 I am Nicolespo with Reason. This is the Reason livestream. I'm joined by my colleague, Zach Weismiller. Hello. Hello, Zach. And we are joined today by Renegade SEC Commissioner, Pester Purse, late of the Mercatus Center. She has written a very interesting, dare I say, blistering critique of a recent decision by the SEC, the Securities and Exchange Commission, a regulatory outfit that was once headed up by Joseph Kennedy Sr. way back in the day at its origins. Hester Purse, Commissioner Purse, thanks for joining us. Nic, Zach, it's great to be with you. And I have to. You have a disclaimer. I've got to start with my disclaimer, which is that my views are my own views, not necessarily those of the SEC or my fellow commissioners. And you are coked to the gills right now, right? You are flying on a mix of all sorts of illicit drugs. No coffee, but that's about it. And coffee is fully legal, at least for the time being. We are going to run a clip. Coffee, I'll say, is legal, despite the fact that the SEC might start to regulate that after it gets through the crypto space. And maybe a security. Yeah, it certainly is acting like one. We are going to run a short clip by the chairman of the SEC, Gary Gensler, talking about the cracking decision. And then I want to come back to you and ask you about your dissent, Zach, can we roll it? Put everyone on notice in this marketplace. This really should put everyone on notice in this marketplace, whether you call it LEND, whether you call it EARN, whether you call it yield. So those other platforms should take note of this and seek to come into compliance, do the proper disclosures and registration and the like. So what Chairman Gensler there is talking about is a recent $30 million fine that was levied against the cryptocurrency platform, Kraken, for issuing unregistered or unlicensed securities because they were allowing people to make money by parking their cryptocurrencies at the Kraken platform. You dissented from that fine. Can you explain what was wrong with it and why you think it should not have happened? It's just the latest in a series of enforcement actions where we're seemingly regulating the crypto industry through enforcement rather than doing the work of trying to sit down and figure out where are the connections with our securities regulatory regime and how is it possible for people to engage in the activities they want to engage in in a way that's compliant? And instead what we tend to do in these circumstances is just shut it down. And that doesn't seem like, I mean, that is one way of protecting investors from participating in something, but it's not a way of protecting investors' ability to make decisions about what they wanna participate in. Yeah, you called it lazy in your critique of it. Zach, should we put up the quotes or the tweets from, I was gonna say the tweets from Jesse Powell, the head of Kraken who was saying like, oh, if all I had to do was fill out a couple of forms as Chairman Getzler seems to suggest in his comments, I would have done that. Commissioner Perce, is there a way right now for crypto platforms to register with the SEC? Well, so there are a couple of different things there. So this particular enforcement action was around Kraken's crypto staking program and to the extent that staking as a service needs to be registered and that has to be assessed on a case by case basis, they could theoretically come in and register with us I think that's where the lazy, I was talking about the institution being lazy, we've got lots of very hardworking people here, it's not the employees, it's the institutions taking the lazy approach because it actually would require us to do some work to figure out what registering and crypto staking program would look like. And so it's not as easy as just downloading a form from the SEC's website, filling it out and you're ready to go. It would be a lot more complicated than that. Zach? So we're gonna be after Hester Perce leaves us today, we're gonna be chatting a little bit with the author of this piece, Nick Carter who has claimed that there's something that he's calling Operation Choke Point 2.0 that's a reference to an Obama administration era program that was using the banking system to crack down on certain industries like payday lenders, sex workers, things like this. And he's characterized what has been happening in recent months, a lot of this coming from the banking regulation side of things as kind of a concerted effort across various government agencies, the FDIC and the Fed to basically deny banking charters or financial services to crypto providers. There was a recent, just yesterday, the SEC proposed that they want to bar investment advisors from keeping assets crypto firms. Do you agree that there's this kind of, I don't know, this concerted effort across various government agencies at this point to take a much closer look at crypto? And if that's true, is that warranted or are there some dangers in that kind of approach to things? Well, just as an initial matter, I think that description of what happened yesterday at the SEC is a little bit simplified. It was a broader rule around custody of investment advisors. It does affect crypto custody and it's an area I hope will get some comment on. I do have concerns about attempts to try to wall off crypto from the traditional financial system. A lot of people in crypto probably find that somewhat attractive, but I think that there are going to be touch points between crypto and the traditional financial system, whether that's banks, investment advisors, broker dealers and so forth. And I think what we need to try to do is figure out how traditional players are able to engage with crypto. Instead, it does seem that the government is one by one saying, no, we don't want banks to do this. We don't want banks to custody. We don't want investment advisors to do this. We don't want there to be an exchange traded product built on Bitcoin. That doesn't make a lot of sense to me and I think we have to be very careful. This is the whole reason that a lot of people are passionate about crypto because too often the financial system has been used as a way to exclude certain people and let other people in. And so I really get concerned when regulators show up and they're favoring particular uses or disfavoring particular uses of the financial system. I think we have to be very careful about that. Let's, I wanna ask you, I guess two questions but first and one is kind of historical. When you talk about the institution of the SEC being kind of lazy, and it's very clear you're not talking about the people who actually work there. Where does that come from? Where does that laziness or that kind of predisposition against innovation and change come from? And can it be fixed? I'm thinking a few years ago I read a biography of Joseph Kennedy Sr. the father of John F. Kennedy, Ted Kennedy, Robert F. Kennedy. And one of the reasons he was so instrumental in the founding of the SEC is he said plausibly at a point when the stock market was gonna be regulated. I know every grift there is because I pulled it and I'm gonna help you write and create a system where it won't be gained. I mean, is it possible for the SEC to not be kind of reactionary when faced with new kind of financial instruments or opportunities that are presented most starkly in something like crypto, particularly Bitcoin? It's difficult for government agencies like ours to handle innovation well. And I knew coming into this job that that was an area I wanted us to think about and kind of examine ourselves to see if we were doing a good job with that. Crypto does, as you suggested, present the question very starkly. So what happens in an agency like ours is you get used to dealing with the same institutions time after time. They tend to be large institutions that can afford to wait while you think about their new products and services. And you're not used to people coming in and challenging the incumbents. It's very hard to figure out how to interact with them. And so we're seeing that with crypto, especially because you're seeing people who are not, they're coming from totally from outside of the financial system. They're trying something new and it is difficult. But I do think that we could, if we made a choice, to try to engage with whether it's crypto, product entrepreneurs or other product entrepreneurs, we could make a choice to do it better. It would certainly require a lot of work. And yes, I have all the concerns about governments trying to manage innovation that you all probably have as well. And that's not the role I want us to be in, but I do think that we could try for a fresh start. And then Morse, go ahead, Zach. Well, I was just going to ask, how do you think about what the SEC's role is dealing with a new asset class like crypto? Because you're the securities and exchange commission and you traditionally regulate securities or people holding stock in a company and cryptocurrency is a little bit different. And there's been a little bit of controversy about what even is a cryptocurrency? There's this ongoing discussion of whether the SEC or the CFTC, which regulates commodities, would be more appropriate. And then of course, there's people within the crypto world who don't want any regulation whatsoever. And then this issue with Kraken has to do with not cryptocurrency per se, but staking cryptocurrency. So you're using these coins to, these tokens to kind of fuel the mining process. And maybe that's a little bit different than just holding Bitcoin on a custodial wallet. How do you think broadly about those questions and like what is cryptocurrency and what is the SEC's role in managing it? I'm going to give you the facts and circumstances line that lawyers like to use. The thing about the definition security is a very broad, it's a broad concept. And so we can touch lots of different things that you might not at first blush think involves a security. So I think we just have to look at everything on facts and circumstances. There is a question about whether, and I've disputed with some of my colleagues about what the definition of a weather crypto assets themselves fit within the definition of security. And it's probably not worth going into that discussion right now. I think the question is, are there some gaps in federal regulations where there isn't actually a federal regulator? And I think that's probably true with respect to crypto assets and with respect to crypto trading platforms. Then you get to the question of, well, do we think we need a federal framework for that? I might feel one way about that. I think in light of some of the events of 2022, a lot of people think, yes, we wanna have a federal framework. Then you have to think about, is the SEC the right regulator? I think if you're gonna set up the federal framework, the SEC could be the right regulator for a lot of this. But again, that's really not our call to make. That's Congress's decision. Yeah, can I follow up on that? Do you, is there a sense that Congress is moving to resolve that question? I mean, in a broad scope, and I know I think everyone on this call has ties to, one way or another, George Mason University and a critique that emanates from that, an economic and legal critique of the administrative state. But is Congress working to do that? Or is this gonna be something that either the CFTC or the SEC or somebody in the White House, whether it's a Republican or a Democrat comes up with? There certainly have been efforts to draft bills and we've seen some of those and I expect we'll see many of them being reintroduced in this Congress. The question of whether you can get that across the finish line, it's difficult because a lot of the issues really are quite difficult to draft, but I certainly think it's on the radar of people in Congress. Are you comfortable though that, I mean, these are the same cast of characters with some minor additions. They've gotten rid of some old characters and brought in some adorable new mopets like a long running sitcom, but by and large, these are people who whenever somebody from a tech industry shows up, they hold up whatever their Game Boy or their flip phone or whatever and say, can you help me fix this? I mean, I talked to Cynthia Lummis, the Senator from Wyoming, who's very bullish on crypto. She said that the level of even understood knowledge of like that it exists much less expertise in crypto is stunningly small among her elected colleagues. Well, as a regulator, I think it's really important that we take our guidance from Congress because they are the ones who are politically accountable. And so, it's important for people who are interested in this area or any other area to be in touch with their members of Congress. But we really have to take guidance from them. And I wouldn't assume that, one of the theories behind agencies is that they're expert regulators. And we do have a lot of people here at the SEC with tremendous expertise in securities law, obviously, but also who know a lot about this technology. But still, we can't design this without the input of politically accountable actors. Is that point of view that you have, is that widely shared by your fellow commissioners? Well, I think so. I mean, I think we all recognize who the boss is and it's not us, but I think one of the things that you're seeing happen in this area that's really causing me a lot of concern is that you're having jurisdiction grabbing through enforcement, right? If you plant your flag with enough enforcement cases, people start thinking, oh, well, I guess the SEC is the regulator or the CFTC is the regulator. And that's why I really would like for Congress to come in and say, no, this is who we want to be the regulator. This is how we want it to work. I'd like to bring up this comment because I think it represents the kind of, crypto enthusiast point of view on regulation. I'd just like to get your reaction to it. Denny Hicks says, I don't think the SEC should be involved in it at all. This was founded on that main idea to move away from any entity controlling the monetary investments and transactions. The group started Bitcoin because they were wanting to have full control over their finances without the federal level getting involved and taking their cut or making any rules and regulations for it, violation of freedom. And that's true. That is why Bitcoin was started, that it's in the Satoshi White Paper and there's kind of the inevitability that regulators are gonna try to regulate. You mentioned some of the issues that arise there with kind of they get comfortable with incumbent firms and then makes it harder for new entrants. So this was all meant to disrupt that whole system. Is there a case for just saying, okay, if the SEC wants to put out some sort of registration form and make it optional and let people who wanna opt in to only the SEC approved versions, that's fine, but just let crypto be crypto and people can kind of enter at their own risk. Yeah, and I certainly understand that point of view, but I think we have rules on the books and to the extent that whether it's crypto or something else, those implicate the existing rules then we have to enforce those rules. Now, if you're talking about do we wanna develop a new regulatory framework where there really are gaps and where things really aren't covered, that's a conversation that we should be having. And I think one of the things I always say is don't jump to the conclusion that regulation is going to be the answer to solving problems. I mean, a lot of the problems we saw with centralized entities in the crypto world during the last year are problems that are very similar to problems we've seen with traditional financial intermediaries, but there also are things that people can do on their own to hold those intermediaries accountable. And as people working at intermediaries, they can do things to show people that they're doing what they're saying they're doing. So people in crypto shouldn't be jumping to the conclusion that regulation is always the first and best answer. We have to have this conversation as a community. Maybe on one side of the spectrum in saying, look, let's figure out whether there's a better way to do this, but there are other people who are very much committed to having a regulatory solution. And that's just something in this society we gotta work out and figure out where most people are. How much of the sense of urgency, that seems to be kind of coursing through the SEC and the CFTC and the federal government in general, is being driven by the meltdown of FTX and the apparent hypocrisy and kind of mendacity of Sam Bakeman Freed. And can you, I mean, is that particularly the stories that point to a very kind of cozy relationship between SEC Chairman Gary Gensler and SBF? Is that, are we in a mode now where something's got to happen and weirdly it's gonna be, the pretext for that is going to be dealing with somebody who is atypical of the way crypto platforms actually operate? And before you answer, I just wanna give the full context of this story here because we're not pointing the finger and accusing Gensler of anything necessarily. This story is just an example of the kind of political pressure that we speculate might be on him. This meeting that happened, the reporting was that Gensler was lukewarm to Freedman's pitch and wanted, this is from Fox Business, any new SEC announced crypto exchange to mere standards of public exchanges like NASDAQ or the New York Stock Exchange. So it's not necessarily that anything wrong happened to there that we know of, but I guess the question, and correct me if I'm wrong, Nick, is like, is that political pressure or what happened with STX Meltdown driving decision-making at all within the SEC from your- And just to put another layer of frosting on that, SBF, we talked with Jesse Powell of Kraken a few months ago. And one of the things he pointed out is that most of the major crypto platforms which have been around for a decade at this point or close to that have come together on a kind of basic code of conduct, best practices. FTX was not interested in doing any of that. And they were not registered in the US except to the bare minimum that they needed to be. I mean, they were headquartered off-shore and they kept going to the SEC and other agencies to say, hey, let's do a special deal that pulls us in. So that's what I'm saying, where somebody like SBF is atypical of kind of the bigger and more established exchanges. So, are we gonna end up making regulations about crypto based on somebody who was a bad actor as opposed to the kind of more responsible people really at the center of the industry? Well, I can't speak to FTX specifically. We do have an enforcement case, but I'll say generally that the events of 2022 confirmed the preconceptions of many people in the Washington world, which is that crypto doesn't have any use and is not decentralized and is all about defrauding people. That's what some people in Washington think. I'm not saying everyone does, but I think some people do. And that's why it's really important for people who are in crypto to think about, applying the lessons from traditional finance, thinking about that, thinking about if you're really trying to build something decentralized, what does that actually look like? And then sort of thinking about whether it makes sense to say, let's try to carve out the decentralized world and figure out whether, and really make the pitch that regulation is not, wouldn't play the same role there because the decentralization, the on-chain aspects, the fact that everyone can participate on the same terms, that actually takes the place of regulation. It's harder to make that case when you're talking about large centralized intermediaries that are holding people's assets, right? So I think we can try to make some distinctions, but it's really important. I mean, and to the comment that you read earlier Zach, you know, it is important to think about where are the spaces where people just want to be able to say, yes, I'm opting in to a less regulated space. I'm certainly open to something like that. I don't know whether others in Washington are, but I think everyone goes in eyes wide open. You've made a choice to operate in a space that has less regulation than other spaces. I mean, could you talk just a little bit about the structure of the SEC for people who don't understand it, this commissioner system. I've read your work on this. I know you were actually an advocate of that system and now as someone who's inside of it, what is that like being, you know, on a board of commissioners who, you know, disagree on topics and how does that form or how does that affect the ultimate decision-making process? Yeah, I mean, there are five of us and the chairman sets the agenda and manages the staff, but and so we have less input on sort of the rules that we're going to be doing and so forth, but we all have a voice and the idea is that you want to have people from different perspectives because you want to have some policy consistency over time. We all vote on every enforcement action and on every rule-making. I, you know, people sometimes say to me, well, Hester, you do nothing except for talk about things. So why don't you just resign? And I think the point is, and other people say to me, well, someone who is as skeptical of regulation as you are shouldn't even be at a regulator. And my response is I think it's really important to have people with different voices saying, we need to look at these things from a different perspective. And, you know, sometimes it takes a long time to shift the thinking, but I think it's worth having people sort of debating these things rather than just coming out with one view. I mean, the world is very complicated and there's more than one way to look at things. We've got two questions for you and we're going to let you go at 1.30. First, can you, building on that, what is your general theory of good regulation in the financial sector? You know, as when you were working at the Mercatus Center at George Mason, you wrote, you were a fierce critic of Sarbanes-Oxley and Dodd-Frank, the last two mega kind of, you know, pieces of legislation on the financial sector. What does good regulation look like? You know, if you were able to write that. Well, I think the first, my first principle is that if two people voluntarily agree that they wanna do something, there needs to be a very good reason for the government to step in into that transaction and say, no, you can't do that or you have to do it differently. There are times when the two people's agreement to do something can have consequences for other people outside of that transaction, we have to be thinking about that. So that's my general philosophy. I think we need to make sure that people's incentives are match up with consequences, right? So if you take a step that's a stupid step and you lose a lot of money, the government shouldn't be coming in to prevent you from losing it. And unfortunately that has happened a lot in our financial system and it sort of changed the way everything works and it's led government to come in and say, well, since we're bearing the consequences when people make stupid decisions, we're gonna try to make decisions for them. But because government doesn't have the right incentives, it's very difficult for government to make decisions effectively. Markets are much more effective at conveying information than a regulatory system is. And so we need to capitalize on that. We need to take advantage of the fact that markets transmit information really well. So that might, my theory is always, yeah, there's a place for regulation, but it shouldn't be the first place we look. It should be the last place. What does a good regulation or what's an example do you think of a good regulation that actually reduces transaction costs without distorting, you know, behaviors? I think we can play a role in helping people get disclosure to make their own decisions about things. So, and certainly, you know, there are rules around mutual funds that I think have been effective rules. There are a lot of things the SEC does that I think do help reduce transaction costs. But I think too often we try to just jump in and make a merit-based decision based on our understanding of someone else's circumstances. And I find that really offensive. This question we have on our YouTube live stream, people can pay money to make sure their question gets asked. So we always try to honor that. Ganush dash, get a stash, excuse me. Right, so I was reading about how the Web3 Foundation worked with the SEC on morphing Polkadot from a registered security to no longer a security. It became software. Can all crypto companies come in and do that too? Could you- Well, I'm not familiar with the circumstances of that particular question. Yes, people can come in and work with the SEC. But I think one of the problems that we've seen in the crypto space is that people are not coming out when they come in. They're not coming out with a workable solution to move forward. And that's what's so frustrating to me is you can't just be all about enforcement. You have to say, you have to show people proactively that no, you can actually come in, we'll work with you to meet our regulatory objectives which Congress gave us, but also to allow you to operate as a business, not to have you sitting in line or in the waiting room for three years as your funding dries up only to find out that you can't move forward. And that's what we really need to work on at the SEC. That's what I hope we can do. I still am optimistic that we can change our approach. Commissioner Hester Purse of the SEC, thank you so much for talking to the Reason livestream today. Thanks Nick, thanks Zach. Thank you. All right. So we are going to be joined in a little bit by Nick Carter, the investor finance character and Bitcoin bull extraordinaire in just a few minutes. And we're going to be talking about his operation choke point, 2.0 is underway and crypto is in its crosshairs piece at Pirate Wire is a sub-stack run by Mike Solana which everybody should check out. Zach, just your initial feedback from or sense of what Commissioner Purse was talking about. Yeah, it was interesting when she was talking about this kind of this comment she gets all the time about what's the point of you even being there? You're the one person who is saying, hey, can we rethink these regulations and you can't write your dissents, but there's no action. I thought that was really interesting because it's, I mean, I know for one, I'm glad that there's at least one person on the SEC board of commissioners who's forcing a kind of rethinking of that. So yeah, that was one of the more interesting insights to take away from that to kind of get an idea of how things work on the board. Yeah, I agree. And also just the, you know, I mean, like the herd dissent on the Kraken fine was, you know, the vote was four to one. She was the one against that like, you know, it's better that it's four to one than it's five to zero. And who knows, maybe she will win over some people. Her term doesn't end until 2025. SEC commissioners are, you know, they have kind of overlapping stacked terms. So that no one party, you know, the idea behind that is that no one president essentially gets to, you know, fully install the whole board. So that there is, you know, there's differences of opinion. And then she was talking a lot about, or she talked a little bit about the sort of relationship that inevitably develops between the regulators and the industry that they're regulating where they just become more and more comfortable with certain firms because the big firms tend to be the ones that both are better at complying and also kind of provide them with some expertise on the industry. And that's the problem that, you know, the economist George Stigler identified as be called, you know, regulatory capture basically. And I think that is really at the root of what's driving the crypto, at least that's not what's driving kind of the crypto economy. What's driving that is a lot of it is frankly, you know, speculation and people trying to make a quick dollar, but that was at the core of its beginnings was to try to sever that relationship. And, you know, right now I was just about to pull this up earlier, this is the amount of value locked in the so-called DeFi economy right now. And you see it was peaking, you know, close to the 200 billion mark, I think it was about 180 billion was at its peak. And then there was the crypto crash. And right now there's almost $50 billion, you know, locked in this, in this economy that people characterize as the wild west, but there's despite that being the case, despite it still being a relatively unregulated space, there's still like something is happening there and some value is clearly being created. And there's a dynamism there. And like the whole idea that people can kind of opt into it and know that there's risks to it. And there's this volatility, there's these ups and downs. And then there's the outright frauds like, or let's say alleged frauds like Sam Bankman freed. It's kind of like, it's just really interesting to watch this emergent relatively unregulated and now pretty huge market develop. And I'm a little bit worried that kind of the heavy hand is just now starting to come down. Yeah, let's run through some comments from Facebook as well as YouTube. Lawrence Espinoza asked, how did they pick and choose where to target? That would have been a great question for commissioner purse. But I mean, she intimated the commissioner really sets the agenda. So it's up to Gary Gensler. What are the priorities and things like that? But it's like any regulatory agency, I think where there's a lot of different interests that are pushing to say, hey, do this, do that. Oftentimes, one of the things, and Zach, you were getting at this, there's an idea that what regulators do is that they look at it at the area that is under their survey or their domain. And they say, where are things bad? And we're gonna fix that. But in fact, oftentimes what happens is that they are working kind of at the behest of the biggest, most established firms in an industry. And they are doing the bidding of that firm where they might say, hey, you know what? Like rule changes in this direction would help us. And why don't you do that? So that happens. Vera S says, does the agency worry about the increased risk of potential legal challenges to it for its sub rows of regulation by enforcement efforts? I'm not sure I understand that fully, but I think the SEC doesn't care. They're not worried about that, nor is any other regulatory agency. Occasionally they'll get smacked down. Let me chime in on the earlier question about why was Kraken specifically targeted? And I don't know the exact answer. I see that Nick Carter just popped in. So maybe we'll circle back to that in a second actually, and welcome Nick into the stream. Can you hear us all right? Yes, sir. Yeah, thanks for having me. Thank you for joining us. I see the mustache is back. So we just talked with Commissioner Hester Purse of the SEC who dissented from the recent fine that was levied against Kraken. And you had in a previous kind of online conversation leading up to this, you had asked whether or not do you think she would distance herself from the idea that the SEC or any agency should try to essentially rule out any particular subset of an industry or a field? She answered affirmatively, like that there's no reason that any agency should be going after a particular subset within a legal industry, which brings us to what we want to start out talking with you about, which is your recent piece for Pirate Wires, the Mike Solana Substack, Operation Chokepoint 2.0 is underway, and crypto is in its crosshairs. Can you very quickly kind of summarize this piece for us and start off by talking about what Operation Chokepoint 1.0 was? Yeah, let's start with that. Thanks for having me. Chokepoint 1.0 was a program that lasted from approximately 2014 to 2017, which involved effectively ring fencing certain legal, but maybe distasteful industries and other legal industries that maybe, depending on your perspective, we're fine. Mostly under the Obama administration and instead of using Congress to set policy or legislate, the end around that was found was to use the FDIC to pressure banks to not service these industries. Basically the banks would pressure the payment processors, which would then de-platform these specific industries and the ones in questions were like firearms, ammunition, the adult entertainment industry, and a lot of other stuff. Some of it pretty sketchy like payday lending and things like that. And what really characterized Chokepoint was sort of the informal nature. So it was all about insinuations and veiled threats that basically banks would be investigated if they continued to platform these particular industries. And that ended in 2017 when a few members of Congress noticed what was happening. They got complaints from constituents and basically opened investigations and shed some light on the thing. So that was Chokepoint 1.0. It didn't really end though. I mean, basically this guidance was internalized and then payment processors and banks started to incorporate these risk standards into their assessments of who to platform, which meant that there is still kind of an issue in terms of a lot of these high risk industries being platformed thereafter. What is 2.0 doing to put crypto in its crosshairs now as the headline puts it? Yeah, so some people accuse me of being inflammatory with this, but as a crypto person, I'm seeing it on the ground. I'm hearing directly from startups that they're being de-risk. They're not able to get bank access. The standards for being able to be banked are much, much higher all of a sudden. So there is a concerted effort now basically from the administration on a cross agency basis across virtually all bank regulators in this country, really only recently, I'd say last three months and in particular in the last month to sideline the crypto space and deprive them of their linkages to the traditional banking system. This is a multi-front attack. It's happening on a coordinated basis. In fact, the coordination is very clear because sometimes the same guidance comes out from multiple agencies and organs of the government on the same day within hours. So it's not a spontaneous thing. I mean, clearly it's coordinated. And the objective is really to, the benign interpretation is, well, crypto is risky and so we don't want banks touching it in any way because we don't want crypto to have systemic effects on the banking system. That's the benign interpretation. The more hostile one is, well, we just want crypto to go away as an industry and so we're gonna deprive them of their linkages to fiat which would eventually kill the industry if it was successful. And so that's on the banking side of things. And by the way, we'll link this and all the material we show in the show notes. So you can read Nick Carter's piece in full by just following that link below. But we've just been discussing in the first part of the show, the latest SEC actions. Do you see that as part of this or is this just a totally, do you suspect there's some sort of coordinated action across the entire Biden administration or is the SEC really a totally separate, they've got their own thing going. And also like how big a deal do you think this action that was taken against Kraken is in the big scheme of things? Is it kind of a minor setback for Kraken or is it like an existential threat to the whole industry? Yeah, a lot in there. So the SEC has been hostile to crypto ever since, well really under Clayton and now of course under Gensler. That hostility is nothing new. So it's not entirely surprising that they're going after Kraken and staking. I would say the intensification is evident from the SEC in terms of oversight. I believe that they feel emboldened that they have more of a political mandate now to go after crypto post 2022 in the FTX collapse. So I think the same undercurrent trends are driving the SEC's action and the action of the Fed, FDIC, OCC which is feeling politically emboldened due to a lot of people are sympathetic with attempts to ring funds through crypto space in the US after the collapses of last year and also Congress being deadlocked. That's an important thing that I think people are not talking about is the prospects for legislation here of any sort are very minimal going forward for the next two years. I don't think we'll see anything pertaining to crypto actually believe it or not even though the house is somewhat favorable. So the agencies realize nothing's gonna come out of Congress nothing's gonna be done that way. They're gonna be stymied. Let's say the Biden administration had a crypto package they wanted to push it they wouldn't be able to do that with the house. So now a lot of folks in the executive branch are saying to themselves well it's on us to regulate effectively legislate through regulation and that is absolutely what we're seeing at the SEC they are interpreting their mandate in a very broad way. As is the Fed, the Fed is now growing their mandate. There's a little, there's some wonkish details in the January 27 chain of events which I mean are probably worth digging into but I think that's what we're seeing really is this understanding in Washington now Congress is deadlocked. Okay it's on us the regulators to do something. Can I ask with something like FTX clearly kind of the crypto winter kind of sets the stage for more regulation because you have a lot of people who are probably going either grousing to their congressman or there's a sense like okay we lost this huge percentage of whatever we had invested in crypto for whatever reason and we're kind of pissed about that. This happened after the tech bubble burst there's new stock markets up as a housing bubble burst there's new regulations with FTX really puts gas on all of that. Can I ask you is there something the crypto community should have been doing to kind of unmask or expose or get people to stop putting money into FTX ahead of time or is there anything like that? If broadly speaking crypto is going to be something that is independent of government and independent of regulation not independent of risk but like is there something that people in the crypto space should have or could have been doing more of to unmask like to squeeze out the SBFs of the world before they get to a point where they really threaten everybody who's acting in a positive way. Absolutely without a doubt. There's three things specifically. One is the investors need to be better with their diligence. Today a lawsuit dropped against Sequoia and Paradigm the lead investors in that FTX deal alleging that they failed in their diligence and in fact they sort of endorsed FTX and caused people to trust it wrongly. I'm sympathetic to that frankly. I'm a VC we didn't invest in FTX because they were offshore brokerage. We looked at the early rounds they have those pitch decks because they're an offshore brokerage and we thought there's no way they could come on shore legally they had the FTT token which we thought was an unregistered security which would cause them problems down the road and they had Alameda trading on the exchange. I was looking back in my old email trail from LPs why didn't you invest in FTX? You got the look, what are you doing? You missed this huge deal. We told them exactly that. There's no way an exchange in the US would be able to have a proprietary trading firm owned by the same entity trading exclusively on the exchange. That would not be allowed. And I guess it's worth hammering home the fact that FTX was exposed at a moment when a company that was going, thinking about buying it said, eh, you know what? We're not gonna do this because we don't trust it. I mean the market on some profound level the market worked to expose a bad company. But so like what do you think happened there because there's presumably some pretty smart people at Sequoia and these other big investors. Why did they miss what you were seeing pretty clearly? Different approach to risk tolerance and also the deal dynamics. I mean in 2021 remember hottest time venture capital history. I'm sure the deal was moving extremely fast. This was the fastest growing company in the industry and the hottest industry on earth for venture dollars. So the power would have been totally on the side of the founders and not on the side of the VC. So I'm sure they understood they needed to do less diligence. This will come out in the court of law eventually what happened in order to win the deal. And they thought that that was a worthwhile trade off. I mean, it wasn't just FTX where this was the mindset among VC's. It was very common back then. You mentioned that being. I'm sorry, could you also you had said there were three things that the crypto world could be doing. And just to get back to those one of them was doing due diligence like investors doing due diligence. Do you remember the other two? Yeah, so for just to summarize the first thing VC's aren't just VC's. Their stakeholders aren't just their LPs their stakeholders are everyone. And when you're investing in these exchanges that have hundreds of millions of clients globally your stakeholders, everyone that uses crypto because if you fail you will bring the regulatory hammer down which is what is happening now. So VC's need to understand that. Two, proof of reserves. It's a very obvious thing. If there had been a proof of reserves in place which is basically a procedure whereby an exchange or custodian demonstrates that they have reserves and then they compare those to their client liabilities and they show they match. That's cryptographically provable. It's technically very doable. Quite a few exchanges do it already. If FTX had done that obviously they wouldn't have been able to commit fraud. If proof of reserves had been normalized throughout the industry FTX wouldn't have been able to do it assuming they were in this parallel universe they were doing fraud and they would have been sticking out like a sore thumb. So if that was normalized throughout the industry these insolvencies FTX, Mt. Gox, Quadriga they would be really evident. So that is a very simple thing. I'm pushing very hard for it. You'll actually see legislation. Texas introduced a bill asking for it. I think that'll pass. That will become part of the self regulatory framework that is used in the industry and it's a very positive thing. Unfortunately, we're too late now and the only reason it's got so much uptake is because of FTX. The third thing is just building better to centralized exchanges such that we don't have a reliance on centralized exchanges. That's also happening. So the technological trends here are very self-regulatory as far as I can tell. You, with regards to the proof of reserves question you know, I want to play this little clip from Gensler the video that he put out after the Kraken action that has been kind of circulating especially among what you might describe as the Bitcoin maximalists. I want to play this and get your reaction because they are saying that this validates the view that it's Bitcoin and self-custody are the only way to go. So let's just play this real quick and get your reaction. Crypto, not your keys, not your crypto. You see, you're basically an investor in their platform. If it goes under and we've seen plenty of that recently you end up in line in the bankruptcy court. That's why it's so important that these companies and platforms comply with the securities law. There's an- So, you know, the point there is that, you know, Gensler is quoting the famous not your keys, not your crypto line. And that is kind of validating the idea that you really shouldn't even have your crypto on an exchange if you want, you know, total security and sovereignty. What do you make of that, Nick? Yeah, I mean, I agree. Obviously, you know, we invest heavily in startups that help people self-custody their coins. So I clearly support that. Crypto only works if people have some self-custody because otherwise we give all the power back to the intermediaries and we haven't accomplished anything because then the government can co-opt the intermediaries and use them as they will. However, I'm also pragmatic and I recognize that exchanges will exist. There's demand for their services. We can't do everything in a non-custodial way. So, and there's a whole set of allocators that will need centralized touch points to custody their coins, to trade on them, et cetera. The decentralized infrastructure isn't the totality of the industry and it will never be. So in my view, the challenge is to improve the exchanges that do exist and pressure them to be as accountable as possible, which is why I'm an advocate of proof of reserves, for instance. Regarding like whether it validates Bitcoin maximalism, I mean, staking can be done self-custodially. It can be done on your own. Even there's actually, you know, services allow you to stake. If you don't want to stake yourself, you still kind of retain access to your coins, but you're relying on a more sophisticated pool that will help you do it, which is not a securities transaction in my opinion. Kraken may have left themselves open to that allegation in terms of the structure of, I think that is, I'm actually sympathetic to the SEC in that particular instance, but there's certainly ways to stake, even as a retail individual who's not very sophisticated about technology or anything, there's ways to outsource that to others which don't render it a security. So I don't see it as vindicating Bitcoin maximalism, you know, in either direction or, yeah. So, you know, staking ultimately will be more decentralized by virtue of the fact that Kraken is out of the business of doing it. Just a comment from Bitcoin motorists writing in from YouTube saying, I just buy Bitcoin, I don't stake. Should I care about any of this? And I mean, I guess the answer is if you don't own your, if you don't own your keys or you don't have your keys, you should be worried about it, regardless of whether or not you're staking, right? I think you should care that the SEC is harassing the exchanges. A lot of people, you know, that may think that they're totally insulated from that. They still have some reliance on an exchange as an on and off ramp. We do need these touchpoints with banks and with the, you know, traditional financial system, we'll always need that. We don't have a perfectly peer-to-peer economy of Bitcoin that I'm not even sure that's really possible. So yeah, I mean, I'm concerned that the SEC is going after, the Kraken in particular has been one of the most reputable and successful exchanges. And, you know, I'd be concerned if they're going after Coinbase too. Even if you don't agree with everything Coinbase does or everything Kraken does, we still do need these credible intermediaries. You said that you do have some sympathy for the SEC in this particular Kraken case. And you also mentioned earlier that you, you know, part of the red flags with FTX for you was that they were offshore. Presumably that the red flag was that they're not complying with US regulations. So, you know, what are the realms that you see regulation being appropriate for the crypto space and where should they just, the government just be, you know, completely hands off? Yeah, great question. I mean, I don't think that a no regulation world is the best because clearly the crypto industry has failed to self-regulate. I think you could ask exchanges to do proof reserve. That's similar in some ways to having oversight over, I would say it's actually more of a substitute for a really aggressive top-down regulatory stance. I think asking exchanges to segregate client and operating capital in an accounting and a literal sense is completely the right way. If you look at NYDFS, they had guidance recently that they published asking for that segregation, asking a privileged client deposits in the case of liquidation. I totally agree with that. You know, it doesn't make sense for clients of exchanges to be really subordinate junior creditors in the case of bankruptcy. You should have a trust style product in the name of the client such that they're insulated in the case of bankruptcy or something like that. So, you know, those are really common sense things that I think should exist. Aside from that, I think, you know, well, other domains where regulation is warranted would be kind of a securities law framework where we were able to bring tokens into concert with securities law through some disclosure framework that was fit for purpose. The way we have a disclosure framework for equities, the things you need to disclose are different. So we will need a revised framework. However, the administration has not implied anything or suggested that they might want to do that. So that's more of sort of a wish list item, but I don't think it'll happen anytime soon. Do you... Oh, go ahead, Zach. Well, just on the proof of reserve question, is the government necessary in order to implement that sort of thing or are there ways to... Is it possible to validate that some other way? It's right now it's being done on a purely discretionary bottom-up basis by a number of exchanges, including Binance. They just released a new implementation of their POR and it's really client-facing. So it allows the clients to have the confidence that the exchanges have their coins. And you don't need the government to do it. You don't even need an audit firm necessarily to oversee the process. But because not all exchanges do it, I think it's warranted that the state would actually ask them to. I know I'll be called a status for saying that, but it's actually really proactive and positive measure. Do you... Are there places either in Congress or among regulatory agencies that are pushing in the right direction or is it just overwhelmingly... Over the past year, there have been so many negative events that it's virtually impossible to change the kind of direction of the regulatory push right now. Well, Hester Purcell, your guest that was on just now, obviously does an amazing job as one of the minority members of the SEC. I think she offers a voice of reason there, an alternative voice. In Congress, the Republican controlled house is where a lot of crypto folks are looking to in terms of defending against some of what I perceive as an unconstitutional overreach, especially through the bank regulators to redline the crypto space. So representative Emmer who's now the whip or McHenry who's the chairman of the financial services committee, many of us in the crypto space are hoping that they might be galvanized into action here. In the Senate, there's a few key members as well, but it's very unclear what the Senate's stance is on crypto. And then the courts honestly, I believe that in many cases, the facts are on our side, whether it's securities law, whether it's stable coins, being securities or not, which is now apparently an open question. I think the courts would generally take sensible common sense views. And so a lot of this will play out actually, I think eventually we'll have a series of marquee Supreme Court decisions. And the problem is that that just takes too long. And so if you're predicating your business on something where there's a regulatory prohibition, you can't wait for a favorable court case to follow your way. Are there states that, obviously, certain states are better than others in terms of regulating crypto and its operations. What are the worst states right now and what are the best? Historically, New York's been the worst because they had the bit license, which was a very restrictive, basically charter you needed to obtain a new business there. I think- And there's no indication. I mean, like New York state and New York city should be the world capital of fucking Bitcoin, but there's no indication that anybody's rethinking that, right? They've gotten better. Their newer guidance is good and the bit license isn't as hard to get as it was before. It was kind of a shake down in my opinion before and the barred entry has lowered. So I'm sort of less upset at them these days. The best state by far in my opinion is Texas. Texas legislature has three current bills regarding crypto. I think two of them pertain to mining and one of them, as I mentioned, pertains to exchange credibility. So, you know, what's interesting is New York is the center of gravity for crypto in the US, even though- Despite a bad regulatory regime. What are they doing with Bitcoin mining at this point? Is there any movement on their attempts to kind of ban proof of work? Kathy Hock will sign the, after sitting on it, we thought she was gonna desk veto prior to the election. After the election, I guess she didn't need that anymore. So she signed their moratorium on vertically integrated Bitcoin mines, which is not, that doesn't cover all of them in New York, but it's the start and I'm sure eventually they'll ban it outright. So yeah, on the state by state basis, that's an interesting phenomenon. I think you'll see quite a few blue states ban it, Bitcoin mining that is, and red states encourage it the way Texas is, for instance. How do you, when you think about players in the Bitcoin or crypto space calling for regulation, how do you decipher or differentiate who are the people that are actually trying to improve things and who are just the rent seekers? Because this was like an issue with, this was an issue with Sam Bankman Freed. I mean, it was possibly a major part of his downfall is we pulled up this tweet when we were talking about him before from the CEO of Binance, who ultimately was the person who blew the whistle that started the cascade and the downfall. And he said, we won't support people who lobby against other industry players behind their backs. And there's this deep suspicion and I think very warranted with the crypto community of any financial regulation whatsoever, but you are saying that there is some prudent regulation. Do you have, I don't know, rule of thumb or are there red flags that you're on the lookout for when you hear people in the crypto space talking about regulation? Yeah, I mean, the first thing is qui bono, right? I mean, look at what SVTX was lobbying for. It was basically to allow themselves to get a regulatory blessing to come on shore and operate a spot and derivatives market under the US ages. And they were lobbying against DeFi. So it was very clear that they were not good actors in that process. And I and many others are immensely relieved that their efforts were stymied. I think we were actually very close to them achieving that kind of regulatory capture in DC, especially with their weird proximity to the SEC, which I think still needs to be investigated and their IEX acquisition. So it was very clear in that case that they were not operating in good faith. Generally, the rule of thumb would be, are you supporting the core crypto ideological principles which have to do with allowing self-custody, transactions that are occurring outside the ambit of the bank system, right? So that's a very core thing. Do you support financial privacy, self-determination, basically freedom to transact? Do you support cash, the properties of cash, right? In a digital context, that's what stablecoins are. That's cash that settles finally, instantly with no settlement risk whatsoever. And we don't have to ask permission transact. Do you support non-custodial, more complex transactions like DeFi? To the extent you're doing that, I think it's fine to engage with regulators in the state. But if you are trying to improve your own standing in the industry at the expense of those principles and those ideologies, then that's when there's a problem. I wonder if, yeah, I mean, we're getting near the end of our time, so this is kind of like my last question for Nick and then I'll let you wrap up with him, Nick, is like, what is that, this idea of digital cash being one of the fundamental propositions of cryptocurrency, what is for people who might be watching this who are curious about cryptocurrency, but they're not steeped in it like you are, could you just make the big picture case for why you think this industry is thriving and or why it's grown so much in a relatively short span and what is the, like what's the point of it? Why is the idea of digital cash good and necessary and why is decentralized finance a good thing? Well, there's two main things that, two main trends basically that crypto people, it's a broad tent, are fighting against or trying to restore. One is there's a sound money contingent. So basically believing that we should reinstitute a monetary system that has less discretion. And so that's a rebellion against the waves of credit that are created with basically discretionary monetary policy. That's a long discussion, of course. So that's a big part of it. The second is a push to restore transactional privacy that has been eroded since really the 70s since finance was digitized. That's, and since intermediaries have been more empowered and there have been a specific number of legal cases, especially the third party doctrine that meant that financial privacy has been effectively eliminated in the US and a lot of us identify this is a very dangerous trend and they're trying to push back at it. So DeFi and stablecoins and of course, Bitcoin are attempts to restore something which we once had, which was financial autonomy and the freedom to transact without asking the state for permission. Final question, what's the state of concern that you have over central bank digital currencies? And are they moving forward in a way? Obviously governments are gonna try and confuse people to say, oh, this is digital cash. Obviously it's a very distinct alternative to actual anonymous or mostly anonymous cash. What's going on with central bank digital currency formation that's wearing you the most right now? In the US, I'm not too worried about it, thankfully. The Fed has actually pumped the brakes on it a little bit. I think people are, they recognize that it wouldn't make sense to disintermediate the bank sector and just install the Federal Reserve as a retail facing institution. So not too worried here, overseas in countries with fewer protections for individuals, I expect it will be implemented. Obviously we see implementations in China but thankfully I think the US is wide awake to the risks and the issues there. What about the EU? Because I've read a couple of reports over the past few weeks that the EU is seriously thinking about it. Do you think that's a place where kind of like the US where people will kind of back away from it for a variety of reasons? I think it's more likely to happen in the EU. Certainly than here. But I mean, is it the type of thing where China can kind of force a central bank digital currency whereas if you're living in a more democratic country or one with a longer tradition of some level of nationalism or autonomy, it might be more difficult. Yes, absolutely. But in the EU, they're already going cashless in many countries. There's less of a tradition of cash. If you look at some of the Nordics almost entirely cashless. And they've just passed a sweeping framework covering crypto which basically bans stablecoins and they see stablecoins as a competitive threat to CBDC. So that should be the canary in the coal mine where you see stablecoins banned. That's when there's a desired institute of CBDC. That is kind of amazing if it happens in Europe too because the Euro is like a relatively new phenomenon when you think about monetary history and how hard it was to get that implemented after centuries of individualized or nationalized currencies. Yeah, so it's just a fundamentally more collectivist place and a more fertile breeding ground for ideas like CBDCs. Well, we are going to end it there. We have been talking with Nick Carter. Do check it, follow him on Twitter at NickNIC underscore Carter and read his peace operation chokepoint 2.0 is underway and crypto is in its crosshairs at PirateWires. Nick, where else should people follow you? All my work is in my personal website, nickarter.info, so you can find everything there. Thank you so much. Thanks, Nick. Thanks guys. And Zach, we will, I guess we're calling it a moment right now too. So we're, as Joe Biden would say, we're putting a lid on this and we will see you next week assuming we wake up in time, unlike Joe Biden. Thanks everyone.