Regulation in Crypto

Mark:

Welcome to WTF crypto, where we dive into the crypto universe and peel back the layers of the onion to understand what's really going on and how it affects your crypto investing strategy and portfolio. I'm your host, Mark Lori. Today, we're talking about regulators. What are they doing? How is the crypto community engaging with them? And what lessons can we draw from other industries who have engaged with regulators successfully and unsuccessfully in the past? I'm joined by Richard Gorelick today. Hi Richard. Thanks for joining us.

Richard:

Thanks, Mark. Good to be here.

Mark:

Richard, I heard a crazy story recently about a conference in New York, Messari Mainnet, where a bunch of subpoenas were handed out in the conference. Is that true?

Richard:

I wasn't there, but I heard the same story.

Mark:

Okay. I heard that there were agents waiting at the top of an elevator. And when participants from outside the US came up the elevator, they were met with a subpoena. That's quite dramatic. I think that belongs in an episode of CSI or some TV show.

Richard:

That's right. And regulators now are getting more active in the space. The last few years there were a lot of speeches and a trickle of enforcement actions. A lot of people expect that with new leadership at the SEC and the CFTC and with a growing focus on crypto, that we will see more and more of these enforcement actions. And this might just be the beginning.

Mark:

Interesting. Okay. A lot of drama to come. Now this is fun to watch, but how relevant is it to the normal person? I mean, my brother isn't going to get served with subpoena at a crypto conference, because he's not going to a crypto conference, and he's not really building anything in crypto. Why should everyday people be paying attention?

Richard:

Sure, absolutely. There's been this rumor, this myth that the crypto markets are unregulated or that they're the wild west. The SEC Commissioner, Hester Peirce, recently gave a great speech about the wild west of crypto and mythology that's always around that. The truth of the matter is that there are lots of rules that apply. That some of these rules are very old. They've been around for many decades. They may or may not use the language of cryptocurrencies and DeFi, but they very much apply. And so most operators in this space have had to figure out how do they operate with a bunch of rules that may not seem to fit exactly, but that likely do in some form or fashion. And so from a product development standpoint, this is not usually the kind of issue that can be retrofitted after the fact. A lot of product development needs to take in regulatory issues, compliance issues and legal issues from the very beginning.

Mark:

And that doesn't just affect products and it doesn't just affect users. It's also a young enough ecosystem. It seems to me that the products that exist are really affecting the market. And so how public policy allows people to engage with the markets, whether they can trade derivatives or securities or commodities that are crypto assets, and whether they can use various products that are built, that can actually affect the crypto markets as a whole. This is something that if you're engaging with crypto today, you actually really should be paying attention to. In other words, public policy and how it plays out can affect your portfolio.

Richard:

Absolutely. We see rumors of regulatory crackdowns, or the approval of an ETF, for example, that happened earlier this week, move markets in significant ways. And so the regulatory landscape is critical for investors.

Mark:

So what experience have you had in this space that equips you to share your knowledge and thoughts with us today?

Richard:

Well, thank you, Mark. So I started my career as a lawyer. I spent a couple years at a big firm in New York and then went and got involved with technology businesses initially as a lawyer for a early internet company in the late 90s. After that business was sold to eBay and to Google, but a little too late for anyone to make a lot of money. I took a little time off and figured out what I wanted to do, and ended up co-founding a trading firm here in Austin, Texas, that was one of the original automated high frequency trading firms. We didn't use the term high frequency trading. We didn't even hear that term for several years, but there were a number of firms like ours that sprung up in the early 2000s that had realized that regulation had changed, that technology had changed and that all of this was enabling a new way for technologists and data scientists to engage with the market.

Richard:

So we started doing that in 2001, we gradually expanded, we were able to do this in relative quiet without a lot of public scrutiny for the first few years, but then the financial crisis came around. And it quickly became apparent that the public was interested in what was going on with markets. We didn't know exactly what that was going to mean or how things were going to shake out, but it came clear that people were waking up to the realization that markets weren't what they thought it was, that people weren't... As much as they had before that trading wasn't going on by people and crazy bright colored shirts, yelling at each other and using hand signals across trading floors. This was not CNBC's studio set. This was not the old trading places movie with a frozen concentrated orange juice. It was something very different. It was a bunch of nerdy technologists in front of their computers, writing code, uploading their software to data centers where the exchanges were operating their computers and providing a very different electronic experience for how trading worked.

Mark:

So, I read the book Flash Boys, I think it's called Flash Boys. This sounds like what that dealt with, is that correct?

Richard:

Sure. Now I have always been a big Michael Lewis fan. I've read a lot of his books and really enjoyed them. This is one book that I happen to take some exception too. This one, while it was very entertaining and while he is a great storyteller, I think a lot of that book belonged more in the fiction section than in the non-fiction section where a lot of the books worked. The main flaw in that book, I think to me, was that Lewis looked at everything that was going on with the electronification of markets, and just drew very different, flawed and dramatic conclusions about those and sort of look for mischief in every possible court.

Mark:

He's a storyteller.

Richard:

He's a great storyteller. We had expected a very different story though. We had thought we were not the villains in the story. We thought we were the heroes. We looked at Moneyball. I remember reading Moneyball while we were early on in the days of the business. And this is where a bunch of outsider computery, nerdy people came in, changed the way that baseball was played and ended up being the heroes of that story. We thought we were like that. We were a bunch of scrappy upstarts. We were competing with the big banks and the entrenched intermediaries. We were using computers. We were using science. We were giving the public a much better deal than they'd ever had.

Mark:

Sounds a little bit like crypto today.

Richard:

It does sound a little bit like crypto today. I think you're maybe teasing where this conversation's going to go in a little bit. But we thought that we were the heroes of the Michael Lewis, high frequency trading story, who came in, used science and technology to revolutionize the markets and in the process, give investors a great deal, better prices than they'd ever seen before. More transparency, less shenanigans. And turns out Michael Lewis decided to take a different angle with that story.

Mark:

I want to add on to what Richard shared by mentioning that he's an extremely experienced operator and thought leader in the space. He is the chairman of the advisory board to the CFTC, And was the CEO of RGM Advisors for many years, in addition to having experience as a lawyer, having his [inaudible 00:09:15] from Georgetown, and his undergrad from University of Pennsylvania. So let's dive right in, what are regulators doing today? Let's just level set on what they're doing now.

Richard:

So when we sold RGM to DRW in late 2017, I joined DRW and took on this role of head of market structure, where I was theoretically responsible for being the in-house expert in all 30 something markets on which we traded and the structures of those markets, as well as regulatory and public policy engagement with regard to those markets and industry relations with regard to those markets. As it turned out for most of the time that I was there, regulators primarily wanted to talk about crypto. It's, frankly, one of the most fascinating things that's going on in market structure today. And it's one of these areas that doesn't fit neatly into boxes.

Richard:

So the issues that we're arguing about today as it relates to equities market structure are really refinements of a market that's very mature and working very well. Similarly with the futures market or even the over the counter derivatives markets, foreign exchange markets. These markets have been around for a while. They've matured. Some people have suggestions for how they could be better. Some people have complaints about things that they don't like, but in general, they're pretty mature markets. Crypto is a whole new animal, and that's where there's just a lot of interest. Regulators want to talk about it. The public wants to talk about it. And lots of new businesses and creators and investors are trying to figure out what is the regulation today, and what should the public policy be going forward to help get the best out of all of these developments.

Mark:

I see. So they're not just trying to catch up. They are interested and paying attention.

Richard:

They've been interested and paying attention for a lot longer than some people give them credit for. So I've been on the CFTC's technology advisory committee since about 2010. I believe we started talking about Bitcoin in 2013 in public hearings and a public forum. And so the regulators have been really paying attention to these issues and these developments for quite some time. I would say early on, it was more of a curiosity than anything else. These markets were relatively small. Regulators were interested in paying attention and understanding what was going on, but not necessarily rewriting laws that have served more or less well for many decades.

Mark:

But this is interesting because it seems to me that there is a lot of commentary in crypto that complains about lack of clarity, lack of guidance, lack of input from regulators. How do I reconcile that with the idea that regulators have been paying attention and are grappling with this very actively?

Richard:

Right. I think the issue is that these problems do not pose easy answers. And so I think we've been, for the most part, well served by regulators taking their time here, learning the issues, becoming familiar, watching how things develop. Now, occasionally that means getting caught flat footed. I think the SEC probably wishes that they had been paying a little bit closer attention to the whole ICO boom, back in 2017, maybe were a little bit more prepared for that. Sometimes it means a lot of frustration for market participants. In that we all wish we had really clear rules. We understood exactly how things were going to play out and could build our businesses with that in mind. That said, when I started going to DC talking about cryptocurrencies and DeFi and public policy around these, I found a lot of people had been thinking about these issues for a while, that they were fairly well inform, occasionally there's misunderstandings, this stuff is complicated, but I didn't run into a lot of people who had never heard of Bitcoin.

Mark:

Well, that's great to hear, and reassuring. And to be fair, I mean, it's true these are hard issues, right? So what do you feel like the hardest are and why are they so hard to grapple with?

Richard:

There's a few things. We have some US specific issues, which have been very challenging and have taken a lot of attention. Particularly we have these very tricky jurisdictional issues about who the relevant regulators are for particular activities. There's been sort of a well discussed debate over what is the nature of cryptocurrencies? Are they, for the most part, securities or are they commodities? And that's more than just an academic interesting discussion. What it really dictates is which regulators and which rule sets apply. If they're securities they're governed by the SEC, and if they are commodities, they are, for the most part, regulated by the CFTC. And even more so directly regulated by the CFTC if they're commodity derivatives. So there's lots of these jurisdictional questions that have still yet to be answered particularly thoroughly to many people's satisfaction. We also have the issue where you have 50 states and a few odds and ends territories that also have their own rules that apply. And so a lot of the debate in the last few years is figuring out who the relevant regulators are and which rules apply.

Mark:

Out of curiosity, how much of that debate is on the merits. And how much of that debate do you think is happening on the political battlefield, around who gets to have power over various decisions?

Richard:

That's a great question. I think that there is an extent to which this is political. I have heard that there've always been the sort of jurisdictional battles between the SEC and the CFTC going back many years about who gets to regulate what. I have heard that that's not just an issue from the regulators, but also from the oversight committees in Congress and in the Senate that oversee each of these regulators. The CFTC is overseen by the agriculture committees while the SEC is generally overseen by the financial services or banking committees. And so these are jurisdictional issues that have been battled out for many years.

Richard:

But I think there's also some real substantive concerns that come in here. The question becomes who is responsible for, for example, investor protection? And there's just different kinds of investor protection inherent in whether something is a security or a commodity, for example, in a security, in the traditional security sense, there's usually an issuer of a security. And that issuer is responsible for disclosure and for compliance with certain rules around their issuance of their securities. If I am apple stock. If I'm the issuer of that stock, I need to disclose lots of information to the public about how I'm operating my business. And it's very clear that an issuer focused regulatory environment makes sense for security. On the other hand, if I am a bar of gold or a barrel of oil, there is no real issuer involved here.

Richard:

So the types of regulatory issues, the types of disclosure issues are quite a bit different. At base, it comes down to a few legitimate concerns around investor protection, anti fraud, making sure that people have all the information they need to make good decisions about how to invest their money. But the way that you get there is quite a bit different, whether something is a traditional security with an issuer involved, or whether it's a commodity, which is something where the market is, in crypto, terms that people can understand a lot more decentralized.

Mark:

I see. And it sounds like a lot of these various agencies and regulators, they have a mission to protect investors in certain situations. And the complex reality of a lot of these new instruments in crypto is that they might span multiple traditional definitions of instruments. They might have elements that are similar to each. And then everyone's trying to pursue their mission in a very genuine manner and yet you still end up with a jurisdictional tension.

Richard:

Exactly. There's been a lot of digital inks spilled over this in the last several years. There was a question about, what is Bitcoin? Is it a commodity or is it a security? I think the wind tends to be blowing. Most people seem to think, and the members of the SEC have given certain speeches that strongly suggest that Bitcoin is a commodity. And as a result, the CFTC has taken primary responsibility for regulating commodity derivatives, futures contracts and the like based on Bitcoin. Similar debates have occurred with respect to Ethereum. There's, I think a good credible argument that at the time of the original crowd sale of Ethereum, that Ethereum may have been in fact a security, but there's some guidance from a speech at the SEC in recent years that suggest that no, it's probably at this point, decentralized enough to be a commodity. And therefore the CFTC is again, approved derivatives based on Ethereum. Beyond that it starts to get pretty murky. And I should probably give my ordinary disclaimer that I'm no longer a lawyer. I'm not your lawyer. I'm not anybody's lawyer. Get your own legal advice.

Mark:

And to piggyback on that, this is not financial advice, and neither of us are financial advisors.

Richard:

Absolutely. We're just a couple of guys talking.

Mark:

Talking and trying to understand what's actually going on here.

Richard:

Exactly.

Mark:

So let's bring it back. What do you think the hardest parts about regulating crypto are from the perspective of these regulators? Why do they find it difficult to come off with answers?

Richard:

Well, I think most traditional financial regulation has been based on this idea of regulating the financial intermediaries. So you regulate broker dealers, you require them to register. You require them to meet all sorts of compliance requirements. You require that they do certain things, and if something goes wrong, if people don't live up to their standards, the broker's on the hook. You have exchange operators, you have custodians across multiple asset classes that all rely on their being these central intermediaries, a neck to ring, if something goes long, so to speak. In DeFi, there may not be any intermediaries, or they may not be these traditional forms of intermediaries.

Mark:

And DeFi is Decentralized Finance.

Richard:

Absolutely. And I tend to use it in the broad sense. I'm not just talking about smart contract-based platforms, I'm including Bitcoin. And all decentralized financial instruments and technologies. It's sort of this broad definition of DeFi. And when you don't necessarily have central intermediaries, it just gets hard sometimes to apply these traditional notions of how do you regulate these markets.

Mark:

That makes a lot of sense, square peg round hole, or round peg square hole.

Richard:

Right. I think whatever it is, it's some kind of peg in a different kind of hole. But the issue is, is that some operators in the space have seen that as an excuse to just go ahead and pretend that the space is not regulated. And I think that that is ill-advised. I think that generally speaking, there are lots of rules that apply, and different people will have different ideas about how clear the application of those rules is to a particular set of facts and circumstances. It's the old lawyer thing. It depends. So there are rules, this is a regulated space, but exactly how they apply really depends on what's going on. And so I wouldn't allow this uncertainty to lead to the conclusion that there are in fact no rules.

Mark:

So does that mean that you think that in the absence of a clear intermediary, the developer of project is liable?

Richard:

So this is a great question. And the CFTC's technology advisory committee listened to a great presentation back in December from some of the members of the virtual currency subcommittee. So again, you get committees and subcommittees and advisors and advisory, and it gets all very bureaucratic sounding. But this was a great presentation. And there was a real thorough discussion of DeFi and how regulators should think about it. And one of the ideas that sometimes gets kicked around is that developers might be the new central intermediaries in some of these DeFi platforms. I think that's challenging from a public policy perspective and generally a bad idea. And I think for the most part, regulators are coming to that conclusion as well. So I think it's important to consider that just software code can be used for good or bad purposes. And generally speaking, someone merely writing software doesn't really control how that code is used. And so therefore holding that developer responsible for the way that someone else chooses to use their tools is initially problematic.

Mark:

I see. It would be like holding a medical device company liable for a doctor misusing the product.

Richard:

Or maybe a hardware man, or someone who made a hammer responsible if someone decided to hit their neighbor with their hammer, instead of hitting a nail and doing normal construction work. These things are tools. They can be used for good. They can be used for bad. It would be hard to blame the developers for someone else taking a technology that on its face is neutral and deciding to use it for illegal purposes. So that's one of the problems with developer liability.

Richard:

The other thing is it may just flat out be unconstitutional. For the most part, software development is protected by the first amendment. And so we have free speech. Most of the time the courts have found that developing software is an expression of speech. And so it's hard if all that someone is doing is developing software, to hold them legally responsible as an intermediary for the most part. Most of the regulatory cases that have come down in this area seem to suggest that it's going to require something more than just writing software, that you need to either maintain the interface to the smart contract exclusively, or maintain centralized control over some aspect of the operations of the protocol or the platform, have some plus factors in addition to writing the code to really get in the realm of liability.

Mark:

So there's this clear tension where it's unclear who the responsible party is. It's probably a bad idea to hold the developer responsible, and yet regulators have a mission to try to ensure safe and fair functioning of markets. I guess we'll see how that plays out. They could get it right. They could get it wrong. And it seems to me that as an industry and a community, it's a good idea for crypto to engage with them, to help whatever they do come up with make sense, and accomplish what I hope are shared goals about economic development, technological development, growth, and prosperity for all of us.

Richard:

I think different operators in the space, different creators, different investors have taken different approaches. I think there's a continuum from on the one side, sticking your head in the sand and believing that none of the rules apply. There's the whole west coast mentality of moving fast and breaking things. Sometimes that works great, generally, not in heavily regulated markets. That would usually not be my recommendation. You need to be aware of what the rules are, and what the minds are, where they may be located in the field that you're walking out into. If you are NASA, or if you're sending people to space, these are very big, high risk activities that require lots of thought.

Mark:

So if that's not the right approach, what is, though I think there is a large segment of crypto which is taking that approach. What are some other approaches that the crypto community is taking today?

Richard:

At a bare minimum, creators in this space should work closely with their lawyers, work closely with regulatory experts, to understand the rules that might apply to them and their activities. It's essential to figure out what rules you think apply and why, and to understand various risks of the different ways you could operate your business. I think that's the baseline. You make good decisions, you document why you think what you're doing makes sense, and you move forward.

Richard:

I think if you have the opportunity, it makes sense to go a little step beyond that. If you have the opportunity, you've done the work, you've figured things out. I think it's important to develop good policy ideas and suggestions, and to show up in Washington DC or wherever the regulators are. Talk to them, talk to policymakers, explain what you're doing, why you think it's a good thing. Explain what challenges are out there, and how you're handling those challenges. There's a real desire and a thirst for knowledge among the regulators. And I think if they're well informed, if they understand what's going on, they're much more likely to reach good constructive decisions as they go forward and figure out how to protect the legitimate interest that they're charged with protecting.

Mark:

Is that happening today? Who is going and engaging the regulators from the crypto community? Or are we just not? Is it just engaging vacuum?

Richard:

It is happening. There are good organizations that have popped up in the last several years that are taking a very professional and thoughtful approach to policy development in this space. And they've been around the block a few times. Coin Center was one of the first organizations in this space that I got to know as I was getting up to speed on crypto policy, so to speak. They focus on policy issues impacting the technology around these cryptocurrency platforms. There's a group called the Blockchain Association, of which I was a founding board member, that's doing a good job of representing the interests of a number of the market participants in this space, in DC and elsewhere.

Richard:

I think these groups and others, I don't mean to leave anybody out, but these are the groups that I've been most familiar with, are doing a good job of helping people in this space to engage constructively with people in DC. I think some of the biggest firms in the space like Coinbase, for sure, and others have hired their own public policy experts, and have really engaged in their own name. But I think for most of the firms out there from the small, medium and large, but not giant firms yet, the best approach is to team up with others through some of these organizations, and make sure that your voices are being heard.

Mark:

Okay. So you've been through this before. This is not your first rodeo. I'd love to understand how that happened, and what worked and didn't work there, and how you think those lessons can inform crypto as it goes through the same growing pains.

Richard:

Sure. So early on in my process of learning about public policy advocacy for financial technology, someone told me that, Hey, if you're not at the table, you're on the menu. And that's something that stuck with me all along. I knew that we were very clearly not at the table, that the rules were going to be rewritten, that the big banks were very well-represented in Washington DC, the exchanges and the exchange groups and the exchange operators were very well represented in DC. And we were a bunch of computer guys all around the country without customers. Because, remember we were for the most part, proprietary trading firms, meaning we didn't have any customers. So we had very little experience talking to the public about our businesses. So we knew we had to get a seat at the table.

Mark:

That sounds like a very complex environment where you're not just engaging with regulators who are trying to engage with you. You're trying to engage, at the time you were trying to engage with regulators when there were a lot of other lobbies and interests and communities who were also lobbying with their own interests in mind. Do you think crypto is similar or different to that context? Are there a lot of other interest groups that are all trying to push regulators to grapple with crypto in a specific way? Or is it a little more one-to-one?

Richard:

I think there clearly are lots of people with different interests around crypto that are trying to get the ear of regulators and policymakers. A lot of the traditional financial market players may be a little bit skeptical when it comes to public policy, they don't want to have to compete with one hand behind their back. So if they're seeing lots of people coming in, trying to disintermediate them in ways that they think are not fair, because the crypto market participants don't have the same rules apply to them. They're probably more than whispering in the ears of the regulators and the policymakers.

Mark:

I see. So if you're a bank and you're providing a service that can also be provided in a decentralized way in the blockchain, you have to adhere to certain regulations and standards that create costs and complexities as a centralized bank actor. But the decentralized alternative that you're competing against either doesn't or has a different set of requirements. And that actually presents a competitive... They feel the playing field might not be level.

Richard:

Right. So the cynical view would be that they're just probably in there arguing to protect their narrow interests and their big pay days. I take a more generous interpretation, which is that they will, wherever possible, argue for a level playing field. And that, to the extent that there are other participants who are getting regulatory subsidies, they will likely be in there arguing to end those subsidies in one way or another.

Mark:

I see. Okay. Super interesting. But I took you away from what was a very good story.

Richard:

Right. So I think one of the first things that we thought about was getting a seat at the table. We didn't want to be on the menu. We wanted to be there when decisions were being made, we wanted to be in the room where it happened, to quote someone once.

Mark:

I've heard that [crosstalk 00:35:19].

Richard:

I've heard that somewhere. I'm not quite sure where that's coming from. Anyhow, this was a central focus of our efforts throughout this time period. And I think the crypto market participants would be well-advised to think about things in a similar way. It's important to take your time and build relationships with people in policy circles. I think if you show up for the first time, when there's a hot issue and you have a major new ask, people aren't going to take you seriously. You have to take your time, build relationships and build your credibility. So we spent a lot of time going around to anyone who would listen to us and explain what we did, how we did it, why we thought it was good for the markets, why some of the mythology around high-frequency trading or market structure or flash boys or whatever it was, wasn't our lived reality.

Richard:

And we started slowly to build credibility and familiarity. I think it was good. We started doing that 2009ish. So by 2010, May 6th of 2010, there was a big market episode. The flash crash that some of the listeners may have heard of, in which the stock and related futures markets took a dramatic drop for about 15 minutes and then mostly recovered in the next 15 minutes, but it really shook people up. I think another thing I learned as I started to make the rounds was that nobody really cared about the success of my business. That was not a legitimate public policy concern for the most part. It was really important for people to understand common goods about how things were working, what were the benefits to the masses, to voters, to the general public. So we really had to talk about important issues like jobs, economic inclusion, low cost for investors, ability for people to save for retirement. Things that really made a big difference to most people in the country. A competitiveness.

Richard:

And I think that this presents real important lessons for crypto public policy advocacy today. No one cares in DC, for the most part, about the price of Bitcoin or the price of whatever coin or token it is that you really care a lot about. If you're going to DC, you need to have a better argument than that. So I think arguments about jobs, about international competitiveness, about economic inclusion, about privacy, about American leadership. These are the types of issues that if properly presented with real data and evidence, have a chance of moving the dial.

Mark:

That sounds like a good thing. I mean, I'm glad those are the conversations that are happening instead of a bunch of special interest groups. I mean, that sounds like DC works and is prioritizing the right thing. It's hardening.

Richard:

Yeah. I'm not sure that I'd go that far. I haven't been in every back room, smoke-filled back room. Sure. I'm open to the possibility that there's some shady stuff that goes on in DC. That said, my experience has been very different. For the most part, I've been dealing with real smart people who want to talk about policy, and legitimate public policy. And that's the level at which I've chosen to engage. And I think for the most part, that's the best chance of being effective in the short medium and long-term.

Mark:

Out of curiosity. So you learned that it's not productive to talk about your business success in the halls of public policy. Are there any other little lessons that you learned along the way that you think crypto should keep in mind as it engages?

Richard:

Sure. And so just to be clear, I wouldn't play hide the ball with your business interests. I think everyone in DC assumes that you're talking your book.

Mark:

Sure.

Richard:

And so that's sort of the backdrop of every presentation. People will try and figure out no matter how good whatever you're saying sounds, why are you saying this? And how does it help you? So people really understand that angle. And so I would think that it's very important to, despite that, be honest about what your business interests are as much as possible, and to try and be objective and to recognize it and acknowledge where you may benefit from certain things and where you may be harmed by certain things. I don't think it's helpful to hide the ball. Again, credibility-

Mark:

It's not about obfuscation. It's just about focus.

Richard:

Exactly. Credibility is going to be your biggest asset when you show up and try and get a seat at the big boy public policy community table. So credibility is important. So be honest and as much as possible, and objective and point out where your interests lie. To that end, it's critical to bring data. What I have found is that within regulatory and public policy circles, people are very hungry to understand exactly what's going on. And if you can show up with real data that helps people to understand things better. You will immediately be invited back.

Richard:

I started my public policy engagement relatively early on, on high-frequency trading and market structure and the equities markets by putting out a research paper with some of my colleagues. We looked at what had happened to market quality. We tried to define what is market quality and explain how people benefit from a high quality market and how they're hurt by a low quality market. And we were able to present lots of information that had demonstrated that market quality had improved as markets have become increasingly electronic and technological. I think that was counterintuitive to some people who were expecting that somehow these computers were preying on innocent, mom and pap investors. But so we showed up with real data and evidence that showed what was going on. And we kept getting invited back with more and similar data. Some of the data was hard to get.

Richard:

So we urged some of the exchanges at the time, like Nasdaq, to release a data set of information that would enable academic researchers to conduct studies and tell the world what they were seeing. So I think the more that people don't like what's going on, or they want to urge particular policy outcomes. If you can show up with data and encourage transparency, invite academics who already have their own credibility into the discussion, it goes a long way.

Richard:

One of my favorite stories about this is there was a congressional staffer who was a market structure economist, and I'm not going to mention names, but I came in and spoke to him. And pretty soon he started calling me with questions about footnotes and academic papers. And I took the time and I engaged with him on these things. We had a real good back and forth. Invited me back next time I was in DC. Eventually he became an SEC commissioner.

Richard:

And over the years, we were able to really engage at a level of a discussion about data and analysis that was very comfortable for me as a data person. And I think when we've got so many smart technologists and data people in crypto, this will be a very good way to engage with public policy. Now it needs to be done at a level that makes sense to the general public and to people. And that's hard. So we will have to, as a community, figure out how to translate from some of the technological terms and the very specialized economic data science terms that we use to where that really brings it home to the more general public, but that can be done.

Mark:

Data is very widely accessible in crypto because the blockchain is a public ledger, and publicly visible. At the same time, there was a recent scare when the infrastructure bill had a component, which was going to apply really just some nonsensical language to the crypto industry. And it caused an uproar. And the ask from a lot of the advocacy groups within the crypto ecosystem was, call your Senator. And that's a good thing to do. And I did it. But it feels like there's a lot of talent that can do a lot more. Is there any advice you have for people who can grapple with this data to help and to provide backup and research and data in a way that's actually useful to this conversation in the rooms and at the levels that it's being had.

Richard:

What's really important is to start doing this studies, doing the analysis and putting the data out there and having the engagement and the discussions with other members of the community. I think that will stress test some of the arguments, stress test the data, make sure that things are very credible. And we'll also prepare all of our peers in their own conversations with regulators and policy makers to present as informed of you as possible. I think people often revert to talking about their feelings and talking about how they feel about the markets, or how a particular technology or an event or an outcome made them feel. And well, that actually may be very good for storytelling and for narratives and for generalizing the research in a way that communicates well with policy makers and the general public. I think we need to ground that with real good empirical research. And I see a lot of that in crypto. Unfortunately I see a lot of it in very technical ways that are not particularly accessible.

Richard:

And so I would urge people first to do the work, first to figure out what's going on, first to figure out what they think is important, but then really spend the time about how to make the messaging accessible. I think some of the groups in DC, the advocacy organizations are doing a pretty good job of that at the moment, but I wouldn't just throw a big, giant database full of numbers and technical terms at a regulatory commissioner or a congressional staffer and say, "See." Really, you need to think about the narrative around that data as well.

Mark:

Stories are important. And data is important in the context of those stories.

Richard:

Yep. Just make sure that what you're saying makes sense, and it is credible. And I think first reaction, first passes of data often, as we know, end up to not be the right long-term take. So I think we start kicking around data and analysis among the community, putting out blog posts and posting results in various locations. I think that will encourage a real good dialogue that will surface up to meaningful, accurate narratives.

Richard:

Now I'd also say, the whole calling your Senator thing is really interesting to me. I think there's an opportunity with cryptocurrencies to do something that we never really had the opportunity to do with the equity market structure stuff, which is to make it a grassroots effort. The numbers I hear are that there are tens of millions of people who own crypto assets in some form or fashion and are starting to learn and experiment with, and really value their freedom to do so. And I think there's an opportunity when issues come up where these grass roots campaigns, like calling your Senator, can in fact be impactful, where I really thought that equity market structure was a pretty narrow geeky issue. And as much as I would like ordinary investors in their 401ks to appreciate how much money they were being saved by electronification of the equity markets and to call their senators about that, realistically, that wasn't going to happen very often. I think in crypto it might be different.

Mark:

Yeah, fair enough.

Richard:

I think in crypto, there is enough of a mass appeal that some of the strategies that were not available to me when I was engaged in public policy debates around equity market structure may very well be available to the crypto community.

Mark:

One reflection from this conversation is that regulators don't just make decisions from on high. It is a conversation. And if you're worried, then you really should be taking part in that conversation instead of waiting for it to happen to you.

Richard:

I would think about this in a couple of different ways, depending on who your audience is. So there are regulators, and then there are legislators. And I think we need to think about the different constraints with which each of them operate. At the regulatory agencies like the SEC or the CFTC or even treasury. There are a lot of domain experts who've really taken the time to understand these issues in great technical detail. But they're also constrained by existing law. So to the extent that there's a law that's been passed by Congress, signed by the president, that's binding law, that determines how these regulatory agencies need to regulate, they need to comply with that. There's some bounds to their flexibility. Within those rules, I think for the most part, my experience has been that the regulators really want to learn and understand and figure out ways to apply the law, to apply their existing rules in ways that accomplish their objectives, and that do no harm.

Richard:

And I think that's very important. We have very good financial markets on the equity side, on the security side, on the future side, regulators don't want to screw that up. We have important leadership opportunities in the crypto space. Regulators, I think for the most part, they might be scared of some of the changes, but they really don't want to screw things up. And so think about the constraints of regulators in one way. Policy makers, legislators, and Congress, and the Senate. They have different constraints. They can actually write new law. Now they have political constraints. It's often hard to get anything done in DC. And for the most part, I would argue that we in very technical markets don't want Congress to get hands-on involved in exactly how these markets work, because they're frankly just not the expert regulators that we have at these other agencies. And I think if Congress has to regulate exactly how a smart contract works, something's gone terribly wrong.

Mark:

I suppose, but circling back to earlier in our conversation, your point was that the concept of products and Decentralized Finance that does not have a central intermediary or a primary actor, that is a concept that I'm not sure regulators can themselves work around. I mean, that is a new concept and they're trying to apply laws that don't consider that, and aren't built for that to this industry. So it strikes me that on some level a really sustainable and healthy solution actually has to be legislated and has to deal with Congress.

Richard:

I think that's right. And I think it is likely that Congress will be involved in various ways. But I think there's risk in that as well. And I think we saw that in this infrastructure bill. That's still an active proposal, as far as I'm aware, in that sort of in the middle of the night, tacked onto another major unrelated, for the most part, piece of legislation, a proposal came in that was pretty technical in that directly presented challenges to the crypto industry and American competitiveness and opportunity in this space. And despite the best efforts of a lot of really thoughtful people to make those changes, they still exist as part of the proposal. And there will be a few more opportunities down the road to try and fix that.

Mark:

But it's a double-edged sword. Once you open the box, it can create solutions and it can also result in collateral damage.

Richard:

Absolutely. And I think we will be better served by a slow, deliberate, thoughtful, legislative process, and being prepared to show up when something gets rushed through like that. I think we are fortunate that we had some good advocates who had been building those relationships for a long time in DC, had established credibility, had shown up with data. And they were able to explain why some of these proposals were not good. But even with that, it's still there, and it's still a risk. And so this is going to be a long game, and we want to make sure that we are involved in a thoughtful, long-term constructive way.

Mark:

Do you think that there will be transformative legislation on crypto and on this issue, or do you think this mostly gets handled in the regulatory sphere?

Richard:

I think this will mostly get handled in the regulatory sphere and in the courts. And I think that's an important thing to keep in mind, that there's some major court cases hanging out there that will have a significant impact on what the rules are and how the rules are to be interpreted. A lot of people complain about regulation by enforcement, but that's the reality. That's how a lot of this regulation works when you're in new and uncertain areas, new fact patterns, oftentimes the courts are called on to interpret existing law.

Richard:

And so I think we will be, for the most part, reactive to court issues, to issues at the regulators, and occasionally to legislative proposals. But I would think that would be the third most influential outcome in the near term, coming from legislation. New major impactful legislation seems like the least likely to me. I would point out one thing though, if the court cases come out in a particular way and regulators feel that they don't have the tools they need to fulfill their requirements and their mandates, the regulators themselves may have to go back to Congress and ask for new legislation. And so that's a risk factor as well. People may initially applaud certain outcomes from the courts, but it's not clear to me that that would be the end of the day.

Mark:

I see. So that's a very interesting mechanism that I didn't realize, the legislation is perhaps most likely to happen when the regulators tell Congress that they need more tools to do their job. And the things that trigger that can be incidents that may in the short term, even be interpreted as favorable by the crypto markets. But in the longterm may open, I don't think Pandora's box is the right word, because as I recall from the myth, everything that came out of it was bad, but may open the issue that could result in big changes, some good, some potentially bad, but regardless, a conversation that we need to be prepared to have.

Richard:

Right. And another thing about thinking about the possibility of legislation is that, right now the way that Congress is functioning, with everything becoming a partisan issue, lots of gridlock, and very difficult to pass any new laws. I would not look to Congress in the first instance to solve any problems that we're finding here. I think it's hard to get any laws passed today. And that brings up another thought. Another thing that I learned in this high-frequency trading equity market structure advocacy world, was that it's important to try to not make your issue a partisan issue. It always seemed to me that like exactly how the equity markets worked should not be a partisan issue. There were very technical rules that somehow over time often became partisan. Democrats like a particular flavor of a rule. Republicans liked another flavor of rule. It didn't make any sense to me. But it got locked in that way. And that also occasionally made it hard to make good progress on certain issues, even when the data and the logic and the analysis all made sense.

Mark:

Interesting. It sounds just like COVID, where perhaps the most difficult thing about handling this pandemic is that masks and vaccines became partisan issues. And that became very difficult to handle them in a data-driven and responsible way politically.

Richard:

We need to be very careful to not make crypto into a partisan issue. I think Democrats and Republicans alike should find things that they like very much about crypto. It may be different things, and maybe they like it for different reasons. But it's going to be important to present this as a nonpartisan or bipartisan issue. There should be a consensus around American competitiveness. There should be a consensus around economic inclusion. There's a lot of ways to think about this that both parties should like. We need to be careful not to intentionally or inadvertently make these into partisan issues. Because if we do, we're going to not have the kind of predictable regulatory environment that we want. Every time there's a party change in the white house or in Congress, will be subject to whip saws. That's not the way to push this forward in the best way.

Mark:

Well, Richard, thank you for sharing your wisdom. I have a much deeper understanding about how this process actually works, how people are thinking about this in DC, and how it one day can affect them both in the short and long term. So I really appreciate your thoughts and this conversation, and joining us today.

Richard:

Thank you, Mark. This has been a lot of fun.

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