of issues for liquidity and ultimately is incredibly harmful and serves no real upside to the ecosystem but I understand the reason behind why they'd want that regime they don't want a situation where Venture capitalists and project Founders collude they create a very large pre-mine and they dump all of their supply over time on retail investors and walk away with large profits and disappear it's Ponzi scheme then and I believe Commodities regulation can resolve that because if they have a large amount and it's a commodity and they're manipulating Market that's cartel-like behavior and we already have a very rigorous anti-fraud both civil and criminal regime to resolve these types of things we don't need to imply that something is a security in that respect we still lack proper token taxonomy there are nine different types of digital assets if you if you take a look at Don tapscott's recent work in a digital asset Revolution and each and every one of them have different regulatory Notions and concerns and a single token can become these things over time for example you could use a Bitcoin as a currency you can use it as a digital commodity it's a store value you could really identify that particular currency that particular Bitcoin and make it into an nft and so there's something valuable about that kind of like what the color coins idea is you could certainly securitize that Bitcoin and chop it up into a thousand pieces and sell shares with it etc etc you could do you could just go down the list and keep doing things with them so one instrument is chimeric it's a stem cell and it can become anything so category based regulation doesn't seem to make any sense it needs to be functional regulation there are some discussions in the European theater especially with Micah about how one would approach that and also what is the role of intermediaries for example if centralized exchanges have a disclosure regime and we believe that they're around and those disclosures end up in the public domain and we're okay with that we probably shouldn't have any issue then with decentralized exchanges than trading those assets once they've gone through the one-time disclosure self-certification there's still a question of compliance and that's that's a very tough one and there's an issue of how one would bind identity with cryptocurrency wallets and transactions and so this is usually in reference to the fat of travel Rule and it's something that we've had a lot of discussions about the verite group that Circle has put together with consensus and others is also thinking about how to apply these standards to things like dips but this is one of the reasons we created a tala prism and our tightly integrating prism into lace so that one can create identities go through compliance build reputation systems and use that for alternative credit scoring and use that also for fast account creation where kyc and AML are required know your customer anti-money laundering it is a very interesting concept of how do you connect identity to nfts we call those vnfts verified nfts and it is a very interesting concept about how do you connect identity to dapps for regulated D5 which is a component We Believe of real five so anyway long in the short is that a lot of stuff is happening a lot of discussions are happening the Swiss still serve pretty good food and it was very good to engage with members of Congress and the cftc in particular and have a chance to to learn from them talked with them and have a very fruitful conversations we'll keep chipping away at it we have people regularly going to DC and other locations and we've been regularly engaging with various lawmakers and they've been very productive dialogues and I think immediately after midterm when the dust settles we'll be in a position as an industry to start finding a way to converge to some legislation which at the very least will significantly mitigate the uncertainty that's around there's still a lot of questions about exchanges Market manipulation custodial standards asset-backed stable coin regulation and whether to give them a back license or not this is why we created the Speedy Bank legislation over in Wyoming in anticipation of of that type of regulation for asset-backed stable coins like usdc and things like tether and reasonable Minds will pursue one thing that did come up is the notion of a dow being an unincorporated association and as a result having no corporate veil to protect the fiduciaries of the Dow and where those boundaries need to be written and if someone under what conditions would someone be in control of such things and then held liable for the actions of it this is a recent regulatory case that's come up it's another reason why the Dow wrapper was created in Wyoming and actually Chris brummer the person who put on the DC fintech event wrote a good paper about it I called Legal wrappers for Dows which I'd highly recommend that you read so that's another topic on the menu a lot of topics sanctions compliance custody taxonomy tests and tools for prosecutorial discussions discretion consumer protections investor protections American competitiveness and use and utility in other Industries a lot of stuff on the menu it's a very complicated very nuanced conversation glad to be part of it glad to be working with people and I think we'll get it done one way or the other because it's necessary for us to get the next level as many of we want cardano and cryptocurrencies in general to become the financial operating systems of the world and my big passion in life has always been banking the unbanked and giving the unbanked economic identity that they control that self-sovereign and ultimately Global in nature and ensuring human rights the freedom of Association Commerce and expression to accomplish that there needs to be a regulatory regime that acknowledges the existence of cryptocurrencies fuse them as positive things and appreciates the Liberty that they provide people so this is the time to figure out how to put all those pieces together and create something that we can all live with thrive in and innovate now as a side note while at the Swiss ambassadors residence the representative from The People's Bank of China happened to do a presentation on the digital Yuan and it was very striking how sophisticated and already scaled the system is 40 million users 10 000 transactions per second a quasi-account model and very very tight coupling with some of the existing Payment Systems they have we chat alipay these types of things and it's very clear that they're bundling social credit and the belt and Road program with this digital currency if this is allowed to spread money system will exist or a very small group of people have total and absolute control over billions of people's economic Liberty it's not a hypothetical it's an active project with great technology behind it Brilliant Minds behind it and already 40 million users is a beta and that will spread like wildfire first throughout China and then any country that is adopting the Yuan the rimimbi as its Reserve currency it's reality that we all have to face the antidote for this is cryptocurrency with properties that have Liberty not another cbdc a digital dollar or something like that so we'll fight that fight we're fighting in Africa right now we see the influence in Zambia and Zimbabwe and Ethiopia and other places and we definitely see that there's a grand plan rolling out the United States does as well and hopefully we're able to understand that the only way to be something that wishes to push the world into total control of a few is to give the world the fires of freedom so we'll keep those fires lit you guys do as well there are certainly hard weeks and there's certainly weeks that are distracted by mobs of people but you have to show up to work every day because that's the job easy days and hard days it's been a hard week but a productive week thank you everyone