Navigating Policy & Regulation in Blockchain

Transcript

Markus Veith:

All right. Good afternoon, everyone. Thanks for joining us. We are going to talk about regulatory and legislative developments in a crypto space. And we’re just going to do a quick round of introductions. As Ian already said, I’m Markus Veith. I’m a Partner. I’m the National Leader for Crypto Blockchain for the accounting firm Grant Thornton, and a pleasure to be here. I’ll be your moderator.

Joe Ciccolo:

Hi, everybody. Joe Ciccolo, founder and President of BitAML. We provide regulatory compliance consulting services to the crypto space. I’m also the Executive Director of the California Blockchain Advocacy Coalition 501(c)(6) Trade Association, representing the interests of the crypto and broader Web3 community before the California legislature, California Governor’s Office, and various state regulatory agencies.

Josh Deems:

Great, nice to meet everyone. My name is Josh Deems. I am Head of Americas for Figment. Figment is a staking services company headquartered in Canada, but we do a lot of work here in the US. I’m based in Boston, so it’s nice to have an event like this in our backyard, which is fantastic. I’ve spent a lot of time working in the space, both in the Boston area with Fidelity and State Street prior and kind of full circle now bringing staking services to larger institutions, having the regulatory clarity that they’ve got over the last year. I’m really excited to talk to you all more about that today.

Wasim Ahmad:

Hi, everyone. My name is Wasim Ahmad. I am Co-Founder of a company called Vault12, and we handle crypto inheritance. A few years ago we issued tokens, and since then we’ve been encumbered by the lack of regulations here in the US and the lack of regulations in the UK and the ridiculous regulations that now exist in Europe. And so, I spent a lot of time commenting on bills, briefing politicians, briefing staffers, working with the Digital Chamber, working with other lobby groups, so lots to say on this subject.

Kristopher Klaich:

Hello, everybody, my name is Kristopher Klaich. I am a Senior Director of Operations and Policy at the Digital Chamber. We are the largest and first trade association for the industry. We represent around 160 companies to advocate and educate on their behalf largely to the federal government, but increasingly at the state level and internationally. And I lead our National Security Policy.

Markus Veith:

All right. So without further ado, let’s get started. We have prepared a couple of questions and we have about 30 minutes. We don’t have room for Q&A, so if you have any questions, please approach us after the sessions. We’ll all be hanging around.

So let’s get started. So we recently have seen the first piece of crypto legislation signed into law, the GENIUS Act. As stablecoins continue to grow and gain prominence and more adoption, I just wanted to start with that topic. So Josh, I’d like to start with you. Can you talk about some of the details with the GENIUS Act and what it means for the industry?

Josh Deems:

Yeah. So even just to zoom out one step further and talk about how the GENIUS Act fits within the overall framework that this current administration is pushing, at least from an agenda and policy perspective on crypto assets, there was kind of three main things or four main things that they’re trying to accomplish. The first is come up with a regulatory framework for stablecoins. This exists in some way, shape, or form in Europe, exists in some way, shape, or form in Hong Kong. And this is really, shaping this was something that was critical to the second term of this Trump presidency. So that is kind of goal number one, is come up with a national framework for being able to issue and list a stablecoin. The second was really allow stablecoins to be issued by private entities and keep them out of this sort of surveillance style of what we call central bank digital currency. So those were kind of like the two stablecoin-related goals of this current congress and the current executive branch.

And then, on top of that is come up with a market structure bill, which is really at the heart of it determining what the SEC has the oversight over versus what the CFTC does, what constitutes a security versus a commodity, and all the downstream implications from there. And I guess the last is really just coming up with a way for the US to hold a strategic crypto reserve.

GENIUS Act is the first law that we have in the United States around cryptocurrencies, period. And it allows non-bank issuers as well as bank issuers to issue their own form of money, to issue a dollarized version on a blockchain. And it sort of prescribes how they want to see this done. There are reserve requirements, so how much can be held in short-term Treasuries, how much can be held in cash behind the actual issuance of the token. But really, this opens the door for companies like Circle to be able to list USDC and other firms to be able to interact with USDC as a payment mechanism under the law of the United States. So that’s a major step forward in terms of a policy achievement under this administration.

For us at Figment, we’re a producer of blocks, we’re helping generate rewards for keeping the blockchain running. And so, the reason we like to see GENIUS, the reason stablecoins matter is people are using blockchains more. There’s more demand for blockspace, meaning there are fees that are being paid to the chains in order to send stablecoin transactions. So ultimately, this benefits the overall crypto economic system, but in a way that is being done not through regulatory arbitrage, but also through having sound policy. So we were really excited to see the GENIUS Act get signed into law this July.

Markus Veith:

If I can just add one more thing on the requirements. As the accountant on the panel, the GENIUS Act also comes with reporting requirements, right? So as many of you know, most the stablecoin issuers outside of New York state, DFS has come up with a set of rules and requirements for stablecoin attestation. There’s now a monthly stablecoin attestation requirement as well as the annual audit requirement that also comes with the Act.

Next up, just to stay with the stablecoins, I keep reading more and more about that banks and particularly regional banks are feeling the heat from stablecoin issuers, and they’re feeling unfairly treated about some of the requirements they’re subjected to versus non-bank regulated or non-state bank regulated stablecoin issuers. Josh, can you just also elaborate on that a little bit?

Josh Deems:

Yeah, so I think some of the state banks are under pressure or they’re feeling competitive pressure because a company like Circle can condition with stablecoin not have the same reserve requirements as a regular bank and they’re basically be able to bifurcate or sort of sort of bypass this dual banking system, this state-by-state banking framework that we’ve set up if you create a bank at a state level. So there’ll probably be some changes to GENIUS. I think there’s healthy debate and I think there’s also bipartisan support to kind of work on some carve-outs that still also protect the state-level banks, but this was something that they’ll fix over time, but not something that people have any real major opposition to.

Markus Veith:

Great, thank you. So Josh already mentioned a little bit about the market structure bill, so just want to talk a little bit about the market structure bill, which is the next landmark legislation. Can you talk a little bit about the upcoming regulation, what you see in your space?

Wasim Ahmad:

Sure. So the market structure bill is the over-encompassing bill that will govern how the market works, who’s going to regulate it, and how the market participants will interact with all of the rules that the regulators come up with. And so, there’s a couple of pieces to this.

Firstly, what is the role of the SEC versus the CFTC? So that is being redefined and both of these regulators are getting focused on very, very specific areas.

So an example of that, the prior administration’s SEC was very focused on enforcement with lawsuits and those kinds of things. Now they’re very, very focused on not only innovation, I think all these bills support innovation, but they’re focused on fraud. So they have a very specific mandate to root out and find fraud, which is great.

The CFTC is going to have jurisdiction over another range of commodities and will have to work hand in hand with the SEC. So there’s sort of stipulations around how the SEC communicates with the CFTC to make sure that nothing falls through the cracks.

Other parts of the market structure bill involve how companies who issue tokens, which may in the past have been considered securities, how they can transition to a different model where the token is being used inside the network, so in a very decentralized way. So these are some of the kinds of things that are coming along.

The status of it is that the House has passed a version of the CLARITY Act, and then there’s a version from the Senate. But there’s quite a lot of work that needs to happen over the next couple of months, and so it’s heading to get signed by the end of the year. So that’s kind of the timeline of the market structure bill, the actual law getting signed.

But if I may, there are some other layers that certainly this administration has been, from a strategic perspective, putting into all of the legislation. So there’s overarching bills. A lot of what’s in the GENIUS Act is referred to in the market structure bill. There’s also guidelines like Safe Harbor that are being pursued, which is something that’s coming from the SEC. So the idea is that all of these bills, all of these laws and then the rules underneath, are layered so that if one of them is rescinded by a future administration, there’s still protection for the overall market. And I think this is a very good thing. It means that things will take a little longer to get done. Originally, CLARITY Act was supposed to be signed by August 1st and then it was September 30th, but I think third time lucky, I think we’re on track for post-Thanksgiving.

The other thing to note just in this area of regulations, the laws are the laws, but the rules are what the regulators will give to the market, and the rules also have to be formulated. And obviously, everyone is beavering away. The SEC is super busy doing that right now. I know because I’ve been talking to them.

Some of those rules may have some kind of 90-day consultation period, some of them which are a lower level, maybe it’s better to call it guidance, can just be issued, communicated to the market and they go into effect straight away. So after the law is signed, there’s going to be a period of time before all of the rules are in place and we actually have a way to participate in the market and be very, very clear about how things work. So we’re not done December 30th, but it’s coming. And it hasn’t been coming for many years and now there’s tremendous momentum here. And the best thing about the market structure bill is it’s going to usher in an era of consumer crypto, which is the biggest I think, opportunity especially here in Massachusetts with all the financial services companies here.

Kristopher Klaich:

I can add a little bit of color because we’re in the weeds on these issues, helping to develop the policy and the laws. We’re working directly with Congress and the senators and their staff and the congressmen and their staff to help flesh out the details of what will go into these bills based on our members’ interests and input. And then, as you mentioned, after a bill is passed, we are working with the regulators to help flesh out what those rules are, responding to the request for comment from Treasury, from FinCEN, from SEC and CFDC, for example, to help define how those laws are actually implemented in practice. And so, that’s a long, much more convoluted process than the average crypto or blockchain adherent would maybe realize, but it’s a long ugly process sometimes and that’s what we do to help advocate on behalf of our members to make sure that the industry can thrive in the US.

Markus Veith:

Thank you.

Joe Ciccolo:

Yes. I just wanted to add, similarly, in California we’re going through, I mentioned rulemaking working with our regulators. So in California we passed DFAL, Digital Financial Assets Law. It’s comprehensive regulatory framework for crypto, including oversight of stablecoin issuers. And that was signed back in 2023 pre-GENIUS, so we’re grappling with what that might look like. There’s language already in GENIUS that would put in preemption for state level. And so, there’s a feeling in California that we worked so hard to build this infrastructure and staffing, and now we’re sort of going, “Are we going to oversee? What’s that going to look like? Is there going to be licensing? Maybe, but maybe some of the aspects of the rulemaking won’t go through.” So right now, going through the rulemaking process for DFAL, which goes live July 1st of next year. So that’s regulating crypto exchanges, trading platforms, but also the stablecoin issuers. That Chapter 6 of Assembly Bill 39, which would oversee stablecoin issuers, is kind of in flux at the moment. And so, through the rulemaking process, there’s been several notice of public engagement and not one has dealt with stablecoin topics.

So we’re sort of deer in the headlights in California, and I think that brings up a broader issue of what that might look like at the state levels when we have preemption. And as I understand it, in CLARITY or at least one of the more recent versions I saw, there was preemption in that as well. So what does that mean for all the state regulators that are counting on their ability to continue to oversee various aspects of the crypto marketplace?

Markus Veith:

Yeah. It’s interesting, right? I’ve been involved with crypto for 10 years now, 10, 11 years. And at the beginning it was like the Wild West, right? Most of the entrepreneurs consider themselves and may still consider themselves to be running a technology firm. My background is banking and banking risk, credit risk management, but I always said, “Look, this looks to me like a broker dealer like a bank.” And I was always expecting 10 years down the road, crypto companies will have some kind of a banking or broker dealer license.

And then, 2022 happened, came around and everybody was crying foul and looking for being rescued, being bailed out and, “Where’s the federal regulator?” Right? You can’t have it both ways. I’m a proponent of regulation, but it needs to be sensible. It needs to protect the users, specifically individuals, consumers, but it also needs to give the flexibility for companies to grow and explore and expand. So it’s glad to see after 10 years of back and forth, maybe, maybe not that we finally see some traction.

And I think we’re going to talk a little bit more, it has to be bipartisan. Right? It cannot be a partisan issue. Crypto is not a national, it’s not a political thing. It’s international. It’s a technology that we all want to benefit and harvest and see the best use of it.

So next up, I want to talk a little bit about the SEC’s recent take on staking. So the SEC has declared certain staking services as not a security offering. And Josh, I know Figment is dealing with it on the forefront. Can you tell the audience a little bit more what is staking and how does it impact the thought process at SEC? How does it impact the industry?

Josh Deems:

Yeah. So basically, staking is a consensus mechanism that non-Bitcoin effectively protocols operate on top of which requires participants to lock their tokens without transferring the custody of them into a validator. That validator then is responsible for securing the blockchain for basically voting and attesting to transactions happening on the blockchain. And in return for providing that service for locking up your tokens, you earn a reward. And that reward is usually in two components. One is new inflation, so the new issuance of tokens on the blockchain, and the second is in the form of transaction fees, so fees that users are paying to each other to transact on chain.

We did not have clarity in the United States on whether or not staking, using or holding Ethereum or Solana or any of these tokens that have staking embedded within their operating, within their consensus mechanism, whether or not that constituted the creation of a security, right? You’re earning rewards by validating a blockchain network. Us and our competitors and pretty much everybody had gotten legal opinion that stated staking does not, it’s a technology service, but there was nothing really at the highest level of government.

And so, on May 29th, we actually received notice from the SEC, or not notice, but we received non-binding guidance that basically stated staking does not constitute the offering of a security when it’s offered in the way that we do and most of our competitors offer it, which was huge news for us. It just gave us a sigh of relief, because it gave legitimacy to what we were doing and the rules looked exactly as we had thought that they would be designed. Again, it’s non-binding guidance so if there were to be a new SEC that were to come in under a new administration, that could potentially go away. But that was a really good step in the right direction.

The second thing is about a month and a half later, the SEC followed up with guidance around liquid staking token. So we talked about what staking is, a liquid staking token is a representation of a stake position, but it’s liquid, it’s tokenized. So my stake Ethereum can become tokenized. I can deposit my Ethereum in a protocol called Lido and receive ST ETH or staked ETH back. But I can trade that, I can transact that, which I can’t do when my Ethereum is locked. The SEC came out and said, “LST, those liquid staked tokens, also don’t constitute the creation of a security in July guidance.

So I think, very similar to you, Wasim, I’ve been in lockstep with a crypto task force over the last couple of months. I think again, it’s just a signal. If anything it’s symbolic, that this SEC is willing to engage, willing to have the conversation, willing to be educated. We’ve done teach-ins. They’ve said, “Hey, just come in and tell us how these things work.” We’ll bring people from our engineering team or our compliance team or whoever to come in and just engage. And I think that sort of engagement is leading to good decisions, even though it’s not law, at least rules that operators like us can abide by, so yeah.

We think the next thing that will happen from here on out is the whole reason we want the SEC to kind of be in favor of staking as a technology service, not constitute the offering of a security, is so that the ETFs, the impending Solano ETFs and the existing Ethereum ETFs in the United States, which have almost $20 billion of assets in them, can stake those assets; because today they can’t because there wasn’t this type of clarity around whether or not the act of staking created a security or not.

Markus Veith:

Thank you. Just one more point, you mentioned you got a legal letter, right? I think before the shift in the stance by the SEC, I think law firms were less and less willing to issue a legal letter, right? Because as an accountant, I deal with it. I would be the one that says, “Hey, do you have a legal letter, a legal opinion that says it’s not a securities offering?” And law firms, like accounting firms, have been holding back saying, “Look, this is becoming too risky. It’s becoming too hot a topic.” So it’s good to see that we’re finally making progress here.

So next up, we already talked a little bit about the state level, so I’d like to hear a little bit more how the federal initiatives impact the state level. And if you can also talk a little bit what we mentioned about the bipartisan and blue versus red states a little bit, if you can.

Joe Ciccolo:

Yeah, and I think I talked about preemption before, and I think that’s a concern for the states having their sort of orbit of regulatory oversight and what does that look like in response. And I think that there’s a lot of wait and see on that.

As far as bipartisanship, I’ve met with some of the other chapters or other groups at different states, both red and blue and I guess purple, we can throw that in the mix. And we agree, we want to make this bipartisan or nonpartisan at all. And so, I’ve met with some of the other blue state leadership and how can we elevate the voices of folks that are out there that have been enthusiastic about crypto and it just so happens they’re Democrats. How do we make sure that we don’t lose them in the process? And at the same time as an extension of that, how do we bring on board more Democrats and more folks on the liberal side of the aisle that do support crypto, and what does that look like so it doesn’t become about one particular elected official or one particular political party.

And different ways of achieving that, right? In California, we talk about the balance between protecting consumers and being pro-innovation. Right? We have Silicon Valley and we sort of fancy ourselves being ahead of the curve on protecting consumers; both noble pursuits that I don’t think are mutually exclusive, so using that. And then, maybe if we talk to some folks from Texas, we might get a different opinion about the swashbuckling entrepreneur and how can we mine more crypto and things like that. So it’s about appealing to the constituency and finding what resonates in terms of messaging.

Real quick, since it was mentioned before, we were talking about staking; so following that, a lot of the states rescinded their cease and desist against staking rewards. California was not one of those states. There’s still an active cease and desist that targeted Coinbase, although it’s widely viewed as a blanket across the board. So Commissioner Mohseni said he’ll reconsider that in a recent conversation with me, so hopefully he’ll follow up and take a look at that. But it just sort of shows that it’s not sort of one-to-one, right? The federal government does something and the states go, “Oh, that sounds good to me.” There’s still going to be a back and forth and a little bit of a tug of war going on.

Markus Veith:

Great, thank you. So kind of like to round it up, I want to get back to the federal level. Chris, can you talk a little bit more or take a look at the crystal ball and see what you think we’ll see in the near future as other federal regulation or initiatives that will give us regulatory clarity?

Kristopher Klaich:

Sure. Yeah. So right now the administration’s three main priorities are developing the rules and regulations that will flow out of the GENIUS Act that was passed at the end of July; developing the market structure legislation that we’ve talked about, that has to go through a process which I can break down a little bit more; and then, also the Strategic Bitcoin Reserve Act. Those are the three main priorities that the administration has and is leaning in to hard.

The process for having the market structure bill passed, as I mentioned before, it’s much more complex than just throwing some words on a paper and having a vote in sometime over the next few months. Right now we have new language that has come out of the Senate Banking Committee that we and others have helped to shape by providing input into what we think ought to be in the bill. That will be marked up, which is really sort of a public opportunity where the Senate Banking Committee comes together to edit and debate the bill inside the committee.

The Senate Agriculture Committee is doing the same thing. They’re probably a month or so behind, give or take. So we are waiting for language, draft language to come from the Senate Agriculture Committee for their portions of the bill. The industry will comment on it, provide some feedback, and there will be a markup on that bill in the Senate Agriculture Committee sometime probably in end of October, potentially November, ideally with a vote before Congress goes out of session for the end of the year.

That’s probably the best case scenario. And like I said, the administration is leaning very hard on Congress to get something done, but you just never know. I say this in a loving way. I cut my teeth in D.C. working in the Senate, but Congress is sort of like a cat with a laser pointer. And again, I don’t mean that to demean them, but they end up being focused on whatever is in the front page of the news. So if there is an attack, there’s a war, something like that, attention can shift very quickly and momentum can stall very quickly. And so, the time to act is to push now and to try to get something completed as soon as possible.

Markus Veith:

Great, thank you. And just I guess the last question real quick, just a sentence or two, I just want to ask the panelists what they think we will see in the next five years near-term, mid-term from a regulatory development. Chris, do you want to start?

Kristopher Klaich:

I think if we do have the market structure bill passed over the next several months, real world assets and asset tokenization has, many companies are already jumping in even without full clarity because they see the writing on the wall and the opportunity is just massive, massive from a financial perspective and efficiencies perspective. So I think that focus will shift there. And the focus is never far from the national security issues as well. That is an underlying and continual concern that won’t go away regardless of what is passed and when it’s passed.

Markus Veith:

Wasim.

Wasim Ahmad:

Sure. I think market structure bill getting signed means a huge wave of momentum for consumer crypto financial services. Every bank will offer exposure to crypto, and then exposure to other services like insurance, inheritance, et cetera. And hopefully we’ll see the end of our reliance on software wallets and not ridiculous hardware wallets and we’ll just deal with all of that on devices like this, which is strong enough to hold my passport so it should be strong enough to hold my crypto.

Josh Deems:

Yeah, I’m with you, Wasim. I really believe in this idea of a super app where you can have access to your banking, your crypto, your commodities, your stocks. You can pay anybody anywhere at any time without any sort of intervention or anyone in between. I think that’s like if we land a market structure bill and we do it right, I think we’ll have this sort of concept in the US. The last thing I’ll say is I want to own Bitcoin and I want to own Solana and Ethereum and be able to stake those two in my retirement account. That’s a lofty goal.

Joe Ciccolo:

Fantastic. What do I see in crystal ball? I think the turf war is going to ramp up the states and the federal government, not just with GENIUS, but presuming that CLARITY moves forward in some form or fashion I think the issue of preemption is going to remain. And I think you’re going to see the states sort of push back, a lot of that obviously driven by politics, and so we will see that how that shakes out. The state regulators aren’t going away. There’s not going to be a spirit of Halloween banner across the state regulatory agency offices. It’s just going to be a matter of who’s going to oversee what and how they complement or don’t complement each other.

Markus Veith:

All right. Thank you very much.